e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 001-33368
Glu Mobile Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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91-2143667
(IRS Employer
Identification No.)
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45 Fremont Street, Suite 2800
San Francisco, California
(Address of Principal
Executive Offices)
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94105
(Zip Code)
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(415) 800-6100
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.0001 per share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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
Regulation S-T
(§ 232.405 of this chapter during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the closing price
of such stock on June 30, 2010, the last business day of
the registrants most recently completed second fiscal
quarter, as reported by The NASDAQ Global Market, was
approximately $27,041,101. Shares of common stock held by each
executive officer and director of the registrant and by each
person who owns 10% or more of the registrants outstanding
common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrants common
stock as of March 15, 2011 was 53,817,591.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for registrants
2011 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A within 120 days after registrants
fiscal year ended December 31, 2010 are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act). Such statements are based upon current expectations
that involve risks and uncertainties. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
estimates, predicts,
potential, continue,
strategy, believes,
anticipates, plans, expects,
intends and similar expressions are intended to
identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors
that might cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this report in
the section titled Risk Factors and the risks
discussed in our other Securities and Exchange Commission (the
SEC) filings. We undertake no obligation to update
the forward-looking statements after the date of this report.
PART I
Corporate
Background
General
Glu Mobile designs, markets and sells mobile games. We have
developed and published a portfolio of casual and traditional
games designed to appeal to a broad cross section of the users
of smartphones and tablet devices who purchase our games through
direct-to-consumer
digital storefronts as well as users of feature phones served by
wireless carriers and other distributors. We create games and
related applications based on our own original brands and
intellectual property as well as third-party licensed brands.
Our original games based on our own intellectual property
include Beat It!, Bonsai Blast, Brain Genius, Glyder, Gun
Bros, Hero Project, Jump O Clock, Magic Life,
Stranded, Super K.O. Boxing, Toyshop Adventures and
Zombie Isle. Our games based on licensed intellectual
property include
Build-a-lot,
Call of Duty, Deer Hunter, Diner Dash, DJ
Hero, Guitar Hero, Family Feud, Family Guy, Lord of the Rings,
Paperboy, The Price Is Right, Transformers, Wedding Dash,
Who Wants to Be a Millionaire? and World Series of
Poker. We are based in San Francisco, California and
our primary international offices are located in Brazil, China,
England and Russia.
We were incorporated in Nevada in May 2001 as Cyent Studios,
Inc. and changed our name to Sorrent, Inc. later that year. In
November 2001, we incorporated a wholly owned subsidiary in
California, and, in December 2001, we merged the Nevada
corporation into this California subsidiary to
form Sorrent, Inc., a California corporation. In May 2005,
we changed our name to Glu Mobile Inc. In March 2007, we
reincorporated in Delaware and implemented a
3-for-1
reverse split of our common stock and convertible preferred
stock. Also in March 2007, we completed our initial public
offering and our common stock is traded on the NASDAQ Global
Market under the symbol GLUU.
Acquisitions
In December 2004, we acquired Macrospace Limited, or Macrospace,
a company registered in England and Wales; in March 2006, we
acquired iFone Holdings Limited, or together with its affiliates
iFone, a company registered in England and Wales; in December
2007, we acquired Beijing Zhangzhong MIG Information Technology
Co. Ltd., or together with its affiliates MIG, a domestic
limited liability company organized under the laws of China; and
in March 2008, we acquired Superscape Group plc, or together
with its affiliates Superscape, a company registered in England
and Wales with operations in Russia and the United States.
Available
Information
We file annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and other reports, and amendments to these
reports, required of public companies with the SEC. The public
may read and copy the materials we file with the SEC at the
SECs Public Reference Room at 100 F Street,
1
NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains a Web site at www.sec.gov that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. We make
available free of charge on the Investor Relations section of
our corporate website all of the reports we file with the SEC as
soon as reasonably practicable after the reports are filed. Our
internet website is located at www.glu.com and our investor
relations website is located at www.glu.com/investors. The
information on our website is not incorporated into this report.
Copies of our 2010 Annual Report on
Form 10-K
may also be obtained, without charge, by contacting Investor
Relations, Glu Mobile Inc., 45 Fremont Street, Suite 2800,
San Francisco, California 94105 or by calling
415-800-6100.
Business
Developments and Highlights
Since January 1, 2010, we have taken the following actions
to support our business:
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We increased our focus on designing, marketing and selling games
for smartphones, such as Apples iPhone and mobile phones
utilizing the Googles Android operating system. We
generated $9.9 million in smartphone revenues in 2010, a
127.2% increase from the $4.3 million in smartphone
revenues we generated in 2009. In December 2010, we had
approximately 12.1 million monthly active users of our
games on smartphones based on the Apple iOS and Google Android
operating systems. As of December 31, 2010, we had
50.2 million cumulative installs of our games on
smartphones based on the Apple iOS and Google Android operating
systems, including 18.0 million installs during the fourth
quarter of 2010.
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We have formulated our smartphone strategy around becoming the
leading publisher of social, mobile freemium
games games that are downloadable without an initial
charge, but which enable a variety of additional features to be
accessed for a fee or otherwise monetized through various
advertizing and offer techniques. We released our initial five
social, freemium games in the fourth quarter of 2010 and expect
to release 20 to 25 additional social, freemium games during
2011.
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We have initiated our Glu Partners program, which includes the
following features: (1) external development of Glu
content, as approximately half of the social, freemium games
that we intend to release during 2011 will be produced by third
parties with which we have a strategic relationship,
(2) extension of Glu games to other digital platforms, such
as our recently announced launch of Gun Bros on Facebook,
hi5 and Wild Tangent, and (3) in the future, making our
global distribution platform available to independent content
developers.
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We have launched the Glu Games Network distribution platform and
community, which will allow us to deepen engagement in our
global social gaming community as well as provide global
distribution for third party-content. The Glu Games Network
includes a standalone application for smartphones and tablets
that enables consumers to sign in through multiple social
networks, contains a proprietary loyalty program and functions
as our gaming community hub.
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We have established and expanded our data analytics group, which
enables us to have continually updated information regarding the
number of consumers who download and play our games, as well as
detailed information regarding consumers engagement with
our games, including information regarding average game session
length, average number of daily game sessions per user,
consumers purchasing of virtual currency and virtual items
and game level achievement.
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In August 2010, we issued and sold in a private placement an
aggregate of 13,495,000 shares of our common stock at $1.00
per share and warrants exercisable to purchase up to
6,747,500 shares of our common stock at $1.50 per share for
net proceeds of approximately $13.2 million after offering
expenses (excluding any proceeds we may receive upon exercise of
the warrants). In January 2011, we issued and sold in an
underwritten public offering an aggregate of
8,414,635 shares of our common stock at a price to the
public of $2.05 per share for net proceeds of approximately
$15.9 million after underwriting discounts and commissions
and offering expenses.
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In December 2010, we relocated our corporate headquarters from
San Mateo, California to San Francisco, California. We
believe that San Francisco has become the hub of social,
mobile gaming, and that having our corporate headquarters in
San Francisco will assist us in recruiting top talent to
our company.
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The mobile games market continued to undergo meaningful changes
in 2010. There has been, and we believe that there will continue
to be, an acceleration in the number of smartphones being sold
as consumers continue to migrate from traditional feature phones
to smartphones. In addition, since the beginning of 2010, Apple
and a number of other manufacturers have introduced tablet
devices, which enable mobile game designers to create games that
are optimized for larger screen sizes and designed to take
advantage of the tablets advanced capabilities and
functionality. As a result of the expected continued migration
of users from traditional feature phones to smartphones, we
expect our feature phone revenues, which represented a
significant majority of our revenues in 2010, to continue to
decrease in 2011.
For us to succeed in 2011 and beyond, we believe that we must
increasingly publish mobile games that are widely accepted and
commercially successful on the smartphone and tablet digital
storefronts, which include Apples App Store, Googles
Android Market, Microsofts Windows Marketplace for Mobile,
Palms App Catalog, Nokias Ovi Store and Research In
Motions Blackberry App World. Our strategy for increasing
our revenues from smartphones and tablets involves becoming the
leading publisher of social, mobile freemium games. Our social,
mobile freemium games are provided as a live service and are
generally designed to be persistent through regular content
updates, which is in contrast to our premium smartphone games
which consumers download for a fee and are generally not
updated. We believe this approach will enable us to build a
growing, longer lasting and more direct relationship with our
customers, which will assist us in our future sales and
marketing efforts. We intend to have the substantial majority of
these social, freemium games be based upon our own intellectual
property, unlike our premium smartphone games which are
generally based on licensed brands; we believe creating our own
game franchises will significantly enhance our margins and
long-term value. In addition, we intend to utilize a significant
portion of the net proceeds from our recent public offering to
further the development of our global social gaming community,
including with respect to our Glu Games Network and Glu Partners
initiatives.
Although we expect our revenues from smartphones and tablets to
increase in 2011, we do not expect this increase to fully offset
the anticipated decline in revenues from games we develop for
feature phones, and therefore in 2011 we expect that our total
revenues will decline from our 2010 revenues. However, we
believe that our smartphone revenues will surpass our feature
phone revenues on a monthly run rate basis by the end of 2011
and that this transition will position us to return to overall
revenue growth in the longer term.
Our
Products
We develop and publish a portfolio of casual and traditional
games designed to appeal to a broad cross section of the users
of smartphones and tablet devices who purchase our games through
direct-to-consumer
digital storefronts as well as users of feature phones served by
wireless carriers and other distributors. We create games and
related applications based on our own original brands and
intellectual property as well as third-party licensed brands.
Our original games based on our own intellectual property
include Beat It!, Bonsai Blast, Brain Genius, Glyder, Gun
Bros, Hero Project, Jump O Clock, Magic Life,
Stranded, Super K.O. Boxing, Toyshop Adventures and
Zombie Isle. Our games based on licensed intellectual
property include
Build-a-lot,
Call of Duty, Deer Hunter, Diner Dash, DJ
Hero, Guitar Hero, Family Feud, Family Guy, Lord of the Rings,
Paperboy, The Price Is Right, Transformers, Wedding Dash,
Who Wants to Be a Millionaire? and World Series of
Poker.
Consumers download our freemium games for smartphones and tablet
devices through
direct-to-consumer,
digital storefronts, which include Apples App Store,
Googles Android Market, Microsofts Windows
Marketplace for Mobile, Palms App Catalog, Nokias
Ovi Store and Research In Motions Blackberry App World.
Our freemium games are provided as a live service and are
generally designed to be persistent through regular content
updates, which is in contrast to our premium smartphone games
which consumers download for a fee and are generally not
updated. Although our freemium games may be downloaded and
played free of charge, consumers may elect to purchase virtual
currency which can be used to acquire various items to enhance
their gameplay experience we sometimes refer to
these as in-app purchases or micro-transactions. We sell virtual
currency and other virtual items to consumers at various prices
ranging from $0.99 to $99.99, with the significant majority of
such
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purchases occurring at the lower price points. With respect to
our premium games for smartphones and tablets, end users
purchase our games through the
direct-to-consumer
digital storefronts at prices generally ranging between $0.99
and $4.99. The digital storefronts generally share with us 70%
of the consumers payments for our games and virtual
currency, which we record as revenues.
In addition to in-app purchases of virtual currency and other
items, we monetize our freemium games through offers and in-game
advertising. Offers enable users to acquire virtual currency
without paying cash but by instead downloading another
application, which is typically a third-party application, but
could be another Glu game. We work with third parties, including
Tapjoy and Flurry, to provide these offers to the end users of
our freemium games, and we receive a payment from the
third-party offer provider based on consumer downloading of
these offers. We also work with third-party advertising
aggregators who embed banner-type advertising in our games, and
we receive a payment from such third-party advertising
aggregators based on the number of impressions in our games.
For our feature phone business, end users typically purchase our
games from their wireless carrier and are billed on their
monthly phone bill. In the United States, one-time fees for
unlimited use generally range between approximately $5.00 and
$10.00, and prices for subscriptions generally range between
approximately $2.50 and $4.00 per month, typically varying by
game and carrier. In Europe, one-time fees for unlimited use
generally range between approximately $2.50 and $10.00 (at
current exchange rates), and prices for subscriptions generally
range between approximately $1.50 and $4.00 per month (at
current exchange rates), typically varying by game and carrier.
Prices in the Asia-Pacific and Latin America regions are
generally lower than in the United States and Europe. Carriers
normally share with us 40% to 65% of their subscribers
payments for our games, which we record as revenues.
For games based on licensed brands, we share with the content
licensor a portion of our revenues. The average royalty rate
that we paid on games based on licensed intellectual property
was approximately 33.4% in 2010, 35.5% in 2009 and 33.5% in
2008. However, the individual royalty rates that we pay can be
significantly above or below the average because our licenses
were signed over a number of years and in some cases were
negotiated by one of the companies we acquired. The royalty
rates also vary based on factors, such as the strength of the
licensed brand, the platforms for which we are permitted to
distribute the licensed content, and our development or porting
obligations.
Our portfolio of games includes original games based on our own
intellectual property and games based on brands and other
intellectual property licensed from branded content owners.
These latter games are inspired by non-mobile brands and
intellectual property, including movies, board games,
Internet-based casual games and console games. In 2010, 2009 and
2008, Glu-branded original games accounted for approximately
21.9%, 22.5% and 25.0% of our revenues, respectively. However,
we intend to have the substantial majority of the social,
freemium games that we release in 2011 and beyond be based upon
our own intellectual property, and, as a result, we expect
Glu-branded original games to account for a significantly
increased percentage of our revenues in future periods.
For more information on the revenues for the last three fiscal
years by geographic areas, please see Note 12 of Notes to
Consolidated Financial Statements included in Item 8 of
this report.
Sales,
Marketing and Distribution
We market and sell our games for smartphones and tablets
primarily through
direct-to-consumer
digital storefronts. The significant majority of our smartphone
revenues have historically been derived from the Apple App
Store, but no smartphone digital storefront accounted for more
than 10% of our total revenues in any of 2010, 2009 or 2008.
As part of our efforts to successfully market our games on these
direct-to-consumer
digital storefronts, we attempt to educate the digital
storefront owners regarding our title roadmap and seek to have
our games featured or otherwise prominently placed within the
digital storefront. We believe that the featuring or prominent
placement of our games is likely to result in our games
achieving a greater degree of commercial success. We believe
that a number of factors may influence the featuring or
placement of a game in these digital storefronts, including:
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the perceived attractiveness of the title or brand;
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the past critical or commercial success of the game or of other
games previously introduced by a publisher;
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the publishers relationship with the applicable digital
storefront owner and future pipeline of quality titles for
it; and
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the current market share of the publisher.
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In addition to our efforts to secure prominent featuring or
placement for our games in these digital storefronts, we have
also undertaken a number of marketing initiatives designed to
increase the sales of our games for smartphones and tablets.
These initiatives include the following:
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Undertaking extensive outreach efforts with video game websites
and related media outlets, such as providing reviewers with
advance access to our games prior to launch, which efforts are
designed to help promote our games and increase sales.
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Paying third parties, such as Tapjoy, Flurry, FreeAppADay.com
and FreeGameoftheDay.com, to encourage or incentivize consumers
to download our games through offers or recommendations.
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Utilizing social networking websites such as Facebook and
Twitter to build a base of fans and followers to whom we can
quickly and easily provide information about our games.
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Launching the Glu Games Network distribution platform and
community, which will allow us to create a global social gaming
community. The Glu Games Network includes a standalone
application for smartphones and tablets that enables consumers
to sign in through multiple social networks, contains a
proprietary loyalty program and functions as our gaming
community hub. This application replaces the Get More
Games functionality that we previously embedded into our
games, which served to inform users about, and enabled them to
easily purchase, other of our games.
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For our feature phone business, we market and sell our games
primarily through wireless carriers via placement in the
deck of games and other applications that the
carriers choose to make available to their feature phone
customers. We also coordinate our marketing efforts with
carriers and mobile handset manufacturers in the launch of new
games with new handsets. We are often required to execute
simultaneous and coordinated
day-and-date
game launches, which are typically used for games associated
with other content platforms such as films, television and
console games.
We co-market our games for feature phones with our partners,
including wireless carriers, branded content owners and
direct-to-consumer
companies. For example, when we create an idea for a game, we
discuss the game with wireless carriers early in the development
process to gain an understanding of the attractiveness of the
game to them, to obtain their other feedback regarding the game,
and to develop plans for co-marketing and a potential launch
strategy. In addition, we work with our wireless carriers to
develop merchandising initiatives, such as pre-loading of games
on handsets, often with free trials, Glu-branded game menus that
offer games for trial or sale, and
pay-per-play
or other alternative billing arrangements.
We believe that placement of games for feature phones on the top
level or featured handset menu or toward the top of the
genre-specific or other menus, rather than lower down or in
sub-menus,
is likely to result in games achieving a greater degree of
commercial success. We believe that a number of factors may
influence the deck placement of a game including:
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the perceived attractiveness of the title or brand;
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the past critical or commercial success of the game or of other
games previously introduced by a publisher;
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the number of handsets for which a version of the game is
available;
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the relationship with the applicable carrier and pipeline of
quality titles for it;
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the carriers economic incentives with respect to the
particular game, such as the revenue split percentage; and
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the level of marketing support, including marketing development
funds.
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End users download our mobile games and related applications to
their handsets, and typically their carrier bills them a
one-time fee or monthly subscription fee, depending on the end
users desired payment arrangement
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and the carriers offerings. Our carrier distribution
agreements establish the portion of revenues that will be
retained by the carrier for distributing our games and other
applications. Wireless carriers generally control the price
charged to end users for our mobile games either by approving or
establishing the price of the games charged to their
subscribers. Some of our carrier agreements also restrict our
ability to change established prices. Similarly, for the
significant minority of our carriers, including Verizon
Wireless, when we make changes to a pricing plan (the wholesale
price and the corresponding suggested retail price based on our
negotiated revenue-sharing arrangement), adjustments to the
actual retail price charged to end users may not be made in a
timely manner or at all, even though our wholesale price was
reduced.
We currently have agreements with numerous wireless carriers and
other distributors. Verizon Wireless accounted for 15.2%, 20.5%
and 21.4% of our revenues in 2010, 2009 and 2008, respectively.
No other carrier represented more than 10.0% of our revenues in
any of these years. In addition, in 2010, 2009 and 2008, we
derived approximately 44.1%, 49.1% and 51.4%, respectively, of
our revenues from relationships with our top five carriers, in
each year including Verizon Wireless. We expect that we will
continue to generate a substantial majority of our feature phone
revenues through distribution relationships with fewer than 20
carriers for the foreseeable future.
Studios
We have four internal studios that create and develop games and
other entertainment products. These studios, based in
San Francisco, California; Beijing, China; Sao Paulo,
Brazil and Moscow, Russia, have the ability to design and build
products from original intellectual property, based on games
originated in other media such as online and game consoles, or
based on other licensed brands and intellectual property.
Our game development process involves a significant amount of
creativity, particularly with respect to the development of
original intellectual property franchises or games in which we
license intellectual property from motion pictures or brands
that are not based on games from other media. In addition, even
where we license intellectual property based on console or
Internet games, our developers must create games that are
inspired by the game play of the original. In each of these
cases, creative and technical studio expertise is necessary to
design games that appeal to end users and work well on mobile
phones and tablets with their inherent limitations, such as
small screen sizes and control buttons.
Our four studios are located on four different continents, which
results in certain inherent complexities. To address these
issues, we have instituted our Glu University training program.
Glu University is designed to increase interaction amongst our
studio teams, including having international studio team members
regularly spend time in our San Francisco headquarters. The
goal of this program is to ensure that we increase the
uniformity, quality and commercial success of our games. In
addition, we have recently hired a Vice President of Studios who
has primary responsibility for overseeing the efforts of our
international studio teams.
Product
Development
We have developed proprietary technologies and product
development processes that are designed to enable us to rapidly
and cost effectively develop and publish games that meet the
expectations and preferences of consumers and the needs of our
wireless carriers and other distributors. These technologies and
processes include:
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core development platforms;
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porting tools and processes;
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broad development capabilities;
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application hosting;
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provisioning and billing capabilities;
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merchandising, monetization tools and marketing
platform; and
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thin client-server platform.
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Since the markets for our products are characterized by rapid
technological change, particularly in the technical capabilities
of mobile phones and tablets, and changing end-user preferences,
continuous investment is required to innovate and publish new
games, regularly update our social, freemium games that are
delivered as a live service, and modify existing games for
distribution on new platforms. We have instituted a number of
measures that are both designed to increase the speed with which
we bring our game concepts to market as well as more quickly in
the product development cycle identify and terminate game
concepts that are unlikely to be commercially successful. We
have historically published the majority of our games
internally, and have, in certain cases, retained a third-party
to support our development activities. We have also begun using
a third-party
3-D
rendering solution in connection with building our new social,
freemium games.
Recently, we initiated our Glu Partners program, which will
provide for the external development of some of our games; we
currently expect that approximately half of the social, freemium
games that we intend to release during 2011 will be produced by
third parties with which we have a strategic relationship. In
addition, a component of our Glu Partners strategy is to extend
our successful game franchises to other digital platforms. Our
initial measure in this regard was the recent launch of Gun
Bros on Facebook, hi5 and Wild Tangent, and we expect to
explore additional similar opportunities for our games in the
future.
As of December 31, 2010, we had 369 employees in
research and development compared with 402 as of
December 31, 2009. Research and development expenses were
$25.2 million, $26.0 million and $32.1 million
for 2010, 2009 and 2008, respectively. We expect 2011 spending
for research and development activities to significantly
increase from 2010 levels and be more similar to 2008 levels,
and we expect that substantially all of this spending will be
utilized for creating games for smartphones and tablets, with a
portion allocated for third-party development under our Glu
Partners program. However, we cannot be certain that we will be
able to successfully develop new games that satisfy end user
preferences and technological changes or that any such games
will achieve market acceptance and commercial success.
Data
Analytics
We established our data analytics team in 2010 to better analyze
the number of consumers who download and play our games as well
as the behavior of such consumers with respect to their
gameplay. Some of the information that we regularly track and
analyze includes the following:
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Revenues;
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Installations of our games by consumers;
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Daily active users (DAU) of our games, or the number of unique
consumers playing our games each day;
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Monthly active users (MAU) of our games, or the number of unique
consumers playing our games each month;
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The number of minutes users are playing our games; and
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The number of sessions users play our games and the average
session length.
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All of the above information can be broken down and analyzed in
a number of ways, including by platform, game title and time
period. In addition, for each of our games we are able to
analyze the behavior of consumers with respect to their
gameplay. For example, for a game like Toyshop
Adventures, we are able to analyze whether players are
getting stuck on a particular level and address this issue by
releasing an update that includes a hint for that level. We
believe that our analytics information will provide us with a
competitive advantage and will enable us to better tailor our
games to consumer preferences.
Customer
Service
We established our customer service team in 2010 as a direct
result of the shift in our strategic focus towards developing
social, freemium games that are provided as a live service and
are regularly updated. Customer service has also become a more
important facet of our business as we continue to build
relationships with our consumers.
7
We regard customer service as an important part of fostering
customer loyalty and are committed to providing prompt responses
to our customers inquiries, which are primarily made
through our corporate website or on our Facebook and Twitter
pages. Examples of services we provide include addressing
problems in recovering lost game accounts, virtual items and
virtual currency. In addition, we also investigate and address
irregularities in game operation reported by players. With the
growth of our daily and monthly active users and the expansion
of our social, freemium game portfolio, we expect to continue to
expand the role of our customer service team in 2011 and beyond.
Seasonality
Many new mobile phones and tablets are released in the fourth
calendar quarter to coincide with the holiday shopping season.
Because many end users download our games soon after they
purchase new mobile phones and tablets, we generally experience
seasonal sales increases based on the holiday selling period.
However, due to the time between mobile phone and tablet
purchases and game purchases, some of this holiday impact occurs
for us in our first calendar quarter. In addition, for a variety
of reasons, including roaming charges for data downloads that
may make purchase of our games prohibitively expensive for many
end users while they are traveling, we sometimes experience
seasonal sales decreases during the summer, particularly in
parts of Europe. We are unsure of whether, and to what degree,
our increasing concentration on social, freemium games provided
as a live service will mitigate or enhance the effects of the
seasonality factors, or introduce entirely new seasonality
factors.
Competition
Developing, publishing and selling mobile games is a highly
competitive business, characterized by frequent product
introductions and rapidly emerging new platforms, technologies
and distribution mechanisms, such as
direct-to-consumer
digital storefronts. Our primary competitors have historically
been Electronic Arts (EA Mobile) and Gameloft, with Electronic
Arts having the largest market share of any company in the
mobile games market. With respect to our social, freemium games
that we publish for smartphones and tablets, we also compete
with a number of other companies, including DeNA, which became a
more formidable competitor through its acquisition of ngmoco,
and Zynga, as well as other large publishers who also create
content for traditional gaming consoles and for online play. In
addition, given the open nature of the development and
distribution for smartphones and tablets, we also compete or
will compete with a vast number of small companies and
individuals who are able to create and launch games and other
content for these mobile devices utilizing limited resources and
with limited
start-up
time or expertise. Many of these smaller developers are able to
offer their games at no cost or substantially reduce their
prices to levels at which we may be unable to respond
competitively and still achieve profitability given their low
overhead. As an example of the competition that we face, it has
been estimated that more than 50,000 active games were available
on the Apple App Store as of March 1, 2011. The
proliferation of titles in these open developer channels makes
it difficult for us to differentiate ourselves from other
developers and to compete for end users who purchase content for
their smartphones and tablets without substantially increasing
spending to market our products or increasing our development
costs.
For end users, we compete primarily on the basis of game
quality, brand, customer reviews and, with respect to our
premium products, price. We compete for promotional and deck
placement based on these factors, as well as the relationship
with the digital storefront owner or wireless carrier,
historical performance, perception of sales potential and
relationships with licensors of brands and other intellectual
property. For content and brand licensors, we compete based on
royalty and other economic terms, perceptions of development
quality, porting abilities, speed of execution, distribution
breadth and relationships with carriers. We also compete for
experienced and talented employees.
Some of our competitors and our potential
competitors advantages over us, either globally or in
particular geographic markets, include the following:
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significantly greater revenues and financial resources;
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stronger brand and consumer recognition regionally or worldwide;
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the capacity to leverage their marketing expenditures across a
broader portfolio of mobile and non-mobile products;
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larger installed customer bases from related platforms such as
console gaming or social networking websites to which they can
market and sell mobile games;
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more substantial intellectual property of their own from which
they can develop games without having to pay royalties;
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lower labor and development costs;
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greater resources to make acquisitions;
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greater platform specific focus, experience and
expertise; and
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broader global distribution and presence.
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For more information on our competition, please see the Risk
Factor The markets in which we operate are
highly competitive, and many of our competitors have
significantly greater resources than we do and the other
risk factors described in Item 1A of this report.
Intellectual
Property
Our intellectual property is an essential element of our
business. We use a combination of trademark, copyright, trade
secret and other intellectual property laws, confidentiality
agreements and license agreements to protect our intellectual
property. Our employees and independent contractors are required
to sign agreements acknowledging that all inventions, trade
secrets, works of authorship, developments and other processes
generated by them on our behalf are our property, and assigning
to us any ownership that they may claim in those works. Despite
our precautions, it may be possible for third parties to obtain
and use without consent intellectual property that we own or
license. Unauthorized use of our intellectual property by third
parties, including piracy, and the expenses incurred in
protecting our intellectual property rights, may adversely
affect our business. In addition, some of our competitors have
in the past released games that are nearly identical to
successful games released by their competitors in an effort to
confuse the market and divert users from the competitors
game to the copycat game. To the extent that these tactics are
employed with respect to any of our games, it could reduce our
revenues that we generate from these games.
We own 23 trademarks registered with the U.S. Patent and
Trademark Office, including Glu, Superscape, Bonsai
Blast, Brain Genius, Space Monkey, Super
K.O. Boxing and our
2-D
g character logo, and have 11 trademark applications
pending with the U.S. Patent and Trademark Office,
including Gun Bros, Hero Project, Magic Life, Toyshop
Adventures, Zombie Isle and our
3-D
g character logo. We also own, or have applied to
own, one or more registered trademarks in certain foreign
countries, depending on the relevance of each brand to other
markets. Registrations of both U.S. and foreign trademarks
are renewable every ten years.
In addition, many of our games and other applications are based
on or incorporate intellectual property that we license from
third parties. We have both exclusive and non-exclusive licenses
to use these properties for terms that generally range from two
to five years. Our licensed brands include, among others,
Build-a-lot,
Call of Duty, Deer Hunter, Diner Dash, DJ
Hero, Guitar Hero, Family Feud, Family Guy, Lord of the Rings,
Paperboy, The Price Is Right, Transformers, Wedding Dash,
Who Wants to Be a Millionaire? and World Series of Poker.
Our licensors include a number of well-established video
game publishers and major media companies.
From time to time, we encounter disputes over rights and
obligations concerning intellectual property. If we do not
prevail in these disputes, we may lose some or all of our
intellectual property protection, be enjoined from further sales
of our games or other applications determined to infringe the
rights of others,
and/or be
forced to pay substantial royalties to a third party, any of
which would have a material adverse effect on our business,
financial condition and results of operations.
9
Government
Regulation
Legislation is continually being introduced that may affect both
the content of our products and their distribution. For example,
data and consumer protection laws in the United States and
Europe impose various restrictions, which will be increasingly
important to our business as we continue to market our products
directly to end users and we collect information, including
personal identifiable information, about our end user customers.
Those rules vary by territory although the Internet recognizes
no geographical boundaries. In the United States, for example,
numerous federal and state laws have been introduced which
attempt to restrict the content or distribution of games.
Legislation has been adopted in several states, and proposed at
the federal level, that prohibits the sale of certain games to
minors. The Federal Trade Commission has also recently indicated
that it intends to review issues related to in-app purchases,
particularly with respect to games that are marketed primarily
to minors. In addition, two self-regulatory bodies in the United
States (the Entertainment Software Rating Board) and the
European Union (Pan European Game Information) provide consumers
with rating information on various products such as
entertainment software similar to our products based on the
content (e.g., violence, sexually explicit content, language).
Furthermore, the Chinese government has adopted measures
designed to eliminate violent or obscene content in games. In
response to these measures, some Chinese telecommunications
operators have suspended billing their customers for certain
mobile gaming platform services, including those services that
do not contain offensive or unauthorized content, which could
negatively impact our revenues in China. China has also adopted
measures that prohibit the use of virtual currency to purchase
any real world good or service.
We are subject to federal and state laws and government
regulations concerning employee safety and health and
environmental matters. The Department of Labor, Occupational
Safety and Health Administration, the Environmental Protection
Agency, and other federal and state agencies have the authority
to establish regulations that may have an impact on our
operations.
Employees
As of March 1, 2011, we had 384 employees, including
290 in research and product development. Of our total employees
as of March 1, 2011, 105 were based in the United States
and Canada, 95 were based in Europe, 103 were based in Asia
Pacific and 81 were based in Latin America. Our employees in
Brazil and China are represented by a labor union. We have never
experienced any employment-related work stoppages and consider
relations with our employees to be good. We believe that our
future success depends in part on our continued ability to hire,
assimilate and retain qualified personnel.
Our business is subject to many risks and uncertainties, which
may affect our future financial performance. If any of the
events or circumstances described below occurs, our business and
financial performance could be harmed, our actual results could
differ materially from our expectations and the market value of
our stock could decline. The risks and uncertainties discussed
below are not the only ones we face. There may be additional
risks and uncertainties not currently known to us or that we
currently do not believe are material that may harm our business
and financial performance. Because of the risks and
uncertainties discussed below, as well as other variables
affecting our operating results, past financial performance
should not be considered as a reliable indicator of future
performance and investors should not use historical trends to
anticipate results or trends in future periods.
We have a history of net losses, may incur substantial net
losses in the future and may not achieve profitability.
We have incurred significant losses since inception, including a
net loss of $106.7 million in 2008, a net loss of
$18.2 million in 2009 and a net loss of $13.4 million
in 2010. As of December 31, 2010, we had an accumulated
deficit of $190.7 million. We expect to incur increased
costs in order to implement additional initiatives designed to
increase revenues, such as increased research and development
and sales and marketing expenses related to our new games,
particularly those designed for smartphones and tablets, such as
Apples iPhone and iPad and devices based on Googles
Android operating system. If our revenues do not increase to
offset these additional expenses, if we experience unexpected
increases in operating expenses or if we are required to take
additional charges related to impairments or restructurings, we
will continue to incur significant losses and will not become
profitable. In addition, our revenues declined in each of 2009
and 2010 from the preceding year, and we expect that our
revenues
10
will likely decline in 2011 from 2010 levels. If we are not able
to significantly increase our revenues, we will likely not be
able to achieve profitability in the future. Furthermore, during
2008, we incurred aggregate charges of approximately
$77.6 million for goodwill impairments, royalty impairments
and restructuring activities, during 2009, we incurred aggregate
charges of approximately $8.5 million for royalty
impairments and restructuring activities and during 2010, we
incurred aggregate charges of approximately $4.3 million
for royalty impairments and restructuring activities. As of
December 31, 2010, an additional $2.5 million of
prepaid royalties remained on our balance sheet that are
potentially subject to future impairment. If we continue to
incur these charges, it will continue to negatively affect our
operating results and our ability to achieve profitability.
Our financial results could vary significantly from
quarter to quarter and are difficult to predict, particularly in
light of the current economic environment, which in turn could
cause volatility in our stock price.
Our revenues and operating results could vary significantly from
quarter to quarter because of a variety of factors, many of
which are outside of our control. As a result, comparing our
operating results on a
period-to-period
basis may not be meaningful. In addition, we may not be able to
predict our future revenues or results of operations. We base
our current and future expense levels on our internal operating
plans and sales forecasts, and our operating costs are to a
large extent fixed. As a result, we may not be able to reduce
our costs sufficiently to compensate for an unexpected shortfall
in revenues, and even a small shortfall in revenues could
disproportionately and adversely affect financial results for
that quarter. This will be particularly true for 2011, as we
implemented significant cost-reduction measures in 2008, 2009
and 2010, making it more difficult for us to further reduce our
operating expenses without a material adverse impact on our
prospects in future periods. We intend to only selectively enter
into new licensing arrangements in 2011, if any, which we expect
will contribute to the anticipated reduction in our revenues
from feature phones and which may adversely impact our revenues
from smartphones and tablets to the extent that our games based
on original intellectual property are not successful. With
respect to our games based on licensed intellectual property, we
may incur impairments of prepaid royalty guarantees if our
forecasts for these games are lower than we anticipated at the
time we entered into the agreements. For example, in 2008, 2009
and 2010, we impaired $6.3 million, $6.6 million and
$663,000, respectively, of certain prepaid royalties and royalty
guarantees primarily due to several distribution arrangements in
our Europe, Middle East and Africa region and other global
development and distribution arrangements that we entered into
in 2007 and 2008. In addition, some payments from carriers that
we recognize as revenue on a cash basis may be delayed
unpredictably.
We are also subject to macroeconomic fluctuations in the United
States and global economies, including those that impact
discretionary consumer spending, which have deteriorated
significantly in many countries and regions, including the
United States, and may remain depressed for the foreseeable
future. Some of the factors that could influence the level of
consumer spending include continuing conditions in the
residential real estate and mortgage markets, labor and
healthcare costs, access to credit, consumer confidence and
other macroeconomic factors affecting consumer spending. These
issues can also cause foreign currency rates to fluctuate, which
can have an adverse impact on our business since we transact
business in more than 70 countries in more than 20 different
currencies. In 2008, some of these currencies fluctuated by up
to 40%, and we experienced continued significant fluctuations in
2009 and 2010. These issues may continue to negatively impact
the economy and our growth. If these issues persist, or if the
economy enters a prolonged period of decelerating growth or
recession, our results of operations may be harmed. As a result
of these and other factors, our operating results may not meet
the expectations of investors or public market analysts who
choose to follow our company. Our failure to meet market
expectations would likely result in a decline in the trading
price of our common stock.
