e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the Transition Period from to
Commission File Number 001-33368
Glu Mobile Inc.
(Exact name of the Registrant as Specified in its Charter)
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Delaware
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91-2143667 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
2207 Bridgepointe Parkway, Suite 250
San Mateo, California 94404
(Address of Principal Executive Offices, including Zip Code)
(650) 532-2400
(Registrants Telephone number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 o |
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(Do not check if a smaller reporting company) |
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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
Shares of Glu Mobile Inc. common stock, $0.0001 par value per share, outstanding as of August
8, 2008: 29,402,699 shares.
GLU MOBILE INC.
FORM 10-Q
Quarterly Period Ended June 30, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLU MOBILE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
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June 30, 2008 |
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December 31, 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
24,133 |
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$ |
57,816 |
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Short-term investments |
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1,524 |
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1,994 |
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Accounts receivable, net of allowance of $454
and $368 at June 30, 2008 and December 31,
2007, respectively |
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21,580 |
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18,369 |
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Prepaid royalties |
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12,537 |
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10,643 |
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Prepaid expenses and other |
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3,629 |
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2,589 |
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Total current assets |
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63,403 |
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91,411 |
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Property and equipment, net |
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6,217 |
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3,817 |
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Prepaid royalties |
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7,661 |
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2,825 |
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Other long-term assets |
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1,159 |
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1,593 |
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Intangible assets, net |
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27,231 |
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14,597 |
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Goodwill |
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61,352 |
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47,262 |
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Total assets |
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$ |
167,023 |
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$ |
161,505 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
8,359 |
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$ |
6,427 |
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Accrued liabilities |
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504 |
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217 |
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Accrued compensation |
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3,787 |
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2,322 |
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Accrued royalties |
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14,740 |
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12,759 |
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Deferred revenues |
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823 |
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640 |
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Accrued restructuring charge |
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1,521 |
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Total current liabilities |
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29,734 |
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22,365 |
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Other long-term liabilities |
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14,712 |
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9,679 |
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Total liabilities |
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44,446 |
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32,044 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock, $0.0001 par value; 5,000
shares authorized at June 30, 2008 and December
31, 2007; no shares issued and outstanding at
June 30, 2008 and December 31, 2007 |
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Common stock, $0.0001 par value:
250,000 shares authorized at June 30, 2008 and
December 31, 2007; 29,371 and 29,023 shares
issued and outstanding at June 30, 2008 and
December 31, 2007 |
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3 |
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3 |
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Additional paid-in capital |
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184,720 |
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179,924 |
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Deferred stock-based compensation |
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(48 |
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(113 |
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Accumulated other comprehensive income |
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2,938 |
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2,080 |
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Accumulated deficit |
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(65,036 |
) |
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(52,433 |
) |
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Total stockholders equity |
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122,577 |
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129,461 |
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Total liabilities and stockholders equity |
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$ |
167,023 |
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$ |
161,505 |
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The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
GLU MOBILE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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$ |
23,704 |
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$ |
16,377 |
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$ |
44,296 |
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$ |
32,076 |
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Cost of revenues: |
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Royalties |
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5,633 |
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4,388 |
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11,123 |
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8,681 |
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Amortization of intangible assets |
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3,135 |
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553 |
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4,842 |
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1,106 |
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Total cost of revenues |
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8,768 |
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4,941 |
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15,965 |
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9,787 |
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Gross profit |
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14,936 |
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11,436 |
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28,331 |
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22,289 |
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Operating expenses: |
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Research and development |
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8,861 |
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5,577 |
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15,381 |
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10,290 |
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Sales and marketing |
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6,042 |
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3,131 |
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11,824 |
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6,206 |
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General and administrative |
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6,096 |
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4,263 |
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11,491 |
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8,273 |
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Amortization of intangible assets |
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69 |
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67 |
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137 |
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133 |
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Acquired in-process research and development |
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71 |
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1,110 |
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Restructuring charge |
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86 |
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161 |
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Gain on sale of assets |
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(1,040 |
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Total operating expenses |
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21,225 |
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13,038 |
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40,104 |
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23,862 |
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Loss from operations |
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(6,289 |
) |
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(1,602 |
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(11,773 |
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(1,573 |
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Interest and other income/(expense), net: |
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Interest income |
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189 |
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959 |
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717 |
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1,125 |
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Interest expense |
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(11 |
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(10 |
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(21 |
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(856 |
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Other income/(expense), net |
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(272 |
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68 |
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(181 |
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227 |
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Interest and other income/(expense), net |
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(94 |
) |
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1,017 |
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515 |
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496 |
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Loss before income taxes and minority interest |
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(6,383 |
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(585 |
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(11,258 |
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(1,077 |
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Income tax provision |
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(213 |
) |
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(313 |
) |
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(1,343 |
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(585 |
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Minority interest in consolidated subsidiaries |
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(5 |
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(2 |
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Net loss |
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(6,601 |
) |
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(898 |
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(12,603 |
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(1,662 |
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Accretion to preferred stock |
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(17 |
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Deemed dividend |
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(3,130 |
) |
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Net loss attributable to common stockholders |
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$ |
(6,601 |
) |
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$ |
(898 |
) |
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$ |
(12,603 |
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$ |
(4,809 |
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Net loss per share attributable to common stockholders basic and diluted: |
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Net loss |
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$ |
(0.23 |
) |
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$ |
(0.03 |
) |
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$ |
(0.43 |
) |
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$ |
(0.09 |
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Accretion to preferred stock |
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Deemed dividend |
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(0.18 |
) |
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Net loss per share attributable to common stockholders basic and
diluted |
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$ |
(0.23 |
) |
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$ |
(0.03 |
) |
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$ |
(0.43 |
) |
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$ |
(0.27 |
) |
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Weighted average common shares outstanding basic and diluted |
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29,317 |
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28,725 |
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29,231 |
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17,703 |
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Stock-based compensation included in: |
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Research and development |
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$ |
174 |
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$ |
259 |
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$ |
250 |
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$ |
354 |
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Sales and marketing |
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1,303 |
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178 |
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2,605 |
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274 |
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General and administrative |
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554 |
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571 |
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1,148 |
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|
987 |
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The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
GLU
MOBILE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Six Months Ended June 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(12,603 |
) |
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$ |
(1,662 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and accretion |
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1,361 |
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928 |
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Amortization of intangible assets |
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5,050 |
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1,237 |
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Stock-based compensation |
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4,003 |
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1,615 |
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Change in carrying value of preferred stock warrant liability |
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10 |
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Amortization of value of warrants issued in connection with loan |
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477 |
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Amortization of loan agreement costs |
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20 |
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81 |
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Non-cash foreign currency translation gain |
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(384 |
) |
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(217 |
) |
Acquired in-process research and development |
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1,110 |
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Impairment of prepaid royalties and guarantees |
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234 |
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Impairment of auction rate securities |
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470 |
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Gain on sale of assets |
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(1,040 |
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Changes in allowance for doubtful accounts |
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86 |
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(42 |
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Changes in operating assets and liabilities, net of effect of acquisitions: |
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(Increase)/decrease in accounts receivable |
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1,342 |
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(768 |
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Increase in prepaid royalties |
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(1,926 |
) |
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(1,492 |
) |
Increase in prepaid expenses and other assets |
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(463 |
) |
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(1,153 |
) |
Increase/(decrease) in accounts payable |
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(543 |
) |
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1,241 |
|
Increase/(decrease) in other accrued liabilities |
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834 |
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(843 |
) |
Increase in accrued compensation |
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1,171 |
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55 |
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Increase in accrued royalties |
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57 |
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1,319 |
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Increase in deferred revenues |
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183 |
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18 |
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Decrease in accrued restructuring |
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(1,568 |
) |
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(36 |
) |
Increase in other long-term liabilities |
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1,665 |
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|
286 |
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Net cash provided by operating activities |
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99 |
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14 |
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Cash flows from investing activities: |
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Purchase of short-term investments |
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(63,900 |
) |
Sale of short-term investments |
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10,750 |
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Purchase of property and equipment |
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(3,357 |
) |
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(1,302 |
) |
Proceeds from sale of assets, net of selling costs |
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|
1,040 |
|
Acquisition of MIG, net of cash acquired |
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|
(693 |
) |
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Acquisition of Superscape, net of cash acquired |
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(30,008 |
) |
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Net cash used in investing activities |
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(34,058 |
) |
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(53,412 |
) |
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Cash flows from financing activities: |
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Proceeds from IPO shares, net of issuance costs |
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74,764 |
|
Proceeds from exercise of stock options |
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158 |
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|
98 |
|
Proceeds from exercise of stock warrants |
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101 |
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Debt payments |
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(12,060 |
) |
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Net cash provided by financing activities |
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|
259 |
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|
62,802 |
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Effect of exchange rate changes on cash |
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|
17 |
|
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|
82 |
|
Net increase/(decrease) in cash and cash equivalents |
|
|
(33,683 |
) |
|
|
9,486 |
|
Cash and cash equivalents at beginning of period |
|
|
57,816 |
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|
3,823 |
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Cash and cash equivalents at end of period |
|
$ |
24,133 |
|
|
$ |
13,309 |
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Supplemental disclosure of non-cash information |
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Accrued acquisition costs |
|
$ |
340 |
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|
|
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|
The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
GLU MOBILE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1 The Company, Basis of Presentation and Summary of Significant Accounting Policies
Glu Mobile Inc. (the Company or Glu) was incorporated as Cyent Studios, Inc. in Nevada in
May 2001 and changed its name to Sorrent, Inc. In November 2001, New Sorrent, Inc., a wholly owned
subsidiary of the Company was incorporated in California. The Company and New Sorrent, Inc. merged
in December 2001 to form Sorrent, Inc., a California corporation. In May 2005, the Company changed
its name to Glu Mobile Inc. In November 2006 the Company reincorporated in the state of Delaware.
The Company is a leading global publisher of mobile games and has developed and published a
portfolio of casual and traditional games to appeal to a broad cross section of subscribers served
by the Companys wireless carriers and other distributors. Glu creates games and related
applications based on third-party licensed brands and other intellectual property, as well as
developing its own original brands and intellectual property.
In March 2007, the Company completed its initial public offering (IPO) of common stock in
which it sold and issued 7,300 shares at an issue price of $11.50 per share. The Company raised a
total of $83,950 in gross proceeds from the IPO, or approximately $74,758 in net proceeds after
deducting underwriting discounts and commissions of $5,877 and other offering costs of $3,315. Upon
the closing of the IPO, all shares of redeemable convertible preferred stock outstanding
automatically converted into 15,680 shares of common stock.
In connection with the IPO, in March 2007, the Company affected a 1-for-3 reverse stock split
of its outstanding capital stock and derivative securities. All share numbers and exercises prices
in these financial statements give effect to the reverse stock split.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding interim financial
reporting. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K, File Number 001-33368, filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring adjustments, which the
Company believes are necessary for a fair statement of the Companys financial position as of June
30, 2008 and its results of operations for the three and six months ended June 30, 2008 and 2007,
respectively. These condensed consolidated financial statements are not necessarily indicative of
the results to be expected for the entire year. The consolidated balance sheet presented as of
December 31, 2007 has been derived from the audited consolidated financial statements as of that
date, and the consolidated balance sheet presented as of June 30, 2008 has been derived from the
unaudited condensed consolidated financial statements as of that date.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
majority-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 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.
6
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 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. The Company applies the provisions of
Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to
all transactions.
Revenues are recognized from our 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 Emerging Issues Task Force, or EITF Issue No. 99-19, Reporting Revenue
Gross as a Principal Versus Net as an Agent, 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 agreements and has determined that it is not the principal when selling its games through
carriers. Key indicators that it evaluated to reach this determination include:
|
|
|
wireless subscribers directly contract with the carriers, which have most of the service
interaction and are generally viewed as the primary obligor by the subscribers; |
|
|
|
|
carriers generally have significant control over the types of games that they offer to
their subscribers; |
|
|
|
|
carriers are directly responsible for billing and collecting fees from their subscribers,
including the resolution of billing disputes; |
|
|
|
|
carriers generally pay the Company a fixed percentage of their revenues or a fixed fee
for each game; |
7
|
|
|
|
carriers generally must approve the price of the Companys games in advance of their sale
to subscribers, 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. |
Short-Term Investments
The Company invests in auction-rate securities that are bought and sold in the marketplace
through a bidding process sometimes referred to as a Dutch auction. After the initial issuance of
the securities, the interest rate on the securities is reset periodically, at intervals set at the
time of issuance (e.g., every seven, 28 or 35 days or every six months), based on the market demand
at the reset period. The stated or contractual maturities for these securities, however,
generally are 20 to 30 years.
The Company has classified these investments as available-for-sale securities under Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115). In accordance with SFAS No. 115, these securities are reported at fair
value with any temporary changes in market value reported as a part of comprehensive income/(loss).
No unrealized gains or losses related to temporary change in market value were recognized during
the three or six months ended June 30, 2008 or 2007.
The Company periodically reviews these investments for impairment. In the event the carrying
value of an investment exceeds its fair value and the decline in fair value is determined to be
other-than-temporary, the Company writes down the value of the investment to its fair value. The
Company recorded an impairment of $235 and $470 during the three and six months ended June 30,
2008, respectively, due to a decline in fair value of two failed auctions as of June 30, 2008 that
was determined to be other-than-temporary based on quantitative and qualitative assumptions and
estimates using valuation models including a firm liquidation quote provided by the sponsoring
broker and an analysis of other-than-temporary impairment factors including the use of cash for the
two recent acquisitions, the ratings of the underlying securities, the Companys intent to continue
to hold these securities and further deterioration in the auction-rate securities market. No
realized gains or losses were recognized during the three or six months ended June 30, 2007.
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 collectibility on a monthly basis. It reviews all
other balances quarterly. The Company charges off accounts receivable balances against the
allowance when it determines that the amount will not be recovered.
The following table summarizes the revenues from customers in excess of 10% of the Companys
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Verizon Wireless |
|
|
21.9 |
% |
|
|
23.6 |
% |
|
|
21.1 |
% |
|
|
22.7 |
% |
China Mobile |
|
|
13.7 |
% |
|
|
* |
|
|
|
11.3 |
% |
|
|
* |
|
Vodafone |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
10.5 |
% |
|
|
|
* |
|
Revenues from the customer were less than 10% during the period. |
At June 30, 2008, Verizon Wireless accounted for 24.5% of total accounts receivable. At
December 31, 2007, Verizon Wireless accounted for 23.5% of total accounts receivable. No other
customer represented greater than 10% of the Companys revenues or accounts receivable in these
periods or as of these dates.
8
The following table summarizes the revenues from specific titles in excess of 10% of the
Companys revenues:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
Monopoly Here & Now |
|
|
* |
|
|
|
11.4 |
% |
|
|
|
* |
|
Revenues from the title were less than 10% during the period. |
No title represented 10% of the Companys revenues during the three months ended June 30, 2008
and 2007.
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 our
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.
The Companys contracts with some licensors include minimum guaranteed royalty payments, which
are payable regardless of the ultimate volume of sales to end users. Effective January 1, 2006, the
Company adopted FSP FIN 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue
Guarantees Granted to a Business or Its Owners. The Company has recorded a minimum guaranteed
liability of approximately $11,309 and $7,876 as of June 30, 2008 and December 31, 2007,
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 prepaid royalties, as well as any
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 an impairment of $234 within the royalty expense line during the three and six months
ended June 30, 2008, respectively. However, the Company recorded no such impairments during the
three and six months ended June 30, 2007, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109), 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 SFAS 109, 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 Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48), which supplements SFAS 109 by defining the confidence level that a
tax position must meet in order to be recognized in the financial statements. FIN 48 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.
9
With the adoption of FIN 48, companies are required 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. FIN 48 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 total amount of unrecognized tax benefits as of the
adoption date was $575. 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.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, and followed
the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). Under APB No. 25, compensation expense for an option is
based on the difference, if any, on the date of the grant, between the fair value of a companys
common stock and the exercise price of the option. Employee stock-based compensation determined
under APB No. 25 is recognized using the multiple option method prescribed by the Financial
Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans (FIN 28), over the option vesting period.
Effective January 1, 2006, the Company adopted the fair value provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123R), which supersedes
its previous accounting under APB No. 25. SFAS No. 123R requires the recognition of compensation
expense, using a fair-value based method, for costs related to all share-based payments including
stock options. SFAS No. 123R requires companies to estimate the fair value of share-based payment
awards on the grant date using an option pricing model. The Company adopted SFAS No. 123R 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, SFAS No. 123R shall
be applied to option grants on and after the required effective date. For options granted prior to
the SFAS No. 123R effective date that remain unvested on that date, the Company continues to
recognize compensation expense under the intrinsic value method of APB No. 25. In addition, the
Company continues to amortize those awards valued prior to January 1, 2006 utilizing an accelerated
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 EITF Topic No.
D-32 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 SFAS No. 123, EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and FIN
28.
