Item 1. Business
General
Glu Mobile develops, publishes, and markets a portfolio of free-to-play mobile games designed to appeal to a broad cross section of users who download and make purchases within our games through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play Store, and others (“Digital Storefronts”). Free-to-play games are games that a player can download and play for free, but which allow players to access a variety of additional content and features for a fee and to engage with various advertisements and offers that generate revenue for us. We have a portfolio of compelling games based on our own intellectual property such as Cooking Dash, Covet Fashion, Deer Hunter, Design Home, and Diner DASH Adventures, as well as games based on or significantly incorporating third party licensed brands including Disney Sorcerer’s Arena, Kim Kardashian: Hollywood, the MLB Tap Sports Baseball franchises and Restaurant Dash with Gordon Ramsay. We are headquartered in San Francisco, California, with other U.S. offices in Foster City, California, Orlando, Florida and international locations in Toronto, Canada and Hyderabad, India.
We were incorporated in Nevada in May 2001 as Cyent Studios, Inc. and changed our name to Sorrent, Inc. later that year. In November 2001, we incorporated a wholly owned subsidiary in California, and, in December 2001, we merged the Nevada corporation into this California subsidiary to form Sorrent, Inc., a California corporation. In May 2005, we changed our name to Glu Mobile Inc. In November 2006, Glu Mobile Inc. reincorporated in the state of Delaware. In March 2007, we completed our initial public offering and our common stock is traded on the Nasdaq Global Select Market under the symbol “GLUU.” Except where the context requires otherwise, in this Annual Report on Form 10-K, references to “Company,” “Glu,” “Glu Mobile,” “we,” “us” and “our” refer to Glu Mobile Inc., and where appropriate, its subsidiaries.
On February 8, 2021, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Electronic Arts Inc. (“Electronic Arts”) pursuant to which Electronic Arts has agreed to acquire us for $12.50 in cash for each share of our common stock issued and outstanding as of immediately prior to the closing of the transaction (the “Merger”). This represents approximately $2.1 billion in enterprise value. Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, we will become a wholly owned subsidiary of Electronic Arts. The transaction is anticipated to close in the quarter ending June 30, 2021, subject to approval by our stockholders, the receipt of required regulatory approvals and other customary closing conditions.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports, and amendments to these reports, required of public companies with the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. We make available free of charge on the Investor Relations section of our corporate website all of the reports we file with the SEC as soon as reasonably practicable after they are filed. Our internet website is located at www.glu.com and our Investor Relations website is located at www.glu.com/investors. The information on our website is not incorporated into this report, unless otherwise expressly stated. Copies of our Annual Report on Form 10-K for the year ended December 31, 2020 may also be obtained, without charge, by contacting Investor Relations, Glu Mobile Inc., 875 Howard Street, Suite 100, San Francisco, California 94103 or by emailing IR@glu.com.
Strategy and Business Developments
Our Strategy
Our goal is to become the leading developer and publisher of free-to-play mobile games. Our strategy for achieving this goal is comprised of three parts:
●Building Growth Games and Maximizing the Value of Catalog Games;
●Attracting and Fostering Creative Leaders, Including Potentially by Selective Acquisitions; and
●Cultivating Highly Creative Environments.
Building Growth Games and Maximizing the Value of Catalog Games
The first prong of our strategy is to build growth games for smartphones and tablets as well as maximize the value we derive from our catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We believe a key component of driving annual revenue growth from a growth game is the inclusion of community features which may involve users competing with each other, forming clubs or groups to cooperate in completing goals, or contributing their own original content to the game, as well as other live operations efforts such as running regular in-game events, offering virtual currency or item discounts and optimizing our merchandising strategies. Covet Fashion, Design Home and MLB Tap Sports Baseball are our existing growth games. We currently publish titles primarily in four genres: lifestyle, casual, role playing games (“RPGs”), and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game.
We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements. Catalog games differ from growth games in that our focus is to reduce and potentially reverse their year over year revenue declines; to the extent that we succeed in our efforts to grow annual revenue from a catalog game and expect such title’s revenue to continue to grow on an annual basis, we would then consider such catalog game to be a growth game. Cooking Dash, Deer Hunter 2018, Kim Kardashian: Hollywood and Restaurant Dash with Gordon Ramsay are examples of our existing catalog games.