In addition to other risk factors discussed in this section,
factors that may contribute to the variability of our quarterly
results include:
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the number of new games released by us and our competitors;
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the timing of release of new games by us and our competitors,
particularly those that may represent a significant portion of
revenues in a period;
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the popularity of new games and games released in prior periods;
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changes in the prominence of deck placement or storefront
featuring for our leading games and those of our competitors;
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fluctuations in the size and rate of growth of overall consumer
demand for mobile handsets, games and related content;
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the rate at which consumers continue to migrate from traditional
feature phones to smartphones, as well as the rate of adoption
of tablet devices;
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our success in developing and monetizing social, freemium games
for smartphones and tablets;
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our ability to increase the daily and monthly active users of
our social, freemium games that we develop for smartphones and
tablets, as well as the number of minutes these users play such
games;
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changes in accounting rules, such as those governing recognition
of revenue, including the period of time over which we recognize
revenue for in-app purchases of virtual currency and goods
within certain of our games;
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the expiration of existing content licenses for particular games;
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the timing of charges related to impairments of goodwill,
intangible assets, prepaid royalties and guarantees;
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changes in pricing policies by us, our competitors or our
carriers and other distributors, including to the extent that
smartphone digital storefront owners impose a platform tax on
our revenues derived from offers;
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changes in pricing policies by our carriers related to
downloading content, such as our games, which pricing policies
could be influenced by the lower average prices for content on
smartphones;
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changes in the mix of original and licensed games, which have
varying gross margins;
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the timing of successful mobile handset launches;
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the timeliness and accuracy of reporting from carriers;
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the seasonality of our industry;
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strategic decisions by us or our competitors, such as
acquisitions, divestitures, spin-offs, joint ventures, strategic
investments or changes in business strategy;
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the timing of compensation expense associated with equity
compensation grants; and
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decisions by us to incur additional expenses, such as increases
in marketing or research and development.
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Our strategy to grow our business includes developing a
significant number of new titles for smartphones and tablets
rather than for feature phones, which currently comprises the
substantial majority of our revenues. If we do not succeed in
generating considerable revenues and gross margins from
smartphones and tablets, our revenues, financial position and
operating results may suffer.
As a result of the expected continued migration of users from
traditional feature phones to smartphones, we expect our feature
phone revenues, which represented a significant majority of our
revenues in 2010, to continue to decrease in 2011. For us to
succeed in 2011 and beyond, we believe that we must increasingly
publish mobile games that are widely accepted and commercially
successful on the smartphone and tablet digital storefronts
(such as Apples App Store, Googles Android Market,
Research In Motions Blackberry App World, Palms App
Catalog, Nokias Ovi Store and Microsofts Windows
Marketplace for Mobile) as well as significantly increase our
marketing-related expenditures in connection with the launch of
our new games on these digital storefronts. Our efforts to
significantly increase our revenues derived from games for
smartphones and tablets may prove unsuccessful or, even if
successful, it may take us longer to achieve significant revenue
than anticipated because, among others reasons:
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the open nature of many of these digital storefronts increases
substantially the number of our competitors and competitive
products and makes it more difficult for us to achieve prominent
placement or featuring for our games;
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the billing and provisioning capabilities of some smartphones
are currently not optimized to enable users to purchase games or
make in-app purchases, which could make it difficult for users
of these smartphones to
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purchase our games or make in-app purchases and could reduce our
addressable market, at least in the short term;
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competitors may have substantially greater resources available
to invest in development and publishing of products for
smartphones and tablets;
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these digital storefronts are relatively new markets, for which
we are less able to forecast with accuracy revenue levels,
required marketing and developments expenses, and net income or
loss;
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we have less experience with open storefront distribution
channels than with carrier-based distribution;
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the pricing and revenue models for titles on these digital
storefronts are rapidly evolving (for example, the introduction
of in-app purchasing capabilities and the potential introduction
of usage-based pricing for games), and has resulted, and may
continue to result, in significantly lower average selling
prices for our premium games developed for smartphones as
compared to games developed for feature phones, and a lower than
expected return on investment for these games;
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the competitive advantage of our porting capabilities may be
reduced as smartphones become more widely adopted;
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many of our key licenses do not grant us the rights to develop
games for the iPhone and certain other smartphones and
tablets; and
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many OEMs and carriers are developing their own storefronts and
it may be difficult for us to predict which ones will be
successful, and we may expend time and resources developing
games for storefronts that ultimately do not succeed.
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If we do not succeed in generating considerable revenues and
gross margins from smartphones and tablets, our revenues,
financial position and operating results will suffer.
If we do not achieve a sufficient return on our investment
with respect to our efforts to develop social, freemium games
for smartphones and tablets, it could negatively affect our
operating results.
We expect that a significant portion of our development
activities for smartphones and tablets in 2011 and beyond will
be focused on social, freemium games games that are
downloadable without an initial charge, but which enable a
variety of additional features to be accessed for a fee or
otherwise monetized through various advertising and offer
techniques. Our efforts to develop social, freemium games for
smartphones and tablets may prove unsuccessful or, even if
successful, may take us longer to achieve significant revenue
than anticipated because, among others reasons:
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we have limited experience in successfully developing and
marketing social, freemium games;
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our relatively limited experience with respect to creating games
that include micro-transaction capabilities, advertizing and
offers may cause us to have difficulty optimizing the
monetization of our freemium games;
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some of our competitors have released a significant number of
social, freemium games on smartphones, and this competition will
make it more difficult for us to differentiate our games and
derive significant revenues from them;
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some of our competitors have substantially greater resources
available to invest in the development and publishing of social,
freemium games;
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we intend to have the significant majority of our social,
freemium games be based upon our own intellectual property
rather than well-known licensed brands, and, as a result, we may
encounter difficulties in generating sufficient consumer
interest in our games, particularly since we historically have
had limited success in generating significant revenues from
games based on our own intellectual property;
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social, freemium games currently represent a significant
minority of the games available on smartphones and tablets and
have a limited history, and it is unclear how popular this style
of game will become or their revenue potential;
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our strategy with respect to developing social, freemium games
for smartphones assumes that a large number of consumers will
download our games because they are free and that we will
subsequently be able to effectively monetize these games via
in-app purchases. offers and advertisements; however, some
smartphones charge users a fee for downloading content, and
users of these smartphones may be reluctant to download our
freemium games because of these fees, which would reduce the
effectiveness of our product strategy;
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our social, freemium games may otherwise not be widely
downloaded by consumers for a variety of reasons, including poor
consumer reviews or other negative publicity, ineffective or
insufficient marketing efforts or a failure to achieve prominent
storefront featuring for such games;
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even if our social, freemium games are widely downloaded, we may
fail to retain users of these games or optimize the monetization
of these games for a variety of reasons, including poor game
design or quality, gameplay issues such as game unavailability,
long load times or an unexpected termination of the game due to
data server or other technical issues or our failure to
effectively respond and adapt to changing user preferences
through updates to our games;
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we expect that approximately half of the social, freemium games
that we intend to release during 2011 will be produced by third
parties with which we have a strategic relationship, which will
reduce our control over the development process and may result
in product delays and games that do not meet our and consumer
expectations regarding quality;
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the Federal Trade Commission has recently indicated that it
intends to review issues related to in-app purchases,
particularly with respect to games that are marketed primarily
to minors, and the Federal Trade Commission might issue rules
significantly restricting or even prohibiting in-app
purchases; and
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because these are effectively new products for us, we are less
able to forecast with accuracy revenue levels, required
marketing and development expenses, and net income or loss.
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If we do not achieve a sufficient return on our investment with
respect to developing and selling social, freemium games, it
will negatively affect our operating results.
An unexpected acceleration in the slowdown in sales of
feature phones in our carrier-based business, which currently
represents the significant majority of our revenues, or a
decline in the average selling prices of our games sold through
wireless carriers, could have a material adverse impact on our
revenues, financial position and results of operations.
We currently derive the significant majority of our revenues
from sales of our games on feature phones through wireless
carriers. Our revenues for each of 2009 and 2010 declined from
the prior year due to a decrease in sales in our carrier-based
business, resulting primarily from the continuing migration of
consumers from feature phones to smartphones that enable the
download of applications from sources other than a
carriers branded
e-commerce
service, such as the Apple App Store and Googles Android
Market. We believe that the decline in the sales of feature
phones and the transition of consumers to smartphones will
continue to accelerate and will result in an overall decline in
our revenues in 2011. In addition, due to the accelerating
decline in the sales of feature phones, we intend to release
significantly fewer games for feature phones in future periods,
which will further reduce our revenues that we derive from
feature phones. The ability of smartphones and tablets to serve
as a source of significant revenues is uncertain, and we will
likely be unable to generate sufficient revenues from these
platforms in 2011 to make up for the expected decline in sales
of our games on feature phones. In addition, games sold on
smartphones typically have lower average prices than our games
sold on feature phones, and to the extent consumers continue to
migrate to smartphones, it could result in lower average prices
for our games sold on feature phones. Any unexpected
acceleration in the slowdown in sales of feature phones, or any
reduction in the average prices of our games sold through our
wireless carriers, could have a material adverse impact on our
revenues, financial position and results of operations.
14
The markets in which we operate are highly competitive,
and many of our competitors have significantly greater resources
than we do.
The development, distribution and sale of mobile games is a
highly competitive business, characterized by frequent product
introductions and rapidly emerging new platforms, technologies
and storefronts. For end users, we compete primarily on the
basis of game quality, brand, customer reviews and, with respect
to our premium products, price. We compete for promotional and
deck placement based on these factors, as well as the
relationship with the digital storefront owner or wireless
carrier, historical performance, perception of sales potential
and relationships with licensors of brands and other
intellectual property. For content and brand licensors, we
compete based on royalty and other economic terms, perceptions
of development quality, porting abilities, speed of execution,
distribution breadth and relationships with carriers. We also
compete for experienced and talented employees.
Our primary competitors have historically been Electronic Arts
(EA Mobile) and Gameloft, with Electronic Arts having the
largest market share of any company in the mobile games market.
With respect to our social, freemium games that we publish for
smartphones and tablets, we also compete with a number of other
companies, including DeNA, which became a more formidable
competitor through its acquisition of ngmoco, and Zynga, as well
as other large publishers who create content for traditional
gaming consoles and for online play. In addition, given the open
nature of the development and distribution for smartphones and
tablets, we also compete or will compete with a vast number of
small companies and individuals who are able to create and
launch games and other content for these mobile devices
utilizing limited resources and with limited
start-up
time or expertise. Many of these smaller developers are able to
offer their games at no cost or substantially reduce their
prices to levels at which we may be unable to respond
competitively and still achieve profitability given their low
overhead. As an example of the competition that we face, it has
been estimated that more than 50,000 active games were available
on the Apple App Store as of March 1, 2011. The
proliferation of titles in these open developer channels makes
it difficult for us to differentiate ourselves from other
developers and to compete for end users who purchase content for
their smartphones without substantially increasing spending to
market our products or increasing our development costs.
Some of our competitors and our potential
competitors advantages over us, either globally or in
particular geographic markets, include the following:
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significantly greater revenues and financial resources;
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stronger brand and consumer recognition regionally or worldwide;
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the capacity to leverage their marketing expenditures across a
broader portfolio of mobile and non-mobile products;
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larger installed customer bases from related platforms such as
console gaming or social networking websites to which they can
market and sell mobile games;
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more substantial intellectual property of their own from which
they can develop games without having to pay royalties;
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lower labor and development costs and better overall economies
of scale;
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greater resources to make acquisitions;
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greater platform specific focus, experience and
expertise; and
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broader global distribution and presence.
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If we are unable to compete effectively or we are not as
successful as our competitors in our target markets, our sales
could decline, our margins could decline and we could lose
market share, any of which would materially harm our business,
operating results and financial condition.
End user tastes are continually changing and are often
unpredictable; if we fail to develop and publish new mobile
games that achieve market acceptance, our sales would
suffer.
Our business depends on developing and publishing mobile games
that digital storefront owners will prominently feature or
wireless carriers will place on their decks and that end users
will buy. We must continue
15
to invest significant resources in research and development,
analytics and marketing to enhance our offering of games and
introduce new games, and we must make decisions about these
matters well in advance of product release to timely implement
them. Our success depends, in part, on unpredictable and
volatile factors beyond our control, including end-user
preferences, competing games, new mobile platforms and the
availability of other entertainment activities. If our games and
related applications do not respond to the requirements of
digital storefront owners and carriers and the entertainment
preferences of end users, or they are not brought to market in a
timely and effective manner, our business, operating results and
financial condition would be harmed. Even if our games are
successfully introduced and initially adopted, a subsequent
shift in the entertainment preferences of end users could cause
a decline in our games popularity that could materially
reduce our revenues and harm our business, operating results and
financial condition.
If we are unsuccessful in establishing and increasing
awareness of our brand and recognition of our games or if we
incur excessive expenses promoting and maintaining our brand or
our games, our potential revenues could be limited, our costs
could increase and our operating results and financial condition
could be harmed.
We believe that establishing and maintaining our brand is
critical to establishing a direct relationship with end users
who purchase our products from
direct-to-consumer
channels, such as the Apple App Store and Googles Android
Market, and maintaining our existing relationships with wireless
carriers and content licensors, as well as potentially
developing new such relationships. Increasing awareness of our
brand and recognition of our games will be particularly
important in connection with our new strategic focus of
developing social, freemium games based on our own intellectual
property. Our ability to promote the Glu brand depends on our
success in providing high-quality mobile games. Similarly,
recognition of our games by end users depends on our ability to
develop engaging games of high quality with attractive titles.
However, our success also depends, in part, on the services and
efforts of third parties, over which we have little or no
control. For instance, if digital storefront owners or wireless
carriers fail to provide high levels of service, our end
users ability to access our games may be interrupted,
which may adversely affect our brand. If end users, digital
storefront owners, branded content owners and wireless carriers
do not perceive our existing games as high-quality or if we
introduce new games that are not favorably received by our end
users, digital storefront owners and wireless carriers, then we
may not succeed in building brand recognition and brand loyalty
in the marketplace. In addition, globalizing and extending our
brand and recognition of our games will be costly and will
involve extensive management time to execute successfully,
particularly as we expand our efforts to increase awareness of
our brand and games among international consumers. Moreover, if
a game is introduced with defects, errors or failures or
unauthorized objectionable content or if a game has playability
issues such as game unavailability, long load times or a
unexpected termination of the game due to data server or other
technical issues, we could experience damage to our reputation
and brand, and our attractiveness to digital storefront owners,
wireless carriers, licensors, and end users might be reduced. In
addition, although we have significantly increased our sales and
marketing-related expenditures in connection with the launch of
our new social, freemium games, these efforts may not succeed in
increasing awareness of our brand and new games. If we fail to
increase and maintain brand awareness and consumer recognition
of our games, our potential revenues could be limited, our costs
could increase and our business, operating results and financial
condition could suffer.
Inferior storefront featuring or deck placement would
likely adversely impact our revenues and thus our operating
results and financial condition.
Wireless carriers provide a limited selection of games that are
accessible to their subscribers through a deck on their mobile
handsets. The inherent limitation on the number of games
available on the deck is a function of the limited screen size
of handsets and carriers perceptions of the depth of menus
and numbers of choices end users will generally utilize.
Carriers typically provide one or more top-level menus
highlighting games that are recent top sellers, that the carrier
believes will become top sellers or that the carrier otherwise
chooses to feature, in addition to a link to a menu of
additional games sorted by genre. We believe that deck placement
on the top-level or featured menu or toward the top of
genre-specific or other menus, rather than lower down or in
sub-menus,
is likely to result in higher game sales. If carriers choose to
give our games less favorable deck placement, our games may be
less successful than we anticipate, our revenues may decline and
our business, operating results and financial condition may be
materially harmed.
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Conversely, the open nature of the digital storefronts, such as
the Apple App Store and Googles Android Market, allow for
vast numbers of applications to be offered to consumers from a
much wider array of competitors than in the wireless carrier
channel. This may reduce the competitive advantage of our
established network of relationships with wireless carriers. It
may also require us to expend significantly increased amounts to
generate substantial revenues on these platforms, reducing or
eliminating the profitability of publishing games for them.
The open nature of many of the digital storefronts substantially
increases the number of our competitors and competitive
products, which makes it more difficult for us to achieve
prominent placement or featuring for our games. Our failure to
achieve prominent placement or featuring for our games on the
smartphone storefronts could result in our games not generating
significant sales. We believe that a number of factors may
influence the featuring or placement of a game in these digital
storefronts, including:
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the perceived attractiveness of the title or brand;
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the past critical or commercial success of the game or of other
games previously introduced by a publisher;
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the publishers relationship with the applicable digital
storefront owner and future pipeline of quality titles for
it; and
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the current market share of the publisher.
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If carriers choose to give our games less favorable deck
placement or if our games do not receive prominent placement on
the digital storefronts, our games may be less successful than
we anticipate, our revenues may decline and our business,
operating results and financial condition may be materially
harmed.
Third parties will be developing some of our social,
freemium games, and to the extent that they do not timely
deliver high-quality games that meet our and consumer
expectations, our business will suffer.
Recently, we initiated our Glu Partners program, which will
provide for the external development of some of our games; we
currently expect that approximately half of the social, freemium
games that we intend to release during 2011 will be produced by
third parties with which we have a strategic relationship. We
have historically created and developed all of our games in our
internal studios, and we do not have any experience in
outsourcing and managing the production of our game concepts by
external developers. Because we will have no direct supervision
and reduced control of this external development process, it
could result in development delays and games of lesser quality
and that are more costly to develop than those produced by our
internal studios. This may particularly be the case to the
extent that we do not provide our external developers with
sufficiently detailed game development documentation, which
could result in us providing them with a number of change orders
that would delay development and increase our production costs.
In addition, we may lose the services of one of our external
developers for a number of reasons, including that a competitor
acquires its business or signs the developer to an exclusive
development arrangement, or the developer might encounter
financial or other difficulties that cause it to go out of
business, potentially prior to completing production of our
games. There is also significant demand for the services of
external developers which may cause our developers to work for a
competitor in the future or to renegotiate agreements with us on
terms less favorable for us. Furthermore, we have agreed to pay
these external developers significant development fees and, in
some cases, bonuses based on consumer reviews of the published
games, and to the extent that these games are not commercially
successful, we may not generate sufficient revenues to recoup
our development costs or produce a sufficient return on
investment, which would adversely affect our operating results.
Changes in foreign exchange rates and limitations on the
convertibility of foreign currencies could adversely affect our
business and operating results.
Although we currently transact approximately one-half of our
business in U.S. Dollars, we also transact approximately
one-fourth of our business in pounds sterling and Euros and the
remaining portion of our business in other currencies.
Conducting business in currencies other than U.S. Dollars
subjects us to fluctuations in currency exchange rates that
could have a negative impact on our reported operating results.
Fluctuations in the value of the U.S. Dollar relative to
other currencies impact our revenues, cost of revenues and
operating margins and result in foreign currency exchange gains
and losses. For example, in 2008, we recorded a
$3.0 million foreign currency
17
exchange loss primarily related to the revaluation of
intercompany balance sheet accounts. To date, we have not
engaged in exchange rate hedging activities, and we do not
expect to do so in the foreseeable future. Even if we were to
implement hedging strategies to mitigate this risk, these
strategies might not eliminate our exposure to foreign exchange
rate fluctuations and would involve costs and risks of their
own, such as cash expenditures, ongoing management time and
expertise, external costs to implement the strategies and
potential accounting implications.
We face additional risk if a currency is not freely or actively
traded. Some currencies, such as the Chinese Renminbi, in which
our Chinese operations principally transact business, are
subject to limitations on conversion into other currencies,
which can limit our ability to react to rapid foreign currency
devaluations and to repatriate funds to the United States should
we require additional working capital.
We have depended on a small number of games for a
significant portion of our revenues in recent fiscal periods. If
these games do not continue to succeed or we do not release
highly successful new games, our revenues would decline.
In our industry, new games are frequently introduced, but a
relatively small number of games account for a significant
portion of industry sales. Similarly, a significant portion of
our revenues comes from a limited number of mobile games,
although the games in that group have shifted over time. For
example, in 2010, 2009 and 2008, we generated approximately
41.6%, 35.0% and 30.5% of our revenues, respectively, from our
top ten games, but no individual game represented more than 10%
of our revenues in any of those periods. If our new games are
not successful, our revenues could be limited and our business
and operating results would suffer in both the year of release
and thereafter.
We might elect not to renew our existing brand and content
licenses when they expire and might not choose to obtain
additional licenses, which would negatively impact our feature
phone revenues and might negatively impact our smartphone
revenues to the extent that we do not create successful games
based on our own intellectual property.
Revenues derived from mobile games and other applications based
on or incorporating brands or other intellectual property
licensed from third parties accounted for 78.1%, 77.5% and 75.0%
of our revenues in 2010, 2009 and 2008, respectively. In 2010,
revenues derived under various licenses from our five largest
licensors, Activision, Atari, Freemantle Media, Harrahs
and 2waytraffic, together accounted for approximately 45.0% of
our revenues. Creating games based on well-known, licensed
brands has historically been critical to the success of our
feature phone business, as this helped us achieve more prominent
placement on our wireless carriers decks and contributed to
greater commercial success with feature phone consumers.
However, we have determined to shift our business strategy
towards becoming the leading publisher of social, mobile
freemium games, and we intend to have the substantial majority
of these social, freemium games be based upon our own
intellectual property. As a result, we will be allocating a
significantly smaller amount of our operating budget to
licensing deals and might elect not to renew our existing brand
and content licenses when they expire. In addition, we intend to
only selectively enter into new licensing arrangements, if any,
in future periods. Our existing licenses expire at various times
during the next several years, and our feature phone revenues
will be negatively impacted to the extent that we lose the right
to distribute games based on licensed content. This expected
decline in our feature phone revenues could have an unexpectedly
greater impact on our overall revenues and operating results to
the extent that we are not successful in significantly
increasing our revenues from games developed for smartphones and
tablets based on our own intellectual property. The most
successful games that we have developed for smartphones have
historically been based on licensed brands and content, and we
may encounter difficulties in generating sufficient consumer
interest and significant revenues from games based on our own
intellectual property. For example, we released five social,
freemium games in the fourth quarter of 2010, four of which were
based on our own intellectual property and one of which was
based on licensed intellectual property. Although one of our
games based on our original intellectual property, Gun
Bros, had the greatest commercial success, the other three
original intellectual property games fared worse commercially
than the game based on licensed intellectual property, Deer
Hunter Challenge. To the extent that we do not create more
original intellectual property games that have the level of
commercial success of Gun Bros, our revenues and
operating results will suffer.
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System or network failures could reduce our sales,
increase costs or result in a loss of revenues or end users of
our games.
We rely on digital storefronts, wireless carriers
and other third-party networks to deliver games to end users and
on their or other third parties billing systems to track
and account for the downloading of our games. We also rely on
our own servers to operate our new social, freemium games that
are delivered as a live service, to maintain our analytics data
and to deliver games on demand to end users through our
carriers networks. In addition, certain of our
subscription-based games, require access over the mobile
Internet to our servers to enable certain features. Any
technical problem with storefronts, carriers, third
parties or our billing, delivery or information systems,
servers or communications networks could result in the inability
of end users to download or play our games, prevent the
completion of billing for a game or result in the loss of
users virtual currency or other in-app purchases or our
analytics data, or interfere with access to some aspects of our
games. For example, in connection with the release of our Gun
Bros game on the Apple App Store in the fourth quarter of
2010, we experienced issues with our data servers that resulted
in gameplay issues and the loss of some users virtual
assets they acquired through in-app purchases. In the event of a
loss of virtual assets, we may be required to issue refunds, we
may receive negative publicity and game ratings, and we may lose
users of our games, any of which would negatively affect our
business. In addition, during the fourth quarter of 2010, we
lost some of our analytics data, including data with respect to
our daily and monthly average users. Furthermore, from time to
time, our carriers have experienced failures with their billing
and delivery systems and communication networks, including
gateway failures that reduced the provisioning capacity of their
branded
e-commerce
system. Any such technical problems could cause us to lose end
users or revenues or incur substantial repair costs and distract
management from operating our business.
We currently rely primarily on wireless carriers to market
and distribute our games for feature phones and thus to generate
a significant portion of our revenues. The loss of or a change
in any significant carrier relationship, including their credit
worthiness, could materially reduce our revenues and adversely
impact our cash position.
A significant portion of our revenues is derived from a limited
number of carriers. In 2010, we derived approximately 44.1% of
our revenues from relationships with five carriers, including
Verizon Wireless, which accounted for 15.2% of our revenues. We
expect that we will continue to generate a significant portion
of our revenues through distribution relationships with fewer
than 20 carriers in 2011. If any of our carriers decides not to
market or distribute our games or decides to terminate, not
renew or modify the terms of its agreement with us or if there
is consolidation among carriers generally, we may be unable to
replace the affected agreement with acceptable alternatives,
causing us to lose access to that carriers subscribers and
the revenues they afford us. In addition, having a significant
portion of our revenues concentrated among a limited number of
carriers also creates a credit concentration risk for us, and in
the event that any significant carrier were unable to fulfill
its payment obligations to us, our operating results and cash
position would suffer. Finally, our credit facilitys
borrowing base is tied to our accounts receivable. If any of our
wireless carriers were delinquent in their payments to us, it
would reduce our borrowing base and could require us to
immediately repay any borrowings outstanding related to such
carrier. If any of these eventualities come to pass, it could
materially reduce our revenues and otherwise harm our business.
Changes made by wireless carriers and other distributors
to their policies regarding pricing, revenue sharing, supplier
status, billing and collections could adversely affect our
business and operating results.
Wireless carriers generally control the price charged for our
mobile games either by approving or establishing the price of
the games charged to their subscribers. Some of our carrier
agreements also restrict our ability to change prices. In cases
where carrier approval is required, approvals may not be granted
in a timely manner or at all. A failure or delay in obtaining
these approvals, the prices established by the carriers for our
games, or changes in these prices could adversely affect market
acceptance of those games. Similarly, for some of our carriers,
including Verizon Wireless, when we make changes to a pricing
plan (the wholesale price and the corresponding suggested retail
price based on our negotiated revenue-sharing arrangement),
adjustments to the actual retail price charged to end users may
not be made in a timely manner or at all (even though our
wholesale price was reduced). A failure or delay by these
carriers in adjusting the retail price for our games, could
adversely affect sales volume and our revenues for those games.
In addition, wireless carriers have the ability to change their
pricing policy with their customers for downloading content,
such as our games. For example, Verizon Wireless began imposing
a data surcharge to download content on those of its customers
who had not otherwise subscribed to a data plan. Such charges
have, and could in the future, deter end users from purchasing
our content. In addition, wireless carriers could renegotiate
the
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revenue sharing arrangement that we have in place with them to
our detriment. For example in the first quarter of 2010, China
Mobile, the largest carrier in China, reduced the revenue share
that we receive from our games sold on the mBox platform in
approximately 15 provinces in China, which has begun, and will
likely continue, to negatively impact our revenues in China.
Furthermore, a portion of our revenues is derived from
subscriptions. Our wireless carriers have the ability to
discontinue offering subscription pricing, without our approval.
In China, sales to wireless carriers such as China Mobile may
only be made by service providers, which are companies who have
been licensed by the government to operate and publish mobile
games. China Mobile has designated four classes of licenses for
service providers with respect to mobile gaming, with a
Class A license being the highest designation. We hold,
through our Chinese subsidiaries, one of the three Class A
licenses that have currently been awarded by China Mobile. In
order to maintain this Class A license, we must maintain a
certain level of monthly revenues, as well as meet certain
minimum download and customer satisfaction levels. If we were to
lose this Class A license, our revenues in China would be
significantly and adversely impacted.
Carriers and other distributors also control billings and
collections for our games, either directly or through
third-party service providers. If our carriers or their
third-party service providers cause material inaccuracies when
providing billing and collection services to us, our revenues
may be less than anticipated or may be subject to refund at the
discretion of the carrier. Our market is experiencing a growth
in adoption of smartphones, such as the Apple iPhone and devices
based on Googles Android operating system. For many of our
wireless carriers, these smartphones are not yet directly
integrated into the carriers provisioning infrastructure
that would allow them to sell games directly to consumers, and
games are instead sold through third parties, which is a more
cumbersome process for consumers and results in a smaller
revenue share for us. These factors could harm our business,
operating results and financial condition.
A shift of technology platform by wireless carriers and
mobile handset manufacturers could lengthen the development
period for our games, increase our costs and cause our games to
be of lower quality or to be published later than
anticipated.
End users of games must have a mobile handset with multimedia
capabilities enabled by technologies capable of running
third-party games and related applications such as ours. Our
development resources are concentrated in the Apple iPhone,
Google Android, Blackberry, i-mode, Mophun, Palm, Symbian,
Windows Mobile, BREW and Java platforms. It is likely that one
or more of these technologies will fall out of favor with
handset manufacturers and wireless carriers, as transitions to
different technologies and technology platforms have happened in
the past and will occur in the future. If there is a rapid shift
to a different technology platform, such as Adobe Flash or Flash
Lite, or a new technology where we do not have development
experience or resources, the development period for our games
may be lengthened, increasing our costs, and the resulting games
may be of lower quality, and may be published later than
anticipated. In such an event, our reputation, business,
operating results and financial condition might suffer.
We face added business, political, regulatory,
operational, financial and economic risks as a result of our
international operations and distribution, any of which could
increase our costs and adversely affect our operating
results.
International sales represented approximately 55.1%, 52.2% and
52.0% of our revenues in 2010, 2009 and 2008, respectively. In
addition, as part of our international efforts, we acquired
U.K.-based Macrospace in December 2004, UK-based iFone in March
2006, China-based MIG in December 2007 and Superscape, which had
a significant presence in Russia, in March 2008. We have
international offices located in a number of foreign countries
including Brazil, China, England and Russia. We expect to
maintain our international presence, and we expect international
sales to be an important component of our revenues. Risks
affecting our international operations include:
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challenges caused by distance, language and cultural differences;
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multiple and conflicting laws and regulations, including
complications due to unexpected changes in these laws and
regulations;
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foreign currency exchange rate fluctuations;
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difficulties in staffing and managing international operations;
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potential violations of the Foreign Corrupt Practices Act,
particularly in certain emerging countries in East Asia, Eastern
Europe and Latin America;
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greater fluctuations in sales to end users and through carriers
in developing countries, including longer payment cycles and
greater difficulty collecting accounts receivable;
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protectionist laws and business practices that favor local
businesses in some countries;
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regulations that could potentially affect the content of our
products and their distribution, particularly in China;
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potential adverse foreign tax consequences;
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foreign exchange controls that might prevent us from
repatriating income earned in countries outside the United
States, particularly China;
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price controls;
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the servicing of regions by many different carriers;
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imposition of public sector controls;
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political, economic and social instability;
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restrictions on the export or import of technology;
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trade and tariff restrictions and variations in tariffs, quotas,
taxes and other market barriers; and
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difficulties in enforcing intellectual property rights in
certain countries.
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In addition, developing user interfaces that are compatible with
other languages or cultures can be expensive. As a result, our
ongoing international operations may be more costly than we
expect. As a result of our international operations in Asia,
Europe and Latin America, we must pay income tax in numerous
foreign jurisdictions with complex and evolving tax laws. If we
become subject to increased taxes or new forms of taxation
imposed by governmental authorities, our results of operations
could be materially and adversely affected.
These risks could harm our international operations, which, in
turn, could materially and adversely affect our business,
operating results and financial condition.
If we fail to deliver our games at the same time as new
mobile handset models and tablets are commercially introduced,
our sales may suffer.
Our business depends, in part, on the commercial introduction of
new handset models and tablets with enhanced features, including
larger, higher resolution color screens, improved audio quality,
and greater processing power, memory, battery life and storage.
For example, some companies have launched new smartphones or
tablets, including Apples iPhone and iPad and devices
based on the Googles Android operating system. In
addition, consumers generally purchase the majority of content,
such as our games, for a new handset or tablet within a few
months of purchasing the handset or tablet. We do not control
the timing of these handset and tablet launches. Some new
handsets are sold by carriers with one or more games or other
applications pre-loaded, and many end users who download our
games do so after they purchase their new handsets to experience
the new features of those handsets. Some handset and tablet
manufacturers give us access to their handsets prior to
commercial release. If one or more major handset or tablet
manufacturers were to cease to provide us access to new handset
models prior to commercial release, we might be unable to
introduce compatible versions of our games for those handsets or
tablets in coordination with their commercial release, and we
might not be able to make compatible versions for a substantial
period following their commercial release. If, because we do not
adequately build into our title plan the demand for games for a
particular handset or tablet or experience game launch delays,
we miss the opportunity to sell games when new handsets or
tablets are shipped or our end users upgrade to a new handset or
tablet, our revenues would likely decline and our business,
operating results and financial condition would likely suffer.
21
If a substantial number of the end users that purchase our
games by subscription change mobile handsets or if wireless
carriers switch to subscription plans that require active
monthly renewal by subscribers or change or cease offering
subscription plans, our sales could suffer.
Subscriptions represent a significant portion of our feature
phone revenues. As handset development continues, over time an
increasing percentage of end users who already own one or more
of our subscription games will likely upgrade from their
existing handsets. With some wireless carriers, end users are
not able to transfer their existing subscriptions from one
handset to another. In addition, carriers may switch to
subscription billing systems that require end users to actively
renew, or opt-in, each month from current systems that passively
renew unless end users take some action to opt-out of their
subscriptions, or change or cease offering subscription plans
altogether. If our subscription revenues decrease significantly
for these or other reasons, our sales would suffer and this
could harm our business, operating results and financial
condition.
If we fail to maintain and enhance our capabilities for
porting games to a broad array of mobile handsets, our
attractiveness to wireless carriers and branded content owners
will be impaired, and our sales and financial results could
suffer.
To reach large numbers of wireless subscribers, mobile
entertainment publishers like us must support numerous mobile
handsets and technologies. Once developed, a mobile game
designed for feature phones may be required to be ported to, or
converted into separate versions for, more than 1,000 different
handset models, many with different technological requirements.
These include handsets with various combinations of underlying
technologies, user interfaces, keypad layouts, screen
resolutions, sound capabilities and other carrier-specific
customizations. If we fail to maintain or enhance our porting
capabilities, our sales could suffer, branded content owners
might choose not to grant us licenses and carriers might choose
to give our games less desirable deck placement or not to give
our games placement on their decks at all.
Changes to our game design and development processes to address
new features or functions of handsets or networks might cause
inefficiencies in our porting process or might result in more
labor intensive porting processes. In addition, in the future we
will be required to port existing and new games to a broader
array of handsets and develop versions specific to new
smartphones. If we utilize more labor-intensive porting
processes, our margins could be significantly reduced and it may
take us longer to port games to an equivalent number of
handsets. For example, the time required to develop and port
games to some of the new smartphones, including the iPhone and
those based on the Android operating system, is longer and thus
developing and porting for the advanced platforms is more costly
than developing and porting for games for feature phones. Since
the majority of our revenues are currently derived from the sale
of games for feature phones in our carrier-based business, it is
important that we maintain and enhance our porting capabilities.
However, as additional smartphone digital storefronts are
developed and gain market prominence, our porting capabilities
represent less of a business advantage for us, yet we could be
required to invest considerable resource in this area to support
our existing business. These additional costs could harm our
business, operating results and financial condition.
Our industry is subject to risks generally associated with
the entertainment industry, any of which could significantly
harm our operating results.
Our business is subject to risks that are generally associated
with the entertainment industry, many of which are beyond our
control. These risks could negatively impact our operating
results and include: the popularity, price and timing of release
of games and mobile handsets on which they are played; the
commercial success of any movies upon which one of more of our
games are based; economic conditions that adversely affect
discretionary consumer spending; changes in consumer
demographics; the availability and popularity of other forms of
entertainment; and critical reviews and public tastes and
preferences, which may change rapidly and cannot necessarily be
predicted.
If one or more of our games were found to contain hidden,
objectionable content, our reputation and operating results
could suffer.
Historically, many video games have been designed to include
hidden content and gameplay features that are accessible through
the use of in-game cheat codes or other technological means that
are intended to enhance the gameplay experience. For example,
our Super K.O. Boxing game released for feature phones includes
additional characters and game modes that are available with a
code (usually provided to a player after accomplishing a certain
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level of achievement in the game). These features have been
common in console and computer games. However, in several cases,
hidden content or features have been included in other
publishers products by an employee who was not authorized
to do so or by an outside developer without the knowledge of the
publisher. From time to time, some of this hidden content and
these hidden features have contained profanity, graphic violence
and sexually explicit or otherwise objectionable material. If a
game we published were found to contain hidden, objectionable
content, our wireless carriers and other distributors of our
games could refuse to sell it, consumers could refuse to buy it
or demand a refund of their money, and, if the game was based on
licensed content, the licensor could demand that we incur
significant expense to remove the objectionable content from the
game and all ported versions of the game. This could have a
materially negative impact on our business, operating results
and financial condition.
Our business and growth may suffer if we are unable to
hire and retain key personnel.
Our future success will depend, to a significant extent, on our
ability to retain and motivate our key personnel, namely our
management team and experienced sales and engineering personnel.