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. Net loss attributable to common stockholders is calculated
using the two-class method; however, preferred stock dividends were not included in the Companys
diluted net loss per share calculations because to do so would be anti-dilutive for all periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss attributable to common stockholders |
|
$ |
(6,601 |
) |
|
$ |
(898 |
) |
|
$ |
(12,603 |
) |
|
$ |
(4,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
29,350 |
|
|
|
28,815 |
|
|
|
29,269 |
|
|
|
17,800 |
|
Weighted average unvested common shares subject to repurchase |
|
|
(33 |
) |
|
|
(90 |
) |
|
|
(38 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic and diluted net loss per share |
|
|
29,317 |
|
|
|
28,725 |
|
|
|
29,231 |
|
|
|
17,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders basic and diluted |
|
$ |
(0.23 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following weighted average options, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,405 |
|
Warrants to purchase common stock |
|
|
106 |
|
|
|
229 |
|
|
|
131 |
|
|
|
229 |
|
Unvested common shares subject to repurchase |
|
|
33 |
|
|
|
90 |
|
|
|
38 |
|
|
|
97 |
|
Options to purchase common stock |
|
|
4,720 |
|
|
|
3,571 |
|
|
|
4,390 |
|
|
|
3,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,859 |
|
|
|
3,890 |
|
|
|
4,559 |
|
|
|
11,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (FAS
157). In February 2008, the FASB issued a staff position, FSP No. 157-2, that delays the effective
date of SFAS 157 for all non-financial assets and liabilities except for those recognized or
disclosed in the financial statements at fair value at least annually. Therefore, the Company has
adopted the provision of FAS 157 with respect to its financial assets and liabilities only. FAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Fair value is defined under FAS 157 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 measure date. Valuation techniques used to measure fair value under FAS 157
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 this statement required additional disclosures of assets and liabilities
measured at fair value (see Note 3); it did not have a material impact on the Companys
consolidated results of operations and financial condition.
Effective January 1, 2008, the Company adopted FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159) 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 FAS 159
as this Statement is not expected to have a material impact on the Companys consolidated results
of operations and financial condition.
In December 2007, the FASB issued FAS No. 141R, Business Combinations (FAS 141R) which
replaces FAS No. 141 and 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. FAS 141R 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. FAS 141R 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. Early adoption of FAS 141R is
prohibited. The Company is currently evaluating the impact, if any, of adopting FAS 141R on its
results of operations and financial position.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements (FAS 160) which amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51), to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity separate and
11
apart from the parents equity in the consolidated financial statements. In addition to the
amendments to ARB 51, this Statement amends FASB Statement No. 128, Earnings per Share; so that
earnings-per-share data will continue to be calculated the same way those data were calculated
before this Statement was issued. FAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating
the impact, if any, of adopting FAS 160 on its results of operations and financial position.
Note 2 Acquisitions
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 (or $36,500) based on 183,098,860 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 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 preliminarily allocated the total purchase price of
$38,942 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 preliminary purchase price allocation of the Superscape
acquisition:
|
|
|
|
|
Assets acquired: |
|
|
|
|
Cash |
|
$ |
8,593 |
|
Accounts receivable |
|
|
4,346 |
|
Prepaid and other current assets |
|
|
1,507 |
|
Property and equipment |
|
|
182 |
|
Intangible assets (see Note 5): |
|
|
|
|
Titles, content and technology |
|
|
7,190 |
|
Carrier contracts and relationships |
|
|
7,400 |
|
Patents and core technology |
|
|
2,000 |
|
Trade name |
|
|
330 |
|
In-process research and development |
|
|
1,110 |
|
Goodwill (see Note 5) |
|
|
12,785 |
|
|
|
|
|
Total assets acquired |
|
|
45,443 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable |
|
|
(2,570 |
) |
Accrued liabilities |
|
|
(367 |
) |
Restructuring liabilities |
|
|
(3,564 |
) |
|
|
|
|
Total liabilities acquired |
|
|
(6,501 |
) |
|
|
|
|
Net acquired assets |
|
$ |
38,942 |
|
|
|
|
|
The Company has recorded an estimate for costs to terminate certain activities associated with
the Superscape operations in accordance with the guidance of Emerging Issues Task Force Issue No.
95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. This
restructuring accrual of $3,564 principally related to the termination of 29 Superscape employees
of $2,277, restructuring of facilities of $1,262 and other agreement termination fees of $25.
12
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 six months ended June 30, 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 three and six months ended June 30, 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 based the valuation of identifiable intangible assets and IPR&D acquired on
managements estimates, currently available information and reasonable and supportable assumptions.
The Company based the allocation of the purchase price on the fair value of these net assets
acquired determined using the income and market valuation approaches.
The Company allocated the residual value of $12,785 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 SFAS No. 142, goodwill will not be amortized but will be tested for
impairment at least annually. Goodwill is not deductible for tax purposes.
Acquisition of Beijing Zhangzhong MIG Information Technology Co. Ltd.
On December 19, 2007, the Company acquired the net assets of Awaken Limited group affiliates.
Awaken Limiteds principal operations are through Beijing Zhangzhong MIG Information Technology
(MIG), a domestic limited liability company organized under the laws of the Peoples Republic of
China (the PRC). The Company will refer to the acquired companies collectively as MIG. The
Company acquired MIG in order to accelerate the Companys presence in China, to deepen Glus
relationship with China Mobile, the largest wireless carrier in China, to acquire access and rights
to leading franchises for the Chinese market, and to augment its internal production and publishing
resources with a studio in China. These factors contributed to a purchase price in excess of the
fair value of net tangible and intangible assets acquired, and, as a result, the Company recorded
goodwill in connection with this transaction.
The Company purchased all of the issued and outstanding shares of MIG for a total purchase
price of $15,228 which consisted of cash consideration paid to MIG shareholders of $14,655 and
transaction costs of $573. In addition, subject to MIGs achievement of revenue and operating
income milestones for the year ended December 31, 2008, the Company committed to pay additional
consideration of $20,000 to the MIG shareholders, payable up to a maximum of 30% in the Companys
stock and 70% in cash, and bonus payment of $5,000, entirely in the Companys stock, to two
officers of MIG, who are also shareholders. If earned, one half of the bonus (or $2,500) will be
paid on the earn-out payment date and one half will be paid on December 31, 2009, if the officers
continue their employment with the Company. As of the acquisition date, these two officers owned
27% of the outstanding shares of MIG. Per their employment agreements, these two shareholders will
be entitled to one half of their proportionate share of the earned additional consideration (or
$2,700) on the earn-out payment date and one half of their proportionate share of the earned
additional consideration on December 31, 2009, if they continue their employment with the Company.
In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS 141), the Company has not recorded the additional consideration or bonus in the initial
purchase price as these amounts are contingent on MIGs future earnings. In accordance with
Emerging Issues Task Force Issue No. 98-5, Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination, the Company will record
the estimated contingent consideration and bonus earned by the two officers (totaling $10,400) as
compensation over the two year vesting period ending December 31, 2009. The Company recorded $1,700
and $3,401 of expense during the three and six months ended June 30, 2008 related to the
stock-based and non-equity compensation of the earnout.
13
The Companys consolidated financial statements include the results of operations of MIG from
the date of acquisition. Under the purchase method of accounting, the Company allocated the total
purchase price of $15,228 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 preliminary purchase price allocation of the MIG acquisition:
|
|
|
|
|
Assets acquired: |
|
|
|
|
Cash |
|
$ |
1,899 |
|
Accounts receivable |
|
|
848 |
|
Prepaid and other current assets |
|
|
20 |
|
Property and equipment |
|
|
71 |
|
Intangible assets: |
|
|
|
|
Content and technology |
|
|
490 |
|
Existing titles |
|
|
2,200 |
|
Carrier contracts and relationships |
|
|
8,510 |
|
Service providers license |
|
|
400 |
|
Trade names |
|
|
110 |
|
In-process research and development |
|
|
59 |
|
Goodwill |
|
|
7,880 |
|
|
|
|
|
Total assets acquired |
|
|
22,487 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable |
|
|
(21 |
) |
Accrued liabilities |
|
|
(650 |
) |
Accrued compensation |
|
|
(106 |
) |
|
|
|
|
Total current liabilities |
|
|
(777 |
) |
Long-term deferred tax liabilities |
|
|
(2,652 |
) |
Other long-term liabilities |
|
|
(3,830 |
) |
|
|
|
|
Total liabilities |
|
|
(7,259 |
) |
|
|
|
|
Net acquired assets |
|
$ |
15,228 |
|
|
|
|
|
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, $11,710 was allocated to amortizable intangible
assets. The amortizable intangible assets are being amortized over their respective estimated
useful lives of two to nine years.
In conjunction with the acquisition of MIG, the Company recorded a $59 expense for acquired
IPR&D during the fourth quarter of 2007 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 our consolidated statements of operation in the year ended December 31, 2007.
The IPR&D is related to the development of a new title. 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 21% discount rate.
The Company expects the cash flows generated from this new title to begin in 2008. This rate takes
into account the percentage of completion of the development effort of approximately 60% and the
risks associated with the Companys developing this technology given changes in trends and
technology in the industry. As of February 29, 2008, this acquired IPR&D project had been completed
at costs similar to the original projections.
The Company allocated the residual value of $7,880 to goodwill. Goodwill represents the excess
of the purchase price over the fair value of the net tangible and intangible assets acquired. Any
changes in consideration, transaction costs or fair value of MIGs net assets may change the
preliminary purchase price allocation and amount of goodwill recorded by the Company. In accordance
with SFAS No. 142, goodwill will not be amortized but will be tested for impairment at least
annually. Goodwill is not deductible for tax purposes.
14
The Company has included the results of operations of MIG and Superscape in its consolidated
financial statements subsequent to the date of each respective acquisition. The unaudited financial
information required under FAS 141 was impracticable and immaterial for MIG. The unaudited
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 the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
Six |
|
Six |
|
|
Months |
|
Months |
|
Months |
|
|
Ended |
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2007 |
|
2008 |
|
2007 |
Total pro forma revenues |
|
$ |
20,023 |
|
|
$ |
47,009 |
|
|
$ |
39,304 |
|
Gross profit |
|
|
13,414 |
|
|
|
24,064 |
|
|
|
26,389 |
|
Pro forma net loss |
|
|
(2,562 |
) |
|
|
(12,962 |
) |
|
|
(4,435 |
) |
Pro forma net loss per share basic
and diluted |
|
|
(0.09 |
) |
|
|
(0.44 |
) |
|
|
(0.25 |
) |
The pro forma financial information above includes a charge of $1,110 for IPR&D during the six
months ended June 30, 2008. The results of operations for the three months ended June 30, 2008
include the results of MIG and Superscape.
Note 3 Short-Term Investments and Fair Value Measurements
Short-Term Investments
Marketable securities, which are classified as available-for-sale, are summarized below as of
June 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified on Balance Sheet |
|
|
|
Purchased |
|
|
Realized |
|
|
Aggregate |
|
|
Cash and Cash |
|
|
Short-term |
|
|
|
Cost |
|
|
Loss |
|
|
Fair Value |
|
|
Equivalents |
|
|
Investments |
|
As of June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities |
|
$ |
2,800 |
|
|
$ |
(1,276 |
) |
|
$ |
1,524 |
|
|
$ |
|
|
|
$ |
1,524 |
|
Money market funds |
|
|
4,234 |
|
|
|
|
|
|
|
4,234 |
|
|
|
4,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,034 |
|
|
$ |
(1,276 |
) |
|
$ |
5,758 |
|
|
$ |
4,234 |
|
|
$ |
1,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate securities |
|
$ |
2,800 |
|
|
$ |
(806 |
) |
|
$ |
1,994 |
|
|
$ |
|
|
|
$ |
1,994 |
|
Money market funds |
|
|
50,968 |
|
|
|
|
|
|
|
50,968 |
|
|
|
50,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,768 |
|
|
$ |
(806 |
) |
|
$ |
52,962 |
|
|
$ |
50,968 |
|
|
$ |
1,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, the Company had $2,800 of principal invested in auction-rate securities. The
auction-rate securities held by the Company are private placement securities with long-term nominal
maturities for which the interest rates are reset through a Dutch auction each month. The monthly
auctions historically have provided a liquid market for these securities. The Companys investments
in auction-rate securities represent interests in corporate bonds.
The auction-rate security investments held by the Company all had AAA credit ratings at the
time of purchase but were downgraded to A in July 2008. With the liquidity issues experienced in
global credit and capital markets, the auction-rate securities held by the Company at June 30, 2008
have experienced multiple failed auctions as the amount of securities submitted for sale has
exceeded the amount of purchase orders.
The estimated market value of the Companys auction-rate securities holdings at December 31,
2007 was $1,994, which reflects an $806 impairment to the principal value of $2,800. The estimated
market value of the Companys auction-rate securities holdings at June 30, 2008 was $1,524, which
reflects an additional impairment of $470 to the principal value of $2,800. Although the
auction-rate securities continue to pay interest according to their stated terms, based on
valuation models including a firm liquidation quote provided by the sponsoring broker and an
analysis of other-than-temporary impairment factors including the use of cash for the two recent
acquisitions and the continued and further deterioration in the auction-rate securities market, the
Company has recorded a pre-tax impairment charge of $470 during the six months ended June 30, 2008,
reflecting the auction-rate securities holdings that the Company has concluded have an
other-than-temporary decline in value.
As of June 30, 2008 and December 31, 2007 the contractual maturities of the Companys
remaining two auction-rate securities were 2017. Although the Company may not have the ability to
liquidate these investments within one year of the balance sheet date it may need to sell the
securities within the next year to fund operations. Accordingly, the investments were classified as
current assets on the consolidated balance sheets.
15
Fair Value Measurements
The Companys cash and investment instruments are classified within Level 1 or Level 2 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. The types of
instruments valued based on other observable inputs include investment-grade corporate bonds,
mortgage-backed and asset-backed products, state, municipal and provincial obligations. Such
instruments are generally classified within Level 2 of the fair value hierarchy.
In accordance with FAS 157, the following table represents the Companys fair value hierarchy
for its financial assets (cash, cash equivalents and available for sale investments) as of June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
Auction-rate securities |
|
$ |
1,524 |
|
|
$ |
|
|
|
$ |
1,524 |
|
Money market funds |
|
|
4,234 |
|
|
|
4,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities |
|
|
5,758 |
|
|
$ |
4,234 |
|
|
$ |
1,524 |
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
19,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities |
|
$ |
25,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 Balance Sheet Components
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Computer equipment |
|
$ |
4,769 |
|
|
$ |
3,200 |
|
Furniture and fixtures |
|
|
543 |
|
|
|
1,368 |
|
Software |
|
|
2,395 |
|
|
|
2,196 |
|
Leasehold improvements |
|
|
4,190 |
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
|
11,897 |
|
|
|
8,458 |
|
Less: Accumulated depreciation and amortization |
|
|
(5,680 |
) |
|
|
(4,641 |
) |
|
|
|
|
|
|
|
|
|
$ |
6,217 |
|
|
$ |
3,817 |
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended June 30, 2008 and 2007 were $730 and $467,
respectively. Depreciation expense for the six months ended June 30, 2008 and 2007 were $1,352 and
$914, respectively.
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accounts receivable |
|
$ |
22,034 |
|
|
$ |
18,737 |
|
Less: Allowance for doubtful accounts |
|
|
(454 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
$ |
21,580 |
|
|
$ |
18,369 |
|
|
|
|
|
|
|
|
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet
dates. The Company had no significant write-offs or recoveries during the three or six months ended
June 30, 2008 and 2007.
16
Note 5 Goodwill and 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 intangible assets have
been recorded in the currency of the applicable reporting unit. Therefore, the intangible assets
attributed to the Companys EMEA and APAC reporting units are subject to foreign currency
fluctuations. The carrying amounts and accumulated amortization expense of the acquired intangible
assets at June 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Expense |
|
|
|
|
|
|
Gross |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
(Including |
|
|
|
|
|
|
Carrying |
|
|
(Including |
|
|
|
|
|
|
Estimated |
|
|
Value (Including |
|
|
Impact of |
|
|
Net |
|
|
Value (Including |
|
|
Impact of |
|
|
Net |
|
|
|
Useful |
|
|
Impact of Foreign |
|
|
Foreign |
|
|
Carrying |
|
|
Impact of Foreign |
|
|
Foreign |
|
|
Carrying |
|
|
|
Life |
|
|
Exchange |
|
|
Exchange) |
|
|
Value |
|
|
Exchange |
|
|
Exchange) |
|
|
Value |
|
Intangible assets
amortized to cost of
revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titles, content and
technology |
|
2.5 yrs |
|
$ |
14,236 |
|
|
$ |
(7,119 |
) |
|
$ |
7,117 |
|
|
$ |
5,018 |
|
|
$ |
(4,172 |
) |
|
$ |
846 |
|
Catalogs |
|
1 yr |
|
|
1,551 |
|
|
|
(1,551 |
) |
|
|
|
|
|
|
1,553 |
|
|
|
(1,553 |
) |
|
|
|
|
ProvisionX Technology |
|
6 yrs |
|
|
255 |
|
|
|
(141 |
) |
|
|
114 |
|
|
|
256 |
|
|
|
(118 |
) |
|
|
138 |
|
Carrier contract and
related relationships |
|
5 yrs |
|
|
18,872 |
|
|
|
(2,496 |
) |
|
|
16,376 |
|
|
|
10,922 |
|
|
|
(1,117 |
) |
|
|
9,805 |
|
Licensed content |
|
5 yrs |
|
|
2,794 |
|
|
|
(618 |
) |
|
|
2,176 |
|
|
|
2,651 |
|
|
|
(183 |
) |
|
|
2,468 |
|
Service provider license |
|
9 yrs |
|
|
430 |
|
|
|
(26 |
) |
|
|
404 |
|
|
|
404 |
|
|
|
(2 |
) |
|
|
402 |
|
Trademarks |
|
3 yrs |
|
|
555 |
|
|
|
(188 |
) |
|
|
367 |
|
|
|
218 |
|
|
|
(96 |
) |
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,693 |
|
|
|
(12,139 |
) |
|
|
26,554 |
|
|
|
21,022 |
|
|
|
(7,241 |
) |
|
|
13,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
amortized to operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emux Technology |
|
6 yrs |
|
|
1,655 |
|
|
|
(978 |
) |
|
|
677 |
|
|
|
1,656 |
|
|
|
(840 |
) |
|
|
816 |
|
Noncompete agreement |
|
2 yrs |
|
|
724 |
|
|
|
(724 |
) |
|
|
|
|
|
|
725 |
|
|
|
(725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,379 |
|
|
|
(1,702 |
) |
|
|
677 |
|
|
|
2,381 |
|
|
|
(1,565 |
) |
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles assets |
|
|
|
|
|
$ |
41,072 |
|
|
$ |
(13,841 |
) |
|
$ |
27,231 |
|
|
$ |
23,403 |
|
|
$ |
(8,806 |
) |
|
$ |
14,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to intangible assets during the six months ended June 30, 2008 of $16,920 are a
result of the Superscape acquisition and the additions during the year ended December 31, 2007 of
$11,710 are a result of the MIG acquisition (see Note 2).