In addition, in order to grow our business, succeed on our new
business initiatives, such as developing social, freemium titles
for smartphones and tablets, and replace departing employees, we
must be able to identify and hire qualified personnel.
Competition for qualified management, sales, engineering and
other personnel can be intense, and we may not be successful in
attracting and retaining such personnel. This may be
particularly the case for us to the extent our stock price
remains at a depressed level, as individuals may elect to seek
employment with other companies that they believe have better
long-term prospects. Competitors have in the past and may in the
future attempt to recruit our employees, and our management and
key employees are not bound by agreements that could prevent
them from terminating their employment at any time. We may also
experience difficulty assimilating our newly hired personnel and
they may be less effective or productive than we anticipated,
which may adversely affect our business. In addition, we do not
maintain a key-person life insurance policy on any of our
officers. Our business and growth may suffer if we are unable to
hire and retain key personnel.
Acquisitions could result in operating difficulties,
dilution and other harmful consequences.
We have acquired a number of businesses in the past, including,
most recently, Superscape, which had a significant presence in
Russia, in March 2008 and MIG, which is based in China, in
December 2007. We expect to continue to evaluate and consider a
wide array of potential strategic transactions, including
business combinations and acquisitions of technologies,
services, products and other assets. At any given time, we may
be engaged in discussions or negotiations with respect to one or
more of these types of transactions. Any of these transactions
could be material to our financial condition and results of
operations. The process of integrating any acquired business may
create unforeseen operating difficulties and expenditures and is
itself risky. The areas where we may face difficulties include:
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diversion of management time and a shift of focus from operating
the businesses to issues related to integration and
administration;
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declining employee morale and retention issues resulting from
changes in compensation, management, reporting relationships,
future prospects or the direction of the business;
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the need to integrate each acquired companys accounting,
management, information, human resource and other administrative
systems to permit effective management, and the lack of control
if such integration is delayed or not implemented;
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the need to implement controls, procedures and policies
appropriate for a larger public company that the acquired
companies lacked prior to acquisition;
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in the case of foreign acquisitions, the need to integrate
operations across different cultures and languages and to
address the particular economic, currency, political and
regulatory risks associated with specific countries; and
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liability for activities of the acquired companies before the
acquisition, including violations of laws, rules and
regulations, commercial disputes, tax liabilities and other
known and unknown liabilities.
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If the anticipated benefits of any future acquisitions do not
materialize, we experience difficulties integrating businesses
acquired in the future, or other unanticipated problems arise,
our business, operating results and financial condition may be
harmed.
In addition, a significant portion of the purchase price of
companies we acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment
at least annually. In the future, if our acquisitions do not
yield expected returns, we may be required to take charges to
our earnings based on this impairment assessment process, which
could harm our operating results. For example, during 2008 we
incurred an aggregate goodwill impairment charge related to
write-downs in the third and fourth quarters of 2008 of
$69.5 million as the fair values of our three reporting
units were determined to be below their carrying values.
Moreover, the terms of acquisitions may require that we make
future cash or stock payments to shareholders of the acquired
company, which may strain our cash resources or cause
substantial dilution to our existing stockholders at the time
the payments are required to be made. For example, pursuant to
our merger agreement with MIG, we were required to make
$25.0 million in future cash and stock payments to the
former MIG shareholders, which payments we renegotiated in
December 2008. Had we paid the MIG earnout and bonus payments on
their original terms, we could have experienced cash shortfall
related to the cash payments and our stockholders could have
experienced substantial dilution related to the stock payments.
We may need to raise additional capital or borrow funds to
grow our business, and we may not be able to raise capital or
borrow funds on terms acceptable to us or at all.
The operation of our business, and our efforts to grow our
business, requires significant cash outlays and commitments. As
of December 31, 2010, we had $12.9 million of cash and
cash equivalents, which does not include the $15.9 million
in net proceeds that we received from our underwritten public
offering of common stock in January 2011. In addition to our
general operating expenses and prepaid and guaranteed royalty
payments, we had $2.3 million that was outstanding as of
December 31, 2010 under our revolving credit facility. In
addition, of our $12.9 million of cash and cash equivalents
that we held as of December 31, 2010, $1.4 million was
held in our China subsidiaries. To the extent we require
additional working capital in our U.S. or other non-Chinese
operations, it could be very difficult to repatriate money held
in our China subsidiaries due to our declining operating profits
in China, and such repatriation would be subject to taxation,
potentially at high rates.
As a result of our plans to increase our spending on sales and
marketing and research and development initiatives in connection
with our new social, freemium games that we will release in
2011, we expect to use a significant amount of cash in our
operations in 2011 as we seek to grow our business. If our cash
and cash equivalents, together with borrowings under our credit
facility, are insufficient to meet our cash requirements, we
will either need to seek additional capital, potentially through
an additional debt or equity financing (potentially pursuant to
our effective universal shelf registration statement), by
increasing the amount available to us for borrowing under the
credit facility, procuring a new debt facility or selling some
of our assets. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings, if available, may be on
terms that are dilutive or potentially dilutive to our
stockholders, such was the case with respect to the private
placement transaction we consummated in August 2010 and the
underwritten public offering we effected in January 2011,
particularly given our current stock price. The holders of new
securities may also receive rights, preferences or privileges
that are senior to those of existing holders of our common
stock, all of which is subject to the provisions of our credit
facility. Additionally, we may be unable to increase the size of
the credit facility or procure a new debt facility, or to do so
on terms that are acceptable to us, particularly in light of the
current credit market conditions. We also may not be able to
access the full $8.0 million potentially available under of
our credit facility, as the credit facilitys borrowing
base is based upon our accounts receivable; as of
December 31, 2010, the maximum amount available for
borrowing under the credit facility was limited to
$2.5 million. If new sources of financing are required but
are insufficient or unavailable, we would be required to modify
our growth and operating plans to the extent of available
funding, which would harm our ability to grow our business.
Furthermore, if we are unable to remain in compliance with the
financial or other covenants contained in the credit facility
and do not obtain a waiver from the lender then, subject to
applicable cure periods, any outstanding indebtedness under the
credit facility could be declared immediately due and payable.
This credit facility also is scheduled to expire on
June 30, 2011. We do not intend to extend the
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maturity date of this credit facility, and may seek to enter
into a new credit facility with the lender or a new lender; we
cannot assure you that we would be able to enter into a new
facility on terms favorable to us or at all.
Our business is subject to increasing regulation of
content, consumer privacy, distribution and online hosting and
delivery in the key territories in which we conduct business. If
we do not successfully respond to these regulations, our
business may suffer.
Legislation is continually being introduced that may affect both
the content of our products and their distribution. For example,
data and consumer protection laws in the United States and
Europe impose various restrictions on our business, which will
be increasingly important to our business as we continue to
market our products directly to end users and to the extent we
obtain personal information about our customers. We currently
collect information regarding the unique device identifiers
(UDIDs) of our customers smartphones and tablets any may
in the future collect personally identifiable information
regarding our customers. Any concerns about our practices with
regard to the collection, use, disclosure, or security of
personal information or other privacy related matters, even if
unfounded, could damage our reputation and operating results.
The rules regarding data and consumer protection laws vary by
territory although the Internet recognizes no geographical
boundaries. In the United States, for example, numerous federal
and state laws have been introduced which attempt to restrict
the content or distribution of games. Legislation has been
adopted in several states, and proposed at the federal level,
that prohibits the sale of certain games to minors. If such
legislation is adopted and enforced, it could harm our business
by limiting the games we are able to offer to our customers or
by limiting the size of the potential market for our games. We
may also be required to modify certain games or alter our
marketing strategies to comply with new and possibly
inconsistent regulations, which could be costly or delay the
release of our games. The Federal Trade Commission has also
recently indicated that it intends to review issues related to
in-app purchases, particularly with respect to games that are
marketed primarily to minors. If the Federal Trade Commission
issues rules significantly restricting or even prohibiting
in-app purchases, it would significantly impact our business
strategy. In addition, two self-regulatory bodies in the United
States (the Entertainment Software Rating Board) and the
European Union (Pan European Game Information) provide consumers
with rating information on various products such as
entertainment software similar to our products based on the
content (for example, violence, sexually explicit content,
language). Furthermore, the Chinese government has adopted
measures designed to eliminate violent or obscene content in
games. In response to these measures, some Chinese
telecommunications operators have suspended billing their
customers for certain mobile gaming platform services, including
those services that do not contain offensive or unauthorized
content, which could negatively impact our revenues in China.
Any one or more of these factors could harm our business by
limiting the products we are able to offer to our customers, by
limiting the size of the potential market for our products, or
by requiring costly additional differentiation between products
for different territories to address varying regulations.
If we do not adequately protect our intellectual property
rights, it may be possible for third parties to obtain and
improperly use our intellectual property and our business and
operating results may be harmed.
Our intellectual property is an essential element of our
business. We rely on a combination of copyright, trademark,
trade secret and other intellectual property laws and
restrictions on disclosure to protect our intellectual property
rights. To date, we have not sought patent protection.
Consequently, we will not be able to protect our technologies
from independent invention by third parties. Despite our efforts
to protect our intellectual property rights, unauthorized
parties may attempt to copy or otherwise to obtain and use our
technology and games. Monitoring unauthorized use of our games
is difficult and costly, and we cannot be certain that the steps
we have taken will prevent piracy and other unauthorized
distribution and use of our technology and games, particularly
internationally where the laws may not protect our intellectual
property rights as fully as in the United States. In the future,
we may have to resort to litigation to enforce our intellectual
property rights, which could result in substantial costs and
divert our managements attention and our resources. In
addition, some of our competitors have in the past released
games that are nearly identical to successful games released by
their competitors in an effort to confuse the market and divert
users from the competitors game to the copycat game. To
the extent that these tactics are employed with respect to any
of our games, it could reduce our revenues that we generate from
these games.
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In addition, although we require our third-party developers to
sign agreements not to disclose or improperly use our trade
secrets and acknowledging that all inventions, trade secrets,
works of authorship, developments and other processes generated
by them on our behalf are our property and to assign to us any
ownership they may have in those works, it may still be possible
for third parties to obtain and improperly use our intellectual
properties without our consent. This could harm our business,
operating results and financial condition.
Third parties may sue us, including for intellectual
property infringement, which, if successful, may disrupt our
business and could require us to pay significant damage
awards.
Third parties may sue us, including for intellectual property
infringement, or initiate proceedings to invalidate our
intellectual property, which, if successful, could disrupt the
conduct of our business, cause us to pay significant damage
awards or require us to pay licensing fees. For example, in a
dispute that we settled in July 2010, Skinit, Inc. filed a
complaint against us and other defendants in which it sought
unspecified damages, plus attorneys fees and costs. In the
event of a future successful claim against us, we might be
enjoined from using our or our licensed intellectual property,
we might incur significant licensing fees and we might be forced
to develop alternative technologies. Our failure or inability to
develop non-infringing technology or games or to license the
infringed or similar technology or games on a timely basis could
force us to withdraw games from the market or prevent us from
introducing new games. In addition, even if we are able to
license the infringed or similar technology or games, license
fees could be substantial and the terms of these licenses could
be burdensome, which might adversely affect our operating
results. We might also incur substantial expenses in defending
against third-party disputes, litigation or infringement claims,
regardless of their merit. Successful claims against us might
result in substantial monetary liabilities, an injunction
against us and might materially disrupt the conduct of our
business and harm our financial results.
Our reported financial results could be adversely affected
by changes in financial accounting standards or by the
application of existing or future accounting standards to our
business as it evolves.
Our reported financial results are impacted by the accounting
policies promulgated by the SEC and national accounting
standards bodies and the methods, estimates, and judgments that
we use in applying our accounting policies. Due to recent
economic events, the frequency of accounting policy changes may
accelerate, including conversion to unified international
accounting standards. Policies affecting software revenue
recognition have and could further significantly affect the way
we account for revenue related to our products and services. For
example, we are developing and selling games for smartphones and
tablets, including social, freemium games that we began to
release in the fourth quarter of 2010, and the accounting for
revenue derived from these platforms and games, particularly
with regard to micro-transactions, is still evolving and, in
some cases, uncertain. As we enhance, expand and diversify our
business and product offerings, the application of existing or
future financial accounting standards, particularly those
relating to the way we account for revenue, could have a
significant adverse effect on our reported results although not
necessarily on our cash flows.
If we fail to maintain an effective system of internal
controls, we might not be able to report our financial results
accurately or prevent fraud; in that case, our stockholders
could lose confidence in our financial reporting, which could
negatively impact the price of our stock.
Effective internal controls are necessary for us to provide
reliable financial reports and prevent fraud. In addition,
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate and report on our internal control over financial
reporting. We have incurred, and expect to continue to incur,
substantial accounting and auditing expenses and expend
significant management time in complying with the requirements
of Section 404. Even if we conclude, that our internal
control over financial reporting provides reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles,
because of its inherent limitations, internal control over
financial reporting may not prevent or detect fraud or
misstatements. Failure to implement required new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
reporting obligations. If we or our independent registered
public accounting firm discover a material weakness or a
significant deficiency in our internal control, the disclosure
of that fact, even if quickly remedied, could reduce the
markets confidence in our financial statements and harm
our stock price. In addition, a delay in compliance with
Section 404 could subject us to a variety of administrative
sanctions, including ineligibility for short form resale
registration,
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action by the SEC, the suspension or delisting of our common
stock from the NASDAQ Global Market and the inability of
registered broker-dealers to make a market in our common stock,
which would further reduce our stock price and could harm our
business.
Maintaining and improving our financial controls and the
requirements of being a public company may strain our resources,
divert managements attention and affect our ability to
attract and retain qualified members for our board of
directors.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002, and the rules and regulations of the
NASDAQ Stock Market. The requirements of these rules and
regulations has significantly increased our legal, accounting
and financial compliance costs, makes some activities more
difficult, time-consuming and costly and may also place undue
strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. This can be difficult
to do. For example, we depend on the reports of wireless
carriers for information regarding the amount of sales of our
games and related applications and to determine the amount of
royalties we owe branded content licensors and the amount of our
revenues. These reports may not be timely, and in the past they
have contained, and in the future they may contain, errors.
To maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting, we expend significant resources and provide
significant management oversight to implement appropriate
processes, document our system of internal control over relevant
processes, assess their design, remediate any deficiencies
identified and test their operation. As a result,
managements attention may be diverted from other business
concerns, which could harm our business, operating results and
financial condition. These efforts also involve substantial
accounting-related costs. In addition, if we are unable to
continue to meet these requirements, we may not be able to
remain listed on the NASDAQ Global Market.
The Sarbanes-Oxley Act and the rules and regulations of the
NASDAQ Stock Market make it more difficult and more expensive
for us to maintain directors and officers liability
insurance, and we may be required to accept reduced coverage or
incur substantially higher costs to maintain coverage. If we are
unable to maintain adequate directors and officers
insurance, our ability to recruit and retain qualified
directors, especially those directors who may be considered
independent for purposes of the NASDAQ Stock Market rules, and
officers will be significantly curtailed.
Changes in our tax rates or exposure to additional tax
liabilities could adversely affect our earnings and financial
condition.
We are subject to income taxes in the United States and in
various foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes, and, in
the ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is
uncertain.
We are also required to estimate what our tax obligations will
be in the future. Although we believe our tax estimates are
reasonable, the estimation process and applicable laws are
inherently uncertain, and our estimates are not binding on tax
authorities. The tax laws treatment of software and
internet-based transactions is particularly uncertain and in
some cases currently applicable tax laws are ill-suited to
address these kinds of transactions. Apart from an adverse
resolution of these uncertainties, our effective tax rate also
could be adversely affected by our profit level, by changes in
our business or changes in our structure, changes in the mix of
earnings in countries with differing statutory tax rates,
changes in the elections we make, changes in applicable tax laws
(in the United States or foreign jurisdictions), or changes in
the valuation allowance for deferred tax assets, as well as
other factors. Further, our tax determinations are subject to
audit by tax authorities which could adversely affect our income
tax provision. Should our ultimate tax liability exceed our
estimates, our income tax provision and net income or loss could
be materially affected.
We incur certain tax expenses that do not decline
proportionately with declines in our consolidated pre-tax income
or loss. As a result, in absolute dollar terms, our tax expense
will have a greater influence on our effective tax
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rate at lower levels of pre-tax income or loss than at higher
levels. In addition, at lower levels of pre-tax income or loss,
our effective tax rate will be more volatile.
We are also required to pay taxes other than income taxes, such
as payroll, value-added, net worth, property and goods and
services taxes, in both the United States and foreign
jurisdictions. We are subject to examination by tax authorities
with respect to these non-income taxes. There can be no
assurance that the outcomes from examinations, changes in our
business or changes in applicable tax rules will not have an
adverse effect on our earnings and financial condition. In
addition, we do not collect sales and use taxes since we do not
make taxable sales in jurisdictions where we have employees
and/or
property or we do not have nexus in the state. If tax
authorities assert that we have taxable nexus in the state,
those authorities might seek to impose past as well as future
liability for taxes
and/or
penalties. Such impositions could also impose significant
administrative burdens and decrease our future sales. Moreover,
state and federal legislatures have been considering various
initiatives that could change our position regarding sales and
use taxes.
Furthermore, as we change our international operations, adopt
new products and new distribution models, implement changes to
our operating structure or undertake intercompany transactions
in light of changing tax laws, acquisitions and our current and
anticipated business and operational requirements, our tax
expense could increase.
Our stock price has fluctuated and declined significantly
since our initial public offering in March 2007, and may
continue to fluctuate, may not rise and may decline
further.
The trading price of our common stock has fluctuated in the past
and is expected to continue to fluctuate in the future, as a
result of a number of factors, many of which are outside our
control, such as:
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price and volume fluctuations in the overall stock market,
including as a result of trends in the economy as a whole, such
as the continuing unprecedented volatility in the financial
markets;
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changes in the operating performance and stock market valuations
of other technology companies generally, or those in our
industry in particular;
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actual or anticipated fluctuations in our operating results;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
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failure of securities analysts to initiate or maintain coverage
of us, changes in financial estimates by any securities analysts
who follow our company or our industry, our failure to meet
these estimates or failure of those analysts to initiate or
maintain coverage of our stock;
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ratings or other changes by any securities analysts who follow
our company or our industry;
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announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures, capital raising activities or capital commitments;
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the publics response to our press releases or other public
announcements, including our filings with the SEC;
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any significant sales of our stock by our directors, executive
officers or large stockholders, including the investors in the
private placement transaction we completed in August 2010 whose
shares have been registered for resale under the Securities Act
and may be freely sold at any time;
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lawsuits threatened or filed against us; and
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market conditions or trends in our industry or the economy as a
whole.
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In addition, the stock markets, including the NASDAQ Global
Market on which our common stock is listed, have recently and in
the past, experienced extreme price and volume fluctuations that
have affected the market prices of many companies, some of which
appear to be unrelated or disproportionate to the operating
performance of these companies. These broad market fluctuations
could adversely affect the market price of our common stock. In
the past, following periods of volatility in the market price of
a particular companys securities, securities class
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action litigation has often been brought against that company.
Securities class action litigation against us could result in
substantial costs and divert our managements attention and
resources.
Our principal stockholders, executive officers and
directors have substantial control over our company, which may
prevent you or other stockholders from influencing significant
corporate decisions.
Matthew A. Drapkin and Hany M. Nada, each of whom is a member of
our board of directors, are affiliated with entities that
previously held substantial amounts of our common stock and
purchased shares of our common stock and warrants to purchase
shares of our common stock in the private placement transaction
we completed in August 2010. In addition, Mr. Drapkin and
one of his partners also purchased shares and warrants in the
private placement transaction for their own account. These
persons and entities, which we collectively refer to as the
Affiliated Investors, beneficially owned approximately 16.1% of
our common stock as of March 15, 2011. In addition, the
Affiliated Investors, together with the other members of our
board of directors, our executive officers and our other 5% or
greater stockholders, beneficially owned 42.9% of our common
stock as of March 15, 2011. As a result, these stockholders
will, if they so choose, be able to control or substantially
control all matters requiring stockholder approval. These
matters include the election of directors and approval of
significant corporate transactions, such as a merger,
consolidation, takeover or other business combination involving
us. These stockholders may have interests that differ from yours
and may vote in a way with which you disagree and which may be
adverse to your interests. This concentration of ownership could
also adversely affect the market price of our common stock or
reduce any premium over market price that an acquirer might
otherwise pay.
Some provisions in our certificate of incorporation,
bylaws and the terms of some of our licensing and distribution
agreements and our credit facility may deter third parties from
seeking to acquire us.
Our certificate of incorporation and bylaws contain provisions
that may make the acquisition of our company more difficult
without the approval of our board of directors, including the
following:
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our board of directors is classified into three classes of
directors with staggered three-year terms;
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only our chairman of the board, our lead independent director,
our chief executive officer, our president or a majority of our
board of directors is authorized to call a special meeting of
stockholders;
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our stockholders are able to take action only at a meeting of
stockholders and not by written consent;
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only our board of directors and not our stockholders is able to
fill vacancies on our board of directors;
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our certificate of incorporation authorizes undesignated
preferred stock, the terms of which may be established and
shares of which may be issued without stockholder
approval; and
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advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
a meeting of stockholders.
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In addition, the terms of a number of our agreements with
branded content owners and wireless carriers effectively provide
that, if we undergo a change of control, the applicable content
owner or carrier will be entitled to terminate the relevant
agreement. Also, our credit facility provides that a change in
control of our company is an event of default, which accelerates
all of our outstanding debt, thus effectively requiring that we
or the acquirer be willing to repay the debt concurrently with
the change of control or that we obtain the consent of the
lender to proceed with the change of control transaction.
Individually or collectively, these matters may deter third
parties from seeking to acquire us.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease approximately 19,027 square feet in
San Francisco, California for our corporate headquarters,
including our operations, studio and research and development
facilities, pursuant to a sublease agreement that expires in
November 2013. We also lease approximately 52,100 square
feet in San Mateo, California with respect to
29
our former corporate headquarters, pursuant to a sublease
agreement that expires in July 2012; we have sublet all of this
space to two tenants pursuant to
sub-subleases
that expire in July 2012. We lease approximately
10,600 square feet in London, England for our principal
European sales offices pursuant to a lease that expires in
October 2011. We have an option to extend the London lease for
five years and a right of first refusal to lease additional
space in our building. We lease approximately 15,796 square
feet in Beijing, China for our principal Asia Pacific offices
and our China studio facilities pursuant to a lease that expires
in October 2013 and two leases that both expire in November
2013. We lease approximately 13,429 square feet in Moscow,
Russia for our Russia studio facilities pursuant to a lease that
expires in November 2012. We also lease properties in Brazil,
France, Italy and Spain. We believe our space is adequate for
our current needs and that suitable additional or substitute
space will be available to accommodate the foreseeable expansion
of our operations.
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, we are subject to various claims, complaints
and legal actions in the normal course of business. We do not
believe we are party to any currently pending litigation, the
outcome of which will have a material adverse effect on our
operations, financial position or liquidity. However, the
ultimate outcome of any litigation is uncertain and, regardless
of outcome, litigation can have an adverse impact on us because
of defense costs, potential negative publicity, diversion of
management resources and other factors.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information for Common Stock
Our common stock has been listed on the NASDAQ Global Market
under the symbol GLUU since our initial public
offering in March 2007. The following table sets forth, for the
periods indicated, the high and low
intra-day
prices for our common stock as reported on the NASDAQ Global
Market. The closing price of our common stock on March 18,
2011 was $3.66.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
0.96
|
|
|
$
|
0.35
|
|
Second quarter
|
|
$
|
1.84
|
|
|
$
|
0.48
|
|
Third quarter
|
|
$
|
1.57
|
|
|
$
|
0.75
|
|
Fourth quarter
|
|
$
|
1.52
|
|
|
$
|
0.92
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
1.54
|
|
|
$
|
0.85
|
|
Second quarter
|
|
$
|
1.69
|
|
|
$
|
0.90
|
|
Third quarter
|
|
$
|
1.50
|
|
|
$
|
1.02
|
|
Fourth quarter
|
|
$
|
2.75
|
|
|
$
|
1.34
|
|
Our stock price has fluctuated and declined significantly since
our initial public offering. Please see the Risk
Factor Our stock price has fluctuated and
declined significantly since our initial public offering in
March 2007, and may continue to fluctuate, may not rise and may
decline further in Item 1A of this report.
30
Stock
Price Performance Graph
The following graph shows a comparison from March 22, 2007
(the date our common stock commenced trading on The NASDAQ Stock
Market) through December 31, 2010 of the cumulative total
return for an investment of $100 (and the reinvestment of
dividends) in our common stock, the NASDAQ Composite Index and
the NASDAQ Telecommunications Index. Such returns are based on
historical results and are not intended to suggest future
performance.
The above information under the heading Stock Price
Performance Graph shall not be deemed to be
filed for purposes of Section 18 of the
Exchange Act of 1934, or otherwise subject to the liabilities of
that section or Sections 11 and 12(a)(2) of the Securities
Act, and shall not be incorporated by reference into any
registration statement or other document filed by us with the
SEC, whether made before or after the date of this report,
regardless of any general incorporation language in such filing,
except as shall be expressly set forth by specific reference in
such filing.
Equity
Compensation Plan Information
The following table sets forth certain information, as of
December 31, 2010, concerning securities authorized for
issuance under all of our equity compensation plans: our 2001
Second Amended and Restated Stock Option Plan (the 2001
Plan), which plan terminated upon the adoption of the 2007
Equity Incentive Plan (the 2007 Plan), 2007 Employee
Stock Purchase Plan (the ESPP) and 2008 Equity
Inducement Plan (the Inducement Plan). Each of the
2007 Plan and ESPP contains an evergreen provision,
pursuant to which on January 1st of each year we
automatically add 3% and 1%, respectively, of our shares of
common stock outstanding on the preceding
December 31st to the shares reserved for issuance
under each plan; the evergreen provision for our 2007 Plan
expired after the most recent increase on January 1, 2011,
while the evergreen provision for our 2007 ESPP expires after
the scheduled increase on January 1, 2015. In addition,
pursuant to a pour over provision in our 2007 Plan,
31
options that are cancelled, expired or terminated under the 2001
Plan are added to the number of shares reserved for issuance
under our 2007 Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
|
|
|
Available for
|
|
|
|
Securities to be
|
|
|
Weighted-
|
|
|
Future Issuance
|
|
|
|
Issued Upon
|
|
|
Average
|
|
|
Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price
|
|
|
Compensation
|
|
|
|
Outstanding
|
|
|
of Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Options,
|
|
|
Options,
|
|
|
Securities
|
|
|
|
Warrants and
|
|
|
Warrants
|
|
|
Reflected in
|
|
Plan Category
|
|
Rights
|
|
|
and Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
5,548,021
|
|
|
$
|
2.15
|
|
|
|
4,525,536
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
1,380,592
|
(2)
|
|
|
1.51
|
|
|
|
38,653
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
6,928,613
|
|
|
$
|
2.02
|
|
|
|
4,564,189
|
(4)
|
|
|
|
(1) |
|
Represents 4,109,679 shares available for issuance under
our the 2007 Plan, which plan permits the grant of incentive and
non-qualified stock options, stock appreciation rights,
restricted stock, stock awards and restricted stock units; and
415,857 shares available for issuance under the ESPP. In
addition, 307,650 shares subject to outstanding options
under the 2001 Plan may be re-issued under the 2007 Plan
pursuant to the pour over provision described above. |
|
(2) |
|
Represents outstanding options under the Inducement Plan. |
|
(3) |
|
Represents shares available for issuance under the Inducement
Plan, which plan permits the grant of non-qualified stock
options. |
|
(4) |
|
Excludes 1,337,531 shares available for issuance under the
2007 Plan and 445,844 shares available for issuance under
the ESPP, which in each case were added to the respective share
reserve on January 1, 2011 pursuant to the evergreen
provisions described above. |
In March 2008, our Board of Directors adopted the Inducement
Plan to augment the shares available under our existing 2007
Plan. The Inducement Plan, which has a ten-year term, did not
require the approval of our stockholders. We initially reserved
600,000 shares of our common stock for grant and issuance
under the Inducement Plan, and on December 28, 2009, the
Compensation Committee of our Board of Directors increased the
number of shares reserved for issuance under the Inducement Plan
to 1,250,000 shares in connection with the appointment of
Niccolo M. de Masi as our new President and Chief Executive
Officer. We may only grant Nonqualified Stock Options
(NSOs) under the Inducement Plan and grants under
the Inducement Plan may only be made to persons not previously
an employee or director of Glu, or following a bona fide period
of non-employment, as an inducement material to such
individuals entering into employment with us and to
provide incentives for such persons to exert maximum efforts for
our success. We may grant NSOs under the Inducement Plan at
prices less than 100% of the fair value of the shares on the
date of grant, at the discretion of our Board of Directors. The
fair value of our common stock is determined by the last sale
price of our stock on the NASDAQ Global Market on the date of
determination. If any option granted under the Inducement Plan
expires or terminates for any reason without being exercised in
full, the unexercised shares will be available for grant by us
under the Inducement Plan. All outstanding NSOs are subject to
adjustment for any future stock dividends, splits, combinations,
or other changes in capitalization as described in the
Inducement Plan. If we were acquired and the acquiring
corporation did not assume or replace the NSOs granted under the
Inducement Plan, or if we were to liquidate or dissolve, all
outstanding awards will expire on such terms as our Board of
Directors determines.
32
Stockholders
As of March 15, 2011, we had approximately 104 record
holders of our common stock and hundreds of additional
beneficial holders.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain any future earnings and do
not expect to pay any dividends in the foreseeable future. Our
line of credit facility, entered into in February 2007 and
amended in December 2008, August 2009, February 2010, March 2010
and February 2011, prohibits us from paying any cash dividends
without the prior written consent of the lender. Any future
determination related to our dividend policy will be made at the
discretion of our Board of Directors.
Recent
Sales of Unregistered Securities
Not applicable.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
Not applicable.
33
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Item 8, Financial Statements and
Supplementary Data, and other financial data included
elsewhere in this report. Our historical results of operations
are not necessarily indicative of results of operations to be
expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
|
$
|
66,867
|
|
|
$
|
46,166
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
16,643
|
|
|
|
21,829
|
|
|
|
22,562
|
|
|
|
18,381
|
|
|
|
13,713
|
|
Impairment of prepaid royalties and guarantees
|
|
|
663
|
|
|
|
6,591
|
|
|
|
6,313
|
|
|
|
|
|
|
|
355
|
|
Amortization of intangible assets
|
|
|
4,226
|
|
|
|
7,092
|
|
|
|
11,309
|
|
|
|
2,201
|
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
21,532
|
|
|
|
35,512
|
|
|
|
40,184
|
|
|
|
20,582
|
|
|
|
15,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,813
|
|
|
|
43,832
|
|
|
|
49,583
|
|
|
|
46,285
|
|
|
|
30,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,180
|
|
|
|
25,975
|
|
|
|
32,140
|
|
|
|
22,425
|
|
|
|
15,993
|
|
Sales and marketing
|
|
|
12,140
|
|
|
|
14,402
|
|
|
|
26,066
|
|
|
|
13,224
|
|
|
|
11,393
|
|
General and administrative
|
|
|
13,108
|
|
|
|
16,271
|
|
|
|
20,971
|
|
|
|
16,898
|
|
|
|
12,072
|
|
Amortization of intangible assets
|
|
|
205
|
|
|
|
215
|
|
|
|
261
|
|
|
|
275
|
|
|
|
616
|
|
Restructuring charge
|
|
|
3,629
|
|
|
|
1,876
|
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
|
59
|
|
|
|
1,500
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
69,498
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,262
|
|
|
|
58,739
|
|
|
|
151,790
|
|
|
|
51,841
|
|
|
|
41,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,449
|
)
|
|
|
(14,907
|
)
|
|
|
(102,207
|
)
|
|
|
(5,556
|
)
|
|
|
(11,253
|
)
|
Interest and other income (expense), net
|
|
|
(1,265
|
)
|
|
|
(1,127
|
)
|
|
|
(1,359
|
)
|
|
|
1,965
|
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of change in
accounting principle
|
|
|
(12,714
|
)
|
|
|
(16,034
|
)
|
|
|
(103,566
|
)
|
|
|
(3,591
|
)
|
|
|
(12,125
|
)
|
Income tax benefit (provision)
|
|
|
(709
|
)
|
|
|
(2,160
|
)
|
|
|
(3,126
|
)
|
|
|
265
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,423
|
)
|
|
|
(18,194
|
)
|
|
|
(106,692
|
)
|
|
|
(3,326
|
)
|
|
|
(12,310
|
)
|
Accretion to preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(75
|
)
|
Deemed dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,423
|
)
|
|
$
|
(18,194
|
)
|
|
$
|
(106,692
|
)
|
|
$
|
(6,473
|
)
|
|
$
|
(12,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common
stockholders basic and diluted loss before
cumulative effect of change in accounting principle
|
|
$
|
(0.38
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(3.63
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(2.48
|
)
|
Accretion to preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
Deemed dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common
stockholders basic and diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(3.63
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(2.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
35,439
|
|
|
|
29,853
|
|
|
|
29,379
|
|
|
|
23,281
|
|
|
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense as follows:
|
Research and development
|
|
$
|
480
|
|
|
$
|
716
|
|
|
$
|
714
|
|
|
$
|
939
|
|
|
$
|
207
|
|
Sales and marketing
|
|
|
217
|
|
|
|
564
|
|
|
|
5,174
|
|
|
|
674
|
|
|
|
322
|
|
General and administrative
|
|
|
871
|
|
|
|
1,646
|
|
|
|
2,097
|
|
|
|
2,186
|
|
|
|
1,211
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
12,863
|
|
|
$
|
10,510
|
|
|
$
|
19,166
|
|
|
$
|
59,810
|
|
|
$
|
12,573
|
|
Total assets
|
|
|
44,816
|
|
|
|
57,738
|
|
|
|
92,076
|
|
|
|
161,505
|
|
|
|
81,799
|
|
Current portion of long-term debt
|
|
|
2,288
|
|
|
|
16,379
|
|
|
|
14,000
|
|
|
|
|
|
|
|
4,339
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
10,125
|
|
|
|
|
|
|
|
724
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,363
|
|
Total stockholders equity/(deficit)
|
|
$
|
13,885
|
|
|
$
|
11,693
|
|
|
$
|
26,794
|
|
|
$
|
129,461
|
|
|
$
|
(25,185
|
)
|
Please see Note 2, Note 3 and Note 7 of Notes to
Consolidated Financial Statements, for a discussion of factors
such as accounting changes, business combinations, and any
material uncertainties (if any) that may materially affect the
comparability of the information reflected in selected financial
data, described in Item 8 of this report.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The information in this discussion and elsewhere in this
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are based upon current expectations
that involve risks and uncertainties. Any statements contained
herein that are not statements of historical fact may be deemed
to be forward-looking statements. For example, the words
may, will, believe,
anticipate, plan, expect,
intend, could, estimate,
continue and similar expressions or variations are
intended to identify forward-looking statements. In this report,
forward-looking statements include, without limitation, the
following:
|
|
|
|
|
our expectations and beliefs regarding the future conduct and
growth of our business;
|
|
|
|
our expectations regarding competition and our ability to
compete effectively;
|
|
|
|
our expectations regarding the development of future
products, including those for smartphones and tablets, as well
as our intention to shift a larger portion of our research and
development expenses towards these development efforts;
|
|
|
|
our expectation that we will release 20 to 25 additional
social, freemium games during 2011, of which approximately half
will be developed by third parties pursuant to our Glu partners
program;
|
|
|
|
our intention to focus our development efforts on social,
freemium games and increase our use of in-game advertising,
micro-transactions and other monetization techniques with
respect to the games we develop for smartphones and tablets;
|
|
|
|
our expectation that the substantial majority of the social,
freemium games that we are developing for smartphones will be
based on our own intellectual property;
|
|
|
|
our expectations regarding our revenues and expenses,
including the expected decline in revenues from games we develop
for feature phones in our traditional carrier-based business and
our expectation that our smartphone revenues will surpass our
feature phone revenues on a monthly run rate basis by the end of
2011 and that this transition will position us to return to
overall revenue growth in the longer term;
|
|
|
|
our assumptions regarding the impact of Recent Accounting
Pronouncements applicable to us;
|
|
|
|
our assessments and estimates that determine our effective
tax rate and valuation allowance; and
|
|
|
|
our belief that our cash and cash equivalents, borrowings
under our revolving credit facility and cash flows from
operations, if any, will be sufficient to meet our working
capital needs, contractual obligations, debt service
obligations, capital expenditure requirements and similar
commitments.
|
Our actual results and the timing of certain events may
differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a
discrepancy include, but are not limited to, those discussed in
Risk Factors included in Section 1A of this
report. All forward-looking statements in this document
35
are based on information available to us as of the date
hereof, and we assume no obligation to update any such
forward-looking statements to reflect future events or
circumstances.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and related notes contained
elsewhere in this report. Our Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) includes the following sections:
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|
|
|
|
An Overview that discusses at a high level our operating results
and some of the trends that affect our business;
|
|
|
|
Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments
underlying our financial statements;
|
|
|
|
Recent Accounting Pronouncements;
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|
|
|
Results of Operations, including a more detailed discussion of
our revenues and expenses; and
|
|
|
|
Liquidity and Capital Resources, which discusses key aspects of
our statements of cash flows, changes in our balance sheets and
our financial commitments.
|
Overview
This overview provides a high-level discussion of our operating
results and some of the trends that affect our business. We
believe that an understanding of these trends is important to
understand our financial results for fiscal 2010, as well as our
future prospects. This summary is not intended to be exhaustive,
nor is it intended to be a substitute for the detailed
discussion and analysis provided elsewhere in this report,
including our consolidated financial statements and accompanying
notes.
Financial
Results and Trends
Revenues for 2010 were $64.3 million, a 19% decrease from
2009, in which we reported revenues of $79.3 million. This
decrease was primarily driven by a decline in feature phones
sold in the channel relating to our traditional carrier-based
business, which in turn led to a decrease in the number of games
that we sold. The decrease was partially related to the impact
of foreign currency exchange rates, which had a greater negative
impact on our revenues for 2010 compared to 2009. The decline in
our feature phone revenues was primarily due to the continued
migration of users from traditional feature phones to
smartphones, such as Apples iPhone and mobile phones
utilizing Googles Android operating system, which offer
enhanced functionality. We believe that this transition will
continue to accelerate in 2011 and for the foreseeable future as
consumers increasingly upgrade their phones. In addition, we
intend to release fewer games for feature phones in future
periods, which will further reduce our revenues that we derive
from feature phones. Because we still expect feature phone
revenues to comprise the majority of our revenues for 2011, we
expect an overall decline in our revenues for 2011 compared with
2010.
For us to succeed in 2011 and beyond, we believe that we must
increasingly publish mobile games that are widely accepted and
commercially successful on the smartphone and tablet digital
storefronts, which include Apples App Store, Googles
Android Market, Microsofts Windows Marketplace for Mobile,
Palms App Catalog, Nokias Ovi Store and Research In
Motions Blackberry App World. Although we have experienced
certain successes on these digital storefronts, particularly
with respect to the Apple App Store, our smartphone revenue only
accounted for approximately 15% and 5% of our revenues for the
years ended December 31, 2010 and December 31, 2009,
respectively. Our strategy for increasing our revenues from
smartphones and tablets involves becoming the leading publisher
of social, mobile freemium games games
that are downloadable without an initial charge, but which
enable a variety of additional features to be accessed for a fee
or otherwise monetized through various advertising and offer
techniques. Our social, freemium games are provided as a live
service and are generally designed to be persistent through
regular content updates. We believe this approach will enable us
to build and grow a longer lasting and more direct relationship
with our customers, which will assist us in our future sales and
marketing efforts. We intend to have the substantial majority of
our social, freemium games be based upon our own intellectual
property, which we believe will significantly enhance our
margins and long-term value.
36
Although we expect our revenues from smartphones and tablets to
increase in 2011 as compared to 2010, we do not expect this
increase to fully offset the anticipated decline in revenues
from games we develop for feature phones, and therefore in 2011
we expect that our total revenues will decline from our 2010
revenues. However, we believe that our smartphone revenues will
surpass our feature phone revenues on a monthly run rate basis
by the end of 2011 and that this transition will position us to
return to overall revenue growth in the longer term.
Significantly growing our revenues from smartphones and tablets
may be challenging for us for several reasons, including:
(1) the open nature of many of the smartphone and tablet
storefronts substantially increases the number of our
competitors and competitive products; (2) we have only
recently concentrated our efforts on developing and marketing
social, freemium games; (3) our relatively limited
experience with respect to creating games that include
micro-transaction capabilities, advertizing and offers may cause
us to have difficulty optimizing the monetization of our
freemium games; (4) we historically have had limited
success in generating significant revenues from games based on
our own intellectual property rather than licensed brands;
(5) our social, freemium games may not be widely downloaded
by consumers for a variety of reasons, including poor consumer
reviews or other negative publicity, ineffective or insufficient
marketing efforts or a failure to achieve prominent storefront
featuring for such games; and (6) we have a limited ability
to invest heavily in this strategy.
In addition, our revenues will continue to depend significantly
on growth in the mobile games market, our ability to continue to
attract new end users in that market and the overall strength of
the economy, particularly in the United States. Our revenues may
also be adversely impacted by decisions by our carriers to alter
their customer terms for downloading our games. For example,
Verizon Wireless, our largest carrier, imposes a data surcharge
to download content on those Verizon customers who have not
otherwise subscribed to a data plan. Our revenues depend on a
variety of other factors, including our relationships with
digital storefront owners and our licensors. The loss of any key
relationships with our digital storefront owners, carriers,
other distributors or licensors could impact our revenues in the
future.
Our net loss in 2010 was $13.4 million versus a net loss of
$18.2 million in 2009. This decrease was driven primarily
by a decrease in costs of revenues of $14.0 million due to
a decrease in overall sales and impairments of advanced
royalties, a decrease in operating expenses of $4.5 million
and a decrease in income tax provision of $1.5 million,
which was partially offset by a $15.0 million reduction in
revenues. The decrease in our operating expenses for the year
ended December 31, 2010 compared with the year ended
December 31, 2009 was in part due to the headcount
reductions and related measures that we took in connection with
the restructurings that we implemented in both the third quarter
of 2009 and the first, second and fourth quarters of 2010. Our
operating results are also affected by fluctuations in foreign
currency exchange rates of the currencies in which we incur
meaningful operating expenses (principally the British Pound
Sterling, Chinese Renminbi, Brazilian Real and Russian Ruble)
and our customers reporting currencies, as we transact
business in more than 70 countries in more than 20 different
currencies, and these currencies fluctuated significantly in
2009 and 2010.
We significantly increased our spending on sales and marketing
initiatives in the fourth quarter of 2010 in connection with the
launch of our initial social, freemium titles, and we expect our
sales and marketing expenditures to increase slightly from this
level during 2011. We also expect that our expenses to develop
and port games for advanced platforms and smartphones will
increase as we enhance our existing titles and develop new
titles to take advantage of the additional functionality offered
by these platforms, including through external development
relationships. As a result of this increased spending on sales
and marketing and research and development initiatives, we
expect to use a significant amount of cash in operations as we
seek to grow our business. Our ability to attain profitability
will be affected by our ability to grow our revenues and the
extent to which we must incur additional expenses to expand our
sales, marketing, development, and general and administrative
capabilities to grow our business. The largest component of our
recurring expenses is personnel costs, which consist of
salaries, benefits and incentive compensation, including bonuses
and stock-based compensation, for our employees. We expect that
the restructuring measures we implemented in the first, second
and fourth quarters of 2010, which primarily consisted of
headcount reductions, will have a beneficial effect on our
overall operating expenses, but will not fully offset the
expected increases in our sales and marketing and research and
development expenses in connection with our new social, freemium
games, as discussed above. Our business has historically been
impacted by seasonality, as many new mobile handset models are
released in the fourth calendar quarter to coincide with the
holiday shopping season. Because many end users download our
games soon after they purchase new mobile
37
phones and tablets, we generally experience seasonal sales
increases based on the holiday selling period. However, due to
the time between mobile phone and tablet purchases and game
purchases, some of this holiday impact occurs for us in our
first calendar quarter. Further, for a variety of reasons,
including roaming charges for data downloads that may make
purchase of our games prohibitively expensive for many end users
while they are traveling, we sometimes experience seasonal sales
decreases during the summer, particularly in parts of Europe. We
expect these seasonal trends to continue in the future.
Cash and cash equivalents at December 31, 2010 totaled
$12.9 million, an increase of $2.4 million from the
balance at December 31, 2009. This increase was primarily
due to $13.2 million of net proceeds received from the
private placement of common stock that we completed in August
2010 (the Private Placement), $2.2 million of
cash generated from operations and $598,000 of proceeds received
from option exercises and purchases under our employees stock
purchase program. These inflows were partially offset by
$10.3 million paid during 2010 with respect to the
promissory notes and bonuses that we issued to the MIG
shareholders that are discussed in further detail in
Significant Transactions below. We also repaid
$2.4 million under our credit facility and paid $710,000
for capital expenditures. In addition, our cash and cash
equivalents balance at December 31, 2010 does not include
the $15.9 million in net proceeds that we received from our
underwritten public offering of common stock that we completed
in January 2011, as discussed in further detail in
Significant Transactions below. We believe our cash
and cash equivalents, together with cash flows from operations
and borrowings under our credit facility will be sufficient to
meet our anticipated cash needs for at least the next
12 months.
Significant
Transactions
In January, 2011, we sold in an underwritten public offering an
aggregate of 8,414,635 shares of our common stock at a
price to the public of $2.05 per share for net proceeds of
approximately $15.9 million after underwriting discounts
and commissions and offering expenses. The underwriters of this
offering were Roth Capital Partners, LLC, Craig-Hallum Capital
Group LLC, Merriman Capital, Inc. and Northland Capital Markets.
We intend to utilize a significant portion of the net proceeds
from this offering to further the development of our global
social gaming community, including with respect to our Glu Games
Network and Glu Partners initiatives.
On August 27, 2010, we completed the Private Placement in
which we issued and sold to certain investors an aggregate of
13,495,000 shares of common stock at $1.00 per share and
warrants exercisable to purchase up to 6,747,500 shares of
common stock at $1.50 per share for initial gross proceeds of
approximately $13.5 million (excluding any proceeds we may
receive upon exercise of the warrants).
In December 2008, we renegotiated and extended our credit
facility, and also amended the terms of the credit facility in
August 2009, February 2010, March 2010 and February 2011. The
credit facility, as amended, provides for borrowings of up to
$8.0 million, subject to a borrowing base equal to 80% of
our eligible accounts receivable. The most recent fourth
amendment to the credit facility that we entered into in
February 2011 waived our default in maintaining minimum levels
of earnings before interest, taxes, depreciation and
amortization (EBITDA) specified in the loan
agreement for the period beginning October 1, 2010 and
ending December 31, 2010. This fourth amendment also
removed the EBITDA financial covenant from the loan agreement in
its entirety and replaced this covenant with a net cash
covenant, which requires us to maintain at least
$10.0 million in unrestricted cash at the lender or an
affiliate of the lender, net of any indebtedness that we owe to
the lender under the Loan Agreement.
In March 2008, we acquired Superscape, a global publisher of
mobile games, to deepen and broaden our game library, gain
access to
3-D game
development resources and to augment our internal production and
publishing resources with a studio in Moscow, Russia. We paid 10
pence (pound sterling) in cash for each issued share of
Superscape for a total purchase price of $38.8 million,
consisting of cash consideration of $36.8 million and
transaction costs of $2.1 million. Due to decreases in our
long-term forecasts and current market capitalization the entire
goodwill resulting from the Superscape acquisition was impaired
during the year ended December 31, 2008.
In December 2007, we acquired MIG to accelerate our presence in
China, deepen our relationship with China Mobile, the largest
wireless carrier in China, acquire access and rights to leading
franchises for the Chinese market, and augment our internal
production and publishing resources with a studio in China. As a
result of the attainment of revenue and operating income
milestones in 2008 by MIG, we were committed to pay
$20.0 million in additional
38
consideration to the MIG shareholders and $5.0 million of
bonuses to two officers of MIG. In December 2008, we
restructured the timing and nature of these payments and issued
to former shareholders of MIG an aggregate of $25.0 million
in promissory notes, which were due in 2009 and 2010; we have
repaid the last of the installments on these promissory notes in
the fourth quarter of 2010. Due to decreases in our long-term
forecasts and current market capitalization, a portion of the
goodwill resulting from the MIG acquisition was impaired during
the year ended December 31, 2008.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles, or
GAAP. These accounting principles require us to make certain
estimates and judgments that can affect the reported amounts of
assets and liabilities as of the dates of the consolidated
financial statements, the disclosure of contingencies as of the
dates of the consolidated financial statements, and the reported
amounts of revenues and expenses during the periods presented.
Although we believe that our estimates and judgments are
reasonable under the circumstances existing at the time these
estimates and judgments are made, actual results may differ from
those estimates, which could affect our consolidated financial
statements.
We believe the following to be critical accounting policies
because they are important to the portrayal of our financial
condition or results of operations and they require critical
management estimates and judgments about matters that are
uncertain:
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|
|
revenue recognition;
|
|
|
|
advance or guaranteed licensor royalty payments;
|
|
|
|
business combinations purchase accounting;
|
|
|
|
long-lived assets;
|
|
|
|
goodwill;
|
|
|
|
stock-based compensation; and
|
|
|
|
income taxes.
|
Revenue
Recognition
We generate revenues through the sale of our games on
traditional feature phones and smartphones, such as Apples
iPhone and mobile phones utilizing Googles Android
operating system, that offer enhanced functionality. Feature
phone games are distributed primarily through wireless carriers
and we recognize revenues in accordance with FASB
ASC 985-605,
Software: Revenue Recognition. Smartphone games are
distributed primarily through digital storefronts such as the
Apple App Store and we recognize revenues related to in-app
purchases or micro-transactions in accordance with
(SAB) No. 101, Revenue Recognition in
Financial Statements, as revised by SAB No. 104,
Revenue Recognition.
We estimate revenues from carriers in the current period when
reasonable estimates of these amounts can be made. Several
carriers 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 us to make
reasonable estimates of revenues and therefore to recognize
revenues during the reporting period when the end user licenses
the game. Determination of the appropriate amount of revenue
recognized involves judgments and estimates that we believe are
reasonable, but it is possible that actual results may differ
from our estimates. Our estimates for revenues include
consideration of factors such as preliminary sales data,
carrier-specific historical sales trends, the age of games and
the expected impact of newly launched games, successful
introduction of new handsets, promotions during the period and
economic trends. When we receive the final carrier reports, to
the extent not received within a reasonable time frame following
the end of each month, we record any differences between
estimated revenues and actual revenues in the reporting period
when we determine the actual amounts. Historically, the revenues
on the final revenue report have not differed by more than
one-half of 1% of the reported revenues for the period, which we
deemed to be immaterial. Revenues earned from certain carriers
may not be reasonably estimated. If we are unable
39
to reasonably estimate the amount of revenue to be recognized in
the current period, we recognize revenues upon the receipt of a
carrier revenue report and when our portion of a games
licensed revenues is fixed or determinable and collection is
probable. To monitor the reliability of our estimates, our
management, where possible, reviews the revenues by carrier and
by game on a weekly basis to identify unusual trends such as
differential adoption rates by carriers or the introduction of
new handsets. If we deem a carrier not to be creditworthy, we
defer all revenues from the arrangement with that carrier until
we receive payment and all other revenue recognition criteria
have been met.
In accordance with
ASC 605-45,
Revenue Recognition: Principal Agent Considerations, we
recognize as revenues the amount the carrier reports as payable
upon the sale of our games. We have evaluated our carrier and
digital storefront agreements and have determined that we are
not the principal when selling our games. Key indicators that we
evaluated to reach this determination include:
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|
|
wireless subscribers directly contract with the carriers and
digital storefronts, which have most of the service interaction
and are generally viewed as the primary obligor by the
subscribers;
|
|
|
|
carriers and digital storefronts generally have significant
control over the types of games that they offer to their
subscribers;
|
|
|
|
carriers and digital storefronts are directly responsible for
billing and collecting fees from their subscribers, including
the resolution of billing disputes;
|
|
|
|
carriers and digital storefronts generally pay us a fixed
percentage of their revenues or a fixed fee for each game;
|
|
|
|
carriers and digital storefronts generally must approve the
price of our games in advance of their sale to subscribers or
provide tiered pricing thresholds, and the more significant
carriers generally have the ability to set the ultimate price
charged to their subscribers; and
|
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|
we have limited risks, including no inventory risk and limited
credit risk.
|
We derive a portion of our revenues through the sale of virtual
items and currency on certain games downloaded for free
(freemium games) through digital storefronts. We
recognize revenue related to the sale of these virtual items,
when persuasive evidence of an arrangement exists, the service
has been rendered, the sales price is fixed or determinable, and
collectability is reasonably assured. Determining whether and
when some of these criteria have been satisfied requires
judgments that may have a significant impact on the timing and
amount of revenue we report in each period. For example, on the
date that we sell certain premium games and virtual items and
currency through micro-transactions within our freemium games,
we have an obligation to provide additional services and
incremental unspecified digital content in the future without an
additional fee. In these cases, we account for the sale of the
software product as a multiple element arrangement and recognize
the revenue over the estimated life of the game or virtual item,
with the exception of certain consumable virtual items which are
items consumed at a predetermined time or otherwise have
limitations on repeated use; these are recognized upon full
consumption of the virtual item. All other durable virtual items
which are not consumed at a predetermined time or otherwise do
not have a limitation on repeated use, we recognize over the
estimated life of the virtual item. For these virtual items we
have considered the average period that game players typically
play our games to arrive at our best estimates for the useful
life. While we believe our estimates to be reasonable based on
available game player information, we may revise such estimates
in the future as our games operation periods change. Any
adjustments arising from changes in the estimates of the lives
of these virtual items would be applied prospectively on the
basis that such changes are caused by new information indicating
a change in the game player behavior patterns. Any changes in
our estimates of useful lives of these virtual items may result
in our revenues being recognized on a basis different from prior
periods and may cause our operating results to fluctuate.
Advance
or Guaranteed Licensor Royalty Payments
Our contracts with some licensors include minimum guaranteed
royalty payments, which are payable regardless of the ultimate
volume of sales to end users. In accordance with the criteria
set forth in Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC)
460-10-15,
Guarantees, we recorded a minimum guaranteed liability of
approximately $562,000 as of December 31, 2010. When no
significant
40
performance remains with the licensor, we initially record each
of these guarantees as an asset and as a liability at the
contractual amount. We believe that the contractual amount
represents the fair value of our liability. When significant
performance remains with the licensor, we record royalty
payments as an asset when actually paid and as a liability when
incurred, rather than upon execution of the contract. We
classify minimum royalty payment obligations as current
liabilities to the extent they are contractually due within the
next twelve months.
Each quarter, we also evaluate the realization of our royalties
as well as any unrecognized guarantees not yet paid to determine
amounts that we deem unlikely to be realized through product
sales. We use estimates of revenues, cash flows and net margins
to evaluate the future realization of prepaid royalties and
guarantees. This evaluation considers multiple factors,
including the term of the agreement, forecasted demand, game
life cycle status, game development plans and current and
anticipated sales levels. To the extent that this evaluation
indicates that the remaining prepaid and guaranteed royalty
payments are not recoverable, we record an impairment charge in
the period such impairment is indicated. Subsequently, if actual
market conditions are more favorable than anticipated, amounts
of prepaid royalties previously written down may be utilized,
resulting in lower cost of revenues and higher income from
operations than previously expected in that period. During 2010,
2009 and 2008, we recorded impairment charges of $663,000,
$6.6 million and $6.3 million, respectively.
Business
Combinations Purchase Accounting
For acquisitions prior to January 1, 2009, we utilized the
purchase method of accounting, which required that we allocate
the purchase price of acquired companies to the tangible and
identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values. We record the excess of
purchase price over the aggregate fair values as goodwill. We
engage third-party appraisal firms to assist us in determining
the fair values of assets acquired and liabilities assumed.
These valuations require us to make significant estimates and
assumptions, especially with respect to intangible assets.
Critical estimates in valuing purchased technology, customer
lists and other identifiable intangible assets include future
cash flows that we expect to generate from the acquired assets.
If the subsequent actual results and updated projections of the
underlying business activity change compared with the
assumptions and projections used to develop these values, we
could experience impairment charges. See
Goodwill below. In addition, we have
estimated the economic lives of certain acquired assets and
these lives are used to calculate depreciation and amortization
expense. If our estimates of the economic lives change,
depreciation or amortization expenses could be accelerated or
slowed.
Effective January 1, 2009, we adopted a new accounting
standard update regarding business combinations, ASC 805,
which establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree.
ASC 805 also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial
effects of the business combination. ASC 805 applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Although we
did not enter into any business combinations during 2009 or
2010, we believe ASC 805 may have a material impact on our
future consolidated financial statements if we were to enter
into any future business combinations depending on the size and
nature of any such future transactions.
Long-Lived
Assets
We evaluate our long-lived assets, including property and
equipment and intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable
in accordance with ASC 360, Property Plant &
Equipment (ASC 360). Factors considered
important that could result in an impairment review include
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
manner of use of the acquired assets, significant negative
industry or economic trends, and a significant decline in our
stock price for a sustained period of time. We recognize
impairment based on the difference between the fair value of the
asset and its carrying value. Fair value is generally measured
based on either quoted market prices, if applicable, or a
discounted cash flow analysis.
41
Goodwill
In accordance with ASC 350, Intangibles
Goodwill and Other (ASC 350), we do not amortize
goodwill or other intangible assets with indefinite lives but
rather test them for impairment. ASC 350 requires us to
perform an impairment review of our goodwill balance at least
annually, which we do as of September 30 each year, and also
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. In our
impairment reviews, we look at the goodwill allocated to our
reporting units the Americas, EMEA and Asia-Pacific
(APAC).
ASC 350 requires a two-step approach to testing goodwill for
impairment for each reporting unit annually, or whenever events
or changes in circumstances indicate the fair value of a
reporting unit is below its carrying amount. The first step
measures for impairment by applying the fair value-based tests
at the reporting unit level. The second step (if necessary)
measures the amount of impairment by applying the fair
value-based tests to individual assets and liabilities within
each reporting units. The fair value of the reporting units are
estimated using a combination of the market approach, which
utilizes comparable companies data,
and/or the
income approach, which uses discounted cash flows.
We have three geographic segments comprised of the
(1) Americas, (2) APAC and (3) EMEA regions. As
of December 31, 2010, we only had goodwill attributable to
the APAC reporting unit. We performed an annual impairment
review as of September 30, 2010 as prescribed in
ASC 350 and concluded that we were not at risk of failing
the first step, as the fair value of the APAC reporting unit
exceeded its carrying value and thus no adjustment to the
carrying value of goodwill was necessary. As a result, we were
not required to perform the second step. In order to determine
the fair value of the reporting units, we utilized the
discounted cash flow and market methods. We have consistently
utilized both methods in our goodwill impairment tests and
weight both results equally and we believe both, in conjunction
with each other, provide a reasonable estimate of the
determination of fair value of the reporting unit
the discounted cash flow method being specific to anticipated
future results of the reporting unit and the market method,
which is based on our market sector including our competitors.
The assumptions supporting the discounted cash flow method, were
determined using our best estimates as of the date of the
impairment review.
In 2008, we recorded an aggregate goodwill impairment of
$69.5 million as the fair values of the Americas, APAC and
EMEA reporting units were determined to be below their
respective carrying values.
Application of the goodwill impairment test requires judgment,
including the identification of the reporting units, the
assigning of assets and liabilities to reporting units, the
assigning of goodwill to reporting units and the determining of
the fair value of each reporting unit. Significant judgments and
assumptions include the forecast of future operating results
used in the preparation of the estimated future cash flows,
including forecasted revenues and costs based on current titles
under contract, forecasted new titles that we expect to release,
timing of overall market growth and our percentage of that
market, discount rates and growth rates in terminal values. The
market comparable approach estimates the fair value of a company
by applying to that company market multiples of publicly traded
firms in similar lines of business. The use of the market
comparable approach requires judgments regarding the
comparability of companies with lines of business similar to
ours. This process is particularly difficult in a situation
where no domestic public mobile games companies exist. The
factors used in the selection of comparable companies include
growth characteristics as measured by revenue or other financial
metrics; margin characteristics; product-defined markets served;
customer-defined markets served; the size of a company as
measured by financial metrics such as revenue or market
capitalization; the competitive position of a company, such as
whether it is a market leader in terms of indicators like market
share; and company-specific issues that suggest appropriateness
or inappropriateness of a particular company as a comparable.
Further, the total gross value calculated under each method was
not materially different, and therefore if the weighting were
different we do not believe that this would have significantly
impacted our conclusion. If different comparable companies had
been used, the market multiples and resulting estimates of the
fair value of our stock would also have been different. Changes
in these estimates and assumptions could materially affect the
determination of fair value for each reporting unit, which could
trigger impairment.
42
Stock-Based
Compensation
Effective January 1, 2006, we adopted the fair value
provisions of ASC 718, Compensation-Stock Compensation
(ASC 718), which supersedes our previous
accounting under APB No. 25. ASC 718 requires the
recognition of compensation expense using a fair-value based
method, for costs related to all share-based payments including
stock options. ASC 718 requires companies to estimate the
fair value of share-based payment awards on the grant date using
an option pricing model. To value awards granted on or after
January 1, 2006, we used the Black-Scholes option pricing
model, which requires, among other inputs, an estimate of the
fair value of the underlying common stock on the date of grant
and assumptions as to volatility of our stock over the term of
the related options, the expected term of the options, the
risk-free interest rate and the option forfeiture rate. We
determined the assumptions used in this pricing model at each
grant date. We concluded that it was not practicable to
calculate the volatility of our share price since our securities
have been publicly traded for a limited period of time.
Therefore, we based expected volatility on the historical
volatility of a peer group of publicly traded entities and our
own historic volatility. We determined the expected term of our
options based upon historical exercises, post-vesting
cancellations and the options contractual term. We based
the risk-free rate for the expected term of the option on the
U.S. Treasury Constant Maturity Rate as of the grant date.
We determined the forfeiture rate based upon our historical
experience with option cancellations adjusted for unusual or
infrequent events.
In 2010, 2009 and 2008, we recorded total employee non-cash
stock-based compensation expense of $1.6 million,
$2.9 million and $8.0 million, respectively. In future
periods, stock-based compensation expense may increase as we
issue additional equity-based awards to continue to attract and
retain key employees. Additionally, ASC 718 requires that
we recognize compensation expense only for the portion of stock
options that are expected to vest. If the actual number of
forfeitures differs from that estimated by management, we may be
required to record adjustments to stock-based compensation
expense in future periods.
Income
Taxes
We account for income taxes in accordance with ASC 740,
Income Taxes (ASC 740). As part of the process of
preparing our consolidated financial statements, we are required
to estimate our income tax benefit (provision) in each of the
jurisdictions in which we operate. This process involves
estimating our current income tax benefit (provision) together
with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet using the
enacted tax rates in effect for the year in which we expect the
differences to reverse.
We record a valuation allowance to reduce our deferred tax
assets to an amount that more likely than not will be realized.
As of December 31, 2010 and 2009, our valuation allowance
on our net deferred tax assets was $58.8 million and
$58.5 million, respectively. While we have considered
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be
able to realize our deferred tax assets in the future in excess
of our net recorded amount, we would need to make an adjustment
to the allowance for the deferred tax asset, which would
increase income in the period that determination was made.
We account for uncertain income tax positions in accordance with
ASC 740-10,
which clarifies the accounting for uncertainty in income taxes
recognized in financial statements.
ASC 740-10
prescribes a recognition threshold and measurement attribute of
tax positions taken or expected to be taken on a tax return. The
interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. Our policy is to recognize
interest and penalties related to unrecognized tax benefits in
income tax expense. We do not expect that the amount of
unrecognized tax benefits will change significantly within the
next 12 months.
We have not provided federal income taxes on the unremitted
earnings of our foreign subsidiaries, other than China, because
these earnings are intended to be reinvested permanently.
43
Results
of Operations
The following sections discuss and analyze the changes in the
significant line items in our statements of operations for the
comparison periods identified.
Comparison
of the Years Ended December 31, 2010 and 2009
Revenues
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Feature phone
|
|
$
|
54,475
|
|
|
$
|
74,999
|
|
Smartphone
|
|
|
9,870
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
|
|
|
|
|
|
|
|
Our revenues decreased $15.0 million, or 18.9%, from
$79.3 million in 2009 to $64.3 million in 2010. This
decrease was due to a $20.5 million decline in feature
phone revenue which was partially offset by a $5.5 million
increase in smartphone revenue. The decrease in feature phone
revenues was primarily due to the continued migration of users
from feature phones to smartphones where we were unable to
capture the same market share as we have in our traditional
carrier business. Foreign currency exchange rates also had a
greater positive impact on our revenues during the year ended
December 31, 2009 compared to the year ended
December 31, 2010. Due to the diversification of our
product portfolio, including the titles resulting from the
acquisitions of MIG and Superscape, no single title represented
10% or more of sales in either 2009 or 2010. International
revenues decreased by $6.0 million, from $41.4 million
in 2009 to $35.4 million in 2010. This was primarily
related to a $3.2 million, or 15.7%, decrease in our EMEA
revenues, a $1.7 million, or 22.3%, decrease in our China
revenues and an $893,000, or 8.7%, decrease in our Americas
revenues, excluding U.S. revenues. The decline in our EMEA
and Americas revenues, excluding U.S. revenues, was
primarily due to declining sales in our feature phone business.
The decline in our China revenues was primarily due to $700,000
of one-time revenues recorded from an APAC customer in the first
quarter of 2009 and a decrease in the revenue share we receive
through our revenue share arrangements with China Mobile that
became effective in February 2010. Although we expect our
revenues from smartphones and tablets to increase in 2011 as
compared to 2010, we do not expect this increase to fully offset
the anticipated decline in revenues from games we develop for
feature phones, and therefore we expect that our total revenues
will decline in 2011 as compared with 2010. However, we believe
that our smartphone revenues will surpass our feature phone
revenues on a monthly run rate basis by the end of 2011 and that
this transition will position us to return to overall revenue
growth in the longer term.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
16,643
|
|
|
$
|
21,829
|
|
Impairment of prepaid royalties and guarantees
|
|
|
663
|
|
|
|
6,591
|
|
Amortization of intangible assets
|
|
|
4,226
|
|
|
|
7,092
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
21,532
|
|
|
$
|
35,512
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
66.5
|
%
|
|
|
55.2
|
%
|
Our cost of revenues decreased $14.0 million, or 39.4%,
from $35.5 million in 2009 to $21.5 million in 2010.
This decrease was primarily due to a $5.9 million decrease
in impairments of prepaid royalties and guarantees due
44
to fewer new licenses and full impairment of existing titles, a
decrease of $5.2 million in royalties associated with a
decline in revenue and a $2.9 million reduction in
amortization for titles and content due primarily to certain
intangible assets relating to MIG, Macrospace and Superscape
being fully amortized in the first and fourth quarters of 2009.
Revenues attributable to games based upon branded intellectual
property increased as a percentage of revenues from 77.5% in
2009 to 78.1% in 2010, primarily due to a decrease in sales of
games developed by MIG and Superscape based on their original
intellectual property. Revenues attributable to games based upon
original intellectual property were 21.9% of our total revenues
for 2010, of which nearly one-third related to MIG. We expect
this percentage to increase significantly in 2011 in connection
with our strategy to develop the substantial majority of our new
social, freemium games based on our own intellectual property.
The average royalty rate that we paid on games based on licensed
intellectual property, excluding royalty impairments, decreased
from 35.5% in 2009 to 33.4% in 2010 due to decreased sales of
titles with higher royalty rates. Overall royalties, including
impairment of prepaid royalties and guarantees, as a percentage
of total revenues decreased from 35.8% in 2009 to 27.1% in 2010.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Research and development expenses
|
|
$
|
25,180
|
|
|
$
|
25,975
|
|
Percentage of revenues
|
|
|
39.1
|
%
|
|
|
32.7
|
%
|
Our research and development expenses decreased $795,000, or
3.1%, from $26.0 million in 2009 to $25.2 million in
2010. The decrease in research and development costs was
primarily due to a decrease in salaries and benefits of
$713,000, a $571,000 decrease in outside services costs due to a
reduction in third-party costs for porting and external
development and a decrease in stock-based compensation expense
of $236,000, which was partially offset by an increase in
allocated facilities and overhead costs of $825,000. We
decreased our research and development staff from
402 employees in 2009 to 369 in 2010. As a percentage of
revenues, research and development expenses increased from 32.7%
in 2009 to 39.1% in 2010. Research and development expenses
included $480,000 of stock-based compensation expense in 2010
and $716,000 in 2009. We anticipate that our research and
development expenses will increase significantly in 2011 due to
our expected release of 20 to 25 new social, freemium titles in
2011, approximately half of which will be developed by external
developers as part of our Glu Partners program and which will
require significant upfront cash payment to such developers.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Sales and marketing expenses
|
|
$
|
12,140
|
|
|
$
|
14,402
|
|
Percentage of revenues
|
|
|
18.9
|
%
|
|
|
18.2
|
%
|
Our sales and marketing expenses decreased $2.3 million, or
15.7%, from $14.4 million in 2009 to $12.1 million in
2010. The decrease was primarily due to a $2.1 million
decrease in salaries, benefits, variable compensation and
expatriate costs as we reduced our sales and marketing headcount
from 67 in 2009 to 48 in 2010; this was partially the result of
converting our Latin America sales and marketing team from our
employees to employees of a third-party distribution agent. We
also had an $875,000 decrease in the MIG earnout expense due to
lower amortization of stock-based compensation expense
associated with reaching the end of the vesting terms and
conditions in 2009, a $376,000 decrease in travel and
entertainment expense and a $347,000 decrease in stock-based
compensation expense due to reduced headcount. This was
partially offset by a $915,000 increase in consulting fees
associated with converting our Latin America sales and marketing
to third-party distribution agents as discussed above and a
$672,000 increase in marketing promotions associated with the
launch of our new social, freemium game titles during the fourth
quarter of 2010. As a percentage of revenues, sales and
marketing expenses increased from 18.2% in 2009 to 18.9% in
2010. Sales and marketing expenses included $217,000 of
stock-based
45
compensation expense in 2010 and $564,000 in 2009. We
significantly increased our spending on sales and marketing
initiatives in the fourth quarter of 2010 in connection with the
launch of our initial social, freemium titles, and we expect our
sales and marketing expenditures to remain at this increased
level during 2011.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
General and administrative expenses
|
|
$
|
13,108
|
|
|
$
|
16,271
|
|
Percentage of revenues
|
|
|
20.4
|
%
|
|
|
20.5
|
%
|
Our general and administrative expenses decreased
$3.2 million, or 19.4%, from $16.3 million in 2009 to
$13.1 million in 2010. The decrease in general and
administrative expenses was primarily due to a $1.3 million
decrease in allocated facility and overhead costs, a
$1.2 million decrease in professional and consulting fees
and a $775,000 decrease in stock-based compensation expense.
Salaries and benefits decreased by $541,000, which was offset by
an $893,000 increase in variable compensation under our bonus
plan. We decreased our general and administrative headcount from
72 in 2009 to 56 in 2010. As a percentage of revenues, general
and administrative expenses decreased from 20.5% in 2009 to
20.4% in 2010. General and administrative expenses included
$871,000 of stock-based compensation expense in 2010 and
$1.6 million in 2009.
Other
Operating Expenses
Our restructuring charge increased from $1.9 million in
2009 to $3.6 million in 2010. This was due to an additional
$1.5 million of restructuring charges relating to employee
termination costs in our United States, APAC, Latin America and
United Kingdom offices. The remaining restructuring charge of
$2.1 million related primarily to facility related charges
resulting from the relocation of our corporate headquarters to
San Francisco.
In 2011, we anticipate incurring approximately $600,000 of
restructuring charges related to employee severance and benefit
arrangements associated with the terminations of employees in
China, Russia and the United Kingdom and facility related
charges in China and Russia.
Other
Income (Expense), net
Interest and other income/(expense), net, increased from a net
expense of $1.1 million during 2009 to a net expense of
$1.3 million in 2010. This change was primarily due to a
$754,000 increase in foreign currency losses related to the
revaluation of certain assets and liabilities including accounts
payable and accounts receivable which was partially offset by a
$607,000 decrease in interest expense related to the lower
balances outstanding on the MIG notes and borrowings under our
credit facility.
Income
Tax Benefit (Provision)
Income tax provision decreased from $2.2 million in 2009 to
$709,000 in 2010 as a result of taxable profits in certain
foreign jurisdictions, changes in the valuation allowance and
increased foreign withholding taxes resulting from increased
sales in countries with withholding tax requirements. The
provision for income taxes differs from the amount computed by
applying the statutory U.S. federal rate principally due to
the effect of our
non-U.S. operations,
non-deductible stock-based compensation expense, an increase in
the valuation allowance and increased foreign withholding taxes.