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 three months ended June 30, 2008 and 2007, the Company recorded amortization
expense in the amounts of $3,135 and $553, respectively, in cost of revenues. During the six months
ended June 30, 2008 and 2007, the Company recorded amortization expense in the amounts of $4,842
and $1,106, respectively, in cost of revenues. During the three months ended June 30, 2008 and
2007, the Company recorded amortization expense in the amounts of $69 and $67, respectively, in
operating expenses. During the six months ended June 30, 2008 and 2007, the Company recorded
amortization expense in the amounts of $137 and $133, respectively, in operating expenses.
As of June 30, 2008, the total expected future amortization related to intangible assets was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Amortization |
|
|
|
|
|
|
Included in |
|
|
Included in |
|
|
Total |
|
|
|
Cost of |
|
|
Operating |
|
|
Amortization |
|
Fiscal Years: |
|
Revenues |
|
|
Expenses |
|
|
Expense |
|
2008 (remaining six months) |
|
$ |
6,470 |
|
|
$ |
138 |
|
|
$ |
6,608 |
|
2009 |
|
|
7,166 |
|
|
|
276 |
|
|
|
7,442 |
|
2010 |
|
|
4,273 |
|
|
|
263 |
|
|
|
4,536 |
|
2011 |
|
|
2,878 |
|
|
|
|
|
|
|
2,878 |
|
2012 |
|
|
2,735 |
|
|
|
|
|
|
|
2,735 |
|
2013 and thereafter |
|
|
3,032 |
|
|
|
|
|
|
|
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,554 |
|
|
$ |
677 |
|
|
$ |
27,231 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The Company attributes all of the goodwill resulting from the Macrospace acquisition to its
EMEA reporting unit. The goodwill resulting from the iFone acquisition is evenly attributed to the
Americas and EMEA reporting units. The goodwill allocated to the
17
Americas reporting unit is denominated in United States Dollars, and the goodwill allocated to
the EMEA reporting unit is denominated in Pounds Sterling. As a result, the goodwill attributed to
the EMEA reporting unit is subject to foreign currency fluctuations. The Company attributes all of
the goodwill resulting from the MIG acquisition to its APAC reporting unit. The goodwill resulting
from the acquisition of MIG is denominated in Chinese Renminbi (RMB) and will be subject to
foreign currency fluctuations. The Company attributes all of the goodwill resulting from the
Superscape acquisition to its Americas reporting unit.
Goodwill by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
January 1, |
|
|
Goodwill |
|
|
|
|
|
|
Currency |
|
|
December 31, |
|
|
Goodwill |
|
|
|
|
|
|
Currency |
|
|
June 30, |
|
|
|
2007 |
|
|
Acquired |
|
|
Adjustments |
|
|
Exchange |
|
|
2007 |
|
|
Acquired |
|
|
Adjustments |
|
|
Exchange |
|
|
2008 |
|
Americas |
|
$ |
11,414 |
|
|
$ |
|
|
|
$ |
12 |
|
|
$ |
|
|
|
$ |
11,426 |
|
|
$ |
12,785 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
24,211 |
|
EMEA |
|
|
27,313 |
|
|
|
|
|
|
|
13 |
|
|
|
534 |
|
|
|
27,860 |
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
27,832 |
|
APAC |
|
|
|
|
|
|
7,880 |
|
|
|
|
|
|
|
96 |
|
|
|
7,976 |
|
|
|
|
|
|
|
1,306 |
|
|
|
27 |
|
|
|
9,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,727 |
|
|
$ |
7,880 |
|
|
$ |
25 |
|
|
$ |
630 |
|
|
$ |
47,262 |
|
|
$ |
12,785 |
|
|
$ |
1,306 |
|
|
$ |
(1 |
) |
|
$ |
61,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill was acquired during 2008 as a result of the purchase of Superscape and during 2007 as
a result of the purchase of MIG (see
Note 2). The adjustment to the APAC goodwill related to
additional professional fees incurred during the first quarter of 2008, an adjustment to the
opening deferred tax liabilities and adjustments to open accrued liability balances related to the
acquisition of MIG.
Note 6 Commitments and Contingencies
Leases
The Company leases office space under noncancelable operating facility leases with various
expiration dates through July 2013. Rent expense for the three months ended June 30, 2008 and 2007
was $998 and $493, respectively. Rent expense for the six months ended June 30, 2008 and 2007 was
$1,948 and $903, 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 $920
and $571 at June 30, 2008 and December 31, 2007, respectively, and was included within other
long-term liabilities.
At June 30, 2008, future minimum lease payments under noncancelable operating leases were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
Net |
|
|
|
Lease |
|
|
Sub-lease |
|
|
Lease |
|
Fiscal Years: |
|
Payments |
|
|
Income |
|
|
Payments |
|
2008 (remaining six months) |
|
$ |
2,216 |
|
|
$ |
242 |
|
|
$ |
1,974 |
|
2009 |
|
|
3,809 |
|
|
|
363 |
|
|
|
3,446 |
|
2010 |
|
|
2,636 |
|
|
|
|
|
|
|
2,636 |
|
2011 |
|
|
2,061 |
|
|
|
|
|
|
|
2,061 |
|
2012 |
|
|
1,120 |
|
|
|
|
|
|
|
1,120 |
|
2013 and thereafter |
|
|
213 |
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,055 |
|
|
$ |
605 |
|
|
$ |
11,450 |
|
|
|
|
|
|
|
|
|
|
|
Capital Lease
The Company has one lease that it accounts for as a capital lease. It capitalized a total of
$114 as computer equipment under this lease during the year ended December 31, 2005. The Company
recorded no capital lease obligations during the years ended December 31, 2006, 2007 or during the
three or six months ended June 30, 2008. Accumulated depreciation associated with this capital
lease was $104 and $85 at June 30, 2008 and December 31, 2007, respectively.
18
Minimum Guaranteed Royalties
The Company has entered into license and development agreements with various owners of brands
and other intellectual property so that it could develop and publish games for mobile handsets.
Pursuant to some of these agreements, the Company is required to pay minimum royalties over the
term of the agreements regardless of actual game sales. Future minimum royalty payments for those
agreements as of June 30, 2008 were as follows:
|
|
|
|
|
|
|
Minimum |
|
|
|
Guaranteed |
|
Fiscal Year: |
|
Royalties |
|
2008 (remaining six months) |
|
$ |
7,336 |
|
2009 |
|
|
6,772 |
|
2010 |
|
|
2,246 |
|
2011 |
|
|
350 |
|
2012 |
|
|
425 |
|
2013 and thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
17,129 |
|
|
|
|
|
Commitments in the above table include $11,309 of guaranteed royalties to licensors that are
included in the Companys consolidated balance sheet as of June 30, 2008 because the licensors do
not have any significant performance obligations. These commitments are included in both current
and long-term prepaid and accrued royalties.
Acquisition Related Commitments
The Company may be obligated to pay up to an additional $20,000 of consideration to the MIG
shareholders, payable up to 30% in the Companys stock and 70% in cash, and up to $5,000 of
bonuses, entirely in the Companys stock, to two officers of MIG if certain financial milestones
are achieved in 2008 (see Note 2).
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 June 30, 2008 or December 31, 2007.
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 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 June 30, 2008 or December 31, 2007.
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of
business. The Companys management does not believe that any of these matters, individually or in
the aggregate, will have a materially adverse effect on the Companys business, financial condition
or results of operation, and thus no amounts were accrued for these exposures at June 30, 2008.
19
Note 7 Debt
Loan Agreement
In May 2006, the Company entered into a loan agreement (the Loan) with a principal in the
amount of $12,000. The Loan had an interest rate of 11%. The Company was obligated to pay only
interest through December 31, 2006. Beginning January 1, 2007, the Company became obligated to pay
30 equal payments of principal and accrued interest until the entire principal is paid. As of March
31, 2007, all borrowings were repaid in full. As a result of the repayment, the remaining
unamortized debt issuance costs of $66 were amortized to interest expense during the first quarter
of 2007.
In conjunction with the Loan, the Company issued to entities affiliated with the lender
warrants to purchase 106 shares of Series D Preferred Stock with an exercise price of $9.03 per
share and a contractual life of seven years. The Company calculated the fair value of each warrant
using the Black-Scholes option pricing model with the following assumptions: volatility of 73%,
term of seven years, risk-free interest rate of 5.1% and dividend yield of 0%. The Company recorded
the fair value of the warrants of $607 as a discount to the carrying value of the Loan. Upon
repayment of the Loan in March 2007, the remaining unamortized debt discount of $477 was amortized
in full to interest expense. These warrants converted into warrants to purchase an equal number of
shares of common stock upon the closing of the IPO and remained outstanding at June 30, 2008.
Line of Credit Facility
In February 2007, the Company entered into an agreement to secure a revolving line of credit
that allows the Company to borrow up to $8,000. The facility is restricted to 80% of the Companys
eligible domestic accounts receivable. The line carries an interest rate equal to the prime rate
plus 1% and matures in 24 months. Payments on any borrowings would be interest only with any
remaining borrowings due at maturity. The line is collateralized by all of the assets of the
Company, including intellectual property. The Company is required to maintain a minimum tangible
net worth of $3,000. Also, if the Companys net cash balance, excluding any borrowings under this
line of credit, declines below $3,500, then the Companys accounts receivable must be collected by
means of a lock box, the interest rate on any borrowings would be increased to the prime rate plus
2% and the Company would have to pay a one-time fee to the lender of $50. To date, there have been
no borrowings under this facility. The Company was in compliance with all covenants as of June 30,
2008.
Note 8 Sale of ProvisionX Software
In January 2007, the Company signed an agreement with a third party for the sale of its
ProvisionX software for $1,100. Under the terms of the agreement, the Company will co-own the
intellectual property rights to the ProvisionX software, excluding any alterations or modifications
following completion of the sale, by the third party. The Company recognized a net gain on the sale
of assets of $1,040 which includes approximately $60 of selling costs incurred during the
transition.
Note 9 Stockholders Equity
Common Stock
In March 2007, the Company completed its IPO of common stock in which it sold and issued 7,300
shares of common stock at an issue price of $11.50 per share. The Company raised a total of $83,950
in gross proceeds from the IPO, or approximately $74,758 in net proceeds after deducting
underwriting discounts and commissions of $5,877 and other offering costs of $3,315. Upon the
closing of the IPO, all shares of redeemable convertible preferred stock outstanding automatically
converted into 15,680 shares of common stock.
In April 2007, the underwriters exercised a portion of the over-allotment option as to 199
shares, all of which were sold by stockholders and not by the Company.
Early Exercise of Options
Stock
options granted under the Companys stock option plan provide
certain director and employee option
holders the right to elect to exercise unvested options in exchange for shares of restricted common
stock. Unvested shares, in the amounts of 30 and 50 at June 30, 2008 and December 31, 2007,
respectively, were subject to a repurchase right held by the Company at the original issuance price
in the event the optionees employment is terminated either voluntarily or involuntarily. For
exercises of employee options, this right
20
generally lapses as to 25% of the shares subject to the option on the first anniversary of the
vesting start date and as to 1/48th of the shares monthly thereafter. These repurchase terms are
considered to be a forfeiture provision and do not result in variable accounting. The restricted
shares issued upon early exercise of stock options are legally issued and outstanding and have been
reflected in stockholders equity/(deficit). The Company treats cash received from employees for
exercise of unvested options as a refundable deposit shown as a liability in its consolidated
financial statements. As of June 30, 2008 and December 31, 2007, the Company included cash received
for early exercise of options of $29 and $45, respectively, in accrued liabilities. Amounts from
accrued liabilities are transferred into common stock and additional paid-in capital as the shares
vest.
Warrants to Purchase Common Stock
Upon the effective date of the IPO, warrants to purchase 229 shares of redeemable convertible
preferred stock converted into warrants to purchase 229 shares of common stock. As discussed in
Note 1, the Company classified the freestanding redeemable convertible preferred stock warrants as
a liability and adjusted the warrants to fair value at each reporting period until the completion
of the IPO. Upon closing of the IPO, the preferred stock warrant liability of $1,985 was reclassed
to additional paid-in capital.
In February 2007, the Company issued warrants to purchase an aggregate of 272 shares of common
stock with an exercise price of $0.0003 per share to certain holders of Series D or D-1 redeemable
convertible preferred stock as an inducement for these holders to convert their preferred stock
into common stock upon the consummation of the Companys IPO. These warrants expire 30 days
following the completion of the Companys IPO, provided that, if the date of effectiveness of that
offering was not March 31, 2007 or earlier, the warrants would expire. In connection with the
issuance of the warrants, the Company received an agreement to convert all shares of preferred
stock to common stock upon completion of the Companys IPO from holders of the requisite number of
shares to cause that conversion, provided that the registration statement for the initial public
offering was effective on or before March 31, 2007. The Company recorded a deemed dividend of
$3,130 in connection with the issuance of the warrants during the three months ending March 31,
2007. The deemed dividend represented the fair value of the warrants and was calculated using the
share price at the date of the IPO closing of $11.50 per share and the strike price of the warrants
of $0.0003 per share. These warrants were exercised in April 2007.
In March 2008, a holder of warrants elected to net exercise warrants to purchase 18 shares of
our common stock, which were converted to 10 shares of common stock. Also in March 2008, a holder
of warrants elected to exercise warrants to purchase 53 shares of our common stock at $1.92 per
share for total cash consideration of $101.
Warrants outstanding at June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Exercise |
|
of Shares |
|
|
|
|
|
|
Price |
|
Outstanding |
|
|
Term |
|
per |
|
Under |
Issue Date |
|
(Years) |
|
Share |
|
Warrant |
May 2006 |
|
|
7 |
|
|
$ |
9.03 |
|
|
|
106 |
|
Note 10 Stock Option and Other Benefit Plans
2001 Stock Plan
In December 2001, the Company adopted the 2001 Stock Option Plan (the 2001 Plan), which
terminated in March 2007 when the Company adopted the 2007 Equity Incentive Plan (the 2007 Plan).
The 2001 Plan provides for the granting of stock options to employees, directors, consultants,
independent contractors and advisors of the Company. Options granted under the 2001 Plan could be
either incentive stock options or nonqualified stock options. Incentive stock options (ISO) may
be granted only to Company employees (including officers and directors who are also employees).
Nonqualified stock options (NSO) could be granted to Company employees, directors, consultants,
independent contractors and advisors. As of June 30, 2008, the
Company had outstanding options to purchase 663 shares of
common stock under the 2001 Plan.
2007 Equity Incentive Plan
In January 2007, the Companys Board of Directors adopted, and in March 2007 the stockholders
approved, the 2007 Plan. In addition, shares not issued or subject to outstanding grants under the
2001 Plan on the date of adoption of the 2007 Plan and any
21
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. 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 2001 Plan that were unissued. The number of shares
available for grant and issuance under the 2007 Plan will be increased on January 1 of each of 2008
through 2011, by the lesser of (i) 3% of the number of shares of the Companys common stock issued
and outstanding on each December 31 immediately prior to the date of increase or (ii) such number
of shares determined by the Board of Directors. As of June 30, 2008,
the Company has reserved an aggregate of 3,298 shares of its common
stock for issuance under the 2007 Plan.
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 ISO or 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 generally vest 25% at one year
from the vesting commencement date and an additional 1/48 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 Board of
Directors may terminate the 2007 Plan at any time at its discretion.
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.
As
of June 30, 2008, 1,215 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 stockholders
approved, the 2007 Employee Stock Purchase Plan (the 2007 Purchase Plan). As of June 30, 2008, the Company has reserved
an aggregate of 957 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 the 2007 Purchase 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.
As of June 30, 2008, 827 shares were available for future grants 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). The Inducement Plan did not require the approval of the Companys stockholders.
The Company has reserved 600 shares of its common stock for grant and issuance under the Inducement
Plan. 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. The Inducement Plan does not
provide the Board of Directors the ability to grant restricted stock awards, stock appreciation
rights, restricted stock units, performance shares and stock bonuses.
As of June 30, 2008, 133 shares were available for future grants under the 2008 Inducement
Plan.
22
Stock Option Activity
The following table summarizes the Companys stock option activity for the six months ended
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Available |
|
|
Number of |
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
for |
|
|
Options |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Grant |
|
|
Outstanding |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
Balances, December 31, 2007 |
|
|
817 |
|
|
|
4,036 |
|
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
Additional Authorized |
|
|
1,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
(1,364 |
) |
|
|
1,364 |
|
|
|
4.69 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
(156 |
) |
|
|
1.02 |
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired |
|
|
424 |
|
|
|
(424 |
) |
|
|
7.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2008 |
|
|
1,348 |
|
|
|
4,820 |
|
|
$ |
6.28 |
|
|
|
5.92 |
|
|
$ |
2,822 |
|
Options vested and expected to vest at June 30, 2008 |
|
|
|
|
|
|
4,284 |
|
|
$ |
6.25 |
|
|
|
5.87 |
|
|
$ |
2,741 |
|
Options exercisable at June 30, 2008 |
|
|
|
|
|
|
1,721 |
|
|
$ |
5.57 |
|
|
|
5.07 |
|
|
$ |
2,257 |
|
The aggregate intrinsic value in the preceding table is calculated as the difference between
the exercise price of the underlying awards and the quoted closing price of the Companys common
stock of $4.83 per share as of June 30, 2008. During the six months ended June 30, 2008, the
aggregate intrinsic value of options exercised under the Companys stock option plans was $53. As
of June 30, 2008, the Company had $8,575 of total unrecognized compensation expense under SFAS No.