Our effective income tax benefit rate for the year ended
December 31, 2010 was 5.6% compared to 13.5% in the prior
year. The higher effective benefit tax rate in 2009 was mainly
attributable to a decrease in pre-tax losses and changes in
withholding taxes, dividends and non-deductible stock based
compensation.
Our effective income tax rates for 2010 and future periods will
depend on a variety of factors, including changes in the
deferred tax valuation allowance, as well as changes in our
business such as from intercompany transactions and any
acquisitions, any changes in our international structure, any
changes in the geographic location of our business functions or
assets, changes in the geographic mix of our income, any changes
in or termination of
46
our agreements with tax authorities, changes in applicable
accounting rules, applicable tax laws and regulations, rulings
and interpretations thereof, developments in tax audit and other
matters, and variations in our annual pre-tax income or loss. We
incur certain tax expenses that do not decline proportionately
with declines in our pre-tax consolidated income or loss. As a
result, in absolute dollar terms, our tax expense will have a
greater influence on our effective tax rate at lower levels of
pre-tax income or loss than at higher levels. In addition, at
lower levels of pre-tax income or loss, our effective tax rate
will be more volatile.
One of our subsidiaries in China has received approval as a
High & New Technology Enterprise qualification from
the Ministry of Science and Technology, and also a Software
Enterprise Qualification from the Ministry of Industry and
Information Technology. During the third quarter of 2010, the
State Administration of Taxation approved our application to
apply the favorable tax benefits to operations beginning
January 1, 2009. We revalued certain deferred tax assets
and liabilities during the quarter, and certain taxes that were
expensed in 2009 were refunded in 2010 and the tax benefit was
recognized. However, in the event that circumstances change and
we no longer meet the requirements of our original
qualification, we would need to revalue certain tax assets and
liabilities.
Comparison
of the Years Ended December 31, 2009 and 2008
Revenues
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Feature phone
|
|
$
|
74,999
|
|
|
$
|
89,740
|
|
Smartphone
|
|
|
4,345
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
|
|
|
|
|
|
|
|
|
Our revenues decreased $10.4 million, or 11.6%, from
$89.8 million in 2008 to $79.3 million in 2009. This
decrease was due to a $14.7 million decline in feature
phone revenue which was partially offset by a $4.3 million
increase in smartphone revenue. The decrease in feature phone
revenue was primarily due to the continued migration of users
from feature phones to smartphones where we were unable to
capture the same market share as we have in our traditional
carrier business. Foreign currency exchange rates also had a
greater positive impact on our revenues during the year ended
December 31, 2008 compared to the year ended
December 31, 2009. Due to the diversification of our
product portfolio, including the titles resulting from the
acquisitions of MIG and Superscape, no single title represented
10% or more of sales in either 2008 or 2009. International
revenues decreased by $5.3 million, from $46.7 million
in 2008 to $41.4 million in 2009. The decrease in
international revenues was primarily a result of decreased unit
sales in EMEA and China, which was partially offset by increased
unit sales in Latin America.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
21,829
|
|
|
$
|
22,562
|
|
Impairment of prepaid royalties and guarantees
|
|
|
6,591
|
|
|
|
6,313
|
|
Amortization of intangible assets
|
|
|
7,092
|
|
|
|
11,309
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
35,512
|
|
|
$
|
40,184
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
55.2
|
%
|
|
|
55.2
|
%
|
47
Our cost of revenues decreased $4.7 million, or 11.6%, from
$40.2 million in 2008 to $35.5 million in 2009. This
decrease was primarily due to a $4.2 million reduction in
amortization for titles and content associated with intangible
assets acquired from Superscape that were fully amortized in the
first quarter of 2009 and a decrease of $733,000 in royalty
expense, offset by a $278,000 increase associated with the
impairment of certain royalty guarantees. Revenues attributable
to games based upon branded intellectual property increased as a
percentage of revenues from 75.0% in 2008 to 77.5% in 2009,
primarily due to a decrease in sales of games developed by MIG
and Superscape based on their original intellectual property.
The average royalty rate that we paid on games based on licensed
intellectual property, excluding royalty impairments, increased
from 34.0% in 2008 to 35.5% in 2009 due to increased sales of
titles with higher royalty rates. The impairment of prepaid
royalties and guarantees of $6.6 million in 2009 and
$6.3 million in 2008 primarily related to large
distribution deals in EMEA and, with respect to the 2009 charge,
several global properties that have not performed nor do we
believe will perform as initially expected. Overall royalties,
including impairment of prepaid royalties and guarantees, as a
percentage of total revenues increased from 32.0% in 2008 to
35.8% in 2009.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Research and development expenses
|
|
$
|
25,975
|
|
|
$
|
32,140
|
|
Percentage of revenues
|
|
|
32.7
|
%
|
|
|
35.8
|
%
|
Our research and development expenses decreased
$6.2 million, or 19.2%, from $32.1 million in 2008 to
$26.0 million in 2009. The decrease in research and
development costs was primarily due to decreases in salaries and
benefits of $2.5 million, a reduction in third-party
outside services costs for porting and external development of
$1.7 million, a reduction in facility and overhead costs of
$1.4 million due to reduced headcount and a decrease in
travel and entertainment expenses of $322,000. We decreased our
research and development staff from 445 employees in 2008
to 402 in 2009, and salaries and benefits decreased as a result.
As a percentage of revenues, research and development expenses
declined from 35.8% in 2008 to 32.7% in 2009. Research and
development expenses included $716,000 of stock-based
compensation expense in 2009 and $714,000 in 2008.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Sales and marketing expenses
|
|
$
|
14,402
|
|
|
$
|
26,066
|
|
Percentage of revenues
|
|
|
18.2
|
%
|
|
|
29.0
|
%
|
Our sales and marketing expenses decreased $11.7 million,
or 44.7%, from $26.1 million in 2008 to $14.4 million
in 2009. The decrease was primarily due to a decrease in
stock-based compensation of $4.6 million primarily related
to the MIG stock-based compensation earnout being fully
expensed, a $4.4 million decrease in the MIG earnout
expense due to lower amortization associated with reaching the
end of the vesting terms and conditions, a $1.6 million
decrease in salaries and benefits as we reduced our sales and
marketing headcount from 73 on September 30, 2008 to 67 on
December 31, 2009, a $598,000 decrease in marketing
promotions and a $329,000 decrease in facility and overhead
costs due to reduced headcount. As a percentage of revenues,
sales and marketing expenses decreased from 29.0% in 2008 to
18.2% in 2009. Sales and marketing expenses included $564,000 of
stock-based compensation expense in 2009 and $5.2 million
in 2008.
48
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
General and administrative expenses
|
|
$
|
16,271
|
|
|
$
|
20,971
|
|
Percentage of revenues
|
|
|
20.5
|
%
|
|
|
23.4
|
%
|
Our general and administrative expenses decreased
$4.7 million, or 22.4%, from $21.0 million in 2008 to
$16.3 million in 2009. The decrease in general and
administrative expenses was primarily due to a $2.2 million
decrease in salaries and benefits, a $1.4 million decrease
in professional and consulting fees, a $452,000 decrease in
stock-based compensation and a $395,000 decrease in facility and
overhead costs. We increased our general and administrative
headcount from 71 in 2008 to 72 in 2009, but salaries and
benefits decreased primarily as a result of moving headcount to
lower cost locations. As a percentage of revenues, general and
administrative expenses decreased from 23.4% in 2008 to 20.5% in
2009. General and administrative expenses included
$1.6 million of stock-based compensation expense in 2009
and $2.1 million in 2008.
Other
Operating Expenses
Our restructuring charges increased from $1.7 million in
2008 to $1.9 million in 2009. The $1.9 million of
restructuring charges in 2009 consisted of $867,000 of facility
related charges, $657,000 of severance and termination benefits
associated with the departure of our former Chief Executive
Officer, and $352,000 related to employee termination costs in
our U.S. and U.K. offices. The facility charges consisted
of $708,000 of charges associated with changes in the sublease
probability assumption for the vacated office space in our
U.S. headquarters and an additional restructuring charge of
$159,000 net of sublease income, resulting from vacating a
portion of our EMEA headquarters based in the United Kingdom.
The $1.7 million of restructuring charges in 2008 consisted
of $989,000 related to employee severance and benefit
arrangements due to the termination of employees in France, Hong
Kong, Sweden, the United Kingdom and the United States and
$755,000 related to vacated office space at our United States
headquarters.
Our impairment of goodwill decreased from $69.5 million in
2008 to zero in 2009. The analysis of our goodwill balance in
2008 caused us to conclude that all $25.3 million of the
goodwill attributed to the EMEA reporting unit was impaired, as
was all of the $24.9 million of goodwill attributed to the
Americas reporting unit and $19.3 million of the
$23.9 million of goodwill attributed to the APAC reporting
unit. As a result, a non-cash goodwill impairment charge to
operations totaling $69.5 million was recorded in 2008. No
goodwill impairment charge was recorded related to our APAC
reporting unit in 2009 as the fair value of the reporting unit
exceeded the carrying value of its goodwill. The fair value was
determined using an estimate of forecasted discounted cash flows
and our market capitalization. We had $4.6 million of
goodwill remaining as of December 31, 2009, which was
allocated to the APAC reporting unit.
Our in-process research and development (IPR&D)
charge was $1.1 million in 2008; there was no charge in
2009. The IPR&D charge recorded in 2008 related to the
in-process development of new 2D and 3D games by Superscape at
the date of acquisition.
Other
Income (Expense), net
Interest and other income/(expense), net, decreased from a net
expense of $1.4 million in 2008 to a net expense of
$1.1 million in 2009. This change was primarily due to an
increase of $1.2 million in interest expense related to the
MIG notes and borrowings under our credit facility, a decrease
in interest income of $825,000 resulting from lower cash
balances as a result of the MIG and Superscape acquisitions,
which was offset by a $2.3 million decrease in other
expense. This change in other expense was primarily due to an
increase in foreign currency gains of $3.1 million related
to the revaluation of certain assets and liabilities, offset by
a net decrease of $806,000 associated with lower mark to market
gains on disposal of long-term investments in 2008.
49
Income
Tax Benefit (Provision)
Income tax provision decreased from $3.1 million in 2008 to
$2.2 million in 2009 as a result of taxable profits in
certain foreign jurisdictions, changes in the valuation
allowance and increased foreign withholding taxes resulting from
increased sales in countries with withholding tax requirements.
The provision for income taxes differs from the amount computed
by applying the statutory U.S. federal rate principally due
to the effect of our
non-U.S. operations,
non-deductible stock-based compensation expense, an increase in
the valuation allowance and increased foreign withholding taxes.
Our effective income tax benefit rate for the year ended
December 31, 2009 was 13.5% compared to 3.0% in the prior
year. The higher effective benefit tax rate in 2009 was mainly
attributable to a decrease in pre-tax losses, changes in
withholding taxes, dividends and non-deductible stock based
compensation.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Consolidated Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Capital expenditures)
|
|
$
|
710
|
|
|
$
|
838
|
|
|
$
|
3,772
|
|
Cash flows provided by (used in) operating activities
|
|
|
2,249
|
|
|
|
1,130
|
|
|
|
(5,889
|
)
|
Cash flows used in investing activities
|
|
|
(710
|
)
|
|
|
(838
|
)
|
|
|
(31,673
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
1,141
|
|
|
|
(8,925
|
)
|
|
|
332
|
|
Since our inception, we have incurred recurring losses and
negative annual cash flows from operating activities, and we had
an accumulated deficit of $190.7 million as of
December 31, 2010.
Operating
Activities
In 2010, net cash provided by operating activities was
$2.2 million, primarily due to a decrease in accounts
receivable of $5.2 million due to declining sales of games
for feature phones in our carrier-based business and improved
cash collections, a $3.7 million decrease in our prepaid
royalties, a $1.8 million increase in accrued compensation
and a $1.1 million increase in accounts payable. In
addition, we had adjustments for non-cash items, including
amortization expense of $4.4 million, depreciation expense
of $2.0 million, stock-based compensation expense of
$1.6 million and impairment of prepaid royalties of
$663,000. These amounts were partially offset by a net loss of
$13.4 million and a decrease in accrued royalties of
$5.3 million.
In 2009, net cash provided by operating activities was
$1.1 million as compared to $5.9 million in net cash
used in operating activities in 2008. This increase was
primarily due to a decrease in prepaid royalties of
$6.4 million, which was caused primarily by the impairment
of certain titles during 2009, and a decrease in accounts
receivable of $3.7 million due to declining sales in our
carrier business. In addition, we had adjustments for non-cash
items, including amortization expense of $7.3 million,
impairment of prepaid royalties and guarantees of
$6.6 million, stock-based compensation expense of
$2.9 million, depreciation expense of $2.3 million,
interest expense on debt of $1.3 million and MIG earnout
expense of $875,000. These amounts were partially offset by a
net loss of $18.2 million, a decrease in accrued royalties
of $5.7 million, a decrease in long term liabilities of
$4.2 million due to reclassification of the MIG earnout
from long-term to short-term liabilities, a decrease in accounts
payable of $2.2 million due to lower operating costs and
improvements in processing of payments and a non-cash foreign
currency translation gain of $55,000.
Investing
Activities
Our primary investing activities have consisted of purchases and
sales of short-term investments, purchases of property and
equipment. We may use more cash in investing activities in 2011
for property and equipment related to supporting our
infrastructure and our development and design studios. We expect
to fund these investments with our existing cash and cash
equivalents and our revolving credit facility.
50
In 2010, we used $710,000 of cash for investing activities
resulting primarily from purchases of computer and networking
equipment, software and leasehold improvements.
In 2009, we used $838,000 of cash for investing activities
resulting primarily from purchases of computer and networking
equipment, software equipment and leasehold improvements.
In 2008, we used $31.7 million of cash in investing
activities. This net use of cash resulted from the acquisition
of Superscape, net of cash acquired, of $30.0 million, the
purchase of property and equipment of $3.8 million, and
additional costs related to the MIG acquisition, net of cash
acquired, of $0.7 million, offset by the redemption of
$2.8 million of our previously impaired investments in
auction rate securities.
Financing
Activities
In 2010, net cash provided by financing activities was
$1.1 million due primarily to the $13.2 million of net
proceeds that we received from the Private Placement and
$598,000 of proceeds that we received from option exercises and
purchases under our employee stock purchase plan. These inflows
were partially offset by the $10.3 million that we paid
during 2010 with respect to the promissory notes and bonuses
that we issued to the MIG shareholders and $2.4 million
that we paid down under our credit facility.
In 2009, net cash used in financing activities was
$8.9 million due to the payment of $14.0 million in
principal amount related to the MIG notes, which was partially
offset by the net proceeds from borrowings under our credit
facility of $4.7 million and proceeds from option exercises
and purchases under our employee stock purchase plan of $402,000.
In 2008, we generated $0.3 million of net cash from
financing activities resulting from net proceeds from exercises
of common stock of $0.2 million and net proceeds from
exercises of stock warrants of $0.1 million.
Sufficiency
of Current Cash and Cash Equivalents
Our cash and cash equivalents were $12.9 million as of
December 31, 2010. This amount does not include the
$15.9 million in net proceeds that we received from our
underwritten public offering of common stock that we completed
in January 2011. We expect to fund our operations and satisfy
our contractual obligations for 2011 primarily through our cash
and cash equivalents and borrowings under our revolving credit
facility. However, as a result of our plans to increase our
spending on sales and marketing and research and development
initiatives in connection with our new social, freemium games
that we will release in 2011, we expect to use a significant
amount of cash in our operations during 2011 as we seek to grow
our business. We believe our cash and cash equivalents, together
with borrowings under our credit facility will be sufficient to
meet our anticipated cash needs for at least the next
12 months. However, our cash requirements for the next
12 months may be greater than we anticipate due to, among
other reasons, the impact of foreign currency rate changes,
revenues that are lower than we currently anticipate, greater
than expected operating expenses, particularly with respect to
our research and development and sales and marketing
initiatives, usage of cash to fund our foreign operations,
unanticipated limitations or timing restrictions on our ability
to access funds that are held in our
non-U.S. subsidiaries.
We currently have an $8.0 million credit facility, which
expires on June 30, 2011. We do not intend to extend the
maturity date of this credit facility, and may seek to enter
into a new credit facility with the lender or a new lender. We
cannot assure you that we will be able to enter into a new
facility on terms favorable to us or at all. Our credit facility
contains financial covenants and restrictions that limit our
ability to draw down the entire $8.0 million. These
covenants are as follows:
EBITDA and Net Cash. On August 24, 2009,
we entered into an amendment to our credit facility, which
reduced certain of the minimum targets contained in the credit
facilitys EBITDA-related covenant. On February 10,
2010 we entered into a second amendment to the agreement. The
second amendment changed the measurement period for the EBITDA
covenant from a rolling six month calculation to a quarterly
calculation. On March 18, 2010, we entered into a third
amendment to the agreement which (1) extended the maturity
date of the credit facility from December 22, 2010 until
June 30, 2011, (2) increased the interest rate for
borrowings under the credit facility by 0.75% to the
lenders prime rate, plus 1.75%, but no less than 5.0%, and
(3) requires us to maintain, measured on a consolidated
basis at the end of each periods a minimum amount of EBITDA. On
February 2, 2011, we entered into
51
a fourth amendment to our credit facility which waived our
default in maintaining minimum levels of EBITDA specified in the
loan agreement for the period beginning October 1, 2010 and
ending December 31, 2010. The fourth amendment also removed
the EBITDA financial covenant from the loan agreement in its
entirety and replaced this covenant with a net cash covenant,
which requires us to maintain at least $10.0 million in
unrestricted cash at the lender or an affiliate of the lender,
net of any indebtedness that we owe to the lender under the Loan
Agreement.
Minimum Domestic Liquidity: We must maintain
at the lender an amount of cash, cash equivalents and short-term
investments of not less than the greater of: (a) 20% of our
total consolidated unrestricted cash, cash equivalents and
short-term investments, or (b) 15% of outstanding
obligations under the credit facility.
The credit facility also includes a material adverse
change clause. As a result, if a material adverse change
occurs with respect to our business, operations or financial
condition, then that change could constitute an event of default
under the terms of our credit facility. When an event of default
occurs, the lender can, among other things, declare all
obligations immediately due and payable, could stop advancing
money or extending credit under the credit facility and could
terminate the credit facility. We believe that the risk of a
material adverse change occurring with respect to our business,
operations or financial condition and the lender requesting
immediate repayment of amounts already borrowed, stopping
advancing the remaining credit or terminating the credit
facility is remote.
Our credit facility is collateralized by eligible customer
accounts receivable balances, as defined by the lender. There
can be no assurances that our eligible accounts receivable
balances will be adequate to allow us to draw down on the entire
$8.0 million credit facility particularly if any of our
larger customers creditworthiness deteriorates. At our
current revenue levels, we are not able to access the full
$8.0 million of the credit facility. In addition, among
other things, the credit facility limits our ability to dispose
of certain assets, make acquisitions, incur additional
indebtedness, incur liens, pay dividends and make other
distributions, and make investments. Further, the credit
facility requires us to maintain a separate account with the
lender for collection of our accounts receivables. All deposits
into this account will be automatically applied by the lender to
our outstanding obligations under the credit facility.
As of December 31, 2010, we had outstanding borrowings of
$2.3 million under our credit facility, which is classified
as a current liability on the December 31, 2010 balance
sheet. Our failure to comply with the cash covenants in the
credit facility would not only prohibit us from borrowing under
the facility, but would also constitute a default, permitting
the lender to, among other things, declare any outstanding
borrowings, including all accrued interest and unpaid fees,
immediately due and payable. A change in control of Glu also
constitutes an event of default, permitting the lender to
accelerate the indebtedness and terminate the credit facility.
The credit facility also contains other customary events of
default. Utilizing our credit facility results in debt payments
that bear interest at the lenders prime rate plus 1.75%,
but no less than 5.0%, which adversely impacts our cash position
and result in cash covenants that restrict our operations. See
Note 8 of Notes to Consolidated Financial Statements
included in Item 8 of this report for more information
regarding our debt.
The credit facility matures on June 30, 2011, when all
amounts outstanding will be due. If the credit facility is
terminated prior to maturity by us or by the lender after the
occurrence and continuance of an event of default, then we will
owe a termination fee equal to $80,000, or 1.00% of the total
commitment. As of December 31, 2010, we were not in
compliance with the EBITDA covenant, but the lender subsequently
waived such non-compliance in connection with our entry into the
fourth amendment to the credit facility as described above.
Of the $12.9 million of cash and cash equivalents that we
held at December 31, 2010, approximately $1.4 million
were held in accounts in China. To fund our operations and repay
our debt obligations, we repatriated approximately
$4.0 million of available funds from China to the United
States during 2009, and we repatriated an additional
$1.3 million of available funds from China to the United
States in August 2010. Both of these amounts were subject to
withholding taxes of 5%. We do not anticipate repatriating any
additional funds from China for the foreseeable future, as
changes in our revenue share arrangement with China Mobile has
significantly impacted our ability to generate meaningful cash
from our China operations. In addition, given the current global
economic environment and other potential developments outside of
our control, we may be unable to utilize the funds that we hold
in all of our
non-U.S. accounts,
which funds include cash and marketable securities, since the
funds may be frozen by additional international regulatory
actions, the accounts may become illiquid for an indeterminate
period of time or there may be other such circumstances that we
are unable to predict.
52
In addition, we may require additional cash resources due to
changes in business conditions or other future developments,
including any investments or acquisitions we may decide to
pursue.
If our cash sources are insufficient to satisfy our cash
requirements, we may seek to raise additional capital by selling
convertible debt, preferred stock (convertible into common stock
or unconvertible) or common stock, potentially pursuant to our
effective universal shelf registration statement, seeking to
increase the amount available to us for borrowing under our
credit facility, procuring a new debt facility
and/or
selling some of our assets. We may be unable to raise additional
capital through the sale of securities, or to do so on terms
that are favorable to us, particularly given current capital
market and overall economic conditions. Any sale of convertible
debt securities or additional equity securities could result in
substantial dilution to our stockholders as was the case with
the Private Placement and our recent underwritten public
offering. The holders of new securities may also receive rights,
preferences or privileges that are senior to those of existing
holders of our common stock, all of which is subject to the
provisions of the credit facility. Additionally, we may be
unable to increase the size of our credit facility or procure a
new debt facility, or to do so on terms that are acceptable to
us, particularly in light of the current credit market
conditions. If the amount of cash that we require is greater
than we anticipate, we could also be required to extend the term
of our credit facility beyond its June 30, 2011 expiration
date (or replace it with an alternate loan arrangement), and
resulting debt payments thereunder could further inhibit our
ability to achieve profitability in the future.
Contractual
Obligations
The following table is a summary of our contractual obligations
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Thereafter
|
|
|
(In thousands)
|
|
Operating lease obligations, net of sublease income
|
|
$
|
7,057
|
|
|
$
|
3,433
|
|
|
$
|
3,624
|
|
|
$
|
|
|
|
$
|
|
|
Guaranteed royalties(1)
|
|
|
1,617
|
|
|
|
914
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
Line of credit(2)
|
|
|
2,288
|
|
|
|
2,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have entered into license and development arrangements with
various owners of brands and other intellectual property so that
we can create and publish games for mobile handsets based on
that intellectual property. A significant portion of these
agreements require us to pay guaranteed royalties over the term
of the contracts regardless of actual game sales. |
|
(2) |
|
In March 2010, we signed a third amendment to the credit
facility which extended the maturity date of the credit facility
from December 22, 2010 until June 30, 2011, when all
amounts outstanding will be due. As of December 31, 2010,
the above amount had been classified within current liabilities. |
The above table does not reflect unrecognized tax benefits and
potential interest and penalties of $5.0 million which were
classified within Other long-term liabilities on our
consolidated balance sheets. As of December 31, 2010, the
settlement of our income tax liabilities could not be
determined; however, the liabilities are not expected to become
due during 2011. Additionally in January 2011, we paid $710,000
of taxes that had been withheld on the December 31, 2010
payment that we made to the former MIG shareholders in China.
Off-Balance
Sheet Arrangements
At December 31, 2010, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
Recent
Accounting Pronouncements
In October 2009, the FASB issued Update
No. 2009-13,
Multiple-Deliverable Revenue Arrangements a
consensus of the FASB Emerging Issues Task Force (ASU
2009-13). It
updates the existing multiple-element revenue arrangements
guidance currently included under
ASC 605-25,
which originated primarily from the guidance in EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
The revised
53
guidance primarily provides two significant changes:
(1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting,
and (2) eliminates the residual method to allocate the
arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU
2009-13 will
be effective for the first annual reporting period beginning on
or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to
the beginning of the year of adoption. The adoption of this
standard did not have a material impact on our consolidated
financial statements.
In June 2009, the FASB issued Statement 167, which amended the
consolidation guidance that applies to variable interest
entities (VIE) under ASC 810, Consolidation
(ASC 810). The new guidance requires a
qualitative approach to identifying a controlling financial
interest in a VIE, and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the
holder the primary beneficiary of the VIE. We adopted this
guidance on January 1, 2010. The adoption of this statement
did not have a material impact on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate and Credit Risk
Our exposure to interest rate risk relates primarily to
(1) our interest payable under our $8.0 million credit
facility and potential increases in our interest payments
arising from increases in interest rates and (2) our
investment portfolio and the potential losses arising from
changes in interest rates.
We are exposed to the impact of changes in interest rates as
they affect interest payments under our $8.0 million credit
facility. Advances under the credit facility accrue interest at
rates that are equal to our credit facility lenders prime
rate, plus 1.75%, but no less than 5.0%. Consequently, our
interest expense will fluctuate with changes in the general
level of interest rates. At December 31, 2010, we had
$2.3 million outstanding under the credit facility and our
effective interest rate at that time was approximately 5.75%. We
believe that a 10% change in the lenders prime rate would
have a significant impact on our interest expense, results of
operations and liquidity.
We are also potentially exposed to the impact of changes in
interest rates as they affect interest earned on our investment
portfolio. As of December 31, 2010, we had no short-term
investments and substantially all $12.9 million of our cash
and cash equivalents was held in operating bank accounts earning
nominal interest. Accordingly, we do not believe that a 10%
change in interest rates would have a significant impact on our
interest income, operating results or liquidity related to these
amounts.
The primary objectives of our investment activities are, in
order of importance, to preserve principal, provide liquidity
and maximize income without significantly increasing risk. We do
not currently use or plan to use derivative financial
instruments in our investment portfolio.
As of December 31, 2010 and December 31, 2009, our
cash and cash equivalents were maintained by financial
institutions in the United States, the United Kingdom,
Australia, Brazil, China, Colombia, France, Germany, Hong Kong,
Italy, Russia and Spain and our current deposits are likely in
excess of insured limits.
Our accounts receivable primarily relate to revenues earned from
domestic and international wireless carriers. We perform ongoing
credit evaluations of our carriers financial condition but
generally require no collateral from them. At December 31,
2010, Verizon Wireless accounted for 18.3% and
Telecomunicaciones Movilnet accounted for 14.8% of total
accounts receivable. At December 31, 2009, Verizon Wireless
accounted for 24.1% of total accounts receivable. No other
carrier represented more than 10% of our total accounts
receivable as of these dates.
Foreign
Currency Exchange Risk
We transact business in more than 70 countries in more than 20
different currencies, and in 2009 and 2010, some of these
currencies fluctuated by up to 40%. Our revenues are usually
denominated in the functional currency of the carrier while the
operating expenses of our operations outside of the United
States are maintained in their local currency, with the
significant operating currencies consisting of British Pound
Sterling (GBP), Chinese Renminbi, Brazilian Real and
Russian Ruble. Although recording operating expenses in the
local currency of our
54
foreign operations mitigates some of the exposure of foreign
currency fluctuations, variances among the currencies of our
customers and our foreign operations relative to the United
States Dollar (USD) could have and have had a
material impact on our results of operations.
Our foreign currency exchange gains and losses have been
generated primarily from fluctuations in GBP versus the USD and
in the Euro versus GBP. At month-end, foreign
currency-denominated accounts receivable and intercompany
balances are marked to market and unrealized gains and losses
are included in other income (expense), net. Translation
adjustments arising from the use of differing exchange rates are
included in accumulated other comprehensive income in
stockholders equity. We have in the past experienced, and
in the future may experience, foreign currency exchange gains
and losses on our accounts receivable and intercompany
receivables and payables. Foreign currency exchange gains and
losses could have a material adverse effect on our business,
operating results and financial condition.
There is also additional risk if the currency is not freely or
actively traded. Some currencies, such as the Chinese Renminbi,
in which our Chinese operations principally transact business,
are subject to limitations on conversion into other currencies,
which can limit our ability to react to foreign currency
devaluations.
To date, we have not engaged in exchange rate hedging activities
and we do not expect to do so in the foreseeable future.
Inflation
We do not believe that inflation has had a material effect on
our business, financial condition or results of operations. If
our costs were to become subject to significant inflationary
pressures, we might not be able to offset these higher costs
fully through price increases. Our inability or failure to do so
could harm our business, operating results and financial
condition.
55
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
GLU
MOBILE INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Glu Mobile Inc. Consolidated Financial Statements
|
|
|
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Glu Mobile Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of
stockholders equity and of cash flows present fairly, in
all material respects, the financial position of Glu Mobile Inc.
and its subsidiaries at December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 21, 2011
57
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,863
|
|
|
$
|
10,510
|
|
Accounts receivable, net
|
|
|
10,660
|
|
|
|
16,030
|
|
Prepaid royalties
|
|
|
2,468
|
|
|
|
6,738
|
|
Prepaid expenses and other
|
|
|
2,557
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,548
|
|
|
|
35,798
|
|
Property and equipment, net
|
|
|
2,134
|
|
|
|
3,344
|
|
Other long-term assets
|
|
|
574
|
|
|
|
929
|
|
Intangible assets, net
|
|
|
8,794
|
|
|
|
13,059
|
|
Goodwill
|
|
|
4,766
|
|
|
|
4,608
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
44,816
|
|
|
$
|
57,738
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,666
|
|
|
$
|
4,480
|
|
Accrued liabilities
|
|
|
939
|
|
|
|
817
|
|
Accrued compensation
|
|
|
4,414
|
|
|
|
1,829
|
|
Accrued royalties
|
|
|
7,234
|
|
|
|
12,604
|
|
Accrued restructuring
|
|
|
1,689
|
|
|
|
1,406
|
|
Deferred revenues
|
|
|
842
|
|
|
|
914
|
|
Current portion of long-term debt
|
|
|
2,288
|
|
|
|
16,379
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,072
|
|
|
|
38,429
|
|
Other long-term liabilities
|
|
|
7,859
|
|
|
|
7,616
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,931
|
|
|
|
46,045
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 5,000 shares
authorized at December 31, 2010 and 2009; no shares issued
and outstanding at December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value: 250,000 authorized at
December 31, 2010 and 2009; 44,585 and 30,360 shares
issued and outstanding at December 31, 2010 and 2009
|
|
|
4
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
203,464
|
|
|
|
188,078
|
|
Accumulated other comprehensive income
|
|
|
1,159
|
|
|
|
931
|
|
Accumulated deficit
|
|
|
(190,742
|
)
|
|
|
(177,319
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
13,885
|
|
|
|
11,693
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
44,816
|
|
|
$
|
57,738
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
16,643
|
|
|
|
21,829
|
|
|
|
22,562
|
|
Impairment of prepaid royalties and guarantees
|
|
|
663
|
|
|
|
6,591
|
|
|
|
6,313
|
|
Amortization of intangible assets
|
|
|
4,226
|
|
|
|
7,092
|
|
|
|
11,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
21,532
|
|
|
|
35,512
|
|
|
|
40,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,813
|
|
|
|
43,832
|
|
|
|
49,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,180
|
|
|
|
25,975
|
|
|
|
32,140
|
|
Sales and marketing
|
|
|
12,140
|
|
|
|
14,402
|
|
|
|
26,066
|
|
General and administrative
|
|
|
13,108
|
|
|
|
16,271
|
|
|
|
20,971
|
|
Amortization of intangible assets
|
|
|
205
|
|
|
|
215
|
|
|
|
261
|
|
Restructuring charge
|
|
|
3,629
|
|
|
|
1,876
|
|
|
|
1,744
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
69,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,262
|
|
|
|
58,739
|
|
|
|
151,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,449
|
)
|
|
|
(14,907
|
)
|
|
|
(102,207
|
)
|
Interest and other income/(expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
26
|
|
|
|
94
|
|
|
|
919
|
|
Interest expense
|
|
|
(601
|
)
|
|
|
(1,276
|
)
|
|
|
(78
|
)
|
Other income/(expense), net
|
|
|
(690
|
)
|
|
|
55
|
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income/(expense), net
|
|
|
(1,265
|
)
|
|
|
(1,127
|
)
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
|
(12,714
|
)
|
|
|
(16,034
|
)
|
|
|
(103,566
|
)
|
Income tax benefit/(provision)
|
|
|
(709
|
)
|
|
|
(2,160
|
)
|
|
|
(3,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,423
|
)
|
|
$
|
(18,194
|
)
|
|
$
|
(106,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(3.63
|
)
|
Weighted average common shares outstanding
|
|
|
35,439
|
|
|
|
29,853
|
|
|
|
29,379
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock-based
|
|
|
Income
|
|
|
Accumulated
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(loss)
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Loss
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
29,023
|
|
|
|
3
|
|
|
|
179,924
|
|
|
|
(113
|
)
|
|
|
2,080
|
|
|
|
(52,433
|
)
|
|
|
129,461
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,692
|
)
|
|
|
(106,692
|
)
|
|
$
|
(106,692
|
)
|
Adjustment to deferred stock-based compensation for terminated
employees
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclass of previously recorded stock-based MIG earnout to note
payable
|
|
|
|
|
|
|
|
|
|
|
(4,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,315
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,888
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
7,984
|
|
|
|
|
|
Vesting of early exercised options
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
258
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
Issuance of common stock upon exercise of warrants
|
|
|
63
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
240
|
|
|
|
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
916
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(910
|
)
|
|
|
|
|
|
|
(910
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(107,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
29,584
|
|
|
$
|
3
|
|
|
$
|
184,757
|
|
|
$
|
(11
|
)
|
|
$
|
1,170
|
|
|
$
|
(159,125
|
)
|
|
$
|
26,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,194
|
)
|
|
|
(18,194
|
)
|
|
$
|
(18,194
|
)
|
Adjustment to deferred stock-based compensation for terminated
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,915
|
|
|
|
|
|
Vesting of early exercised options
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
276
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
500
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
(239
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
30,360
|
|
|
$
|
3
|
|
|
$
|
188,078
|
|
|
$
|
|
|
|
$
|
931
|
|
|
$
|
(177,319
|
)
|
|
$
|
11,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,423
|
)
|
|
|
(13,423
|
)
|
|
$
|
(13,423
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568
|
|
|
|
|
|
Vesting of early exercised options
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
330
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
Issuance of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement, net of issuance costs
|
|
|
13,495
|
|
|
|
1
|
|
|
|
13,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,219
|
|
|
|
|
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
400
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
44,585
|
|
|
$
|
4
|
|
|
$
|
203,464
|
|
|
$
|
|
|
|
$
|
1,159
|
|
|
$
|
(190,742
|
)
|
|
$
|
13,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,423
|
)
|
|
$
|
(18,194
|
)
|
|
$
|
(106,692
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,975
|
|
|
|
2,330
|
|
|
|
2,756
|
|
Amortization of intangible assets
|
|
|
4,431
|
|
|
|
7,307
|
|
|
|
11,570
|
|
Stock-based compensation
|
|
|
1,568
|
|
|
|
2,926
|
|
|
|
3,669
|
|
MIG earnout expense
|
|
|
|
|
|
|
875
|
|
|
|
9,591
|
|
Interest expense on debt
|
|
|
413
|
|
|
|
1,125
|
|
|
|
|
|
Amortization of loan agreement costs
|
|
|
188
|
|
|
|
151
|
|
|
|
74
|
|
Non-cash foreign currency remeasurement (gain)/loss
|
|
|
699
|
|
|
|
(55
|
)
|
|
|
2,901
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
69,498
|
|
Impairment of prepaid royalties and guarantees
|
|
|
663
|
|
|
|
6,591
|
|
|
|
6,313
|
|
(Gain)/write down of auction-rate securities
|
|
|
|
|
|
|
|
|
|
|
(806
|
)
|
Write off of fixed assets
|
|
|
|
|
|
|
|
|
|
|
411
|
|
Changes in allowance for doubtful accounts
|
|
|
(42
|
)
|
|
|
78
|
|
|
|
99
|
|
Changes in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
5,237
|
|
|
|
3,687
|
|
|
|
1,783
|
|
Prepaid royalties
|
|
|
3,696
|
|
|
|
6,420
|
|
|
|
(8,320
|
)
|
Prepaid expenses and other assets
|
|
|
(113
|
)
|
|
|
233
|
|
|
|
314
|
|
Accounts payable
|
|
|
1,139
|
|
|
|
(2,159
|
)
|
|
|
(1,825
|
)
|
Other accrued liabilities
|
|
|
(1,223
|
)
|
|
|
(311
|
)
|
|
|
(499
|
)
|
Accrued compensation
|
|
|
1,839
|
|
|
|
(412
|
)
|
|
|
1,258
|
|
Accrued royalties
|
|
|
(5,278
|
)
|
|
|
(5,738
|
)
|
|
|
3,959
|
|
Deferred revenues
|
|
|
(70
|
)
|
|
|
150
|
|
|
|
258
|
|
Accrued restructuring charge
|
|
|
1,055
|
|
|
|
348
|
|
|
|
(2,943
|
)
|
Other long-term liabilities
|
|
|
(505
|
)
|
|
|
(4,222
|
)
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
2,249
|
|
|
|
1,130
|
|
|
|
(5,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
Purchase of property and equipment
|
|
|
(710
|
)
|
|
|
(838
|
)
|
|
|
(3,772
|
)
|
Acquisition of Superscape, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(30,008
|
)
|
Acquisition of MIG, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(710
|
)
|
|
|
(838
|
)
|
|
|
(31,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
|
37,356
|
|
|
|
55,852
|
|
|
|
|
|
Payments on line of credit
|
|
|
(39,729
|
)
|
|
|
(51,179
|
)
|
|
|
|
|
MIG loan payments
|
|
|
(10,302
|
)
|
|
|
(14,000
|
)
|
|
|
|
|
Proceeds from private placement, net
|
|
|
13,218
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and ESPP
|
|
|
598
|
|
|
|
402
|
|
|
|
231
|
|
Proceeds from exercise of stock warrants
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
1,141
|
|
|
|
(8,925
|
)
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(327
|
)
|
|
|
(23
|
)
|
|
|
(1,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
2,353
|
|
|
|
(8,656
|
)
|
|
|
(38,650
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
10,510
|
|
|
|
19,166
|
|
|
|
57,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,863
|
|
|
$
|
10,510
|
|
|
$
|
19,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,349
|
|
|
$
|
403
|
|
|
$
|
|
|
Income taxes paid
|
|
$
|
507
|
|
|
$
|
1,438
|
|
|
$
|
2,297
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of previously recorded stock-based compensation
MIG earnout to note payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,315
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
GLU
MOBILE INC.