123R, net of estimated forfeitures, which will be recognized over a weighted average period of 2.85
years. As permitted by SFAS No. 123R, the Company has deferred the recognition of its excess tax
benefit from non-qualified stock option exercises.
The Company adopted SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
2.91 |
% |
|
|
4.77 |
% |
|
|
2.63 |
% |
|
|
4.71 |
% |
Expected term (years) |
|
|
4.08 |
|
|
|
6.08 |
|
|
|
4.08 |
|
|
|
6.08 |
|
Expected volatility |
|
|
44.1 |
% |
|
|
57.5 |
% |
|
|
44.2 |
% |
|
|
58.4 |
% |
The Company based expected volatility on 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.
SFAS No. 123R requires nonpublic companies that used the minimum value method under SFAS No.
123 to apply the prospective transition method of SFAS No. 123R. Prior to adoption of SFAS No.
123R, the Company used the minimum value method, and it therefore has not restated its financial
results for prior periods. Under the prospective method, stock-based compensation expense for the
year ended December 31, 2006 and the three months ended March 31, 2007 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 SFAS No. 123R, (ii) unmodified
awards granted prior to but not vested as of December 31, 2005 accounted for under APB No. 25 and
(iii) awards outstanding as of December 31, 2005 that were modified after the adoption of SFAS No.
123R.
The Company calculated employee stock-based compensation expense recognized in the three
months ended March 31, 2007 based on awards ultimately expected to vest and reduced it for
estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
23
The following table summarizes the consolidated stock-based compensation expense by line items
in the consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Research and development |
|
$ |
174 |
|
|
$ |
259 |
|
|
$ |
250 |
|
|
$ |
354 |
|
Sales and marketing |
|
|
1,303 |
|
|
|
178 |
|
|
|
2,605 |
|
|
|
274 |
|
General and administrative |
|
|
554 |
|
|
|
571 |
|
|
|
1,148 |
|
|
|
987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,031 |
|
|
$ |
1,008 |
|
|
$ |
4,003 |
|
|
$ |
1,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net cash proceeds from option exercises were $158 and $98 for the six months
ended June 30, 2008 and 2007, respectively. The Company realized no income tax benefit from stock
option exercises during the three months ended June 30, 2008 or 2007. 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.
During the six months ended June 30, 2007, the Company modified one option agreement. The
modifications involved the acceleration of the vesting of one grant totaling 1 share of common
stock. The Company recorded a charge of $5 in connection with this modification during the six
months ended June 30, 2007. The Company did not have any stock option modifications during the
three or six months ended June 30, 2008.
Restricted Stock
During the six months ended June 30, 2007, the Company granted 4 shares of restricted stock to
a director of the Company who had elected to receive restricted stock in lieu of an option grant.
The restricted stock vest as to 50% of the shares after six months and thereafter will vest pro
rata monthly for the next six months. The Company did not grant any restricted stock during the
three or six months ended June 30, 2008.
Note 11 Income Taxes
The Company recorded an income tax provision of $213 and $313 for the three months ended June
30, 2008 and 2007, respectively. The Company recorded an income tax provision of $1,343 and $585
for the six months ended June 30, 2008 and 2007, respectively. The income tax rates vary from the
Federal and State statutory rates due to the valuation allowances on our net operating losses,
foreign tax rate differences, and withholding taxes.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Tax (FIN 48). The total amount of unrecognized tax benefits
as of the date of adoption was $575 and $2,208 as of December 31, 2007 and $2,290 as of June 30,
2008. As of June 30, 2008, approximately $129 of unrecognized tax benefits, if recognized, would
impact our effective tax rate. The remaining balance, if recognized, would adjust our goodwill from
acquisitions or would adjust our deferred tax assets which are subject to a valuation allowance.
The Companys policy is to recognize interest and penalties related to unrecognized tax
benefits in income tax expense. The Company recorded $47 and $73 of interest on uncertain tax
positions during the three and six months ended June 30, 2008. As of June 30, 2008, the Company had
a liability of $2,923 related to interest and penalties for uncertain tax positions.
The Company is subject to taxation in the U.S. and various foreign jurisdictions. The material
jurisdictions subject to examination by tax authorities are primarily the U.S., California, United
Kingdom and the Peoples Republic of China (PRC). 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 2005 tax return in the United Kingdom will close in 2008.
The Companys PRC tax returns are open by statute for tax years 2002 and forward.
Note 12 Segment Reporting
Statement of Financial Accounting Statements No. 131, Disclosures about Segments of an
Enterprise and Related Information, 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 performance.
24
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.
The Company generates its revenues in the following geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States of America (USA) |
|
$ |
11,166 |
|
|
$ |
8,750 |
|
|
$ |
20,674 |
|
|
$ |
17,188 |
|
United Kingdom |
|
|
1,364 |
|
|
|
1,764 |
|
|
|
2,977 |
|
|
|
3,449 |
|
China |
|
|
3,254 |
|
|
|
12 |
|
|
|
5,043 |
|
|
|
26 |
|
Americas, excluding USA |
|
|
2,232 |
|
|
|
1,037 |
|
|
|
4,086 |
|
|
|
2,082 |
|
EMEA, excluding the United Kingdom |
|
|
4,877 |
|
|
|
4,073 |
|
|
|
9,956 |
|
|
|
7,524 |
|
Other |
|
|
811 |
|
|
|
741 |
|
|
|
1,560 |
|
|
|
1,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,704 |
|
|
$ |
16,377 |
|
|
$ |
44,296 |
|
|
$ |
32,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Americas |
|
$ |
4,183 |
|
|
$ |
1,806 |
|
EMEA |
|
|
1,072 |
|
|
|
1,146 |
|
APAC |
|
|
962 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
$ |
6,217 |
|
|
$ |
3,817 |
|
|
|
|
|
|
|
|
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Factors That May Affect Future Results
Our Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
should be read in conjunction with the unaudited condensed consolidated financial statements and
the related notes thereto included elsewhere in this report and the audited consolidated financial
statements and notes thereto and managements discussion and analysis of financial condition and
results of operations for the year ended December 31, 2007 included in the Annual Report on Form
10-K filed with the Securities and Exchange Commission, or SEC, on March 31, 2008. This report
contains forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. These statements are often identified by the use of words such as may,
will, expect, believe, anticipate, intend, could, estimate, or continue, and
similar expressions or variations. In this report, forward-looking statements include, without
limitation, the following:
|
|
our expectations and beliefs regarding future conduct and growth of the business; |
|
|
our beliefs regarding trends for our businesses; |
|
|
the assumptions underlying our Critical Accounting Policies and Estimates, including stock
volatility and other assumptions used to estimate the fair value of share-based compensation; |
|
|
our expectations regarding the costs and other effects of our acquisitions; |
|
|
our assessments and estimates that determine our effective tax rate and valuation
allowance; |
|
|
our expected cash, cash equivalents and short-term investments balance at December 31,
2008; |
|
|
our anticipation that in the future, our primary sources of liquidity will be cash
generated from our operating activities; |
|
|
our belief that the international financial institutions
that hold our investments are financially sound; and |
|
|
our belief that our cash, cash equivalents and investments will be sufficient to meet our
working capital needs, capital expenditure requirements and similar commitments for at least
the next 12 months. |
Such forward-looking statements are subject to risks, uncertainties and other factors that could
cause actual results and the timing of certain events to differ materially from future results
expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those identified below, and those discussed in
the section titled Risk Factors, set forth in Part II, Item 1A of this Form 10-Q. We disclaim any
obligation to update any forward-looking statements to reflect events or circumstances after the
date of this report or to conform these forward-looking statements to actual results.
Our MD&A includes the following sections:
|
|
overview that discusses at a high level our operating results and some of the trends that
affect our business; |
|
|
significant changes since our most recent Annual Report on Form 10-K in the Critical
Accounting Policies and Estimates that we believe are important to understanding the
assumptions and judgments underlying our financial statements; |
|
|
the Recent Accounting Pronouncements that apply to us; |
|
|
our Results of Operations, including a more detailed discussion of our revenue 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. |
26
Overview
About Glu Mobile
Glu Mobile is a leading global publisher of mobile games. We have developed and published a
portfolio of casual and traditional games to appeal to a broad cross section of the subscribers
served by our wireless carriers and other distributors. We create games and related applications
based on third-party licensed brands and other intellectual property, as well as on our own
original brands and intellectual property. Our games based on licensed intellectual property
include Call of Duty 4, Deer Hunter 2, Diner Dash 2, Sonic the Hedgehog, Transformers, World Series
of Poker and Zuma. Our games based on our own intellectual property include Brain Genius, Space
Monkey, Stranded and Super K.O. Boxing.
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 $38.9 million,
consisting of cash consideration of $36.8 and transaction costs of
$2.1 million.
In December 2007, we acquired MIG to accelerate our presence in China, to deepen our
relationship with China Mobile, the largest wireless carrier in China, to acquire access and rights
to leading franchises for the Chinese market, and to augment our internal production and publishing
resources with a studio in China. We purchased all of MIGs then outstanding shares for a total
purchase price of $15.2 million, consisting of cash consideration to MIG shareholders of $14.7
million and transaction costs of $573,000. In addition, subject to MIGs achieving revenue and
operating income milestones for fiscal 2008, we agreed to pay up to $20.0 million in additional
consideration to MIG shareholders, payable up to 30% in Glu stock and 70% in cash, and up to $5.0
million of bonuses, payable entirely in stock, to two officers of MIG. Given MIGs performance
during the first six months of fiscal 2008, we expect that we will be required to make these
earnout payments.
In March 2007, we completed our initial public offering, or IPO, of common stock in which we
sold and issued 7,300,000 shares of common stock at a price of $11.50 per share to the public. We
raised a total of $84.0 million in gross proceeds from the IPO, or approximately $74.8 million in
net proceeds after deducting underwriting discounts and commissions of $5.9 million and other
offering costs of $3.3 million. Upon the closing of the IPO, all shares of redeemable convertible
preferred stock outstanding automatically converted into 15.7 million shares of common stock.
Financial Results and Trends
Revenues for the three months ended June 30, 2008 were $23.7 million, a 44.7% increase from
$16.4 million in the three months ended June 30, 2007. Revenues for the six months ended June 30,
2008 were $44.3 million, a 38.1% increase from $32.1 million in the six months ended June 30, 2007.
The revenue growth in both periods was due primarily to revenues from MIG and Superscape in the
2008 periods, for which we recorded no revenues in the comparable 2007 periods. The revenue growth
not attributable to the MIG and Superscape acquisitions was primarily attributable to the increase
in the numbers of units of games sold. In the three months ended June 30, 2008, two carriers
represented 10% or more of revenues, Verizon Wireless (21.9%) and China Mobile (13.7%), and in the
three months ended June 30, 2007 only one carrier represented 10% or more of revenues, Verizon
Wireless (23.6%). In the six months ended June 30, 2008, two carriers represented 10% or more of
revenues, Verizon Wireless (21.2%) and China Mobile (11.3%), and in the six months ended June 30,
2007, two carriers also represented 10% or more of revenues, Verizon Wireless (22.7%) and Vodafone
(10.5%). In the six months ended June 30, 2008, no title represented 10% or more of revenues,
compared to the six months ended June 30, 2007, in which one title, Monopoly Here & Now, which we
no longer distribute, represented 10% or more of revenues. No title represented 10% or more of
revenues during the three months ended June 30, 2008 and 2007.
Our revenue growth rate will continue to depend significantly on continued growth in the
mobile game market and our ability to continue to attract new end users in that market, purchases
of new mobile handsets, unanticipated governmental
activities in certain international markets and the overall strength
of the economy, particularly in the U.S. In addition, our revenue growth rate may be adversely impacted by decisions by our carriers to
alter their customer terms for downloading our games. For example, Verizon Wireless, our
largest carrier, recently began imposing 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 factors, including our relationships with our carriers and
licensors. Even if mobile games based on licensed content or brands remain popular, any of our
licensors could decide not to renew our existing license or not to license additional intellectual
property to us and instead license to our competitors or develop and publish their own mobile games
or other applications, competing with us in the marketplace. The loss of any key relationships with
our carriers or licensors could impact our revenues in the future.
27
Our total operating expenses for the three months ended June 30, 2008 were $21.2 million, a
62.8% increase over $13.0 million in the three months ended June 30, 2007. Our total operating
expenses for the six months ended June 30, 2008 were $40.1 million, a 68.1% increase over $23.9
million in the six months ended June 30, 2007. The increase in both periods was due primarily to
expenses associated with MIG and Superscape (including charges associated with the acquisitions) in
the 2008 periods, for which we recorded no expenses in the comparable 2007 periods, and
additionally due to increased headcount and related expenses as we added personnel to support our
growth. As of June 30, 2008, we had approximately 600 employees. In addition, we expect that our
expenses to develop and port games for new mobile platforms will increase as we enhance our
existing titles and develop new titles to take advantage of the additional functionality offered by
these platforms.
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
expenses is personnel costs, which consist of salaries, benefits and incentive compensation,
including bonuses and stock-based compensation, for our employees.
Cash, cash equivalents and short-term investments at June 30, 2008 totaled $25.7 million, a
decrease of $34.2 million from December 31, 2007, primarily due to cash paid in March 2008 for the
Superscape acquisition. Included in our $25.7 million of cash, cash equivalents and short-term
investments is $1.5 million of auction-rate securities whose auctions continue to fail and
deteriorate in fair value. We expect that our cash, cash equivalents and short-term investments
balance at December 31, 2008 will be between $22.0 million and $24.0 million.
Critical Accounting Policies and Estimates
There have been no significant changes in our Critical Accounting Policies and Estimates
during the six months ended June 30, 2008 as compared to the Critical Accounting Policies and
Estimates disclosed in Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Recent Accounting Pronouncements
Information with respect to Recent Accounting Pronouncements may be found in Note 1 of Notes
to Unaudited Condensed Consolidated Financial Statements in this quarterly report, which
information is incorporated herein by reference.
Results of Operations
Comparison of the Three Months Ended June 30, 2008 and 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(in thousands) |
Revenues |
|
$ |
23,704 |
|
|
$ |
16,377 |
|
Our revenues increased $7.3 million, or 44.7%, from $16.4 million for the three months ended
June 30, 2007 to $23.7 million for the three months ended June 30, 2008, due primarily to revenues
from MIG and Superscape, our growing catalog of titles and broader distribution reach in our
international markets, particularly in China, Latin American and parts of Europe. The increase also
resulted from sales of new titles (defined as games that have been in release for twelve months or
less) including Call of Duty 4, Diner Dash 2 and Who Wants to be a Millionaire 3. No revenues from
MIG or Superscape titles were recorded during the three months ended June 30, 2007 compared to a
total of $6.7 million in revenues recorded during the three months ended June 30, 2008.
International revenues (defined as revenues generated from carriers whose principal operations are
located outside the United States) increased by $4.9 million, from $7.6 million in the three months
ended June 30, 2007 to $12.5 million in the three months ended June 30, 2008. The increase in
international revenues was primarily a result of increased sales in China and other developing
markets, including Latin America. Additionally, revenues from carriers located in the United
States increased $2.4 million from $8.8 million in the three months ended June 30, 2007 to $11.2
million in the three months ended June 30, 2008 primarily as a result of sales from Superscape.
Finally, as the result of the transition to accrual accounting for China Mobile, we recognized
additional revenues of $697,000 from China Mobile during the June 30, 2008 quarter, which we
otherwise would have recognized during the September 30, 2008 quarter.
28
The year over year increases in revenues were negatively impacted by a decrease in sales of
$1.9 million related to Hasbro titles related that we no longer have the rights to distribute.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
Royalties |
|
$ |
5,633 |
|
|
$ |
4,388 |
|
Amortization of intangible assets |
|
|
3,135 |
|
|
|
553 |
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
8,768 |
|
|
$ |
4,941 |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
23,704 |
|
|
$ |
16,377 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
63.0 |
% |
|
|
69.8 |
% |
Our cost of revenues increased $3.8 million, or 77.5%, from $4.9 million in the three months
ended June 30, 2007 to $8.8 million in the three months ended June 30, 2008. The increase resulted
from an increase in royalties of $1.2 million and an increase in amortization of acquired
intangible assets of $2.6 million due primarily to the amortization of intangible assets acquired
in December 2007 from MIG and March 2008 from Superscape. Royalties, including impairment of
prepaid royalties and guarantees, increased $1.2 million principally due to the absolute dollar
increase in revenues with associated royalties and due to a $234,000 impairment of certain royalty
guarantees. Revenues attributable to games based upon branded intellectual property decreased as a
percentage of revenues from 88.2% in the three months ended June 30, 2007 to 72.4% in the three
months ended June 30, 2008, primarily due to sales of games developed by MIG and Superscape based
on their respective original intellectual property. The average royalty rate that we paid on games
based on licensed intellectual property increased from 30.4% in the three months ended June 30,
2007 to 32.8% in the three months ended June 30, 2008 due to increased sales of titles with higher
royalty rates. Although we had an increase in the average royalty rate from branded titles,
overall royalties, including impairment of prepaid royalties and guarantees, as a percentage of
total revenues decreased from 26.8% to 23.8% due to the increase in revenue from games based on our
intellectual property, especially sales of MIG and Superscape titles.
Gross Margin
Our gross margin decreased from 69.8% in the three months ended June 30, 2007 to 63.0% in the
three months ended June 30, 2008 primarily because of the increase in the amortization of
intangible assets.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Research and development expenses |
|
$ |
8,861 |
|
|
$ |
5,577 |
|
Percentage of revenues |
|
|
37.4 |
% |
|
|
34.1 |
% |
Our research and development expenses increased $3.3 million, or 58.9%, from $5.6 million in
the three months ended June 30, 2007 to $8.9 million in the three months ended June 30, 2008. The
increase in research and development costs was primarily due to increases in salaries and benefits
of $2.1 million, facility and overhead costs to support our increased headcount of $758,000,
outside services costs for porting and external development of $200,000, and travel and
entertainment costs to manage our international studios of $174,000.
Research and development staff increased by 261 employees to a total of 444 at June 30, 2008
as compared to the same period in 2007, and salaries and benefits increased as a result. This
growth in headcount was due primarily to the opening of our development studio in Beijing, China
during 2007, the addition of a studio in Hefei, China as result of the MIG acquisition and the
addition of the development studio in Moscow, Russia as a result of the Superscape acquisition.
Research and development expenses included $259,000 of stock-based compensation expense in the
three months ended June 30, 2007 and $174,000 in the three
months ended June 30, 2008. As a
percentage of revenues, research and development expenses increased from 34.1% in the three months
ended June 30,
2007 to 37.4% in the three months ended June 30, 2008 due to the increase in headcount
resulting from the addition of the China and Russia studios.
29
Sales and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Sales and marketing expenses |
|
$ |
6,042 |
|
|
$ |
3,131 |
|
Percentage of revenues |
|
|
25.5 |
% |
|
|
19.1 |
% |
Our sales and marketing expenses increased $2.9 million, or 93.0%, from $3.1 million in the
three months ended June 30, 2007 to $6.0 million in the three months ended June 30, 2008. The
increase was primarily due to an increase in salaries and benefits of $844,000, as we grew our
sales and marketing headcount from 49 at June 30, 2007 to 76 at June 30, 2008, a $1.1 million
increase in stock-based compensation due primarily to the quarterly accrual related to the MIG
stock-based compensation earnout, a $622,000 increase due to the quarterly cash-based component of
the MIG earnout and a $198,000 increase in allocated facility costs to support our increased
headcount. We recorded the stock and cash-based compensation related to the MIG earnout, as we
believe the financial metrics stipulated in the purchase agreement will be attained given the
current quarters performance. We increased staffing and marketing program spending to expand our
marketing efforts for our games and the Glu brand, to increase sales efforts to our new and
existing wireless carriers and to expand our sales and marketing operations into the Asia-Pacific
and Latin America regions. As a percentage of revenues, sales and marketing expenses increased from
19.1% in the three months ended June 30, 2007 to 25.5% in the three months ended June 30, 2008
primarily due to the accrual of the MIG cash and stock-based earnout. Sales and marketing expenses
included $178,000 of stock-based compensation expense in the three months ended June 30, 2007 and
$1.3 million in the three months ended June 30, 2008.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
General and administrative expenses |
|
$ |
6,096 |
|
|
$ |
4,263 |
|
Percentage of revenues |
|
|
25.7 |
% |
|
|
26.0 |
% |
Our general and administrative expenses increased $1.8 million, or 43.0%, from $4.3 million in
the three months ended June 30, 2007 to $6.1 million in the three months ended June 30, 2008. The
increase in general and administrative expenses was primarily the result of a $782,000 increase in
professional fees for our implementation of Section 404 under Sarbanes-Oxley and for various
recruiting services, a $419,000 increase in salaries and benefits, a $321,000 increase in business
and franchise taxes related to our expanded operations in Brazil and China and an increase in
facility and overhead costs of $160,000 to support our increased headcount. We increased our
general and administrative headcount from 49 at June 30, 2007 to 84 at June 30, 2008. As a
percentage of revenues, general and administrative expenses decreased slightly from 26.0% in the
three months ended June 30, 2007 to 25.7% in the three months ended June 30, 2008 as a result of
increased revenues. General and administrative expenses included $571,000 of stock-based
compensation expense in the three months ended June 30, 2007 and $554,000 in the three months ended
June 30, 2008. We expect to incur additional general and administrative expenses in 2008 as we
comply with Section 404 of the Sarbanes-Oxley Act.
Other Operating Expenses
Our amortization of intangible assets, such as non-competition agreements, acquired from
Macrospace and iFone was $67,000 in the three months ended June 30, 2007 and $69,000 in the three
months ended June 30, 2008.
Our acquired in-process research and development increased from zero in the three months ended
June 30, 2007 to $71,000 in the three months ended June 30, 2008. The IPR&D charge recorded in 2008
was related to the development of new games by Superscape. 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. We determined the value of acquired IPR&D using a discounted-cash flows approach and a
discount rate of 20%. This rate took into account the percentage of completion of the development
effort for each title and the risks associated with our
developing technology given changes in trends and technology in our industry. Revenues from
these titles will be generated in the months subsequent to their completion in the third and fourth
quarters of 2008.
30
Our restructuring charge increased from zero during the three months ended June 30, 2007 to
$86,000 during the three months ended June 30, 2008 as we
undertook activities to terminate a small number of employees in our Hong Kong office. The resulting restructuring charge principally consisted of
costs associated with employee termination benefits that will be paid in the third quarter of 2008.
Other Expenses
Interest and other income/(expense), net, decreased from a net income of $1.0 million during
the three months ended June 30, 2007 to a net expense of $94,000 in the three months ended June 30,
2008. This change was primarily due to a decrease in interest income of $770,000 resulting from
lower cash balances as a result of the MIG and Superscape acquisitions and a write-down of our two
remaining failed auction-rate securities of $235,000. We expect interest income to decrease in 2008
as a result of lower cash balances due to our use of cash for our acquisitions of MIG and
Superscape and the lower interest rates we expect on our investments.
Income Tax Provision
Income tax provision decreased from $313,000 in the three months ended Junes 30, 2007 to
$213,000 in the three months ended June 30, 2008 primarily as a result of decreased taxes on income
in certain foreign entities.
Comparison of the Six Months Ended June 30, 2008 and 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(in thousands) |
Revenues |
|
$ |
44,296 |
|
|
$ |
32,076 |
|
Our revenues increased $12.2 million, or 38.1%, from $32.1 million for the six months ended
June 30, 2007 to $44.3 million for the six months ended June 30, 2008, due primarily to revenues
from MIG and Superscape, our growing catalog of titles, broader international distribution reach
and increased unit sales of our games. No revenues from MIG or Superscape titles were recorded
during the six months ended June 30, 2007 compared to $9.3 million recorded during the six months
ended June 30, 2008. The increase also resulted from sales of new titles, defined as games that
have been in release for less than twelve months or less, including Call of Duty 4, Diner Dash 2
and Who Wants to be a Millionaire 3. International revenues increased $8.7 million from $14.9
million in the six months ended June 30, 2007 to $23.6 million in the six months ended June 30,
2008, primarily as a result of increased sales in APAC and other developing markets, including
Latin America.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Cost of revenues: |
|
|
|
|
|
|
|
|
Royalties |
|
$ |
11,123 |
|
|
$ |
8,681 |
|
Amortization of intangible assets |
|
|
4,842 |
|
|
|
1,106 |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
15,965 |
|
|
$ |
9,787 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
44,296 |
|
|
$ |
32,076 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
64.0 |
% |
|
|
69.5 |
% |
Our cost of revenues increased $6.2 million, or 63.1%, from $9.8 million in the six months
ended June 30, 2007 to $16.0 million in the six months ended June 30, 2008. The increase resulted
primarily from an increase in royalties and amortization of acquired intangible assets. Royalties,
including impairment of prepaid royalties and guarantees, increased $2.4 million principally due to
an increase in the absolute dollar of revenues with associated royalties. Revenues attributable to
games based upon branded intellectual property decreased as a percentage of revenues from 87.0% in
the six months ended June 30, 2007 to 76.1% in the six months ended
31
June 30, 2008 primarily due to the sales of games developed by MIG and Superscape based on
their respective intellectual property. The average royalty rate that we paid on games based on
licensed intellectual property increased from 30.8% in the six months ended June 30, 2007 to 33.0%
in the six months ended June 30, 2008. Although we had an increase in the average royalty rate from
branded titles, overall royalties, including impairment of prepaid royalties and guarantees, as a
percentage of total revenues decreased from 27.1% to 25.1% due to the increase in revenue from
games based on our intellectual property, especially sales of MIG and Superscape titles.
Amortization of intangible assets increased by $3.7 million due primarily to the amortization of
intangible assets acquired from MIG and Superscape.
Gross Margin
Our gross margin decreased from 69.5% in the six months ended June 30, 2007 to 64.0% in the
six months ended June 30, 2008 primarily because of the increase in the amortization of intangible
assets.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Research and development expenses |
|
$ |
15,381 |
|
|
$ |
10,290 |
|
Percentage of revenues |
|
|
34.7 |
% |
|
|
32.1 |
% |
Our research and development expenses increased $5.1 million, or 49.5%, from $10.3 million in
the six months ended June 30, 2007 to $15.4 million in the six months ended June 30, 2008. The
increase in research and development costs was primarily due to increases in salaries and benefits
of $3.2 million, facility and overhead costs to support the increased headcount of $1.4 million,
outside services costs for porting and external development of $384,000 and travel and
entertainment costs to manage our international studios of $230,000, offset by a decrease in
stock-based compensation of $104,000.
Research and development staff increased by 261 employees through June 30, 2008 as compared to
the same period in 2007 and salaries and benefits increased as a result. This growth in headcount
was due primarily to the opening of our development studio in Beijing, China during 2007, the
addition of a studio in Hefei, China as result of the MIG acquisition and the addition of the
development studio in Moscow, Russia as a result of the Superscape acquisition. Research and
development expenses included $354,000 of stock-based compensation expense in the six months ended
June 30, 2007 and $250,000 in the six months ended June 30, 2008. As a percentage of revenues,
research and development expenses increased from 32.1% in the six months ended June 30, 2007 to
34.7% in the six months ended June 30, 2008 due to the increase in headcount resulting from the
addition of the China and Russia studios.
Sales and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
|
|
|
|
Sales and marketing expenses |
|
$ |
11,824 |
|
|
$ |
6,206 |
|
Percentage of revenues |
|
|
26.7 |
% |
|
|
19.3 |
% |
Our sales and marketing expenses increased $5.6 million, or 90.5%, from $6.2 million in the
six months ended June 30, 2007 to $11.8 million in the six months ended June 30, 2008. The increase
was primarily due to an increase in salaries and benefits of $1.6 million as we grew our sales and
marketing headcount from 49 at June 30, 2007 to 76 at June 30, 2008, a $2.3 million increase in
stock-based compensation due primarily to the quarterly accrual related to the MIG stock-based
compensation earnout, $1.2 million increase due to the quarterly cash-based component of the MIG
earnout and a $464,000 increase in allocated facility costs to support our increased headcount. We
recorded the stock and cash-based compensation related to the MIG earnout as we believe the
financial metrics stipulated in the purchase agreement will be attained given the current quarters
performance. We increased staffing and marketing program spending to expand our marketing efforts
for our games and the Glu brand, to increase sales efforts to our new and existing wireless
carriers and to expand our sales and marketing operations into the Asia-Pacific and Latin America
regions. Aside from the increase in headcount in our sales and marketing functions, the increase in
salaries and benefits cost was due to an increase in
32
variable compensation of $215,000, primarily an increase in commissions and bonuses paid to
our sales employees as a result of higher revenues. As a percentage of revenues, sales and
marketing expenses increased from 19.3% in the six months ended June 30, 2007 to 26.7% in the six
months ended June 30, 2008 primarily due to the accrual of the MIG cash and stock-based earnout.
Sales and marketing expenses included $274,000 of stock-based compensation expense in the six
months ended June 30, 2007 and $2.6 million in the six months ended June 30, 2008.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
General and administrative expenses |
|
$ |
11,491 |
|
|
$ |
8,273 |
|
Percentage of revenues |
|
|
25.9 |
% |
|
|
25.8 |
% |
Our general and administrative expenses increased $3.2 million, or 38.9%, from $8.3 million in
the six months ended June 30, 2007 to $11.5 million in the six months ended June 30, 2008. The
increase in general and administrative expenses was primarily the result of a $1.1 million increase
in professional fees related to our accounting and tax integration of MIG and Superscape,
implementation of Section 404 under Sarbanes-Oxley and for recruiting services, a $645,000 increase
in salaries and benefits, a $565,000 increase in business and
franchise taxes related to our expanded operations in Brazil and China, an increase in
facility and overhead costs of $419,000 to support our increased headcount, a $161,000 increase in
stock-based compensation expense and a $142,000 increase in director and officer liability
insurance. We also increased our general and administrative headcount from 49 at June 30, 2007 to
84 at June 30, 2008. As a percentage of revenues, general and administrative expenses increased
slightly from 25.8% in the six months ended June 30, 2007 to 25.9% in the six months ended June 30,
2008. General and administrative expenses included $987,000 of stock-based compensation expense in
the six months ended June 30, 2007 and $1.1 million in the six months ended June 30, 2008. We
expect to incur additional general and administrative expenses in 2008 as we comply with Section
404 of the Sarbanes-Oxley Act.
Other Operating Expenses
Our amortization of intangible assets, such as non-competition agreements, acquired from
Macrospace and iFone was $133,000 in the six months ended June 30, 2007 and $137,000 in the six
months ended June 30, 2008.
Our acquired in-process research and development increased from zero in the six months ended
June 30, 2007 to $1.1 million in the six months ended June 30, 2008. The IPR&D charge recorded in
2008 was related to the development of new games by Superscape, as described above in the
comparison of other operating expenses for the June 30, 2007 and 2008 quarters.
Our restructuring charge increased from zero during the six months ended June 30, 2007 to
$161,000 during the six months ended June 30, 2008 as we undertook activities to terminate a small
number of employees in our Hong Kong office and relocate our France operations from Nice to Paris.
The resulting restructuring charges principally consisted of costs associated with employee
termination benefits that were or will be paid in the second and third quarters of 2008.
Our gain on sale of assets decreased from $1.0 million during the six months ended June 30,
2007 to zero during the six months ended June 30, 2008 due to the sale of ProvisionX software to a
third party in February 2007. Under the terms of the agreement, we will co-own the intellectual
property rights to the ProvisionX software, excluding any alterations or modifications following
the sale, by the third party.
Other Expenses
Interest and other income/(expense), net, increased from a net income of $496,000 during the
six months ended June 30, 2007 to a net income of $515,000 in the six months ended June 30, 2008.
This change was primarily due to a decrease in interest expense of $835,000 and an increase in
foreign currency gains of $35,000 and gains on the sale of fixed assets of $37,000, offset by a
decrease in interest income of $408,000 due to lower cash balances resulting from our acquisitions
of MIG and Superscape and by additional write-downs of our two remaining failed auction-rate
securities of $470,000. We expect interest income to decrease in 2008 as a result of lower cash
balances due to our use of cash for our acquisitions of MIG and Superscape and the lower interest
rates we expect on our investments.
33
Income Tax Provision
Income tax provision increased from $585,000 in the six months ended June 30, 2007 to $1.3
million in the six months ended June 30, 2008 primarily as a result of increased foreign
withholding taxes resulting from increased sales in countries with withholding tax requirements and
taxes on income in certain foreign entities.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
|
|
(in thousands) |
Consolidated Statement of Cash Flows Data: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
3,357 |
|
|
$ |
1,302 |
|
Depreciation and amortization |
|
|
6,411 |
|
|
|
2,165 |
|
Cash flows provided by operating activities |
|
|
99 |
|
|
|
14 |
|
Cash flows provided used in investing activities |
|
|
(34,058 |
) |
|
|
(53,412 |
) |
Cash flows provided by financing activities |
|
|
259 |
|
|
|
62,802 |
|
Since our inception, we have incurred recurring losses and negative annual cash flows from
operating activities, and we had an accumulated deficit of $65.0 million and $52.4 million as of
June 30, 2008 and December 31, 2007, respectively. Our primary sources of liquidity have
historically been private placements of shares of our preferred stock with aggregate proceeds of
$57.4 million and borrowings under our credit facilities with aggregate proceeds of $12.0 million.
In the quarter ended March 31, 2007, we raised $74.8 million of proceeds, net of underwriting
discounts and estimated expenses, in our IPO. In the future, we anticipate that our primary
sources of liquidity will be cash generated from our operating activities.
Operating Activities
In the six months ended June 30, 2008, net cash provided by operating activities was $99,000
as compared to cash provided by operating activities of $14,000 in the six months ended June 30,
2007. This change was primarily due to decreases in accounts receivable of $1.3 million and
increases in other long-term liabilities of $1.7 million and accrued compensation of $1.2 million
offset by an increase of $1.9 million in prepaid royalties and
decreases of $543,000 in
accounts payable and $1.6 million in accrued restructuring primarily related to Superscape employee
termination payments.
We may decide to enter into new licensing arrangements for existing or new licensed
intellectual properties that may require us to make royalty payments at the outset of the
agreement. If we do sign these agreements, this could significantly increase our future use of cash
used in operating activities.
Investing Activities
In the six months ended June 30, 2008 we used $34.1 million of cash for investing activities.
This net cash usage resulted from the acquisition of Superscape net of cash acquired, of $30.0
million, additional cash payments of $693,000 for professional fees related to the acquisition of
MIG and purchases of property and equipment of $3.4 million primarily related to moving our
corporate headquarters.