(In thousands, except per share data and percentages)
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 creates mobile
games and related applications based on third-party licensed
brands and other intellectual property, as well as its own
original intellectual property.
The Company has incurred recurring losses from operations since
inception and had an accumulated deficit of $190,742 as of
December 31, 2010. For the year ended December 31,
2010, the Company incurred a loss from operations of $13,423.
The Company may incur additional operating losses and negative
cash flows in the future. Failure to generate sufficient
revenues, reduce spending or raise additional capital could
adversely affect the Companys ability to achieve its
intended business objectives.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The Companys consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States.
Basis
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated.
Use of
Estimates
The preparation of financial statements and related disclosures
in conformity with U.S. generally accepted accounting
principles (U.S. GAAP) requires the
Companys management to make judgments, assumptions and
estimates that affect the amounts reported in its consolidated
financial statements and accompanying notes. Management bases
its estimates on historical experience and on various other
assumptions it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates and these
differences may be material.
Revenue
Recognition
The Company generates revenues through the sale of games on
traditional feature phones and newer smartphones, such as
Apples iPhone and mobile phones utilizing Googles
Android operating system, that offer enhanced functionality.
Feature phone games are distributed primarily through wireless
carriers and revenues are recognized in accordance with FASB
ASC 985-605,
Software: Revenue Recognition. Smartphone games are
distributed primarily through digital storefronts such as the
Apple App Store and revenues related to in-app purchases or
micro-transactions are recognized in accordance with
(SAB) No. 101, Revenue Recognition in
Financial Statements, as revised by SAB No. 104,
Revenue Recognition.
The Companys revenues are derived primarily by licensing
software products in the form of mobile games. License
arrangements with the end user can be on a perpetual or
subscription basis. A perpetual license gives an end user the
right to use the licensed game on the registered handset on a
perpetual basis. A subscription license gives an end user the
right to use the licensed game on the registered handset for a
limited period of time, ranging from a few days to as long as
one month. All games that require ongoing delivery of content
from the Company or connectivity through its network for
multi-player functionality are only billed on a monthly
subscription basis. The Company distributes its products
primarily through mobile telecommunications service providers
(carriers), which market the games to end users.
License fees for perpetual and subscription licenses are usually
billed by the carrier upon download of the game by the end user.
In the case of subscriber licenses, many subscriber agreements
provide for
62
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
automatic renewal until the subscriber opts-out, while the
others provide opt-in renewal. In either case, subsequent
billings for subscription licenses are generally billed monthly.
Revenues are recognized from the Companys games when
persuasive evidence of an arrangement exists, the game has been
delivered, the fee is fixed or determinable, and the collection
of the resulting receivable is probable. For both perpetual and
subscription licenses, management considers a signed license
agreement to be evidence of an arrangement with a carrier and a
clickwrap agreement to be evidence of an arrangement
with an end user. For these licenses, the Company defines
delivery as the download of the game by the end user. The
Company estimates revenues from carriers in the current period
when reasonable estimates of these amounts can be made. Several
carriers 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 revenues and therefore to
recognize revenues during the reporting period when the end user
licenses the game. 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 Companys estimates. The
Companys estimates for revenues include consideration of
factors such as preliminary sales data, carrier-specific
historical sales trends, the age of games and the expected
impact of newly launched games, successful introduction of new
handsets, promotions during the period and economic trends. When
the Company receives the final carrier reports, to the extent
not received within a reasonable time frame following the end of
each month, the Company records any differences between
estimated revenues and actual revenues in the reporting period
when the Company determines the actual amounts. Historically,
the revenues on the final revenue report have not differed by
more than one half of 1% of the reported revenues for the
period, which the Company deemed to be immaterial. Revenues
earned from certain carriers may not be reasonably estimated. If
the Company is unable to reasonably estimate the amount of
revenues to be recognized in the current period, the Company
recognizes revenues upon the receipt of a carrier revenue report
and when the Companys portion of a games licensed
revenues are fixed or determinable and collection is probable.
To monitor the reliability of the Companys estimates,
management, where possible, reviews the revenues by carrier and
by game on a weekly basis to identify unusual trends such as
differential adoption rates by carriers or the introduction of
new handsets. If the Company deems a carrier not to be
creditworthy, the Company defers all revenues from the
arrangement until the Company receives payment and all other
revenue recognition criteria have been met.
In accordance with
ASC 605-45,
Revenue Recognition: Principal Agent Considerations, the
Company recognizes as revenues the amount the carrier reports as
payable upon the sale of the Companys games. The Company
has evaluated its carrier and digital storefront agreements and
has determined that it is not the principal when selling its
games. Key indicators that it evaluated to reach this
determination include:
|
|
|
|
|
wireless subscribers directly contract with the carriers and
digital storefronts, which have most of the service interaction
and are generally viewed as the primary obligor by the
subscribers;
|
|
|
|
carriers and digital storefronts generally have significant
control over the types of games that they offer to their
subscribers;
|
|
|
|
carriers and digital storefronts are directly responsible for
billing and collecting fees from their subscribers, including
the resolution of billing disputes;
|
|
|
|
carriers and digital storefronts generally pay the Company a
fixed percentage of their revenues or a fixed fee for each game;
|
|
|
|
carriers and digital storefronts generally must approve the
price of the Companys games in advance of their sale to
subscribers or provide tiered pricing thresholds, and the
Companys more significant carriers generally have the
ability to set the ultimate price charged to their
subscribers; and
|
|
|
|
the Company has limited risks, including no inventory risk and
limited credit risk.
|
63
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also derives a portion of its revenues through the
sale of virtual items and currency on certain games downloaded
for free (freemium games) through digital
storefronts such as the Apple App Store. The Company recognizes
revenue related to sale of virtual items, when persuasive
evidence of an arrangement exists, the service has been
rendered, the sales price is fixed or determinable, and
collectability is reasonably assured. Determining whether and
when some of these criteria have been satisfied requires
judgments that may have a significant impact on the timing and
amount of revenue the Company reports in each period. For
example, at the date the Company sells certain premium games and
virtual items and currency through micro-transactions within its
freemium games, it has an obligation to provide additional
services and incremental unspecified digital content in the
future without an additional fee. In these cases, the Company
accounts for the sale of the software product as a multiple
element arrangement and recognizes the revenue over the
estimated life of the game or virtual item, with the exception
of certain virtual items which are items consumed at a
predetermined time or otherwise have limitations on repeated use
(consumable items); these are recognized upon full
consumption of the item. For all other virtual items which are
not consumed at a predetermined time or otherwise do not have a
limitation on repeated use (durable items) (for
example a virtual gun), the Company recognizes revenues from
such virtual item over the estimated life of the virtual item.
For these items, the Company has considered the average period
that game players typically play its games to arrive at a best
estimate for the useful life. While the Company believes its
estimates to be reasonable based on available game player
information, it may revise such estimates in the future as the
games operation periods change. Any adjustments arising
from changes in the estimates of the lives of these virtual
items would be applied prospectively on the basis that such
changes are caused by new information indicating a change in the
game player behavior patterns. Any changes in the Companys
estimates of useful lives of these virtual items may result in
revenues being recognized on a basis different from prior
periods and may cause its operating results to fluctuate.
Deferred
Licensing Fees and Related Costs
Certain premium licensed games sold on digital storefronts such
as the Apple App Store require the revenue to be deferred due to
additional services and incremental unspecified digital content
to be delivered in the future without an additional fee. The
Company is obligated to pay ongoing licensing fees in the form
of royalties related to these games. As revenues are deferred,
the related ongoing licensing fees and costs are also deferred.
The deferred licensing fees and related costs are recognized in
the consolidated statements of operations and comprehensive
income in the period in which the related sales are recognized
as revenue.
Cash
and Cash Equivalents
The Company considers all investments purchased with an original
or remaining maturity of three months or less at the date of
purchase to be cash equivalents. The Company deposits cash and
cash equivalents with financial institutions that management
believes are of high credit quality. Deposits held with
financial institutions are likely to exceed the amount of
insurance on these deposits.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable.
The Company derives its accounts receivable from revenues earned
from customers located in the U.S. and other locations
outside of the U.S. The Company performs ongoing credit
evaluations of its customers financial condition and,
generally, requires no collateral from its customers. The
Company bases its allowance for doubtful accounts on
managements best estimate of the amount of probable credit
losses in the Companys 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.
64
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the revenues from customers in
excess of 10% of the Companys revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Verizon Wireless
|
|
|
15.2
|
%
|
|
|
20.5
|
%
|
|
|
21.4
|
%
|
At December 31, 2010, Verizon Wireless accounted for 18.3%
and Telecomunicaciones Movilnet accounted for 14.8% of total
accounts receivable. At December 31, 2009, Verizon Wireless
accounted for 24.1% of total accounts receivable. No other
carrier represented more than 10% of our total accounts
receivable as of these dates.
Fair
Value
Effective January 1, 2008, the Company adopted
ASC 820, Fair Value Measurements and Disclosures
(ASC 820). On January 1, 2009, the
Company adopted ASC 820 as it applies to non-financial
assets and liabilities. The adoption of ASC 820 did not
have a material impact on the Companys consolidated
financial statements. ASC 820 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. 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 standard describes a fair value hierarchy based on three
levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to
measure fair value which are the following:
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.
The adoption of ASC 820 requires additional disclosures of
assets and liabilities measured at fair value (see Note 4);
it did not have a material impact on the Companys
consolidated results of operations and financial condition.
Effective January 1, 2008, the Company adopted
ASC 825, Financial Instruments (ASC 825)
which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. The Company did
not elect to adopt the fair value option under ASC 825 as
this Statement is not expected to have a material impact on the
Companys consolidated results of operations and financial
condition.
Prepaid
or Guaranteed Licensor Royalties
The Companys royalty expenses consist of fees that it pays
to branded content owners for the use of their intellectual
property, including trademarks and copyrights, in the
development of the Companys games. Royalty-based
obligations are either paid in advance and capitalized on the
balance sheet as prepaid royalties or accrued as incurred and
subsequently paid. These royalty-based obligations are expensed
to cost of revenues at the greater of the revenues derived from
the relevant game multiplied by the applicable contractual rate
or an effective royalty rate based on expected net product
sales. Advanced license payments that are not recoupable against
future royalties are capitalized and amortized over the lesser
of the estimated life of the branded title or the term of the
license agreement.
65
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys contracts with some licensors include minimum
guaranteed royalty payments, which are payable regardless of the
ultimate volume of sales to end users. In accordance with
ASC 460-10-15,
Guarantees (ASC 460), the Company recorded a
minimum guaranteed liability of approximately $562 and $3,867 as
of December 31, 2010 and 2009, respectively. When no
significant performance remains with the licensor, the Company
initially records each of these guarantees as an asset and as a
liability at the contractual amount. The Company believes that
the contractual amount represents the fair value of the
liability. When significant performance remains with the
licensor, the Company records royalty payments as an asset when
actually paid and as a liability when incurred, rather than upon
execution of the contract. The Company classifies minimum
royalty payment obligations as current liabilities to the extent
they are contractually due within the next twelve months.
Each quarter, the Company evaluates the realization of its
royalties as well as any unrecognized guarantees not yet paid to
determine amounts that it deems unlikely to be realized through
product sales. The Company uses estimates of revenues, cash
flows and net margins to evaluate the future realization of
prepaid royalties and guarantees. This evaluation considers
multiple factors, including the term of the agreement,
forecasted demand, game life cycle status, game development
plans, and current and anticipated sales levels, as well as
other qualitative factors such as the success of similar games
and similar genres on mobile devices for the Company and its
competitors
and/or other
game platforms (e.g., consoles, personal computers and Internet)
utilizing the intellectual property and whether there are any
future planned theatrical releases or television series based on
the intellectual property. To the extent that this evaluation
indicates that the remaining prepaid and guaranteed royalty
payments are not recoverable, the Company records an impairment
charge to cost of revenues in the period that impairment is
indicated. The Company recorded impairment charges to cost of
revenues of $663, $6,591 and $6,313 during the years ended
December 31, 2010, 2009 and 2008, respectively.
Goodwill
and Intangible Assets
In accordance with ASC 350, Intangibles-Goodwill and
Other (ASC 350), the Companys goodwill is
not amortized but is tested for impairment on an annual basis or
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. Under
ASC 350, the Company performs the annual impairment review
of its goodwill balance as of September 30. This impairment
review involves a two-step process as follows:
Step 1 The Company compares the fair value of
each of its reporting units to the carrying value including
goodwill of that unit. For each reporting unit where the
carrying value, including goodwill, exceeds the units fair
value, the Company moves on to step 2. If a units fair
value exceeds the carrying value, no further work is performed
and no impairment charge is necessary.
Step 2 The Company performs an allocation of
the fair value of the reporting unit to its identifiable
tangible and intangible assets (other than goodwill) and
liabilities. This allows the Company to derive an implied fair
value for the units goodwill. The Company then compares
the implied fair value of the reporting units goodwill
with the carrying value of the units goodwill. If the
carrying amount of the units goodwill is greater than the
implied fair value of its goodwill, an impairment charge would
be recognized for the excess.
Purchased intangible assets with finite lives are amortized
using the straight-line method over their useful lives ranging
from one to six years and are reviewed for impairment in
accordance with ASC 360, Property, Plant and Equipment
(ASC 360).
Long-Lived
Assets
The Company evaluates its long-lived assets, including property
and equipment and intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable
in accordance with ASC 360. Factors considered important
that could result in an impairment review include significant
underperformance relative to expected historical or projected
future
66
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operating results, significant changes in the manner of use of
acquired assets, significant negative industry or economic
trends, and a significant decline in the Companys stock
price for a sustained period of time. The Company recognizes
impairment based on the difference between the fair value of the
asset and its carrying value. Fair value is generally measured
based on either quoted market prices, if available, or a
discounted cash flow analysis.
Property
and Equipment
The Company states property and equipment at cost. The Company
computes depreciation or amortization using the straight-line
method over the estimated useful lives of the respective assets
or, in the case of leasehold improvements, the lease term of the
respective assets, whichever is shorter.
The depreciation and amortization periods for the Companys
property and equipment are as follows:
|
|
|
Computer equipment
|
|
Three years
|
Computer software
|
|
Three years
|
Furniture and fixtures
|
|
Three years
|
Leasehold improvements
|
|
Shorter of the estimated useful life or remaining term of lease
|
Research
and Development Costs
The Company charges costs related to research, design and
development of products to research and development expense as
incurred. The types of costs included in research and
development expenses include salaries, contractor fees and
allocated facilities costs.
Software
Development Costs
The Company applies the principles of
ASC 985-20,
Software-Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed (ASC
985-20).
ASC 985-20
requires that software development costs incurred in conjunction
with product development be charged to research and development
expense until technological feasibility is established.
Thereafter, until the product is released for sale, software
development costs must be capitalized and reported at the lower
of unamortized cost or net realizable value of the related
product. The Company has adopted the tested working
model approach to establishing technological feasibility
for its games. Under this approach, the Company does not
consider a game in development to have passed the technological
feasibility milestone until the Company has completed a model of
the game that contains essentially all the functionality and
features of the final game and has tested the model to ensure
that it works as expected. To date, the Company has not incurred
significant costs between the establishment of technological
feasibility and the release of a game for sale; thus, the
Company has expensed all software development costs as incurred.
The Company considers the following factors in determining
whether costs can be capitalized: the emerging nature of the
mobile game market; the gradual evolution of the wireless
carrier platforms and mobile phones for which it develops games;
the lack of pre-orders or sales history for its games; the
uncertainty regarding a games revenue-generating
potential; its lack of control over the carrier distribution
channel resulting in uncertainty as to when, if ever, a game
will be available for sale; and its historical practice of
canceling games at any stage of the development process.
Internal
Use Software
The Company recognizes internal use software development costs
in accordance with
ASC 350-40,
Intangibles-Goodwill and Other-Internal Use Software
(ASC
350-40).
Thus, the Company capitalizes software development costs,
including costs incurred to purchase third-party software,
beginning when it determines certain factors are present
including, among others, that technology exists to achieve the
performance requirements
and/or buy
versus internal development decisions have been made. The
Company capitalized certain internal use software
67
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
costs totaling approximately $117, $114 and $432 during the
years ended December 31, 2010, 2009 and 2008, respectively.
The estimated useful life of costs capitalized is generally
three years. During the years ended December 31, 2010, 2009
and 2008, the amortization of capitalized software costs totaled
approximately $262, $421 and $683, respectively. Capitalized
internal use software development costs are included in property
and equipment, net.
Income
Taxes
The Company accounts for income taxes in accordance with
ASC 740, Income Taxes (ASC 740), which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in its financial statements or tax returns. Under ASC
740, the Company determines deferred tax assets and liabilities
based on the temporary difference between the financial
statement and tax bases of assets and liabilities using the
enacted tax rates in effect for the year in which it expects the
differences to reverse. The Company establishes valuation
allowances when necessary to reduce deferred tax assets to the
amount it expects to realize.
On January 1, 2007, the Company adopted the guidance
contained in ASC 740 relating to uncertain tax positions,
which supplemented existing guidance by defining the confidence
level that a tax position must meet in order to be recognized in
the financial statements. ASC 740 requires that the tax
effects of a position be recognized only if it is
more-likely-than-not to be sustained based solely on
its technical merits as of the reporting date. The Company
considers many factors when evaluating and estimating its tax
positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual
outcomes.
ASC 740 guidance relating to uncertain tax positions, requires
companies to adjust their financial statements to reflect only
those tax positions that are more-likely-than-not to be
sustained. Any necessary adjustment would be recorded directly
to retained earnings and reported as a change in accounting
principle as of the date of adoption. ASC 740 prescribes a
comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns.
The Companys policy is to recognize interest and penalties
related to unrecognized tax benefits in income tax expense. See
Note 11 for additional information, including the effects
of adoption on the Companys consolidated financial
position, results of operations and cash flows.
Restructuring
The Company accounts for costs associated with employee
terminations and other exit activities in accordance with
ASC 420, Exit or Disposal Cost Obligations
(ASC 420). The Company records employee
termination benefits as an operating expense when it
communicates the benefit arrangement to the employee and it
requires no significant future services, other than a minimum
retention period, from the employee to earn the termination
benefits.
Stock-Based
Compensation
The Company applies the fair value provisions of ASC 718,
Compensation-Stock Compensation (ASC 718).
ASC 718 requires the recognition of compensation expense,
using a fair-value based method, for costs related to all
share-based payments including stock options. ASC 718
requires companies to estimate the fair value of share-based
payment awards on the grant date using an option pricing model.
The Company adopted ASC 718 using the prospective
transition method, which requires, that for nonpublic entities
that used the minimum value method for either pro forma or
financial statement recognition purposes, ASC 718 shall be
applied to option grants on and after the required effective
date. For options granted prior to the ASC 718 effective
date that remain unvested on that date, the Company continues to
recognize compensation expense under the intrinsic value method
of APB 25. In addition, the Company continues to amortize those
awards valued prior to January 1, 2006 utilizing an
accelerated
68
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortization schedule, while it expenses all options granted or
modified after January 1, 2006 on a straight-line basis.
The Company has elected to use the with and without
approach as described in determining the order in which tax
attributes are utilized. As a result, the Company will only
recognize a tax benefit from stock-based awards in additional
paid-in capital if an incremental tax benefit is realized after
all other tax attributes currently available to the Company have
been utilized. In addition, the Company has elected to account
for the indirect effects of stock-based awards on other tax
attributes, such as the research tax credit, through its
statement of operations.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of ASC 718
and
ASC 505-50.
Advertising
Expenses
The Company expenses the production costs of advertising,
including direct response advertising, the first time the
advertising takes place. Advertising expense was $3,184, $1,734
and $1,870 in the years ended December 31, 2010, 2009 and
2008, respectively.
Comprehensive
Income/(Loss)
Comprehensive income/(loss) consists of two components, net
income/(loss) and other comprehensive income/(loss). Other
comprehensive income/(loss) refers to gains and losses that
under GAAP are recorded as an element of stockholders
equity but are excluded from net income/(loss). The
Companys other comprehensive income/(loss) included only
foreign currency translation adjustments as of December 31,
2010.
Foreign
Currency Translation
In preparing its consolidated financial statements, the Company
translated the financial statements of its foreign subsidiaries
from their functional currencies, the local currency, into
U.S. Dollars. This process resulted in unrealized exchange
gains and losses, which are included as a component of
accumulated other comprehensive loss within stockholders
deficit.
Cumulative foreign currency translation adjustments include any
gain or loss associated with the translation of a
subsidiarys financial statements when the functional
currency of a subsidiary is the local currency. However, if the
functional currency is deemed to be the U.S. Dollar, any
gain or loss associated with the translation of these financial
statements would be included within the Companys
statements of operations. If the Company disposes of any of its
subsidiaries, any cumulative translation gains or losses would
be realized and recorded within the Companys statement of
operations in the period during which the disposal occurs. If
the Company determines that there has been a change in the
functional currency of a subsidiary relative to the
U.S. Dollar, any translation gains or losses arising after
the date of change would be included within the Companys
statement of operations.
69
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Loss per Share
The Company computes basic net loss per share attributable to
common stockholders by dividing its net loss attributable to
common stockholders for the period by the weighted average
number of common shares outstanding during the period less the
weighted average unvested common shares subject to repurchase by
the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,423
|
)
|
|
$
|
(18,194
|
)
|
|
$
|
(106,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
35,439
|
|
|
|
29,854
|
|
|
|
29,399
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
|
|
|
|
(1
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic and diluted net
loss per share
|
|
|
35,439
|
|
|
|
29,853
|
|
|
|
29,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common
stockholders basic and diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(3.63
|
)
|
The following weighted average options and warrants to purchase
common stock and unvested shares of common stock subject to
repurchase have been excluded from the computation of diluted
net loss per share of common stock for the periods presented
because including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Warrants to purchase common stock
|
|
|
2,435
|
|
|
|
106
|
|
|
|
119
|
|
Unvested common shares subject to repurchase
|
|
|
|
|
|
|
1
|
|
|
|
20
|
|
Options to purchase common stock
|
|
|
6,347
|
|
|
|
4,935
|
|
|
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,782
|
|
|
|
5,042
|
|
|
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2009, the FASB issued Update
No. 2009-13,
Multiple-Deliverable Revenue Arrangements a
consensus of the FASB Emerging Issues Task Force (ASU
2009-13). It
updates the existing multiple-element revenue arrangements
guidance currently included under
ASC 605-25,
which originated primarily from the guidance in EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
The revised guidance primarily provides two significant changes:
(1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting,
and (2) eliminates the residual method to allocate the
arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU
2009-13 will
be effective for the first annual reporting period beginning on
or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to
the beginning of the year of adoption. The adoption of this
standard did not have a material impact on the Companys
consolidated financial statements.
In June 2009, the FASB issued Statement 167, which amended the
consolidation guidance that applies to variable interest
entities (VIE) under ASC 810, Consolidation
(ASC 810). The new guidance requires a
qualitative approach to identifying a controlling financial
interest in a VIE, and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the
holder the primary beneficiary of the VIE. The Company adopted
this guidance on January 1, 2010. The adoption of this
statement did not have a material impact on the Companys
consolidated financial statements.
70
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisition
of Superscape Group plc
On March 7, 2008, the Company declared its cash tender
offer for all of the outstanding shares of Superscape Group plc
(Superscape) wholly unconditional in all respects
when it had received 80.95% of the issued share capital of
Superscape. The Company offered 10 pence (pound sterling) in
cash for each issued share of Superscape (Superscape
Shares), valuing the acquisition at approximately
£18,300 based on 183,099 Superscape Shares outstanding.
The Company acquired the net assets of Superscape in order to
deepen and broaden its game library, gain access to
3-D game
development and to augment its internal production and
publishing resources with a studio in Moscow, Russia. These
factors contributed to a purchase price in excess of the fair
value of the net tangible and intangible assets acquired, and as
a result, the Company recorded $13,432 of goodwill in connection
with this transaction.
On March 21, 2008, the date the recommended cash tender
offer expired, the Company owned or had received valid
acceptances representing approximately 93.57% of the Superscape
Shares, with an aggregate purchase price of $34,477. In May
2008, the Company acquired the remaining 6.43% of the
outstanding Superscape shares on the same terms as the
recommended cash offer for $2,335.
The Companys consolidated financial statements include the
results of operations of Superscape from the date of
acquisition, March 7, 2008. Under the purchase method of
accounting, the Company initially allocated the total purchase
price of $38,810 to the net tangible and intangible assets
acquired and liabilities assumed based upon their respective
estimated fair values as of the acquisition date.
The following summarizes the purchase price allocation of the
Superscape acquisition:
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
8,593
|
|
Accounts receivable
|
|
|
4,353
|
|
Prepaid and other current assets
|
|
|
1,507
|
|
Property and equipment
|
|
|
182
|
|
Titles, content and technology
|
|
|
9,190
|
|
Carrier contracts and relationships
|
|
|
7,400
|
|
Trade name
|
|
|
330
|
|
In-process research and development
|
|
|
1,110
|
|
Goodwill
|
|
|
13,432
|
|
|
|
|
|
|
Total assets acquired
|
|
|
46,097
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
(2,567
|
)
|
Accrued liabilities
|
|
|
(585
|
)
|
Accrued compensation
|
|
|
(367
|
)
|
Accrued restructuring
|
|
|
(3,768
|
)
|
Total liabilities
|
|
|
(7,287
|
)
|
|
|
|
|
|
Net acquired assets
|
|
$
|
38,810
|
|
|
|
|
|
|
The Company recorded an estimate for costs to terminate some
activities associated with the Superscape operations in
accordance with the guidance of ASC 805. This restructuring
accrual of $3,768 principally related to
71
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the termination of 29 Superscape employees of $2,277,
restructuring of facilities of $1,466 and other agreement
termination fees of $25.
The valuation of the identifiable intangible assets acquired was
based on managements estimates, currently available
information and reasonable and supportable assumptions. The
allocation was generally based on the fair value of these assets
determined using the income and market approaches. Of the total
purchase price, $16,920 was allocated to amortizable intangible
assets. The amortizable intangible assets are being amortized
using a straight-line method over their respective estimated
useful lives of one to six years.
In conjunction with the acquisition of Superscape, the Company
recorded a $1,110 expense for acquired in-process research and
development (IPR&D) during the year ended
December 31, 2008 because feasibility of the acquired
technology had not been established and no future alternative
uses existed. The IPR&D expense is included in operating
expenses in the consolidated statements of operations for the
year ended December 31, 2008.
The IPR&D is related to the development of new game titles.
The Company determined the value of acquired IPR&D using
the discounted cash flow approach. The Company calculated the
present value of the expected future cash flows attributable to
the in-process technology using a 22% discount rate.
The Company allocated the residual value of $13,432 to goodwill.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and intangible assets acquired.
In accordance with ASC 350, goodwill will not be amortized
but will be tested for impairment at least annually. Goodwill is
not deductible for tax purposes. Based on the Companys
annual and interim goodwill impairment tests, all of the
goodwill related to the Superscape acquisition that had been
attributed to the Americas reporting unit was impaired during
the year ended December 31, 2008 (see Note 6).
Superscapes results of operations have been included in
the Companys consolidated financial statements subsequent
to the date of acquisition. The financial information in the
table below summarizes the combined results of operations of the
Company and Superscape, on a pro forma basis, as though the
companies had been combined as of the beginning of each of the
periods presented, and excludes the IPR&D charge of $1,110
resulting from the acquisition of Superscape:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Total pro forma revenues
|
|
$
|
92,480
|
|
Gross profit
|
|
|
50,025
|
|
Pro forma net loss
|
|
|
(109,275
|
)
|
Pro forma net loss per share basic and diluted
|
|
|
(3.72
|
)
|
The Company is presenting pro forma financial information for
informational purposes only, and this information is not
intended to be indicative of the results of operations that
would have been achieved if the acquisitions had taken place at
the beginning of each of the periods presented.
|
|
NOTE 4
|
FAIR
VALUE MEASUREMENTS
|
Fair
Value Measurements
The Companys cash and investment instruments 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. The types of
instruments valued based on quoted market prices in active
markets include most U.S. government and agency securities,
sovereign government obligations, and money market securities.
Such instruments are generally classified within Level 1 of
the fair value hierarchy. As of December 31, 2010, the
Company had $12,863 in cash and cash equivalents.
72
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
BALANCE
SHEET COMPONENTS
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
4,974
|
|
|
$
|
5,167
|
|
Furniture and fixtures
|
|
|
487
|
|
|
|
455
|
|
Software
|
|
|
2,919
|
|
|
|
2,742
|
|
Leasehold improvements
|
|
|
2,392
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,772
|
|
|
|
11,724
|
|
Less: Accumulated depreciation and amortization
|
|
|
(8,638
|
)
|
|
|
(8,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,134
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization for the years ended
December 31, 2010, 2009 and 2008 were $1,975, $2,330 and
$2,748, respectively.
Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts receivable
|
|
$
|
11,164
|
|
|
$
|
16,576
|
|
Less: Allowance for doubtful accounts
|
|
|
(504
|
)
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,660
|
|
|
|
16,030
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable includes amounts billed and unbilled as of
the respective balance sheet dates.
The movement in the Companys allowance for doubtful
accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
|
|
|
|
End of
|
Description
|
|
Year
|
|
Additions
|
|
Deductions
|
|
Year
|
|
Year ended December 31, 2010
|
|
$
|
546
|
|
|
$
|
153
|
|
|
$
|
195
|
|
|
$
|
504
|
|
Year ended December 31, 2009
|
|
$
|
468
|
|
|
$
|
233
|
|
|
$
|
155
|
|
|
$
|
546
|
|
Year ended December 31, 2008
|
|
$
|
368
|
|
|
$
|
148
|
|
|
$
|
48
|
|
|
$
|
468
|
|
The Company had no significant write-offs or recoveries during
the years ended December 31, 2010, 2009 and 2008.
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Uncertain tax obligations
|
|
$
|
4,991
|
|
|
$
|
4,614
|
|
Deferred income tax liability
|
|
|
1,170
|
|
|
|
1,736
|
|
Restructuring
|
|
|
773
|
|
|
|
|
|
Other
|
|
|
925
|
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,859
|
|
|
|
7,616
|
|
|
|
|
|
|
|
|
|
|
73
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
GOODWILL
AND INTANGIBLE ASSETS
|
Intangible
Assets
The Companys intangible assets were acquired in connection
with the acquisitions of Macrospace in 2004, iFone in 2006, MIG
in 2007 and Superscape in 2008. The carrying amounts and
accumulated amortization expense of the acquired intangible
assets, including the impact of foreign currency exchange
translation at December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
|
|
(Including
|
|
|
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
Impact of
|
|
|
Net
|
|
|
Gross
|
|
|
Impact of
|
|
|
Net
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Foreign
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Foreign
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Value
|
|
|
Exchange)
|
|
|
Value
|
|
|
Value
|
|
|
Exchange)
|
|
|
Value
|
|
|
Intangible assets amortized to cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titles, content and technology
|
|
|
2.5 yrs
|
|
|
$
|
13,545
|
|
|
$
|
(13,545
|
)
|
|
$
|
|
|
|
$
|
13,599
|
|
|
$
|
(13,411
|
)
|
|
$
|
188
|
|
Catalogs
|
|
|
1 yr
|
|
|
|
1,203
|
|
|
|
(1,203
|
)
|
|
|
|
|
|
|
1,239
|
|
|
|
(1,239
|
)
|
|
|
|
|
ProvisionX Technology
|
|
|
6 yrs
|
|
|
|
198
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
204
|
|
|
|
(168
|
)
|
|
|
36
|
|
Carrier contract and related relationships
|
|
|
5 yrs
|
|
|
|
18,832
|
|
|
|
(10,352
|
)
|
|
|
8,480
|
|
|
|
18,558
|
|
|
|
(7,149
|
)
|
|
|
11,409
|
|
Licensed content
|
|
|
5 yrs
|
|
|
|
2,829
|
|
|
|
(2,810
|
)
|
|
|
19
|
|
|
|
2,753
|
|
|
|
(1,902
|
)
|
|
|
851
|
|
Service provider license
|
|
|
9 yrs
|
|
|
|
446
|
|
|
|
(151
|
)
|
|
|
295
|
|
|
|
431
|
|
|
|
(98
|
)
|
|
|
333
|
|
Trademarks
|
|
|
3 yrs
|
|
|
|
547
|
|
|
|
(547
|
)
|
|
|
|
|
|
|
544
|
|
|
|
(512
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,600
|
|
|
|
(28,806
|
)
|
|
|
8,794
|
|
|
|
37,328
|
|
|
|
(24,479
|
)
|
|
|
12,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets amortized to operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emux Technology
|
|
|
6 yrs
|
|
|
|
1,283
|
|
|
|
(1,283
|
)
|
|
|
|
|
|
|
1,321
|
|
|
|
(1,111
|
)
|
|
|
210
|
|
Noncompete agreement
|
|
|
2 yrs
|
|
|
|
562
|
|
|
|
(562
|
)
|
|
|
|
|
|
|
578
|
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845
|
|
|
|
(1,845
|
)
|
|
|
|
|
|
|
1,899
|
|
|
|
(1,689
|
)
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles assets
|
|
|
|
|
|
$
|
39,445
|
|
|
$
|
(30,651
|
)
|
|
$
|
8,794
|
|
|
$
|
39,227
|
|
|
$
|
(26,168
|
)
|
|
$
|
13,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has included amortization of acquired intangible
assets directly attributable to revenue-generating activities in
cost of revenues. The Company has included amortization of
acquired intangible assets not directly attributable to
revenue-generating activities in operating expenses. During the
years ended December 31, 2010, 2009 and 2008, the Company
recorded amortization expense in the amounts of $4,226, $7,092
and $11,309, respectively, in cost of revenues. During the years
ended December 31, 2010, 2009 and 2008, the Company
recorded amortization expense in the amounts of $205, $215 and
$261, respectively, in operating expenses. The Company recorded
no impairment charges during the years ended December 31,
2010, 2009 and 2008.