In the six months ended June 30, 2007 we used $53.4 million of cash for investing activities.
This cash usage resulted from net purchases of short-term investments of $53.2 million and the
purchase of property and equipment of $1.3 million offset by $1.0 million of proceeds from the sale
of assets.
Financing Activities
In the six months ended June 30, 2008, net cash provided by financing activities was $259,000,
substantially all of which came from the proceeds from the exercise of stock options and warrants.
In the six months ended June 30, 2007, our financing activities provided $62.8 million of cash
primarily from $74.8 million of IPO proceeds net of underwriters fees and offering costs offset by
$12.0 million to pay off an outstanding loan.
34
Sufficiency of Current Cash, Cash Equivalents and Short-Term Investments
Our cash, cash equivalents and short-term investments were $25.7 million as of June 30, 2008.
We believe that our cash, cash equivalents and short-term investments and any cash flow from
operations will be sufficient to meet our anticipated cash needs, including for working capital
purposes, capital expenditures and various contractual obligations, for at least the next 12
months. We may, however, require additional cash resources due to changed business conditions or
other future developments, including any investments or acquisitions we may decide to pursue. If
these sources are insufficient to satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to draw down on our $8.0 million credit facility. The
sale of convertible debt securities or additional equity securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in debt service
obligations and could result in operating and financial covenants that would restrict our
operations. In addition, there can be no assurance that any additional financing will be available
on acceptable terms, if at all. We anticipate that, from time to time, we may evaluate acquisitions
of complementary businesses, technologies or assets. However, there are no current material
understandings, commitments or agreements with respect to any acquisitions.
Contractual Obligations
The following table is a summary of our contractual obligations as of June 30, 2008:
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Payments Due by Period |
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|
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|
|
|
Less than |
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|
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|
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|
|
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Total |
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1 Year |
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|
1-3 Years |
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|
3-5 Years |
|
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Thereafter |
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|
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(In thousands) |
|
Operating lease obligations, net of sublease income |
|
$ |
12,055 |
|
|
$ |
2,216 |
|
|
$ |
6,445 |
|
|
$ |
3,394 |
|
|
$ |
|
|
Guaranteed royalties(1) |
|
|
17,129 |
|
|
|
7,336 |
|
|
|
9,018 |
|
|
|
775 |
|
|
|
|
|
FIN 48 obligations, including interest and penalties(2) |
|
|
4,294 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,294 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
$ |
33,478 |
|
|
$ |
9,552 |
|
|
$ |
15,463 |
|
|
$ |
4,169 |
|
|
$ |
4,294 |
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(1) |
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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. Some of these agreements require us to pay guaranteed
royalties over the term of the contracts regardless of actual game sales. Certain of these
minimum payments totaling $11.3 million have been recorded as liabilities on our consolidated
balance sheet because payment is not contingent upon performance by the licensor. |
|
(2) |
|
As of June 30, 2008, unrecognized tax benefits and potential interest and penalties are
classified within Other long-term liabilities on our consolidated balance sheet. As of June
30, 2008, the settlement of our income tax liabilities cannot be determined, however, the
liabilities are not expected to become due within the next twelve months. |
Additionally, we may be obligated to pay up to $20.0 million of additional consideration to
the MIG shareholders, payable up to 30% in Glu stock and 70% in cash, and up to $5.0 million of
bonuses, payable entirely in Glu stock, to two officers of MIG if certain financial milestones are
achieved in 2008.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we
have not entered into any synthetic leases. We are, therefore, not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Credit Risk
We have exposure to interest rate risk that relates primarily to our investment portfolio. All
of our current investments are classified as cash equivalents or short-term investments. We do not
currently use or plan to use derivative financial instruments in our investment portfolio. The risk
associated with fluctuating interest rates is limited to our investment portfolio, and we do not
believe that a 10% change in interest rates would have a significant impact on our interest income,
operating results or liquidity.
As of June 30, 2008, we had $2.8 million of principal invested in auction-rate securities, all
of which were rated AAA at the time of purchase but were downgraded to A in July 2008. Auction-rate
securities are long-term variable rate bonds tied to short-term interest rates. After the initial
issuance of the securities, the interest rate on the securities is reset periodically, at intervals
established at the time of issuance (e.g., every seven, 28, or 35 days; every six months; etc.),
based on market demand for a reset period. The stated or contractual maturities for these
securities, however, generally are 20 to 30 years. Auction-rate securities are bought and sold in
the marketplace through a competitive bidding process often referred to as a Dutch auction. If
there is insufficient interest in the securities at the time of an auction, the auction may not be
completed and the rates may be reset to predetermined penalty or maximum rates. The monthly
auctions historically have provided a liquid market for these securities. Following a failed
auction, we would not be able to access our funds that are invested in the corresponding
auction-rate securities until a future auction of these investments is successful or new buyers
express interest in purchasing these securities in between reset dates.
Given the current negative liquidity conditions in the global credit and capital markets, the
auction-rate securities held by us at June 30, 2008 have experienced multiple failed auctions as
the amount of securities submitted for sale has exceeded the amount of purchase orders. The
underlying assets of our auction-rate securities are corporate bonds. If the underlying issuers are
unable to successfully clear future auctions or if their credit rating deteriorates and the
deterioration is deemed to be other-than-temporary, we would be required to adjust the carrying
value of the auction-rate securities through an impairment charge to earnings. Any of these events
could materially affect our results of operations and our financial condition. For example, in the
fourth quarter of 2007, we recorded a pre-tax impairment charge of $806,000, and during the six
months ended June 30, 2008, we recorded an additional pre-tax impairment charge of $470,000
reflecting the decrease in estimated value of our auction-rate securities as of June 30, 2008 that
were determined to be other-than-temporary as a result of two failed auctions.
As of June 30, 2008, the contractual maturities of our remaining two auction-rate securities
were 2017. Although we may not have the ability to liquidate these investments within one year of
the balance sheet date, we may need to sell the securities within the next year to fund operations.
Accordingly, the investments were classified as current assets on the consolidated balance sheets.
The credit and capital markets have continued to deteriorate in 2008. If uncertainties in
these markets continue, these markets deteriorate further or we experience any additional ratings
downgrades on any investments in its portfolio (including on auction-rate securities), we may incur
additional impairments to our investment portfolio, which could negatively affect our financial
condition, cash flow and reported earnings.
As of June 30, 2008, our cash and cash equivalents were maintained by financial institutions
in the United States, the United Kingdom, Brazil, Chile, China, France, Germany, Hong Kong, Italy,
Russia and Spain and our current deposits are likely in excess of insured limits. We believe that
the financial institutions that hold our investments are financially sound and, accordingly,
minimal credit risk exists with respect to these investments. Also, there are currency and other
regulations that may restrict our ability to transfer cash held in
international financial institutions for use in other operations; compliance
with these requirements may not be achieved quickly and may also
result in measurable costs.
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. As of June 30, 2008, Verizon Wireless accounted for
24.5% of our total accounts receivable, and no other carrier represented more than 10% of our total
accounts receivable. As of December 31, 2007, Verizon Wireless accounted for 23.5% of our total
accounts receivable, and no other carrier represented more than 10% of our total accounts
receivable.
Foreign Currency Exchange Risk
The functional currencies of our United States and United Kingdom operations are the United
States Dollar, or USD, and the pound sterling, respectively. A significant portion of our business
is conducted in currencies other than the USD or the pound sterling.
36
Our revenues are usually denominated in the functional currency of the carrier. Operating
expenses are usually in the local currency of the operating unit, which mitigates a portion of the
exposure related to currency fluctuations. Intercompany transactions between our domestic and
foreign operations are denominated in either the USD or the pound sterling. 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.
Our foreign currency exchange gains and losses have been generated primarily from fluctuations
in the pound sterling versus the USD and in the Euro versus the pound sterling. It is uncertain
whether these currency trends will continue. In the future, we may experience foreign currency
exchange losses on our accounts receivable and intercompany receivables and payables. Foreign
currency exchange 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 out
ability to react to foreign currency devaluations.
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934, or the Exchange Act, require public
companies, including us, to establish and maintain disclosure controls and procedures, which are
defined to mean a companys controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the
Commissions rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is accumulated and communicated to management, including our principal
executive officer and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required or necessary disclosures. Our chief
executive officer and chief financial officer have concluded, based on the evaluation of the
effectiveness of the disclosure controls and procedures by our management as of the end of the
period covered by this report, that our disclosure controls and procedures were effective for this
purpose.
Changes in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies, including us, to evaluate any
change in our internal control over financial reporting as such term is defined in Rule 13a-15(f)
and Rule 15d-15(f) of the Exchange Act. In connection with their evaluation of our disclosure
controls and procedures as of the end of the period covered by this report, our chief executive
officer and chief financial officer did not identify any change in our internal control over
financial reporting during the fiscal quarter covered by this report that materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
At the end of fiscal 2008, Section 404 of the Sarbanes-Oxley Act will require our management
to provide an assessment of the effectiveness of our internal control over financial reporting. We
are in the process of performing the system and process documentation, evaluation and testing
required for management to make this assessment and for our independent auditors to provide its
attestation report. We have not completed this process or its assessment, and this process will
require significant amounts of management time and resources. In the course of evaluation and
testing, management may identify deficiencies that will need to be addressed and remediated.
37
PART II. OTHER INFORMATION
ITEM 1. 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 or financial position.
ITEM 1A. RISK FACTORS
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.
Risks Related to Our Business
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 $17.9 million in
2005, a net loss of $12.3 million in 2006 and a net loss of $3.3 million in 2007. As of December
31, 2007 we had an accumulated deficit of $52.4 million, which increased to $65.0 million as of
June 30, 2008. We expect to continue to increase expenses as we implement initiatives designed to
continue to grow our business, including, among other things, the development and marketing of new
games including for new platforms, further international expansion, expansion of our
infrastructure, acquisition of content, and general and administrative expenses associated with
being a public company. If our revenues do not increase to offset these expected increases in
operating expenses, we will continue to incur significant losses and will not become profitable.
Our revenue growth in recent periods should not be considered indicative of our future performance.
In fact, in future periods, our revenues could decline. Accordingly, we may not be able to achieve
profitability in the future.
We have a limited operating history in an emerging market, which may make it difficult to evaluate
our business.
We were incorporated in May 2001 and began selling mobile games in July 2002. Accordingly, we
have only a limited history of generating revenues, and the future revenue potential of our
business in this emerging market is uncertain. As a result of our short operating history, we have
limited financial data that can be used to evaluate our business. Any evaluation of our business
and our prospects must be considered in light of our limited operating history and the risks and
uncertainties encountered by companies in our stage of development. As an early stage company in
the emerging mobile entertainment industry, we face increased risks, uncertainties, expenses and
difficulties. To address these risks and uncertainties, we must do the following:
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maintain our current, and develop new, wireless carrier relationships, particularly in
international markets; |
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maintain and expand our current, and develop new, relationships with third-party branded
content owners; |
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retain or improve our current revenue-sharing arrangements with carriers and third-party
branded content owners; |
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maintain and enhance our own brands; |
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continue to develop new high-quality mobile games that achieve significant market acceptance; |
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continue to port existing mobile games to new mobile handsets; |
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continue to develop and upgrade our technology; |
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continue to enhance our information processing systems; |
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increase the number of end users of our games; |
38
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maintain and grow our non-carrier, or off-deck, distribution, including through our
website and third-party direct-to-consumer distributors; |
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expand our development capacity in countries with lower costs; |
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execute our business and marketing strategies successfully; |
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respond to competitive developments including new platforms and pricing and distribution
models; and |
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attract, integrate, retain and motivate qualified personnel. |
We may be unable to accomplish one or more of these objectives, which could cause our business
to suffer. In addition, accomplishing many of these efforts might be very expensive, which could
adversely impact our operating results and financial condition.
Our financial results could vary significantly from quarter to quarter and are difficult to
predict.
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. Individual games and
carrier relationships represent meaningful portions of our revenues and net loss in any quarter. We
may incur significant or unanticipated expenses when licenses are renewed, or we may experience a
significant reduction in revenue if licenses are not renewed. 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 U.S. economy, including those that
impact discretionary consumer spending. Recent macroeconomic issues such as those involving
sub-prime mortgages and liquidity issues, as well as liquidity issues in the auction-rate
securities that we invest in, may 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.
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 mobile 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 prominence of deck placement for our leading games and those of our
competitors; |
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the strength in demand for new mobile devices; |
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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; |
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changes in pricing policies by our carriers related to
downloading content, such as our games and other content; |
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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; |
39
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the timeliness of reporting from carriers; |
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the seasonality of our industry; |
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fluctuations in the size and rate of growth of overall consumer demand for mobile games
and related content; |
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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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our success in entering new geographic markets; |
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foreign exchange fluctuations; |
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accounting rules governing recognition of revenue; |
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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. |
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. Failure to meet market
expectations would likely result in decreases in the trading price of our common stock.
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. For
end users, we compete primarily on the basis of brand, game quality and price. For wireless
carriers, we compete for deck placement based on these factors, as well as historical performance
and 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 include Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts
having the largest market share of any company in the mobile games market. In the future, likely
competitors include major media companies, traditional video game publishers, content aggregators,
mobile software providers and independent mobile game publishers. Carriers may also decide to
develop, internally or through a managed third-party developer, and distribute their own mobile
games. If carriers enter the mobile game market as publishers, they might refuse to distribute some
or all of our games or might deny us access to all or part of their networks.
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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more substantial intellectual property of their own from which they can develop games
without having to pay royalties; |
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pre-existing relationships with brand owners or carriers that afford them access to
intellectual property while blocking the access of competitors to that same intellectual
property; |
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greater resources to make acquisitions; |
40
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lower labor and development costs; and |
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broader global distribution and presence. |
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.
Failure to renew our existing brand and content licenses on favorable terms or at all and to obtain
additional licenses would impair our ability to introduce new mobile games or to continue to offer
our current games based on third-party content.
Revenues derived from mobile games and other applications based on or incorporating brands or
other intellectual property licensed from third parties accounted for 80.5%, 88.4% and 88.1% of our
revenues in 2005, 2006 and 2007, respectively. In 2007, revenues derived under various licenses
from our four largest licensors, Atari, Harrahs, Hasbro and PopCap Games, together accounted for
approximately 49.5% of our revenues. Even if mobile games based on licensed content or brands
remain popular, any of our licensors could decide not to renew our existing license or not to
license additional intellectual property and instead license to our competitors or develop and
publish its own mobile games or other applications, competing with us in the marketplace. For
example, one of our licenses with Hasbro under which we create our Battleship, Clue, Game of Life
and Monopoly games, which in the past have accounted for a significant portion of our revenue,
expired in March 2008. Many of these licensors already develop games for other platforms, and may
have significant experience and development resources available to them should they decide to
compete with us rather than license to us. Additionally, licensors may elect to work with
publishers who can develop and publish products across multiple platforms, such as mobile, online
and console, which we currently cannot offer.
We have both exclusive and non-exclusive licenses and both licenses that are global and
licenses that are limited to specific geographies, often with other mobile game publishers having
rights to geographies not covered by our licenses. Our licenses generally have terms that range
from two to five years, with the primary exceptions being our six-year licenses covering World
Series of Poker and Deer Hunter 2 and our seven-year license covering Kasparov Chess. Some of the
licenses that we have inherited through acquisitions provide that the licensor owns the
intellectual property that we develop in the mobile version of the game and that, when our license
expires, the licensor can transfer that intellectual property to a new licensee. Increased
competition for licenses may lead to larger guarantees, advances and royalties that we must pay to
our licensors, which could significantly increase our cost of revenues and cash usage. We may be
unable to renew these licenses or to renew them on terms favorable to us, and we may be unable to
secure alternatives in a timely manner. Failure to maintain or renew our existing licenses or to
obtain additional licenses would impair our ability to introduce new mobile games or to continue to
offer our current games, which would materially harm our business, operating results and financial
condition. Some of our existing licenses impose, and licenses that we obtain in the future might
impose, development, distribution and marketing obligations on us. If we breach our obligations,
our licensors might have the right to terminate the license or change an exclusive license to a
non-exclusive license, which would harm our business, operating results and financial condition.
Even if we are successful in gaining new licenses or extending existing licenses, we may fail
to anticipate the entertainment preferences of our end users when making choices about which brands
or other content to license. If the entertainment preferences of end users shift to content or
brands owned or developed by companies with which we do not have relationships, we may be unable to
establish and maintain successful relationships with these developers and owners, which would
materially harm our business, operating results and financial condition. In addition, some rights
are licensed from licensors that have or may develop financial difficulties, and may enter into
bankruptcy protection under U.S. federal law or the laws of other countries. If any of our
licensors files for bankruptcy, our licenses might be impaired or voided, which could materially
harm our business, operating results and financial condition.
We currently rely on wireless carriers to market and distribute our games and thus to generate our
revenues. In particular, subscribers of Verizon Wireless represented 23.0% of our revenues in 2007.
The loss of or a change in any significant carrier relationships could cause us to lose access to
their subscribers and thus materially reduce our revenues.
Our future success is highly dependent upon maintaining successful relationships with the
wireless carriers with which we currently work and establishing new carrier relationships in
geographies where we have not yet established a significant presence. A significant portion of our
revenues is derived from a very limited number of carriers. In 2007, we derived approximately 23.0%
of our revenues from subscribers of Verizon Wireless. No other carrier represented more than 10.0%
of our revenues in 2007. In 2006, we derived approximately 20.6% of our revenues from subscribers
of Verizon Wireless, 12.6% of our revenues from subscribers of Sprint
41
Nextel affiliates, 11.3% of our revenues from subscribers of AT&T and 10.6% of our revenues
from subscribers of Vodafone. We expect that we will continue to generate a substantial majority of
our revenues through distribution relationships with fewer than 20 carriers for the foreseeable
future. Our failure to maintain our relationships with these carriers would materially reduce our
revenues and thus harm our business, operating results and financial condition.