74
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the total expected future
amortization related to intangible assets was as follows:
|
|
|
|
|
|
|
Amortization
|
|
|
|
Included in
|
|
|
|
Cost of
|
|
Period Ending December 31,
|
|
Revenues
|
|
|
2011
|
|
$
|
2,911
|
|
2012
|
|
|
2,792
|
|
2013
|
|
|
2,722
|
|
2014
|
|
|
272
|
|
2015 and thereafter
|
|
|
97
|
|
|
|
|
|
|
|
|
$
|
8,794
|
|
|
|
|
|
|
Goodwill
The Company attributes all of the goodwill resulting from the
Macrospace acquisition to its Europe, Middle East and Africa
(EMEA) reporting unit. The goodwill resulting from
the iFone acquisition is evenly attributed to the Americas and
EMEA reporting units. The Company attributes all of the goodwill
resulting from the MIG acquisition to its Asia and Pacific
(APAC) reporting unit and all of the goodwill
resulting from the Superscape acquisition to the Americas
reporting unit. The goodwill allocated to the Americas reporting
unit is denominated in U.S. Dollars (USD), the
goodwill allocated to the EMEA reporting unit is denominated in
Pounds Sterling (GBP) and the goodwill allocated to
the APAC reporting unit is denominated in Chinese Renminbi
(RMB). As a result, the goodwill attributed to the
EMEA and APAC reporting units are subject to foreign currency
fluctuations.
Goodwill by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Total
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Total
|
|
|
Balance as of January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
24,871
|
|
|
$
|
25,354
|
|
|
$
|
23,881
|
|
|
$
|
74,106
|
|
|
$
|
24,871
|
|
|
$
|
25,354
|
|
|
$
|
23,895
|
|
|
$
|
74,120
|
|
Accumulated Impairment Losses
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,608
|
|
|
|
4,608
|
|
|
|
|
|
|
|
|
|
|
|
4,622
|
|
|
|
4,622
|
|
Goodwill Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of Foreign Currency Exchange
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of period ended:
|
|
|
|
|
|
|
|
|
|
|
4,766
|
|
|
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
4,608
|
|
|
|
4,608
|
|
Goodwill
|
|
|
24,871
|
|
|
|
25,354
|
|
|
|
24,039
|
|
|
|
74,264
|
|
|
|
24,871
|
|
|
|
25,354
|
|
|
|
23,881
|
|
|
|
74,106
|
|
Accumulated Impairment Losses
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,766
|
|
|
$
|
4,766
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,608
|
|
|
$
|
4,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 350, Intangibles
Goodwill and Other (ASC 350) the Companys
goodwill is not amortized but is tested for impairment on an
annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. Under ASC 350, the Company performs the annual
impairment review of its goodwill balance as of September 30 or
more frequently if triggering events occur.
ASC 350 requires a two-step approach to testing goodwill for
impairment for each reporting unit annually, or whenever events
or changes in circumstances indicate the fair value of a
reporting unit is below its carrying amount. The first step
measures for impairment by applying the fair value-based tests
at the reporting unit level. The second step (if necessary)
measures the amount of impairment by applying the fair
value-based tests to individual assets and liabilities within
each reporting units. The fair value of the reporting units is
estimated using a combination of the
75
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market approach, which utilizes comparable companies data,
and/or the
income approach, which uses discounted cash flows.
The Company has three geographic segments comprised of the
1) Americas, 2) EMEA and 3) APAC regions. As of
December 31, 2010, the Company had goodwill attributable to
the APAC reporting unit. The Company performed an annual
impairment review as of September 30, 2010 as prescribed in
ASC 350 and concluded that it was not at risk of failing
the first step, as the fair value of the APAC reporting unit
exceeded its carrying value and thus no adjustment to the
carrying value of goodwill was necessary. As a result, the
Company was not required to perform the second step. In order to
determine the fair value of the Companys reporting units,
the Company utilizes the discounted cash flow method and market
method. The Company has consistently utilized both methods in
its goodwill impairment tests and weights both results equally.
The Company uses both methods in its goodwill impairment tests
as it believes both, in conjunction with each other, provide a
reasonable estimate of the determination of fair value of the
reporting unit the discounted cash flow method being
specific to anticipated future results of the reporting unit and
the market method, which is based on the Companys market
sector including its competitors. The assumptions supporting the
discounted cash flow method were determined using the
Companys best estimates as of the date of the impairment
review.
In 2008, the Company recorded an aggregate goodwill impairment
of $69,498 as the fair values of the Americas, APAC and EMEA
reporting units were determined to be below their respective
carrying values.
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The Company leases office space under non-cancelable operating
facility leases with various expiration dates through November
2013. Rent expense for the years ended December 31, 2010,
2009 and 2008 was $2,652, $2,813 and $3,759, respectively. The
terms of the facility leases provide for rental payments on a
graduated scale. The Company recognizes rent expense on a
straight- line basis over the lease period, and has accrued for
rent expense incurred but not paid. The deferred rent balance
was $379 and $440 at December 31, 2010 and 2009,
respectively, and was included within other long-term
liabilities.
At December 31, 2010, future minimum lease payments under
non-cancelable operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Net
|
|
|
|
Lease
|
|
|
Sub-lease
|
|
|
Lease
|
|
Period Ending December 31,
|
|
Payments
|
|
|
Income
|
|
|
Payments
|
|
|
2011
|
|
$
|
3,972
|
|
|
$
|
(539
|
)
|
|
$
|
3,433
|
|
2012
|
|
|
2,855
|
|
|
|
(279
|
)
|
|
|
2,576
|
|
2013 and thereafter
|
|
|
1,048
|
|
|
|
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,875
|
|
|
$
|
(818
|
)
|
|
$
|
7,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Guaranteed Royalties
The Company has entered into license and development agreements
with various owners of brands and other intellectual property to
develop and publish games for mobile handsets. Pursuant to some
of these agreements, the
76
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company is required to pay minimum guaranteed royalties over the
term of the agreements regardless of actual game sales. Future
minimum royalty payments for those agreements as of
December 31, 2010 were as follows:
|
|
|
|
|
|
|
Minimum
|
|
|
|
Guaranteed
|
|
Period Ending December 31,
|
|
Royalties
|
|
|
2011
|
|
$
|
914
|
|
2012
|
|
|
698
|
|
2013 and thereafter
|
|
|
5
|
|
|
|
|
|
|
|
|
$
|
1,617
|
|
|
|
|
|
|
These commitments are included in both current and long-term
prepaid and accrued royalties.
Income
Taxes
At this time, the settlement of the Companys income tax
liabilities cannot be determined; however, the liabilities are
not expected to become due during 2011.
Indemnification
Arrangements
The Company has entered into agreements under which it
indemnifies each of its officers and directors during his or her
lifetime for certain events or occurrences while the officer or
director is or was serving at the Companys request in that
capacity. The maximum potential amount of future payments the
Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a director and
officer insurance policy that limits its exposure and enables
the Company to recover a portion of any future amounts paid. As
a result of its insurance policy coverage, the Company believes
the estimated fair value of these indemnification agreements is
minimal. Accordingly, the Company had recorded no liabilities
for these agreements as of December 31, 2010 or 2009.
In the ordinary course of its business, the Company includes
standard indemnification provisions in most of its license
agreements with carriers and other distributors. Pursuant to
these provisions, the Company generally indemnifies these
parties for losses suffered or incurred in connection with its
games, including as a result of intellectual property
infringement and viruses, worms and other malicious software.
The term of these indemnity provisions is generally perpetual
after execution of the corresponding license agreement, and the
maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is
generally unlimited. The Company has never incurred costs to
defend lawsuits or settle indemnified claims of these types. As
a result, the Company believes the estimated fair value of these
indemnity provisions is minimal. Accordingly, the Company had
recorded no liabilities for these provisions as of
December 31, 2010 or 2009.
Contingencies
From time to time, the Company is subject to various claims,
complaints and legal actions in the normal course of business.
For example, the Company was engaged in a contractual dispute
with a licensor, Skinit, Inc., related to, among other claims,
alleged underpayment of royalties and failure to perform under a
distribution agreement. On April 21, 2009, Skinit filed a
complaint against the Company and other defendants, seeking
unspecified damages plus attorneys fees and costs. The
complaint, filed in the Superior Court of California in Orange
County (case number
30-2009),
alleged breach of contract, interference with economic
relations, conspiracy and misrepresentation of fact. On
June 25, 2009, the Company filed a motion in the Superior
Court in Orange County requesting an order compelling Skinit to
arbitrate its claim against the Company and requesting that the
court stay the action pending the determination of the motion
and the subsequent arbitration. On July 30, 2009, the court
granted the Companys motion in its entirety and the
dispute was to proceed to arbitration, which was scheduled to
occur on August 9, 2010. In July 2010, the Company and
Skinit entered into a settlement agreement in full settlement
and
77
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discharge of all claims discussed above. This settlement did not
have a significant impact on the Companys financial
statements.
The Company does not believe it is party to any currently
pending litigation, the outcome of which will have a material
adverse effect on its operations, financial position or
liquidity. However, the ultimate outcome of any litigation is
uncertain and, regardless of outcome, litigation can have an
adverse impact on the Company because of defense costs,
potential negative publicity, diversion of management resources
and other factors.
MIG
Notes
In December 2008, the Company amended the MIG merger agreement
to acknowledge the full achievement of the earnout milestones
and at the same time entered into secured promissory notes in
the aggregate principal amount of $20,000 payable to the former
MIG shareholders (the Earnout Notes) as full
satisfaction of the MIG earnout. The Earnout Notes required that
the Company pay off the remaining principal and interest in
installments. As of December 31, 2010, the Company had
fully repaid the Earnout Notes.
The Earnout Notes were secured by a lien on substantially all of
the Companys assets and were subordinated to the
Companys obligations to the lender under the
Companys Credit Facility (as defined under the caption
Credit Facility below), and any replacement credit
facility that meets certain conditions. The Earnout Notes began
accruing simple interest on April 1, 2009 at the rate of 7%
compounded annually and may be prepaid without penalty. A change
of control of the Company would have accelerated the payment of
principal and interest under the Earnout Notes.
In December 2008, the Company also entered into secured
promissory notes in the aggregate principal amount of $5,000
payable to two former shareholders of MIG (the Special
Bonus Notes) as full satisfaction of the special bonus
provisions of their employment agreements.
The Special Bonus Notes were guaranteed by the Company and the
Companys obligations were secured by a lien on
substantially all of the Companys assets. The Special
Bonus Notes were subordinated to the Credit Facility and any
replacement credit facility that meets certain conditions. The
Special Bonus Notes began accruing simple interest on
April 1, 2009 at the rate of 7% compounded annually, and
could have been repaid in advance without penalty. A change of
control of the Company would have accelerated the payment of
principal and interest under the Earnout Notes. The Company had
recorded the entire $5,000 of the Special Bonus Notes as of
December 31, 2010 as the former MIG shareholders were fully
vested in the special bonus.
In March 2010, the Company entered into an agreement with the
holders of the Earnout Notes and the Special Bonus Notes to
postpone the payments that would have been due on March 31,
2010 until May 1, 2010. As of December 31, 2010, the
Company had paid $20,674 of principal and interest to the MIG
shareholders related to the Earnout Notes and $4,798 of
principal and interest to the former MIG executives related to
the Special Bonus Notes. Additionally in January 2011, the
Company paid $710 of taxes that had been withheld on the
December 31, 2010 Special Bonus Notes payment made to the
former MIG shareholders in China.
Credit
Facility
In December 2008, the Company entered into a revolving credit
facility (the Credit Facility), which amended and
superseded the Loan and Security Agreement entered into in
February 2007, as amended. On August 24, 2009 and
February 10, 2010, the Company entered into amendments to
the Credit Facility, which reduced certain of the minimum
targets contained in the EBITDA-related covenant discussed
below. The February 10, 2010 amendment also changed the
measurement period for the EBITDA covenant from a rolling six
month calculation to a quarterly calculation. On March 18,
2010, the Company entered into a third amendment to the
agreement which extended the maturity date of the Credit
Facility from December 22, 2010 until June 30,
78
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2011 and increased the interest rate for borrowings under the
Credit Facility by 0.75% to the lenders prime rate, plus
1.75%, but no less than 5.0%. On February 2, 2011, the
Company entered into a fourth amendment which waived the
Companys default in maintaining minimum levels of EBITDA
specified in the loan agreement for the period beginning
October 1, 2010 and ending December 31, 2010. Prior to
this date, the Company was in compliance with all covenants
under the Credit Facility. This amendment also removed the
EBITDA financial covenant from the loan agreement in its
entirety and replaced this covenant with a net cash covenant,
which requires the Company to maintain at least $10,000 in
unrestricted cash at the lender or an affiliate of the lender,
net of any indebtedness that is owed to the lender under the
Loan Agreement. The Credit Facility provides for borrowings of
up to $8,000, subject to a borrowing base equal to 80% of the
Companys eligible accounts receivable. The maximum amount
available for borrowing under the Credit Facility was limited to
$2,461 as of December 31, 2010. The Companys
obligations under the Credit Facility are guaranteed by certain
of the Companys domestic and foreign subsidiaries and are
secured by substantially all of the Companys assets,
including all of the capital stock of certain of the
Companys domestic subsidiaries and 65% of the capital
stock of certain of its foreign subsidiaries.
The interest rate for the Credit Facility is the lenders
prime rate, plus 1.75%, but no less than 5.0%. Interest is due
monthly, with all outstanding obligations due at maturity. The
Company must also pay the lender a monthly unused revolving line
facility fee of 0.35% on the unused portion of the $8,000
commitment. In addition, the Company paid the lender a
non-refundable commitment fee of $55 in December 2008 and paid
an additional fee of $55 during December 2009. The Credit
Facility limits the Company and certain of its
subsidiaries ability to, among other things, dispose of
assets, make acquisitions, incur additional indebtedness, incur
liens, pay dividends and make other distributions, and make
investments. The Credit Facility requires the Company to
establish a separate account at the lender for collection of its
accounts receivables. All deposits into this account are
automatically applied by the lender to the Companys
outstanding obligations under the Credit Facility.
In addition, under the Credit Facility, the Company must comply
with a minimum domestic liquidity covenant, which requires it to
maintain at the lender an amount of cash, cash equivalents and
short-term investments of not less than the greater of:
(a) 20% of the Companys total consolidated
unrestricted cash, cash equivalents and short-term investments,
or (b) 15% of outstanding obligations under the Credit
Facility.
The Companys failure to comply with the financial or
operating covenants in the Credit Facility would not only
prohibit the Company from borrowing under the facility, but
would also constitute a default, permitting the lender to, among
other things, declare any outstanding borrowings, including all
accrued interest and unpaid fees, becoming immediately due and
payable. A change in control of the Company (as defined in the
Credit Facility) also constitutes an event of default,
permitting the lender to accelerate the indebtedness and
terminate the Credit Facility. To the extent an event of default
occurs under the Credit Facility and the lender accelerates the
indebtedness and terminates the Credit Facility, this would also
trigger the cross-default provisions of the Earnout Notes and
Special Bonus Notes.
The Credit Facility also includes a material adverse
change clause. As a result, if a material adverse change
occurs with respect to the Companys business, operations
or financial condition, then that change could constitute an
event of default under the terms of the Credit Facility. When an
event of default occurs, the lender can, among other things,
declare all obligations immediately due and payable, could stop
advancing money or extending credit under the Credit Facility
and could terminate the Credit Facility. The Companys
believes that the risk of a material adverse change occurring
with respect to its business, operations or financial condition
and the lender requesting immediate repayment of amounts already
borrowed, stopping advancing the remaining credit or terminating
the Credit Facility is remote.
The Credit Facility matures on June 30, 2011, when all
amounts outstanding will be due. If the Credit Facility is
terminated prior to maturity by the Company or by the lender
after the occurrence and continuance of an event of default,
then the Company will owe a termination fee equal to $80, or
1.00% of the total commitment.
79
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, the Company was not in compliance
with all covenants of the Credit Facility, but the lender
subsequently waived such non-compliance in connection with the
Companys entry into the fourth amendment to the Credit
Facility as described above, and had outstanding obligations of
$2,288. Based on the borrowing rates currently available to the
Company with similar terms and maturities, the carrying value
approximates fair value.
|
|
NOTE 9
|
STOCKHOLDERS
EQUITY/(DEFICIT)
|
Common
Stock
At December 31, 2010, the Company was authorized to issue
250,000 shares of common stock. As of December 31,
2010, the Company had reserved 18,347 shares for future
issuance under its stock plans and outstanding warrants.
Preferred
Stock
At December 31, 2010, the Company was authorized to issue
5,000 shares of preferred stock.
Secondary
Offering
In January 2011, the Company sold in an underwritten public
offering an aggregate of 8,415 shares of its common stock
at a public offering price of $2.05 per share for net proceeds
of approximately $15,900 after underwriting discounts and
commissions and offering expenses. The underwriters of this
offering were Roth Capital Partners, LLC, Craig-Hallum Capital
Group LLC, Merriman Capital, Inc. and Northland Capital Markets.
Shelf
Registration Statement
In December 2010, the Securities and Exchange Commission
declared effective the Companys shelf registration
statement which allows the Company to issue various types of
debt and equity instruments, including common stock, preferred
stock and warrants. Issuances under the shelf registration will
require the filing of a prospectus supplement identifying the
amount and terms of the securities to be issued. The ability to
issue debt and equity is subject to market conditions and other
factors impacting the Companys borrowing capacity. The
Company has a $30,000 limit on the amount securities that can be
issued under this shelf registration statement and has already
utilized $17,250 of this amount pursuant to its underwritten
public offering in January 2011.
Private
Placement
On August 27, 2010, the Company completed the Private
Placement in which it issued to the investors (i) an
aggregate of 13,495 shares of the Companys common
stock at $1.00 per share and (ii) warrants initially
exercisable to purchase up to 6,748 shares of the
Companys common stock at $1.50 per share (the
Warrants), for initial proceeds of approximately
$13,218 net of issuance costs (excluding any proceeds the
Company may receive upon exercise of the Warrants). Of this
amount, $2,198 was allocated to the value of the Warrants and
$11,020 was allocated to the common stock. All amounts are
recorded within stockholders equity.
Warrants
to Purchase Common Stock
The Warrants issued in connection with the Private Placement
have an initial exercise price of $1.50 per share of common
stock, can be exercised immediately, have a five-year term and
provide for weighted-average anti-dilution protection in
addition to customary adjustment for dividends, reorganization
and other common stock events.
80
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common stock warrants outstanding at December 31, 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Exercise
|
|
|
of Shares
|
|
|
|
|
|
|
Price
|
|
|
Outstanding
|
|
|
|
Term
|
|
|
per
|
|
|
Under
|
|
|
|
(Years)
|
|
|
Share
|
|
|
Warrant
|
|
|
May 2006
|
|
|
7
|
|
|
$
|
9.03
|
|
|
|
106
|
|
August 2010
|
|
|
5
|
|
|
|
1.50
|
|
|
|
6,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
Comprehensive loss consists of two components, net loss and
other comprehensive income/(loss). Other comprehensive
income/(loss) refers to revenue, expenses, gains, and losses
that under GAAP are recorded as an element of stockholders
equity but are excluded from net income. The Companys
other comprehensive income/(loss) consists of foreign currency
translation adjustments from those subsidiaries not using the
U.S. dollar as their functional currency. Other
comprehensive loss for 2010, 2009 and 2008 was $13,195, $18,433
and $107,602, respectively.
|
|
NOTE 10
|
STOCK
OPTION AND OTHER BENEFIT PLANS
|
2007
Equity Incentive Plan
In January 2007, the Companys Board of Directors adopted,
and in March 2007 the stockholders approved, the 2007 Equity
Incentive Plan (the 2007 Plan). At the time of
adoption, there were 1,766 shares of common stock
authorized for issuance under the 2007 Plan plus 195 shares
of common stock from the Companys 2001 Stock Option Plan
(the 2001 Plan) that were unissued. In addition,
shares that were not issued or subject to outstanding grants
under the 2001 Plan on the date of adoption of the 2007 Plan and
any shares issued under the 2001 Plan that are forfeited or
repurchased by the Company or that are issuable upon exercise of
options that expire or become unexercisable for any reason
without having been exercised in full, will be available for
grant and issuance under the 2007 Plan. Furthermore, the number
of shares available for grant and issuance under the 2007 Plan
will be increased automatically on January 1 of each of 2008
through 2011 by an amount equal to 3% of the Companys
shares outstanding on the immediately preceding
December 31, unless the Companys Board of Directors,
in its discretion, determines to make a smaller increase.
The Company may grant options under the 2007 Plan at prices no
less than 85% of the estimated fair value of the shares on the
date of grant as determined by its Board of Directors, provided,
however, that (i) the exercise price of an incentive stock
option (ISO) or non-qualified stock options
(NSO) may not be less than 100% or 85%,
respectively, of the estimated fair value of the underlying
shares of common stock on the grant date, and (ii) the
exercise price of an ISO or NSO granted to a 10% stockholder may
not be less than 110% of the estimated fair value of the shares
on the grant date. Prior to the Companys IPO, the Board
determined the fair value of common stock in good faith based on
the best information available to the Board and Companys
management at the time of the grant. Following the IPO, the fair
value of the Companys common stock is determined by the
last sale price of such stock on the NASDAQ Global Market on the
date of determination. The stock options granted to employees
generally vest with respect to 25% of the underlying shares one
year from the vesting commencement date and with respect to an
additional 1/48 of the underlying shares per month thereafter.
Stock options granted during 2007 prior to October 25, 2007
have a contractual term of ten years and stock options granted
on or after October 25, 2007 have a contractual term of six
years.
The 2007 Plan also provides the Board of Directors the ability
to grant restricted stock awards, stock appreciation rights,
restricted stock units, performance shares and stock bonuses.
81
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 3, 2010, at the Companys 2010 Annual Meeting
of Stockholders, the Companys stockholders approved an
amendment to the 2007 Plan to increase the aggregate number of
shares of common stock authorized for issuance under the 2007
Plan by 3,000 shares. As of December 31, 2010,
4,109 shares were available for future grants under the
2007 Plan.
2007
Employee Stock Purchase Plan
In January 2007, the Companys Board of Directors adopted,
and in March 2007 the Companys stockholders approved, the
2007 Employee Stock Purchase Plan (the 2007 Purchase
Plan). The Company initially reserved 667 shares of
its common stock for issuance under the 2007 Purchase Plan. On
each January 1 for the first eight calendar years after the
first offering date, the aggregate number of shares of the
Companys common stock reserved for issuance under the 2007
Purchase Plan will be increased automatically by the number of
shares equal to 1% of the total number of outstanding shares of
the Companys common stock on the immediately preceding
December 31, provided that the Board of Directors may
reduce the amount of the increase in any particular year and
provided further that the aggregate number of shares issued over
the term of this plan may not exceed 5,333. The 2007 Purchase
Plan permits eligible employees to purchase common stock at a
discount through payroll deductions during defined offering
periods. The price at which the stock is purchased is equal to
the lower of 85% of the fair market value of the common stock at
the beginning of an offering period or after a purchase period
ends.
In January 2009, the 2007 Purchase Plan was amended to provide
that the Compensation Committee of the Companys Board of
Directors may fix a maximum number of shares that may be
purchased in the aggregate by all participants during any single
offering period (the Maximum Offering Period Share
Amount). The Committee may later raise or lower the
Maximum Offering Period Share Amount. The Committee established
the Maximum Offering Period Share Amount of 500 shares for
the offering period that commenced on February 15, 2009 and
ended on August 14, 2009, and a Maximum Offering Period
Share Amount of 200 shares for each offering period
thereafter.
As of December 31, 2010, 416 shares were available for
issuance under the 2007 Purchase Plan.
2008
Equity Inducement Plan
In March 2008, the Companys Board of Directors adopted the
2008 Equity Inducement Plan (the Inducement Plan) to
augment the shares available under its existing 2007 Plan. The
Inducement Plan did not require the approval of the
Companys stockholders. The Company initially reserved
600 shares of its common stock for grant and issuance under
the Inducement Plan. On December 28, 2009, the
Companys Board of Directors appointed Niccolo de Masi as
the Companys President and Chief Executive Officer and the
Compensation Committee of the Companys Board of Directors
awarded him a non-qualified stock option to purchase
1,250 shares of the Companys common stock, which was
issued on January 4, 2010 under the Inducement Plan.
Immediately prior to the grant of this award, the Compensation
Committee amended the Inducement Plan to increase the number of
shares available for grant under the plan by 819 shares to
1,250 shares. The Company may only grant NSOs under the
Inducement Plan. Grants under the Inducement Plan may only be
made to persons not previously an employee or director of the
Company, or following a bona fide period of non-employment, as
an inducement material to such individuals entering into
employment with the Company and to provide incentives for such
persons to exert maximum efforts for the Companys success.
The Company may grant NSOs under the Inducement Plan at prices
less than 100% of the fair value of the shares on the date of
grant, at the discretion of its Board of Directors. The fair
value of the Companys common stock is determined by the
last sale price of such stock on the NASDAQ Global Market on the
date of determination.
As of December 31, 2010, 39 shares were reserved for
future grants under the Inducement Plan.
82
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009
Stock Option Exchange Program
On April 22, 2009, the Company launched a voluntary stock
option exchange program (the Exchange Program)
pursuant to which its eligible United States and United Kingdom
employees (Eligible Employees) had the right to
exchange all options to purchase shares of its common stock
outstanding prior to the Exchange Program launch date having an
exercise price equal to or greater than $1.25 per share
(Eligible Options) granted under the 2007 Plan or
the 2001 Plan for new nonqualified stock options to be granted
under the 2007 Plan (New Options). Eligible Options
that were tendered for New Options were cancelled and returned
to the 2007 Plan for re-issuance thereunder. The Companys
executive officers and directors were not eligible to
participate in the Exchange Program. The Exchange Program
provided that Eligible Employees would receive a New Option for
each tendered Eligible Option, depending on the exercise price
of the Eligible Option tendered, in accordance with the exchange
ratios set forth in the table below:
|
|
|
|
|
|
|
Exchange Ratio
|
|
|
|
(New Options-for-
|
|
Exercise Price
|
|
Eligible Options)
|
|
|
$1.25 - $1.99
|
|
|
1-for-1
|
|
2.00 - 3.99
|
|
|
1-for-2
|
|
4.00 - 5.94
|
|
|
1-for-3
|
|
5.95 or greater
|
|
|
1-for-4
|
|
The Company completed the Exchange Program in the second quarter
of 2009. Eligible Employees tendered options to purchase
821 shares of common stock in exchange for replacement
options to purchase 261 shares of common stock under the
Companys 2007 Plan. This resulted in $15 of incremental
stock-based compensation to be amortized monthly over three
years. The new options have a six-year term and vest over three
years in 36 equal monthly installments. The exercise price of
the New Options equals the closing sale price of the
Companys common stock of $0.78 per share as reported on
The NASDAQ Global Market on May 22, 2009.
83
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following table summarizes the Companys stock option
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Available
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Balances at December 31, 2007
|
|
|
817
|
|
|
|
4,036
|
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,607
|
)
|
|
|
2,607
|
|
|
|
3.07
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
1,226
|
|
|
|
(1,226
|
)
|
|
|
6.89
|
|
|
|
|
|
|
|
|
|
Repurchase of early exercised
|
|
|
28
|
|
|
|
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(287
|
)
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
935
|
|
|
|
5,130
|
|
|
|
5.18
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
1,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,211
|
)
|
|
|
2,211
|
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
2,224
|
|
|
|
(2,224
|
)
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(276
|
)
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
2,654
|
|
|
|
4,841
|
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(4,841
|
)
|
|
|
4,841
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
2,424
|
|
|
|
(2,424
|
)
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(330
|
)
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
4,148
|
|
|
|
6,928
|
|
|
$
|
2.02
|
|
|
|
4.70
|
|
|
$
|
4,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2010
|
|
|
|
|
|
|
5,509
|
|
|
$
|
2.21
|
|
|
|
4.58
|
|
|
$
|
3,831
|
|
Options exercisable at December 31, 2010
|
|
|
|
|
|
|
1,815
|
|
|
$
|
3.95
|
|
|
|
3.62
|
|
|
$
|
870
|
|
84
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2010, the options outstanding and currently
exercisable by exercise price were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
(in Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 0.42 - $ 0.89
|
|
|
777
|
|
|
|
3.68
|
|
|
$
|
0.78
|
|
|
|
453
|
|
|
$
|
0.78
|
|
$ 0.97 - $ 1.14
|
|
|
1,029
|
|
|
|
5.05
|
|
|
|
1.07
|
|
|
|
211
|
|
|
|
1.06
|
|
$ 1.16 - $ 1.18
|
|
|
85
|
|
|
|
4.93
|
|
|
|
1.17
|
|
|
|
9
|
|
|
|
1.17
|
|
$ 1.19 - $ 1.19
|
|
|
1,030
|
|
|
|
4.69
|
|
|
|
1.19
|
|
|
|
|
|
|
|
|
|
$ 1.21 - $ 1.21
|
|
|
1,250
|
|
|
|
5.01
|
|
|
|
1.21
|
|
|
|
|
|
|
|
|
|
$ 1.23 - $ 1.51
|
|
|
832
|
|
|
|
5.35
|
|
|
|
1.35
|
|
|
|
105
|
|
|
|
1.47
|
|
$ 1.60 - $ 1.77
|
|
|
735
|
|
|
|
5.81
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
$ 1.83 - $ 4.81
|
|
|
790
|
|
|
|
3.34
|
|
|
|
4.18
|
|
|
|
665
|
|
|
|
4.28
|
|
$ 4.96 - $11.66
|
|
|
377
|
|
|
|
4.00
|
|
|
|
9.26
|
|
|
|
350
|
|
|
|
9.50
|
|
$11.88 - $11.88
|
|
|
23
|
|
|
|
5.56
|
|
|
|
11.88
|
|
|
|
22
|
|
|
|
11.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.42 - $11.88
|
|
|
6,928
|
|
|
|
4.70
|
|
|
$
|
2.02
|
|
|
|
1,815
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has computed the aggregate intrinsic value amounts
disclosed in the above table based on the difference between the
original exercise price of the options and the fair value of the
Companys common stock of $2.07 per share at
December 31, 2010. The total intrinsic value of awards
exercised during the years ended December 31, 2010, 2009
and 2008 was $142, $111 and $906, respectively.
Adoption
of ASC 718
The Company adopted ASC 718 on January 1, 2006. Under
ASC 718, the Company estimated the fair value of each
option award on the grant date using the Black-Scholes option
valuation model and the weighted average assumptions noted in
the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Risk-free interest rate
|
|
|
1.15
|
%
|
|
|
1.43
|
%
|
|
|
2.34
|
%
|
Expected term (years)
|
|
|
3.12
|
|
|
|
3.19
|
|
|
|
4.08
|
|
Expected volatility
|
|
|
77
|
%
|
|
|
59
|
%
|
|
|
43
|
%
|
The Company based its expected volatility on its own historic
volatility and the historical volatility of a peer group of
publicly traded entities. The expected term of options gave
consideration to early exercises, post-vesting cancellations and
the options contractual term, which was extended for all
options granted subsequent to September 12, 2005 but prior
to October 25, 2007 from five to ten years. Stock options
granted on or after October 25, 2007 have a contractual
term of six years. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury Constant
Maturity Rate as of the date of grant. The weighted-average fair
value of stock options granted during the year ended
December 31, 2010, 2009 and 2008 was $0.67 and $0.37 and
$1.15 per share, respectively.
ASC 718 requires nonpublic companies that used the minimum value
method under prior guidance to apply the prospective transition
method of ASC 718. Prior to adoption of ASC 718, the
Company used the minimum value method, and it therefore has not
restated its financial results for prior periods. Under the
prospective method, stock-
85
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based compensation expense for the years ended December 31,
2008, 2009 and 2010 includes compensation expense for
(i) all new stock-based compensation awards granted after
January 1, 2006 based on the grant-date fair value
estimated in accordance with the provisions of ASC 718,
(ii) unmodified awards granted prior to but not vested as
of December 31, 2005 accounted for under APB 25 and
(iii) awards outstanding as of December 31, 2005 that
were modified after the adoption of ASC 718.
The Company calculated employee stock-based compensation expense
based on awards ultimately expected to vest and reduced it for
estimated forfeitures. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
The following table summarizes the consolidated stock-based
compensation expense by line items in the consolidated statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Research and development
|
|
$
|
480
|
|
|
$
|
716
|
|
|
$
|
714
|
|
Sales and marketing
|
|
|
217
|
|
|
|
564
|
|
|
|
5,174
|
|
General and administrative
|
|
|
871
|
|
|
|
1,646
|
|
|
|
2,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,568
|
|
|
$
|
2,926
|
|
|
$
|
7,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net cash proceeds from option exercises were $287,
$190 and $231 for the year ended December 31, 2010, 2009
and 2008, respectively. The Company realized no income tax
benefit from stock option exercises during the year ended
December 31, 2010, 2009 and 2008. As required, the Company
presents excess tax benefits from the exercise of stock options,
if any, as financing cash flows rather than operating cash flows.
At December 31, 2010, the Company had $2,649 of total
unrecognized compensation expense under ASC 718, net of
estimated forfeitures, related to stock option plans that will
be recognized over a weighted-average period of 3.16 years.
Restricted
Stock
The Company did not grant any restricted stock during the years
ended December 31, 2010 or 2009.
401(k)
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering
all employees. In December 2007, the Board of Directors approved
the matching of employee contributions beginning in April 2008.
Matching contributions to the plan are in the form of cash and
at the discretion of the Company. For the year ended
December 31, 2008, employer contributions under this plan
were $337. The Company elected to indefinitely suspend matching
contributions for U.S. employees in the first quarter of
2009.
The components of loss before income taxes by tax jurisdiction
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
(14,527
|
)
|
|
$
|
(15,514
|
)
|
|
$
|
(45,654
|
)
|
Foreign
|
|
|
1,813
|
|
|
|
(520
|
)
|
|
|
(57,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(12,714
|
)
|
|
$
|
(16,034
|
)
|
|
$
|
(103,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income tax provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Current:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
52
|
|
State
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
Foreign
|
|
|
(1,311
|
)
|
|
|
(2,921
|
)
|
|
|
(3,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,314
|
)
|
|
|
(2,924
|
)
|
|
|
(3,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
605
|
|
|
|
764
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605
|
|
|
|
764
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
52
|
|
State
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
Foreign
|
|
|
(706
|
)
|
|
|
(2,157
|
)
|
|
|
(3,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(709
|
)
|
|
$
|
(2,160
|
)
|
|
$
|
(3,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the actual rate and the federal statutory
rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Tax at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State tax, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign rate differential
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
Research and development credit
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
0.3
|
|
Acquired in-process research and development
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
United Kingdom research and development refund
|
|
|
1.1
|
|
|
|
1.5
|
|
|
|
|
|
Withholding taxes
|
|
|
(3.7
|
)
|
|
|
(4.3
|
)
|
|
|
(0.4
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
(22.8
|
)
|
Stock-based compensation
|
|
|
(1.0
|
)
|
|
|
(3.6
|
)
|
|
|
(3.9
|
)
|
Dividend
|
|
|
|
|
|
|
(11.3
|
)
|
|
|
|
|
Other
|
|
|
(0.1
|
)
|
|
|
(2.7
|
)
|
|
|
(0.3
|
)
|
Valuation allowance
|
|
|
(38.1
|
)
|
|
|
(28.8
|
)
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(5.6
|
)%
|
|
|
(13.5
|
)%
|
|
|
(3.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
US
|
|
|
Foreign
|
|
|
Total
|
|
|
US
|
|
|
Foreign
|
|
|
Total
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
|
|
|
$
|
1,516
|
|
|
$
|
1,516
|
|
|
$
|
447
|
|
|
$
|
1,501
|
|
|
$
|
1,948
|
|
Net operating loss carryforwards
|
|
|
25,665
|
|
|
|
18,013
|
|
|
|
43,678
|
|
|
|
21,529
|
|
|
|
25,490
|
|
|
|
47,019
|
|
Accruals, reserves and other
|
|
|
2,432
|
|
|
|
93
|
|
|
|
2,525
|
|
|
|
1,596
|
|
|
|
215
|
|
|
|
1,811
|
|
Foreign tax credit
|
|
|
5,221
|
|
|
|
|
|
|
|
5,221
|
|
|
|
2,642
|
|
|
|
|
|
|
|
2,642
|
|
Stock-based compensation
|
|
|
1,580
|
|
|
|
75
|
|
|
|
1,655
|
|
|
|
2,166
|
|
|
|
141
|
|
|
|
2,307
|
|
Research and development credit
|
|
|
1,948
|
|
|
|
|
|
|
|
1,948
|
|
|
|
1,896
|
|
|
|
|
|
|
|
1,896
|
|
Other
|
|
|
3,517
|
|
|
|
11
|
|
|
|
3,528
|
|
|
|
3,332
|
|
|
|
26
|
|
|
|
3,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
40,363
|
|
|
$
|
19,708
|
|
|
$
|
60,071
|
|
|
$
|
33,608
|
|
|
$
|
27,373
|
|
|
$
|
60,981
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macrospace and iFone intangible assets
|
|
$
|
|
|
|
$
|
(76
|
)
|
|
$
|
(76
|
)
|
|
$
|
|
|
|
$
|
(243
|
)
|
|
$
|
(243
|
)
|
MIG intangible assets
|
|
|
|
|
|
|
(1,242
|
)
|
|
|
(1,242
|
)
|
|
|
|
|
|
|
(1,780
|
)
|
|
|
(1,780
|
)
|
Superscape intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
(37
|
)
|
|
|
(2,089
|
)
|
Fixed assets
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(24
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
39,288
|
|
|
|
18,380
|
|
|
|
57,668
|
|
|
|
31,556
|
|
|
|
25,289
|
|
|
|
56,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(39,288
|
)
|
|
|
(19,496
|
)
|
|
|
(58,784
|
)
|
|
|
(31,556
|
)
|
|
|
(26,978
|
)
|
|
|
(58,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
(1,116
|
)
|
|
$
|
(1,116
|
)
|
|
$
|
|
|
|
$
|
(1,689
|
)
|
|
$
|
(1,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has not provided deferred taxes on unremitted
earnings attributable to foreign subsidiaries because these
earnings are intended to be reinvested indefinitely. However,
the Company repatriated certain distributable earnings from a
subsidiary in China. No deferred tax asset was recognized since
the Company does not believe the deferred tax asset will reverse
in the foreseeable future.
In accordance with ASC 740 and based on all available
evidence on a jurisdictional basis, the Company believes that,
it is more likely than not that its deferred tax assets will not
be utilized, and has recorded a full valuation allowance against
its net deferred tax assets in each of its jurisdictions except
for one entity in China.
At December 31, 2010, the Company has net operating loss
carryforwards of approximately $65,539 and $57,967 for federal
and state tax purposes, respectively. These carryforwards will
expire from 2011 to 2030. In addition, the Company has research
and development tax credit carryforwards of approximately $1,995
for federal income tax purposes and $1,914 for California tax
purposes. The federal research and development tax credit
carryforwards will begin to expire in 2021. The California state
research credit will carry forward indefinitely. The Company has
approximately $5,213 of foreign tax credit carryforwards that
will expire beginning in 2017, and approximately $12 of state
alternative minimum tax credits that will carryforward
indefinitely. In addition, at December 31, 2010, the
Company has net operating loss carryforwards of approximately
$66,481 for United Kingdom tax purposes.
The Companys ability to use its net operating loss
carryforwards and federal and state tax credit carryforwards to
offset future taxable income and future taxes, respectively, may
be subject to restrictions attributable to equity transactions
that result in changes in ownership as defined by Internal
Revenue Code Section 382. Total net operating losses of
$66,481 are available in the United Kingdom, however, of those
losses $66,364 are limited and
88
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
can only offset a portion of the annual combined profits in the
United Kingdom until the net operating losses are fully utilized.
A reconciliation of the total amounts of unrecognized tax
benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
2,899
|
|
|
$
|
2,406
|
|
|
$
|
2,208
|
|
Reductions of tax positions taken during previous years
|
|
|
(49
|
)
|
|
|
(33
|
)
|
|
|
(256
|
)
|
Additions based on uncertain tax positions related to the
current period
|
|
|
417
|
|
|
|
502
|
|
|
|
401
|
|
Additions based on uncertain tax positions related to prior
periods
|
|
|
59
|
|
|
|
24
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,326
|
|
|
$
|
2,899
|
|
|
$
|
2,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, approximately $73 of unrecognized
tax benefits, if recognized, would impact the Companys
effective tax rate. A portion of this amount, if recognized,
would adjust the Companys deferred tax assets which are
subject to valuation allowance. The Company does not anticipate
any significant changes to its uncertain tax positions within
the next twelve months. As of December 31, 2009,
approximately $90 of unrecognized tax benefits, if recognized,
would impact the Companys effective tax rate.
The Companys policy is to recognize interest and penalties
related to unrecognized tax benefits in income tax expense. The
Company has accrued $3,630 of interest and penalties on
uncertain tax positions as of December 31, 2010, as
compared to $3,279 as of December 31, 2009. Approximately
$239 of accrued interest and penalty expense related to
estimated obligations for unrecognized tax benefits was
recognized during 2010.
One of the Companys subsidiaries in China has received the
High & New Technology Enterprise qualification from
the Ministry of Science and Technology, and also the Software
Enterprise Qualification from the Ministry of Industry and
Information Technology. During the third quarter of 2010, the
State Administration of Taxation approved the Companys
application to apply the favorable tax benefits to operations
beginning January 1, 2009. The Company has revalued certain
deferred tax assets and liabilities during the quarter, and
certain taxes that were expensed in 2009 were refunded in 2010,
and the tax benefit was recognized. However, in the event that
circumstances change and the Company no longer meets the
requirements of the original qualification, the Company would
need to revalue certain deferred tax assets and liabilities.
The Company is subject to taxation in the United States and
various foreign jurisdictions. The material jurisdictions
subject to examination by tax authorities are primarily the
State of California, United States, United Kingdom and China.
The Companys federal tax return is open by statute for tax
years 2001 and forward and could be subject to examination by
the tax authorities. The Companys California income tax
returns are open by statute for tax years 2001 and forward. The
statute of limitations for the Companys 2008 tax return in
the United Kingdom will close in 2011. The Companys China
income tax returns are open by statute for tax years 2005 and
forward. In practice, a tax audit, examination or tax assessment
notice issued by the Chinese tax authorities does not represent
finalization or closure of a tax year.
|
|
NOTE 12
|
SEGMENT
REPORTING
|
ASC 280, Segment Reporting (ASC 280),
establishes standards for reporting information about operating
segments. It defines operating segments as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision-maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The
Companys chief operating decision-maker is its Chief
Executive Officer. The Companys Chief Executive Officer
reviews financial information on a geographic basis, however
these aggregate into one operating segment for purposes of
allocating resources and evaluating financial
89
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance. Accordingly, the Company reports as a single
operating segment mobile games. It attributes
revenues to geographic areas based on the country in which the
carriers principal operations are located.
A breakdown of the Companys total sales to customers in
the feature phone and smartphone markets is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Feature phone
|
|
$
|
54,475
|
|
|
$
|
74,999
|
|
|
$
|
89,740
|
|
Smartphone
|
|
|
9,870
|
|
|
|
4,345
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company generates its revenues in the following geographic
regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States of America
|
|
$
|
28,909
|
|
|
$
|
37,918
|
|
|
$
|
43,046
|
|
China
|
|
|
5,962
|
|
|
|
7,676
|
|
|
|
8,883
|
|
Americas, excluding the USA
|
|
|
9,385
|
|
|
|
10,278
|
|
|
|
9,588
|
|
EMEA
|
|
|
17,332
|
|
|
|
20,570
|
|
|
|
25,187
|
|
Other
|
|
|
2,757
|
|
|
|
2,902
|
|
|
|
3,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,345
|
|
|
$
|
79,344
|
|
|
$
|
89,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company attributes its long-lived assets, which primarily
consist of property and equipment, to a country primarily based
on the physical location of the assets. Property and equipment,
net of accumulated depreciation and amortization, summarized by
geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Americas
|
|
$
|
1,013
|
|
|
$
|
2,194
|
|
|
$
|
3,208
|
|
EMEA
|
|
|
714
|
|
|
|
700
|
|
|
|
790
|
|
Other
|
|
|
407
|
|
|
|
450
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,134
|
|
|
$
|
3,344
|
|
|
$
|
4,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring information as of December 31, 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Facilities
|
|
|
|
|
|
Facilities
|
|
|
|
|
|
Facilities
|
|
|
Superscape
|
|
|
|
|
|
|
Workforce
|
|
|
Related
|
|
|
Workforce
|
|
|
Related
|
|
|
Workforce
|
|
|
Related
|
|
|
Plan
|
|
|
Total
|
|
|
Balance as of January 1, 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
100
|
|
|
$
|
443
|
|
|
$
|
457
|
|
|
$
|
1,000
|
|
Charges to operations
|
|
|
|
|
|
|
|
|
|
|
1,009
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876
|
|
Non Cash Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(73
|
)
|
Charges settled in cash
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
|
|
(68
|
)
|
|
|
(100
|
)
|
|
|
(443
|
)
|
|
|
(406
|
)
|
|
|
(1,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
629
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
1,406
|
|
Charges to operations
|
|
|
1,540
|
|
|
|
1,854
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,629
|
|
Non Cash Adjustments
|
|
|
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(272
|
)
|
Charges settled in cash
|
|
|
(1,244
|
)
|
|
|
|
|
|
|
(629
|
)
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(2,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
296
|
|
|
$
|
1,585
|
|
|
$
|
|
|
|
$
|
558
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
2,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, 2009 and 2010, the Companys management
approved restructuring plans to improve the effectiveness and
efficiency of its operating model and reduce operating expenses
around the world. The 2010 restructuring plan included $1,540 of
restructuring charges relating to employee termination costs in
the Companys United States, APAC, Latin America and United
Kingdom offices. The remaining restructuring charge of $1,854
related primarily to facility related charges resulting from the
relocation of the Companys corporate headquarters to
San Francisco. These amounts were partially offset by a
$269 non-cash adjustment, primarily relating to a write down in
fixed assets associated with the restructuring of the
Companys former United Sates headquarters. Since the
inception of the 2009 restructuring plan through
December 31, 2010, the Company incurred $2,111 in
restructuring charges. These charges included $1,009 of
workforce related charges, comprised of severance and
termination benefits of $657 associated with the departure of
the Companys former Chief Executive Officer, and $352
relating to employee termination costs in the Companys
United States and United Kingdom offices. The remaining
restructuring charge included $1,102 of facility related
charges, comprised of $944 of charges associated with changes in
the sublease probability assumption for the vacated office space
in the Companys United States headquarters and an
additional restructuring charge of $158 net of sublease
income, resulting from vacating a portion of the Companys
EMEA headquarters based in the United Kingdom. These amounts
were partially offset by a $62 non-cash adjustment, primarily
relating to a write down in fixed assets associated with the
restructuring of the Companys EMEA headquarters. Since the
inception of the 2008 restructuring plan through
December 31, 2010, the Company incurred $1,744 in
restructuring charges. These charges included $989 related to
employee severance and benefit arrangements due to the
termination of employees in France, Hong Kong, Sweden, the
United Kingdom and the United States and $755 related to vacated
office space at the Companys headquarters. The Company
does not expect to incur any additional charges under the 2009
and 2008 restructuring plans.
As of December 31, 2010, the Companys remaining
restructuring liability of $2,462 was comprised of $296 of
severance and benefits payments due to former executives, which
are due to be paid during 2011, and $2,166 of facility related
costs that are expected to be paid over the remainder of the
lease terms of one to two years. However, any changes in the
assumptions used in the Companys vacated facility accrual
could result in additional charges in the future. As of
December 31, 2010, approximately $773 of facility costs
included in the above table were classified as other long-term
liabilities. As of December 31, 2009, the Companys
remaining restructuring liability of $1,406 was comprised of
$629 of severance and benefit payments due to the Companys
former Chief Executive Officer, which were paid in the first
quarter of 2010, and $777 of facility related costs.
91
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2011, the Company anticipates incurring approximately $600 of
restructuring charges related to employee severance and benefit
arrangements associated with the terminations of employees in
China, Russia and the United Kingdom and facility related
charges in China and Russia.
|
|
NOTE 14
|
QUARTERLY
FINANCIAL DATA (unaudited, in
thousands)
|
The following table sets forth unaudited quarterly consolidated
statements of operations data for 2009 and 2010. The Company
derived this information from its unaudited consolidated
financial statements, which it prepared on the same basis as its
audited consolidated financial statements contained in this
report. In its opinion, these unaudited statements include all
adjustments, consisting only of normal recurring adjustments
that the Company considers necessary for a fair statement of
that information when read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this report. The operating results for any quarter should not be
considered indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
2009
|
|
|
2010
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
20,775
|
|
|
$
|
19,872
|
|
|
$
|
19,645
|
|
|
$
|
19,052
|
|
|
$
|
17,289
|
|
|
$
|
15,952
|
|
|
$
|
15,468
|
|
|
$
|
15,636
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
5,813
|
|
|
|
5,667
|
|
|
|
5,302
|
|
|
|
5,047
|
|
|
|
4,691
|
|
|
|
4,280
|
|
|
|
3,934
|
|
|
|
3,738
|
|
Impairment of prepaid royalties and guarantees
|
|
|
|
|
|
|
589
|
|
|
|
513
|
(a)
|
|
|
5,489
|
|
|
|
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,848
|
|
|
|
1,412
|
|
|
|
1,420
|
|
|
|
1,412
|
|
|
|
1,228
|
|
|
|
1,006
|
|
|
|
1,009
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
8,661
|
|
|
|
7,668
|
|
|
|
7,235
|
|
|
|
11,948
|
|
|
|
5,919
|
|
|
|
5,949
|
|
|
|
4,943
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,114
|
|
|
|
12,204
|
|
|
|
12,410
|
|
|
|
7,104
|
|
|
|
11,370
|
|
|
|
10,003
|
|
|
|
10,525
|
|
|
|
10,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,397
|
|
|
|
6,648
|
|
|
|
6,662
|
|
|
|
6,268
|
|
|
|
6,661
|
|
|
|
6,229
|
|
|
|
5,858
|
|
|
|
6,432
|
|
Sales and marketing
|
|
|
4,112
|
|
|
|
3,546
|
|
|
|
3,556
|
|
|
|
3,188
|
|
|
|
2,971
|
|
|
|
2,437
|
|
|
|
2,692
|
(C)
|
|
|
4,040
|
|
General and administrative
|
|
|
4,485
|
|
|
|
3,905
|
|
|
|
3,986
|
|
|
|
3,895
|
|
|
|
3,813
|
|
|
|
3,052
|
|
|
|
3,107
|
|
|
|
3,136
|
|
Amortization of intangible assets
|
|
|
51
|
|
|
|
51
|
|
|
|
58
|
|
|
|
55
|
|
|
|
55
|
|
|
|
52
|
|
|
|
53
|
|
|
|
45
|
|
Restructuring charge
|
|
|
|
|
|
|
513
|
|
|
|
919
|
|
|
|
444
|
|
|
|
594
|
|
|
|
693
|
|
|
|
|
|
|
|
2,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,045
|
|
|
|
14,663
|
|
|
|
15,181
|
|
|
|
13,850
|
|
|
|
14,094
|
|
|
|
12,463
|
|
|
|
11,710
|
|
|
|
15,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,931
|
)
|
|
|
(2,459
|
)
|
|
|
(2,771
|
)
|
|
|
(6,746
|
)
|
|
|
(2,724
|
)
|
|
|
(2,460
|
)
|
|
|
(1,185
|
)
|
|
|
(5,080
|
)
|
Interest and other income (expense), net
|
|
|
(807
|
)
|
|
|
457
|
|
|
|
(300
|
)
|
|
|
(477
|
)
|
|
|
(631
|
)
|
|
|
(560
|
)
|
|
|
86
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
|
(3,738
|
)
|
|
|
(2,002
|
)
|
|
|
(3,071
|
)
|
|
|
(7,223
|
)
|
|
|
(3,355
|
)
|
|
|
(3,020
|
)
|
|
|
(1,099
|
)
|
|
|
(5,240
|
)
|
Income tax benefit (provision)
|
|
|
(2,019
|
)
|
|
|
464
|
|
|
|
(917
|
)(b)
|
|
|
312
|
|
|
|
(301
|
)
|
|
|
(198
|
)
|
|
|
(504
|
)(d)
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,757
|
)
|
|
$
|
(1,538
|
)
|
|
$
|
(3,988
|
)
|
|
$
|
(6,911
|
)
|
|
$
|
(3,656
|
)
|
|
$
|
(3,218
|
)
|
|
$
|
(1,603
|
)
|
|
$
|
(4,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
(a) |
|
The impairment of prepaid royalties and guarantees of $5,489
recorded in the fourth quarter of 2009 was primarily related to
large distribution deals in EMEA and several global properties
that did not perform as expected. |
|
(b) |
|
The income tax benefit of $312 in the fourth quarter of 2009 was
primarily related to inter-period tax allocations recorded in
the previous quarters of 2009. |
|
(c) |
|
Sales and marketing expense of $4,040 in the fourth quarter of
2010 was related to increased marketing promotions costs
associated with the launch of freemium game titles during the
period. |
92
GLU
MOBILE INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(d) |
|
The income tax benefit of $294 in the fourth quarter of 2010 was
primarily related to the China State Administration of Taxation
approval of the Companys application to apply the
favorable tax benefits to operations beginning January 1,
2009. The Company thus revalued certain deferred tax assets and
liabilities during the quarter, and certain taxes that were
expensed in 2009 were refunded in 2010 and the tax benefit was
recognized. |
|
|
NOTE 15
|
SUBSEQUENT
EVENTS
|
On February 2, 2011, the Company entered into a fourth
amendment to the Credit Facility which waives the Companys
default in maintaining minimum levels of EBITDA specified in the
loan agreement for the period beginning October 1, 2010 and
ending December 31, 2010. Prior to this date, the Company
was in compliance with all covenants under the Credit Facility.
This amendment also removed the EBITDA financial covenants from
the loan agreement in its entirety and replaced these covenants
with a net cash covenant, which requires the Company to maintain
at least $10,000 in unrestricted cash at the lender or an
affiliate of the lender, net of any indebtedness that is owed to
the lender under the Loan Agreement.
In January 2011, the Company sold in an underwritten public
offering an aggregate of 8,415 shares of its common stock
for net proceeds of approximately $15,900 after underwriting
discounts and commissions and offering expenses (see
Note 9).
93
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures pursuant to
Rule 13a-15
under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required
to apply its judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2010,
our disclosure controls and procedures are designed to provide
reasonable assurance and are effective to provide reasonable
assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Managements
Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2010 based on the guidelines established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this
evaluation, our management has concluded that our internal
control over financial reporting was effective as of
December 31, 2010 to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the
United States.
This report is not deemed filed for purposes of
Section 18 of the Exchange Act, or otherwise subject to the
liability of that section. Such certification will not be deemed
to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that we
specifically incorporate it by reference.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Managements report was
not subject to attestation by our independent registered public
accounting firm pursuant to the Dodd-Frank Wall Street Reform
and Consumer Protection Act, whereas non-accelerated filers are
exempt from Sarbanes-Oxley internal control audit requirements.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our fourth fiscal quarter ended
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
94
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Except for the information about our executive officers shown
below, the information required for this Item 10 is
incorporated by reference from our Proxy Statement to be filed
in connection with our 2011 Annual Meeting of Stockholders.
We maintain a Code of Business Conduct and Ethics that applies
to all employees, officers and directors. Our Code of Business
Conduct and Ethics is published on our website at
www.glu.com/investors. We disclose amendments to certain
provisions of our Code of Business Conduct and Ethics, or
waivers of such provisions granted to executive officers and
directors, on our website.
EXECUTIVE
OFFICERS
The following table shows Glus executive officers as of
March 1, 2011 and their areas of responsibility. Their
biographies follow the table.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Niccolo M. de Masi
|
|
|
30
|
|
|
President, Chief Executive Officer and Director
|
Eric R. Ludwig
|
|
|
41
|
|
|
Senior Vice President, Chief Financial Officer, Chief
Administrative Officer and Assistant Secretary
|
Kal Iyer
|
|
|
41
|
|
|
Senior Vice President, Research and Development
|
Giancarlo Mori
|
|
|
54
|
|
|
Chief Creative Officer
|
Niccolo M. de Masi has served as our President and Chief
Executive Officer and as one of our directors since January
2010. Prior to joining Glu, Mr. de Masi was the Chief Executive
Officer and President of Hands-On Mobile, a mobile technology
company and developer and publisher of mobile entertainment,
from October 2009 to December 2009, and previously served as the
President of Hands-On Mobile from March 2008 to October 2009.
Prior to joining Hands-On Mobile, Mr. de Masi was the Chief
Executive Officer of Monstermob Group PLC, a mobile
entertainment company, from June 2006 to February 2007. Mr. de
Masi joined Monstermob in 2004 and, prior to becoming its Chief
Executive Officer, held positions as its Managing Director and
as its Chief Operating Officer where he was responsible for
formulating and implementing Monstermobs growth and
product strategy. Prior to joining Monstermob, Mr. de Masi
worked in a variety of corporate finance and operational roles
within the technology, media and telecommunications (TMT)
sector, beginning his career with JP Morgan on both the TMT debt
capital markets and mergers and acquisitions teams in London. He
has also worked as a physicist with Siemens Solar and within the
Strategic Planning and Development divisions of Technicolor. Mr.
de Masi holds B.A. and M.A. degrees in Physics, and an MSci.
degree in Electronic Engineering all from Cambridge
University.
Eric R. Ludwig has served as our Senior Vice President,
Chief Financial Officer and Assistant Secretary since August
2008, has served as our Chief Administrative Officer since
September 2010, served as our Vice President, Finance, Interim
Chief Financial Officer and Assistant Secretary from May 2008 to
August 2008, served as our Vice President, Finance and Assistant
Secretary since July 2006, served as our Vice President, Finance
since April 2005, and served as our Director of Finance from
January 2005 to April 2005. Prior to joining us, from January
1996 to January 2005, Mr. Ludwig held various positions at
Instill Corporation, an on-demand supply chain software company,
most recently as Chief Financial Officer, Vice President,
Finance and Corporate Secretary. Prior to Instill,
Mr. Ludwig was Corporate Controller at Camstar Systems,
Inc., an enterprise manufacturing execution and quality systems
software company, from May 1994 to January 1996. He also worked
at Price Waterhouse L.L.P. from May 1989 to May 1994.
Mr. Ludwig holds a B.S. in commerce from Santa Clara
University and is a Certified Public Accountant (inactive).
Kal Iyer has served as our Senior Vice President,
Research and Development since July 2010. Mr. Iyer joined
Glu in 2003 and has held increasingly senior positions in
Glus research, development and engineering organization.
Prior to joining us, Mr. Iyer worked at Pumatech
International where he architected and built the
95
infrastructure for mobile browsing. Prior to Pumatech,
Mr. Iyer consulted for several Fortune 500 companies.
Mr. Iyer holds a B.S. in mathematics from Jabalpur
University, India.
Giancarlo Mori has served as our Chief Creative Officer
since August 2010. Prior to joining us, Mr. Mori served as
the Senior Vice President, Development at Skyrockit, a mobile
entertainment agency, from February 2010 to June 2010. Prior to
that, Mr. Mori served as the Senior Vice President,
Interactive at Animal Logic, a digital visual effects company,
from May 2008 to December 2009. Previously, Mr. Mori worked
as an executive consultant to a number of game/entertainment/new
media startups from December 2007 to May 2008. Prior to that,
Mr. Mori served as the Vice President of Production, North
American Studios at Activision, Inc. from August 2004 to
December 2007 where he led the development of numerous titles
based on original intellectual property as well as established
franchises. Mr. Mori holds an MSc. from the University of
Florence.
|
|
Item 11.
|
Executive
Compensation
|
The information required for this Item is incorporated by
reference from our Proxy Statement to be filed for our 2011
Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required for this Item is incorporated by
reference from our Proxy Statement to be filed for our 2011
Annual Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required for this Item is incorporated by
reference from our Proxy Statement to be filed for our 2011
Annual Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required for this Item is incorporated by
reference from our Proxy Statement to be filed for our 2011
Annual Meeting of Stockholders.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements: The financial statements filed as
part of this report are listed on the index to financial
statements on page 52.
(2) Financial Schedules: No separate Valuation and
Qualifying Accounts table has been included as the
required information has been included in the Consolidated
Financial Statements included in this report.
(b) Exhibits. The exhibits listed on the Exhibit Index
(following the Signatures section of this report) are included,
or incorporated by reference, in this report.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLU MOBILE INC.
|
|
|
|
By:
|
/s/ Niccolo
M. de Masi
|
Niccolo M. de Masi,
President and Chief Executive Officer
Date: March 21, 2011
Eric R. Ludwig,
Senior Vice President, Chief Financial Officer and Chief
Administrative Officer
Date: March 21, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacity and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
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/s/ Niccolo
M. de Masi
Niccolo
M. de Masi
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Eric
R. Ludwig
Eric
R. Ludwig
|
|
Senior Vice President, Chief Financial
Officer
and Chief Administrative Officer (Principal Financial and
Accounting Officer)
|
|
March 21, 2011
|
|
|
|
|
|
/s/ William
J. Miller
William
J. Miller
|
|
Chairman of the Board
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Matthew
A. Drapkin
Matthew
A. Drapkin
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Ann
Mather
Ann
Mather
|
|
Director
|
|
March 21, 2011
|
97
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
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/s/ Hany
M. Nada
Hany
M. Nada
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ A.
Brooke Seawell
A.
Brooke Seawell
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Ellen
F. Siminoff
Ellen
F. Siminoff
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Benjamin
T. Smith, IV
Benjamin
T. Smith, IV
|
|
Director
|
|
March 21, 2011
|
98
Exhibit Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
2.01
|
|
Agreement and Plan of Merger, dated as of November 28,
2007, by and among Glu Mobile Inc., Maverick Acquisition Corp.,
Awaken Limited, Awaken (Beijing) Communications Technology Co.
Ltd., Beijing Zhangzhong MIG Information Technology Co. Ltd.,
Beijing Qinwang Technology Co. Ltd., each of Wang Bin, Wang Xin
and You Yanli, and Wang Xin, as Representative (the MIG
Merger Agreement).
|
|
8-K
|
|
001-33368
|
|
|
2
|
.01
|
|
12/03/07
|
|
|
2.02
|
|
Amendment to the MIG Merger Agreement.
|
|
8-K
|
|
001-33368
|
|
|
2
|
.01
|
|
12/30/08
|
|
|
2.03
|
|
Recommended Cash Offer by Glu Mobile Inc. for Superscape Group
plc.
|
|
8-K
|
|
001-33368
|
|
|
2
|
.01
|
|
01/25/08
|
|
|
2.04
|
|
Form of Acceptance, Authority and Election by Glu Mobile Inc.
for Superscape Group plc.
|
|
8-K
|
|
001-33368
|
|
|
2
|
.02
|
|
01/25/08
|
|
|
3.01
|
|
Restated Certificate of Incorporation of Glu Mobile Inc.
|
|
S-1/A
|
|
333-139493
|
|
|
3
|
.02
|
|
02/14/07
|
|
|
3.02
|
|
Amended and Restated Bylaws of Glu Mobile Inc.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
10/28/08
|
|
|
4.01
|
|
Form of Registrants Common Stock Certificate.
|
|
S-1/A
|
|
333-139493
|
|
|
4
|
.01
|
|
02/14/07
|
|
|
4.02
|
|
Amended and Restated Investors Rights Agreement, dated as
of March 29, 2006, by and among Glu Mobile Inc. and certain
investors of Glu Mobile Inc. and the Amendment No. 1 and
Joinder to the Amended and Restated Investor Rights Agreement
dated May 5, 2006, by and among Glu Mobile Inc. and certain
investors of Glu Mobile Inc.
|
|
S-1
|
|
333-139493
|
|
|
4
|
.02
|
|
12/19/06
|
|
|
10.01
|
|
Form of Indemnity Agreement entered into between Glu Mobile Inc.
and each of its directors and executive officers, effective as
of June 15, 2009.
|
|
8-K
|
|
001-33368
|
|
|
10
|
.01
|
|
06/15/09
|
|
|
10.02#
|
|
2001 Stock Option Plan, form of option grant used from
December 19, 2001 to May 2, 2006, form of option grant
used from December 8, 2004 to May 2, 2006 and forms of
option grant used since May 2, 2006.
|
|
S-1/A
|
|
333-139493
|
|
|
10
|
.02
|
|
01/22/07
|
|
|
10.03(A)#
|
|
2007 Equity Incentive Plan, as amended.
|
|
10-Q
|
|
001-33368
|
|
|
10
|
.02
|
|
08/09/10
|
|
|
10.03(B)#
|
|
For the 2007 Equity Incentive Plan, forms of (a) Notice of
Stock Option Grant, Stock Option Award Agreement and Stock
Option Exercise Agreement, (b) Notice of Restricted Stock
Award and Restricted Stock Agreement, (c) Notice of Stock
Appreciation Right Award and Stock Appreciation Right Award
Agreement, (d) Notice of Restricted Stock Unit Award and
Restricted Stock Unit Agreement and (e) Notice of Stock
Bonus Award and Stock Bonus Agreement.
|
|
S-1/A
|
|
333-139493
|
|
|
10
|
.03
|
|
02/16/07
|
|
|
10.04#
|
|
2007 Employee Stock Purchase Plan, as amended and restated on
July 1, 2009.
|
|
10-Q
|
|
001-33368
|
|
|
10
|
.01
|
|
11/09/09
|
|
|
10.05#
|
|
2008 Equity Inducement Plan, as amended and restated on
December 28, 2009, and forms of Notice of Stock Option
Grant, Stock Option Award Agreement and Stock Option Exercise
Agreement.
|
|
10-K
|
|
001-33368
|
|
|
10
|
.05
|
|
03/31/10
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
10.06#
|
|
Forms of Stock Option Award Agreement (Immediately Exercisable)
and Stock Option Exercise Agreement (Immediately Exercisable)
under the Glu Mobile Inc. 2007 Equity Incentive Plan.
|
|
10-Q
|
|
001-33368
|
|
|
10
|
.05
|
|
08/14/08
|
|
|
10.07#
|
|
Form of Change of Control Severance Agreement, dated as of
October 10, 2008, between Glu Mobile Inc. and each of Kevin
S. Chou, Alessandro Galvagni, Eric R. Ludwig and Thomas M.
Perrault.
|
|
10-K
|
|
001-33368
|
|
|
10
|
.08
|
|
03/13/09
|
|
|
10.08#
|
|
Glu Mobile Inc. 2010 Executive Bonus Plan.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
08/03/10
|
|
|
10.09#
|
|
Glu Mobile Inc. 2011 Executive Bonus Plan.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.03
|
|
02/07/11
|
|
|
10.10#
|
|
Employment Agreement for Niccolo M. de Masi, dated
December 28, 2009.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.02
|
|
01/04/10
|
|
|
10.11#
|
|
Change of Control Severance Agreement, dated as of
December 28, 2009, by and between Glu Mobile Inc. and
Niccolo M. de Masi.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.03
|
|
01/04/10
|
|
|
10.12#
|
|
Summary of Compensation Terms of Eric R. Ludwig.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
10.13#
|
|
Summary of Compensation Terms of Kal Iyer.
|
|
10-Q
|
|
001-33368
|
|
|
10
|
.06
|
|
11/10/10
|
|
|
10.14#
|
|
Summary of Compensation Terms of Giancarlo Mori.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
10.15#
|
|
Transitional Employment Agreement, dated as of
September 28, 2010, by and between Glu Mobile Inc. and
Kevin S. Chou.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.04
|
|
10/04/10
|
|
|
10.16#
|
|
Description of Retention Arrangements with Alessandro Galvagni
and Eric R. Ludwig.
|
|
10-Q
|
|
001-33368
|
|
|
10
|
.03
|
|
11/09/09
|
|
|
10.17#
|
|
Non-Employee Director Compensation Program.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
10.18
|
|
Lease Agreement at San Mateo Centre II and III
dated as of January 23, 2003, as amended on June 26,
2003, December 5, 2003, October 11, 2004 and
May 31, 2005, by and between CarrAmerica Realty, L.P. and
Glu Mobile Inc.
|
|
S-1
|
|
333-139493
|
|
|
10
|
.05
|
|
12/19/06
|
|
|
10.19
|
|
Sublease dated as of August 22, 2007, between Oracle USA,
Inc., and Glu Mobile Inc.
|
|
8-K
|
|
001-33368
|
|
|
10
|
.1
|
|
08/28/07
|
|
|
10.20
|
|
Sub-sublease,
dated as of September 29, 2010, by and between Appirio,
Inc. and Glu Mobile Inc.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.03
|
|
10/04/10
|
|
|
10.21
|
|
Sublease, dated as of September 29, 2010, by and between
BlackRock Institutional Trust Company and Glu Mobile Inc.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
10/04/10
|
|
|
10.22
|
|
First Amendment to Sublease, dated as of September 29,
2010, by and between BlackRock Institutional Trust Company
and Glu Mobile Inc.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.02
|
|
10/04/10
|
|
|
10.23+
|
|
BREW Application License Agreement dated as of February 12,
2002 by and between Cellco Partnership (d.b.a. Verizon Wireless)
and Glu Mobile Inc.
|
|
S-1/A
|
|
333-139493
|
|
|
10
|
.11.1
|
|
01/10/07
|
|
|
10.24+
|
|
BREW Developer Agreement dated as of November 2, 2001, as
amended, by and between Qualcomm Inc. and Glu Mobile Inc.
|
|
S-1/A
|
|
333-139493
|
|
|
10
|
.11.2
|
|
01/10/07
|
|
|
10.25
|
|
Form of Warrant dated as of May 2, 2006 by and between
Pinnacle Ventures I Equity Holdings LLC and Glu Mobile Inc., by
and between Pinnacle Ventures I Affiliates, L.P. and Glu Mobile
Inc., and by and between Pinnacle Ventures II Equity
Holdings, LLC and Glu Mobile Inc.
|
|
S-1
|
|
333-139493
|
|
|
10
|
.20
|
|
12/19/06
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
10.26
|
|
Purchase Agreement, dated as of June 30, 2010, by and
between Glu Mobile Inc. and certain PIPE investors.
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
07/06/10
|
|
|
10.27
|
|
Form of Warrant by and between Glu Mobile Inc. and certain PIPE
investors.
|
|
8-K
|
|
001-33368
|
|
|
4
|
.01
|
|
07/06/10
|
|
|
10.28
|
|
Form of Registration Rights Agreement by and between Glu Mobile
Inc. and certain PIPE investors.
|
|
8-K
|
|
001-33368
|
|
|
4
|
.02
|
|
07/06/10
|
|
|
10.29
|
|
Second Amendment to Loan and Security Agreement between Glu
Mobile Inc. and Silicon Valley Bank, dated November 4, 2008.
|
|
8-K
|
|
001-33368
|
|
|
10
|
.01
|
|
11/04/08
|
|
|
10.30
|
|
Amended and Restated Loan and Security Agreement dated as of
December 29, 2008, among Silicon Valley Bank, Glu Mobile
Inc., Glu Games Inc. and Superscape Inc
|
|
8-K
|
|
001-33368
|
|
|
10
|
.06
|
|
12/30/08
|
|
|
10.31
|
|
Amendment No. 1 to Amended and Restated Loan and Security
Agreement by and among Glu Mobile Inc., Glu Games Inc.,
Superscape Inc. and Silicon Valley Bank
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
08/24/09
|
|
|
10.32
|
|
Amendment No. 2 to Amended and Restated Loan and Security
Agreement by and among Glu Mobile Inc., Glu Games Inc.,
Superscape Inc. and Silicon Valley Bank
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
02/10/10
|
|
|
10.33
|
|
Amendment No. 3 to Amended and Restated Loan and Security
Agreement by and among Glu Mobile Inc., Glu Games Inc.,
Superscape Inc. and Silicon Valley Bank
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
03/22/10
|
|
|
10.34
|
|
Amendment No. 4 and Limited Waiver to Amended and Restated
Loan and Security Agreement by and among Glu Mobile Inc., Glu
Games Inc., Superscape Inc. and Silicon Valley Bank
|
|
8-K
|
|
001-33368
|
|
|
99
|
.01
|
|
02/07/11
|
|
|
21.01
|
|
List of Subsidiaries of Glu Mobile Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
23.01
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
31.01
|
|
Certification of Principal Executive Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
31.02
|
|
Certification of Principal Financial Officer Pursuant to
Securities Exchange Act
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
32.01
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
32.02
|
|
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350 and Securities Exchange Act
Rule 13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
# |
|
Indicates management compensatory plan or arrangement. |
|
+ |
|
Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under Rule 406 of the Securities Act
of 1933 and
Rule 24b-2
as promulgated under the Securities Exchange Act of 1934. |
|
* |
|
This certification is not deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that Glu
Mobile Inc. specifically incorporates it by reference. |
102