Our carrier agreements do not establish us as the exclusive provider of mobile games with the
carriers and typically have a term of one or two years with automatic renewal provisions upon
expiration of the initial term, absent a contrary notice from either party. In addition, the
carriers usually can terminate these agreements early and, in some instances, at any time without
cause, which could give them the ability to renegotiate economic or other terms. The agreements
generally do not obligate the carriers to market or distribute any of our games. In many of these
agreements, we warrant that our games do not contain libelous or obscene content, do not contain
material defects or viruses, and do not violate third-party intellectual property rights and we
indemnify the carrier for any breach of a third partys intellectual property. In addition, our
agreements with a substantial minority of our carriers, including Verizon Wireless, allow the
carrier to set the retail price at a level different from the price implied by our negotiated
revenue split, without a corresponding change to our wholesale price to the carrier. If one of
these carriers raises the retail price of one of our games, unit demand for that game might
decline, reducing our revenues, without necessarily reducing, and perhaps increasing, the total
revenues that the carrier receives from sales of that game.
Many other factors outside our control could impair our ability to generate revenues through a
given carrier, including the following:
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the carriers preference for our competitors mobile games rather than ours; |
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the carriers decision not to include or highlight our games on the deck of its mobile
handsets; |
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the carriers decision to discontinue the sale of our mobile games or all mobile games
like ours; |
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the carriers decision to offer games to its subscribers without charge or at reduced
prices; |
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the carriers decision to require market development funds from publishers like us; |
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the carriers decision to restrict or alter subscription or other terms for downloading
our games; |
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a failure of the carriers merchandising, provisioning or billing systems; |
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the carriers decision to offer its own competing mobile games; |
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the carriers decision to transition to different platforms and revenue models; and |
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consolidation among carriers. |
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, which could
materially harm our business, operating results and financial condition.
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 has 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
42
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, particularly given the frequency, size and
varying scope of our recent acquisitions of Superscape and MIG; |
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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; |
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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. |
Some or all of these issues may result from our acquisitions, including our acquisitions of
MIG and Superscape. If the anticipated benefits of any of these or future acquisitions do not
materialize, we experience difficulties integrating these businesses or 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.
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 wireless carriers will
place on their decks and end users will buy. We must continue to invest significant resources in
licensing efforts, research and development, marketing and regional expansion to enhance our
offering of games and introduce new games, and we must make decisions about these matters well in
advance of product release in order to implement them in a timely manner. Our success depends, in
part, on unpredictable and volatile factors beyond our control, including end-user preferences,
competing games and the availability of other entertainment activities. If our games and related
applications are not responsive to the requirements of our carriers or 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 our carriers or 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.
Inferior 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 games achieving a greater degree of commercial
success. 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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We have depended on no more than ten mobile games for a majority of our revenues in recent fiscal
periods.
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 2006 and 2007, we generated approximately 53.3% and 52.7% 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. We expect to release a relatively small number of new games
each year for the foreseeable future. If these 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.
In addition, the limited number of games that we release in a year may contribute to
fluctuations in our operating results. Therefore, our reported results at quarter and year end may
be affected based on the release dates of our products, which could result in volatility in the
price of our common stock. If our competitors develop more successful games or offer them at lower
prices or based on payment models, such as pay-for-play or subscription-based models, perceived as
offering a better value proposition, or if we do not continue to develop consistently high-quality
and well-received games, our revenues would likely decline and our business, operating results and
financial condition would be harmed.
If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our
mobile 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 retaining and expanding
our existing relationships with wireless carriers and content licensors, as well as developing new
relationships. Promotion of the Glu brand will depend on our success in providing high-quality
mobile games. Similarly, recognition of our games by end users will depend on our ability to
develop engaging games of high quality with attractive titles. However, our success will also
depend, in part, on the services and efforts of third parties, over which we have little or no
control. For instance, if our 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,
branded content owners and 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 and carriers, then we may be
unsuccessful 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. Further, the markets in which we operate are
highly competitive and some of our competitors, such as Electronic Arts (EA Mobile), already have
substantially more brand name recognition and greater marketing resources than we do. If we fail to
increase 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.
Our business and growth may suffer if we are unable to hire and retain key personnel, who are in
high demand.
We depend on the continued contributions of our senior management and other key personnel. The
loss of the services of any of our executive officers or other key employees could harm our
business. All of our U.S.-based executive officers and key employees are at-will employees, which
means they may terminate their employment relationship with us at any time. None of our U.S.-based
employees is bound by a contractual non-competition agreement, which could make us vulnerable to
recruitment efforts by our competitors. Internationally, while some employees and contractors are
bound by non-competition agreements, we may experience difficulty in enforcing these agreements. We
do not maintain a key-person life insurance policy on any of our officers or other employees.
Our future success also depends on our ability to identify, attract and retain highly skilled
technical, managerial, finance, marketing and creative personnel. We face intense competition for
qualified individuals from numerous technology, marketing and mobile entertainment companies. In
addition, competition for qualified personnel is particularly intense in the San Francisco Bay
Area, where our headquarters are located. Further, one of our principal overseas operations is
based in London, a city that, similar to our headquarters region, has a high cost of living and
consequently high compensation standards. Qualified individuals are in high demand, and we may
incur significant costs to attract them. We may be unable to attract and retain suitably qualified
individuals who are capable of meeting our growing creative, operational and managerial
requirements, or may be required to pay increased compensation in order to do so. If we are unable
to attract and retain the qualified personnel we need to succeed, our business would suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract
and retain our key employees. Many of our senior management personnel and other key employees have
become, or will soon become, vested in a substantial amount of stock or
stock options. Employees may be more likely to leave us if the shares they own or the shares
underlying their options have significantly appreciated or depreciated in value relative to the
original purchase prices of the
shares or the exercise prices of the
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options, or if the exercise
prices of the options that they hold are significantly above the market price of our common stock.
If we are unable to retain our employees, our business, operating results and financial condition
would be harmed.
Growth may place significant demands on our management and our infrastructure.
We operate in an emerging market and have experienced, and may continue to experience, growth
in our business through internal growth and acquisitions. This growth has placed, and may continue
to place, significant demands on our management and our operational and financial infrastructure.
Continued growth could strain our ability to:
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develop and improve our operational, financial and management controls; |
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enhance our reporting systems and procedures; |
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recruit, train and retain highly skilled personnel; |
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maintain our quality standards; and |
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maintain branded content owner, wireless carrier and end-user satisfaction. |
Managing our growth will require significant expenditures and allocation of valuable
management resources. If we fail to achieve the necessary level of efficiency in our organization
as it grows, our business, operating results and financial condition would be harmed.
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
hinder our growth.
International sales represented approximately 44.8% and 46.2% of our revenues in 2006 and
2007, respectively. In addition, as part of our international efforts, we acquired U.K.-based
Macrospace in December 2004, opened our Hong Kong office in July 2005 (which in the second quarter
of 2008 we implemented a plan to close following our acquisition of MIG and its operations in
Beijing), expanded our presence in the European market with our acquisition of iFone in March 2006,
opened an office in France in the third quarter of 2006, opened additional offices in Brazil and
Germany in the fourth quarter of 2006, opened additional offices in China, Italy and Spain in the
second quarter of 2007, opened an office in Chile in the fourth quarter of 2007, acquired
China-based MIG in December 2007, opened an office in Sweden in the first quarter of 2008, acquired
Superscape, which has a significant presence in Russia, in March 2008, opened an office in Mexico
in the second quarter of 2008 and opened an office in Australia in
July 2008. 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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the burdens of complying with a wide variety of foreign laws and regulations; |
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higher costs associated with doing business internationally; |
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difficulties in staffing and managing international operations; |
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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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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; |
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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; |
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variations in tariffs, quotas, taxes and other market barriers; and |
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difficulties in enforcing intellectual property rights in countries other than the United
States. |
In addition, developing user interfaces that are compatible with other languages or cultures
can be expensive. As a result, our ongoing international expansion efforts may be more costly than
we expect. Further expansion into developing countries subjects us to the effects of regional
instability, civil unrest and hostilities, and could adversely affect us by disrupting
communications and making travel more difficult. As a result of our international expansion in
Asia, Europe and Latin America, we must pay income tax in numerous foreign jurisdictions with
complex and evolving tax laws. In the event 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 expansion efforts, 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 are commercially
introduced, our sales may suffer.
Our business depends, in part, on the commercial introduction of new handset models with
enhanced features, including larger, higher resolution color screens, improved audio quality, and
greater processing power, memory, battery life and storage. For example, certain companies have
recently launched, or announced plans to launch, new mobile handsets or mobile platforms, including
Apple (iPhone), Google (Android), and Nokia (nGage). We do not control the timing of these handset
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 manufacturers give us access to
their handsets prior to commercial release. If one or more major handset 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 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 of game launch delays, we miss the opportunity to sell games
when new handsets are shipped or our end users upgrade to a new handset, or if we miss the key
holiday selling period, either because the introduction of a new handset is delayed or we do not
deploy our games in time for the holiday selling season, our revenues would likely decline and our
business, operating results and financial condition would likely suffer.
Wireless carriers generally control the price charged for our mobile games and the billing and
collection for sales of our mobile games and could make decisions detrimental to us.
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 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). 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.
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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.
This could harm our business, operating results and financial condition.
We may be unable to develop and introduce in a timely way new mobile games, and our games may have
defects, which could harm our brand.
The planned timing and introduction of original games and games based on licensed intellectual
property are subject to risks and uncertainties. Unexpected technical, operational, deployment,
distribution or other problems could delay or prevent the introduction of new games, which could
result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our
games is introduced with defects, errors or failures, we could experience decreased sales, loss of
end users, damage to our carrier relationships and damage to our reputation and brand. Our
attractiveness to branded content licensors might also be reduced. In addition, new games may not
achieve sufficient market acceptance to offset the costs of development, particularly when the
introduction of a game is substantially later than a planned day-and-date launch, which could
materially 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 could suffer.
Once developed, a mobile game 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, we anticipate that in the future we will be
required to port existing and new games to a broader array of handsets. If we utilize more labor
intensive porting processes, our margins could be significantly reduced and it might take us longer
to port games to an equivalent number of handsets. For example, we expect the time to
develop and port games to some of the new advanced mobile handsets,
including the iPhone, to be longer than developing and porting for
games for traditional mobile phones. This, in turn, could harm our business, operating results and
financial condition.
If our independent, third-party developers cease development of new games for us and we are unable
to find comparable replacements, we may have to reduce the number of games that we intend to
introduce, delay the introduction of some games or increase our internal development staff, which
would be a time-consuming and potentially costly process, and, as a result, our competitive
position may be adversely impacted.
We rely on independent third-party developers to develop a few of our games, which subjects us
to the following risks:
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key developers who worked for us in the past may choose to work for or be acquired by our
competitors; |
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developers currently under contract may try to renegotiate our agreements with them on
terms less favorable to us; and |
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our developers may be unable or unwilling to allocate sufficient resources to complete
our games in a timely or satisfactory manner or at all. |
If our developers terminate their relationships with us or negotiate agreements with terms
less favorable to us, we may have to reduce the number of games that we intend to introduce, delay
the introduction of some games or increase our internal development staff, which would be a
time-consuming and potentially costly process, and, as a result, our business, operating results
and financial condition could be harmed.
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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, Super K.O. Boxing includes
additional characters and game modes that are available with a code (usually provided to a player
after accomplishing a certain level of achievement in the game). These features have been common in
console and computer games. However, in several recent 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. Our design and porting process and the constraints on the file
size of our games reduce the possibility of hidden, objectionable content appearing in the games we
publish. Nonetheless, these processes and constraints may not prevent this content from being
included in our games. 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. In addition, our reputation could be
harmed, which could impact sales of other games we sell and our attractiveness to content licensors
and carriers or other distributors of our games. If any of these consequences were to occur, our
business, operating results and financial condition could be significantly harmed.
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 will require us to
evaluate and report on our internal control over financial reporting and have our independent
registered public accounting firm attest to our evaluation beginning with our Annual Report on Form
10-K for the year ending December 31, 2008. We are in the process of preparing and implementing an
internal plan of action for compliance with Section 404 and strengthening and testing our system of
internal controls to provide the basis for our report. The process of implementing our internal
controls and complying with Section 404 will be expensive and time consuming, and will require
significant attention of management. We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial processes and reporting in the future.
Even if we conclude, and our independent registered public accounting firm concurs, 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, 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.
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 competitive position may be
adversely affected.
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
diversion of our management and resources.
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
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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 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 for intellectual property infringement or initiate proceedings to
invalidate our intellectual property, either of which, if successful, could disrupt the conduct of
our business, cause us to pay significant damage awards or require us to pay licensing fees. In the
event of a 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 infringement
claims, regardless of their merit. Successful infringement or licensing claims against us might
result in substantial monetary liabilities and might materially disrupt the conduct of our
business.
Indemnity provisions in various agreements potentially expose us to substantial liability for
intellectual property infringement, damages caused by malicious software and other losses.
In the ordinary course of our business, most of our agreements with carriers and other
distributors include indemnification provisions. In these provisions, we agree to indemnify them
for losses suffered or incurred in connection with our games, including as a result of intellectual
property infringement and damages caused by 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 we could be required to make under
these indemnification provisions is generally unlimited. Large future indemnity payments could harm
our business, operating results and financial condition.
As a result of a substantial portion of our revenues currently being derived from Verizon Wireless
and three other wireless carriers, if Verizon Wireless or any other significant carrier were unable
to fulfill its payment obligations, our financial condition and results of operations would suffer.
As of December 31, 2007, our outstanding accounts receivable balances with Verizon Wireless,
Sprint Nextel, Vodafone and AT&T were $4.3 million, $1.7 million, $0.9 million and $1.0 million,
respectively. As of December 31, 2006, our outstanding accounts receivable balances with those
carriers were $3.0 million, $1.5 million, $1.4 million and $1.2 million, respectively. Since 42.9%
of our outstanding accounts receivable at December 31, 2007 were with Verizon Wireless, Sprint
Nextel, AT&T and Vodafone, we have a concentration of credit risk. If any of these carriers is
unable to fulfill its payment obligations to us under our carrier agreements with them, our
revenues could decline significantly and our financial condition might be harmed.
We invest in securities that are subject to market risk and fluctuations in interest rates and the
recent issues in the financial markets could adversely affect the value of our assets.
As of June 30, 2008, we had $25.7 million in cash, cash equivalents and short-term
investments. We invest our cash in a variety of financial instruments, consisting principally of
investments in money market funds and auction-rate securities. These investments are denominated in
U.S. dollars.
As of June 30, 2008, we had $2.8 million of principal invested in auction rate securities, all
of which were rated AAA at the time of purchase but were downgraded to A in July 2008. Auction-rate
securities are long-term variable rate bonds tied to short-term interest rates. After the initial
issuance of the securities, the interest rate on the securities is reset periodically, at intervals
established at the time of issuance (e.g., every seven, 28, or 35 days; every six months; etc.),
based on market demand for a reset period. The stated or contractual maturities for these
securities, however, generally are 20 to 30 years. Auction-rate securities are bought and sold in
the marketplace through a competitive bidding process often referred to as a Dutch auction. If
there is insufficient interest in the securities at the time of an auction, the auction may not be
completed and the rates may be reset to predetermined penalty or maximum rates. The monthly
auctions historically have provided a liquid market for these securities. Following a failed
auction, we would not be able to access our funds that are invested in the corresponding
auction-rate securities until a future auction of these investments is successful or new buyers
express interest in purchasing these securities in between reset dates.
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Given the current negative liquidity conditions in the global credit and capital markets, the
auction-rate securities held by us at June 30, 2008 have experienced multiple failed auctions as
the amount of securities submitted for sale has exceeded the amount of purchase orders. The
underlying assets of our auction-rate securities are corporate bonds. If the underlying issuers are
unable to successfully clear future auctions or if their credit rating deteriorates and the
deterioration is deemed to be other-than-temporary, we would be required to adjust the carrying
value of the auction-rate securities through an impairment charge to earnings. Any of these events
could materially affect our results of operations and our financial condition. For example, in the
fourth quarter of 2007, we recorded a pre-tax impairment charge of $806,000, in the first quarter
of 2008, we recorded an additional pre-tax impairment of $235,000 and in the second quarter of
2008, we recorded an additional pre-tax impairment of $235,000 reflecting the decrease in estimated
value of our auction-rate securities as of June 30, 2008 that were determined to be
other-than-temporary as a result of two failed auctions.
As of June 30, 2008, the contractual maturities of the remaining two auction-rate securities
were 2017. Although we may not have the ability to liquidate these investments within one year of
the balance sheet date, we may need to sell the securities within the next year to fund operations.
Accordingly, the investments are classified as short-term investments on the June 30, 2008 and
December 31, 2007 consolidated balance sheets. In the event we need to access these funds, we could
be required to sell these securities at an amount below our original purchase value and our current
carrying value.
Investments in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates or if the decline in fair value of our
publicly traded equity investments and auction rate securities is judged to be
other-than-temporary. We may suffer losses in principal if we are forced to sell securities that
decline in market value due to changes in interest rates. Recent events in the sub-prime mortgage
market and with auction rate securities could negatively impact our return on investment for these
debt securities and thereby reduce the amount of cash and cash equivalents and investments on our
balance sheet.
We may need to raise additional capital to grow our business, and we may not be able to raise
capital on terms acceptable to us or at all.
The operation of our business and our efforts to grow our business further, including through
additional acquisitions, will require significant cash outlays and commitments, such as with our
recent acquisitions. If our cash, cash equivalents and short-term investments balances and any cash
generated from operations and from our IPO are not sufficient to meet our cash requirements, we
will need to seek additional capital, potentially through debt or equity financings, to fund our
growth. 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, and the
prices at which new investors would be willing to purchase our securities may be lower than the IPO
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. 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.
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 three-fifths of our business in U.S. Dollars, we
also transact approximately one-third of our business in pounds sterling and Euros and a small
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 transaction gains and losses. To date, we have not engaged in exchange rate hedging
activities. Even were we 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 ongoing management time and expertise, external costs to implement the
strategies and potential accounting implications. 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 rapid foreign currency devaluations.
50
Our business in countries with a history of corruption and transactions with foreign governments,
including with government owned or controlled wireless carriers, increase the risks associated with
our international activities.
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices
Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by the United States and other business
entities for the purpose of obtaining or retaining business. We have operations, deal with carriers
and make sales in countries known to experience corruption, particularly certain emerging countries
in East Asia, Eastern Europe and Latin America, and further international expansion may involve
more of these countries. Our activities in these countries create the risk of unauthorized payments
or offers of payments by one of our employees, consultants, sales agents or distributors that could
be in violation of various laws including the FCPA, even though these parties are not always
subject to our control. We have attempted to implement safeguards to discourage these practices by
our employees, consultants, sales agents and distributors. However, our existing safeguards and any
future improvements may prove to be less than effective, and our employees, consultants, sales
agents or distributors may engage in conduct for which we might be held responsible. Violations of
the FCPA may result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and financial condition.
Changes to financial accounting standards and new exchange rules could make it more expensive to
issue stock options to employees, which would increase compensation costs and might cause us to
change our business practices.
We prepare our financial statements to conform with accounting principles generally accepted
in the United States. These accounting principles are subject to interpretation by the Financial
Accounting Standards Board, or FASB, the SEC, and various other bodies. A change in those
principles could have a significant effect on our reported results and might affect our reporting
of transactions completed before a change is announced. For example, we have used stock options as
a fundamental component of our employee compensation packages. We believe that stock options
directly motivate our employees to maximize long-term stockholder value and, through the use of
vesting, encourage employees to remain in our employ. Several regulatory agencies and entities have
made regulatory changes that could make it more difficult or expensive for us to grant stock
options to employees. For example, the FASB released Statement of Financial Accounting Standards,
or SFAS, No. 123R, Share-Based Payment, that required us to record a charge to earnings for
employee stock option grants beginning in 2006. In addition, regulations implemented by The Nasdaq
Stock Market generally require stockholder approval for all stock option plans, which could make it
more difficult for us to grant stock options to employees. We may, as a result of these changes,
incur increased compensation costs, change our equity compensation strategy or find it difficult to
attract, retain and motivate employees, any of which could materially and adversely affect our
business, operating results and financial condition.
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 (Sarbanes-Oxley Act), and the rules and regulations of
The Nasdaq Stock Market. The requirements of these rules and regulations increases 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.
In order 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
51
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.
Risks Relating to Our Industry
Wireless communications technologies are changing rapidly, and we may not be successful in working
with these new technologies.
Wireless network and mobile handset technologies are undergoing rapid innovation. New handsets
with more advanced processors and supporting advanced programming languages continue to be
introduced. In addition, networks that enable enhanced features, such as multiplayer technology,
are being developed and deployed. We have no control over the demand for, or success of, these
products or technologies. The development of new, technologically advanced games to match the
advancements in handset technology is a complex process requiring significant research and
development expense, as well as the accurate anticipation of technological and market trends. If we
fail to anticipate and adapt to these and other technological changes, the available channels for
our games may be limited and our market share and our operating results may suffer. Our future
success will depend on our ability to adapt to rapidly changing technologies, develop mobile games
to accommodate evolving industry standards and improve the performance and reliability of our
games, without substantially increasing our development and porting costs. In addition, the
widespread adoption of networking or telecommunications technologies or other technological changes
could require substantial expenditures to modify or adapt our games.
Technology changes in our industry require us to anticipate, sometimes years in advance, which
technologies we must implement and take advantage of in order to make our games and other mobile
entertainment products competitive in the market. Therefore, we usually start our product
development with a range of technical development goals that we hope to be able to achieve. We may
not be able to achieve these goals, or our competition may be able to achieve them more quickly and
effectively than we can. In either case, our products may be technologically inferior to those of
our competitors, less appealing to end users or both. If we cannot achieve our technology goals
within the original development schedule of our products, then we may delay their release until
these technology goals can be achieved, which may delay or reduce our revenues, increase our
development expenses and harm our reputation. Alternatively, we may increase the resources employed
in research and development in an attempt either to preserve our product launch schedule or to keep
up with our competition, which would increase our development expenses. In either case, our
business, operating results and financial condition could be materially harmed.
The complexity of and incompatibilities among mobile handsets may require us to use additional
resources for the development of our games.
To reach large numbers of wireless subscribers, mobile entertainment publishers like us must
support numerous mobile handsets and technologies. However, keeping pace with the rapid innovation
of handset technologies together with the continuous introduction of new, and often incompatible,
handset models by wireless carriers requires us to make significant investments in research and
development, including personnel, technologies and equipment. In the future, we may be required to
make substantial investments in our development if the number of different types of handset models
continues to proliferate. In addition, as more advanced handsets are introduced that enable more
complex, feature rich games, we anticipate that our per-game development and porting costs will
increase, which could increase the risks associated with the failure of any one game and could
materially harm our operating results and financial condition.
If wireless subscribers do not continue to use their mobile handsets to access games and other
applications, our business growth and future revenues may be adversely affected.
We operate in a developing industry. Our success depends on growth in the number of wireless
subscribers who use their handsets to access data services and, in particular, entertainment
applications of the type we develop and distribute. New or different mobile entertainment
applications, such as streaming video or music applications, developed by our current or future
competitors may be preferred by subscribers to our games. In addition, other mobile platforms such
as the iPod, iPhone and the Google Android platform, and dedicated portable gaming platforms such
as the PlayStation Portable and the Nintendo DS, may become widespread, and end users may choose to
switch to these platforms. If the market for our games does not continue to grow or we are unable
to acquire new end users, our business growth and future revenues could be adversely affected. If
end users switch their entertainment spending away from the games and related applications that we
publish, or switch to portable gaming platforms or distribution where we do not have comparative
strengths, our revenues would likely decline and our business, operating results and financial
condition would suffer.
52
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; 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.
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 BREW and Java platforms, and we have experience
developing games for the i-mode, Mophun, N-Gage, Symbian and Windows Mobile platforms. If one or
more of these technologies fall out of favor with handset manufacturers and wireless carriers and
there is a rapid shift to a technology platform such as Adobe Flash Lite, iPod, iPhone or Google
Android 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.
System or network failures could reduce our sales, increase costs or result in a loss of end users
of our games.
Mobile game publishers rely on wireless carriers networks to deliver games to end users and
on their or other third parties billing systems to track and account for the downloading of their
games. In certain circumstances, mobile game publishers may also rely on their own servers to
deliver games on demand to end users through their carriers networks. In addition, certain
subscription-based games such as World Series of Poker and entertainment products such as FOX
Sports Mobile require access over the mobile Internet to our servers in order to enable features
such as multiplayer modes, high score posting or access to information updates. Any failure of, or
technical problem with, carriers, third parties or our billing systems, delivery systems,
information systems or communications networks could result in the inability of end users to
download our games, prevent the completion of billing for a game, or interfere with access to some
aspects of our games or other products. If any of these systems fails or if there is an
interruption in the supply of power, an earthquake, fire, flood or other natural disaster, or an
act of war or terrorism, end users might be unable to access our games. For example, 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 failure of, or technical problem with, the carriers, other third
parties or our systems could cause us to lose end users or revenues or incur substantial repair
costs and distract management from operating our business. This, in turn, could harm our business,
operating results and financial condition.
The market for mobile games is seasonal, and our results may vary significantly from period to
period.
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
handsets, we may experience seasonal sales increases based on the holiday selling period. However,
due to the time between handset purchases and game purchases, most of this holiday impact occurs
for us in our first quarter. In addition, we seek to release many of our games in conjunction with
specific events, such as the release of a related movie. If we miss these key selling periods for
any reason, our sales will suffer disproportionately. Likewise, if a key event to which our game
release schedule is tied were to be delayed or cancelled, our sales would also suffer
disproportionately. 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 may experience seasonal sales decreases during the summer, particularly in Europe. If
the level of travel increases or expands to other periods, our operating results and financial
condition may be harmed. Our ability to meet game development schedules is affected by a number of
factors, including the creative processes involved, the coordination of large and sometimes
geographically dispersed development teams required by the increasing complexity of our games, and
the need to fine-tune our games prior to their release. Any failure to meet anticipated development
or release schedules would likely result in a delay of revenues or possibly a significant shortfall
in our revenues and cause our operating results to be materially different than anticipated.
53
Our business depends on the growth and maintenance of wireless communications infrastructure.
Our success will depend on the continued growth and maintenance of wireless communications
infrastructure in the United States and internationally. This includes deployment and maintenance
of reliable next-generation digital networks with the speed, data capacity and security necessary
to provide reliable wireless communications services. Wireless communications infrastructure may be
unable to support the demands placed on it if the number of subscribers continues to increase, or
if existing or future subscribers increase their bandwidth requirements. Wireless communications
have experienced a variety of outages and other delays as a result of infrastructure and equipment
failures, and could face outages and delays in the future. These outages and delays could reduce
the level of wireless communications usage as well as our ability to distribute our games
successfully. In addition, changes by a wireless carrier to network infrastructure may interfere
with downloads of our games and may cause end users to lose functionality in our games that they
have already downloaded. This could harm our business, operating results and financial condition.
Future mobile handsets may significantly reduce or eliminate wireless carriers control over
delivery of our games and force us to rely further on alternative sales channels, which, if not
successful, could require us to increase our sales and marketing expenses significantly.
Substantially all our games are currently sold through carriers branded e-commerce services.
We have invested significant resources developing this sales channel. However, a growing number of
handset models currently available allow wireless subscribers to browse the Internet and, in some
cases, download applications from sources other than a carriers branded e-commerce service. In
addition, the development of other application delivery mechanisms such as premium-SMS may enable
subscribers to download applications without having to access a carriers branded e-commerce
service. Increased use by subscribers of open operating system handsets or premium-SMS delivery
systems will enable them to bypass carriers branded e-commerce services and could reduce the
market power of carriers. This could force us to rely further on alternative sales channels where
we may not be successful selling our games, and could require us to increase our sales and
marketing expenses significantly. As with our carriers, we believe that inferior placement of our
games and other mobile entertainment products in the menus of off-deck distributors will result in
lower revenues than might otherwise be anticipated from these alternative sales channels. We may be
unable to develop and promote our direct website distribution sufficiently to overcome the
limitations and disadvantages of off-deck distribution channels. This could harm our business,
operating results and financial condition.
Actual or perceived security vulnerabilities in mobile handsets or wireless networks could
adversely affect our revenues.
Maintaining the security of mobile handsets and wireless networks is critical for our
business. There are individuals and groups who develop and deploy viruses, worms and other illicit
code or malicious software programs that may attack wireless networks and handsets. Security
experts have identified computer worm programs, such as Cabir and Commwarrior.A, and viruses,
such as Lasco.A, that target handsets running on the Symbian operating system. Although these
worms have not been widely released and do not present an immediate risk to our business, we
believe future threats could lead some end users to seek to return our games, reduce or delay
future purchases of our games or reduce or delay the use of their handsets. Wireless carriers and
handset manufacturers may also increase their expenditures on protecting their wireless networks
and mobile phone products from attack, which could delay adoption of new handset models. Any of
these activities could adversely affect our revenues and this could harm our business, operating
results and financial condition.
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, our sales could suffer.
Subscriptions represent a significant portion of our 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,
it is not currently feasible for these end users 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. In either case, unless we are able to
re-sell subscriptions to these end users or replace these end users with other end users, our sales
would suffer and this could harm our business, operating results and financial condition.
54
Changes in government regulation of the media and wireless communications industries may adversely
affect our business.
It is possible that a number of laws and regulations may be adopted in the United States and
elsewhere that could restrict the media and wireless communications industries, including laws and
regulations regarding customer privacy, taxation, content suitability, copyright, distribution and
antitrust. Furthermore, the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws that may impose additional burdens on companies
such as ours conducting business through wireless carriers. We anticipate that regulation of our
industry will increase and that we will be required to devote legal and other resources to address
this regulation. Changes in current laws or regulations or the imposition of new laws and
regulations in the United States or elsewhere regarding the media and wireless communications
industries may lessen the growth of wireless communications services and may materially reduce our
ability to increase or maintain sales of our games.
A number of studies have examined the health effects of mobile phone use, and the results of
some of the studies have been interpreted as evidence that mobile phone use causes adverse health
effects. The establishment of a link between the use of mobile phone services and health problems,
or any media reports suggesting such a link, could increase government regulation of, and reduce
demand for, mobile phones and, accordingly, the demand for our games and related applications, and
this could harm our business, operating results and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
Not applicable.
Use of Proceeds from Public Offering of Common Stock
The Form S-1 Registration Statement (Registration No. 333-139493) relating to our IPO was
declared effective by the SEC on March 21, 2007, and the offering commenced the following day.
Goldman Sachs & Co. acted as the sole book-running manager for the offering, and Lehman Brothers
Inc., Bank of America Securities LLC and Needham & Company, LLC acted as co-managers of the
offering.
The net proceeds of our IPO were $74.8 million. Through June 30, 2008, we used approximately
$12.0 million of the net proceeds to repay in full the principal and accrued interest on an
outstanding loan and $14.7 million of the net proceeds for the acquisition of MIG. We used
approximately $34.5 million of the net proceeds for the acquisition of Superscape upon declaring
the tender offer wholly unconditional and paid an additional $2.3 million for the remaining
Superscape shares outstanding in May 2008. We expect to use the remaining net proceeds for general
corporate purposes, including working capital and potential capital expenditures and acquisitions.
Our management will retain broad discretion in the allocation and use of the net proceeds of
our IPO, and investors will be relying on the judgment of our management regarding the application
of the net proceeds. Pending specific utilization of the net proceeds as described above, we have
invested the net proceeds of the offering in a variety of financial instruments, consisting
principally in money market funds and auction-rate securities. The goal with respect to the
investment of the net proceeds will be capital preservation and liquidity so that such funds are
readily available to fund our operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
55
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders on June 3, 2008. At the meeting, our stockholders
voted on the two proposals described below. All three of our board nominees were elected under
Proposal No. 1, and Proposal No. 2 (ratification of our independent registered public accounting
firm) was approved. Our stockholders voted as follows:
Proposal No. 1: The election of three Class I directors to serve on our board of
directors, each to serve until our annual meeting of stockholders to be held in 2011 and until his
or her successor is elected and qualified, or until his or her death, resignation or removal:
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
Withheld |
Richard A. Moran |
|
|
22,462,951 |
|
|
|
366,407 |
|
Hany M. Nada |
|
|
22,665,333 |
|
|
|
164,025 |
|
Ellen Siminoff |
|
|
22,646,555 |
|
|
|
182,803 |
|
In addition, the following directors term of office continued after the annual meeting: L.
Gregory Ballard, Ann Mather, William J. Miller, A. Brooke Seawell and Daniel L. Skaff. Ms. Mather
and Mr. Skaff are Class II directors, whose term of office will expire at our annual meeting of
stockholders to be held in 2009. Messrs. Ballard, Miller and Seawell are Class III directors,
whose term of office will expire at our annual meeting of stockholders to be held in 2010.
Proposal No. 2: Ratification of the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
Broker Non-Votes |
22,798,748 |
|
|
29,418 |
|
|
|
1,192 |
|
|
|
0 |
|
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The exhibits listed on the Exhibit Index (following the Signatures section of this report) are
incorporated by reference into this Item 6.
56
SIGNATURES
Pursuant to the requirements 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.
|
|
Date: August 14, 2008 |
By: |
/s/ L. Gregory Ballard
|
|
|
|
L. Gregory Ballard |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 14, 2008 |
By: |
/s/ Eric R. Ludwig
|
|
|
|
Eric R. Ludwig |
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
57
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
10.01#
|
|
Summary of Glu Mobile Inc. Non-Employee Director Compensation Program, as adopted on October 13, 2006. |
|
|
|
10.02#
|
|
Amended and Restated Glu Mobile Inc. 2007 Employee Stock Purchase Plan, as amended on April 20, 2007. |
|
|
|
10.03#
|
|
Executive Bonus Plan, as amended on April 9, 2008. |
|
|
|
10.04#
|
|
Interim CFO Retention Agreement between Glu Mobile Inc. and Eric R. Ludwig, dated as of May 9, 2008. |
|
|
|
10.05#
|
|
Forms of Stock Option Award Agreement (Immediately Exercisable) and Stock Option Exercise Agreement
(Immediately Exercisable) under the Glu Mobile Inc. 2007 Equity Incentive Plan. |
|
|
|
31.01
|
|
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
31.02
|
|
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). |
|
|
|
32.01
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
32.02
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities
Exchange Act Rule 13a-14(b).* |
|
|
|
# |
|
Indicates a management contract or compensatory plan or arrangement. |
|
* |
|
This certification is not deemed filed for purposes of Section 18 of the Securities
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 of 1933
or the Securities Exchange Act of 1934, except to the extent that Glu Mobile specifically
incorporates it by reference. |
58