While we have generally designed our games to incorporate social features that enhance the user’s gameplay experience, as part of our product strategy we are emphasizing adding new social and community-based features, systems, and modes into our growth games. For example, Covet Fashion allows users to join “Fashion Houses” with other users and then borrow each other’s clothes, receive advice on their looks, chat and work together to unlock additional rewards in special style challenges, and our Tap Sports Baseball franchise allows players to challenge their friends to head-to-head matchups and to join clubs that compete in daily events against other clubs as well as includes an improved media-driven chat system. We intend to continue to innovate to further enhance the user experience in our growth games and potentially broaden their audience. For example, we introduced e-commerce functionality to Design Home during 2020, which is intended to deepen the engagement level of our players with the game. In addition, we are exploring making available browser-enabled versions of Tap Sports Baseball and Design Home.
We continue to emphasize developing new titles based on original intellectual property. Reflecting this strategy, revenue from games based on our own intellectual property represented 63.8% of our total revenue in 2020. In addition,
each of the games that we intend to launch worldwide in 2021 will be based on original intellectual property. However, we also seek to selectively license and utilize key brands within our titles if we believe this will maximize their consumer appeal and revenue potential. For example, in March 2020 we launched worldwide Disney Sorcerer’s Arena, our game that features characters from the Disney and Pixar universes, in collaboration with Disney Consumer Products and Interactive Media. We also closely work with our celebrity and brand licensors to engage their social media audiences and build games that will resonate with their unique fan bases. In particular, Kim Kardashian: Hollywood utilizes transmedia storytelling, leveraging Ms. Kardashian West’s built-in social media fan base to drive installs and awareness of the game, and then attempts to surprise and delight those fans with real-world events and other game content based on her life. Our goal is for the game content to become entwined with Ms. Kardashian West’s persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2020 which features all Major League Baseball, or MLB, clubs and uniforms, all 30 real major league stadiums, and current and former MLB players; we intend to continue evaluating ways to enhance the authenticity of this franchise. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity’s fan base. Continuing to drive installs and awareness of our games through our licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games. Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners. We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization.
For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. Furthermore, we are working on optimizing our user acquisition campaigns. We have also made significant investments in our proprietary analytics and central technology infrastructure. With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players. We aim to connect our analytics and revenue central infrastructure to multiple elements of our business - from marketing to merchandising - in order to improve player retention and monetization.
We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features or through enhancing our live operation. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space, particularly as brands continue to migrate budgets from web to mobile.
Attracting and Fostering Creative Leaders, Including Potentially by Selective Acquisitions
The second prong of our strategy is to attract, cultivate and retain proven creative leaders who will develop and update our growth and catalog games. Each creative leader is responsible for the long-term planning of his or her titles and to identify and invest in long-term opportunities and concepts that have the potential to become growth games. Our talent model is to attract the industry’s finest and provide them with world-class infrastructure, tools, funding and the support to create hit games. We have made, and plan to make, significant investment in our creative leaders.
We have worked with our creative leaders to instill financial discipline and operational excellence in our organization by revamping our prototyping and greenlight processes. Prior to developing a new game, a creative leader works with a small team to rapidly prototype new ideas that have the potential to become growth games. We expect our creative leaders to fail fast and to either continue to iterate on a game concept or to move on to rapidly prototyping a new
concept. Once the creative leader and his or her team have sufficiently iterated on their concept and are satisfied that their game has the potential to be a growth game, the creative leader will submit a playable version of the game for greenlighting. If the game is greenlit, we then commit larger investments in terms of headcount and resources.
In addition, we have recently invested significant resources evaluating the potential acquisition of companies and individual game teams in order to complement our existing portfolio and augment our roster of creative leaders, and we might pursue selective acquisitions in the future.
Cultivating Highly Creative Environments
We believe a key part of building growth games and attracting and cultivating creative leaders is providing them with highly creative environments that are optimal for creating hit games. In December 2017, we moved into our current headquarters in San Francisco that were designed to foster collaboration among our game teams and focus the company around our core values and creative-led vision. Creative environments that support our creative leaders and other game development personnel are also needed to attract the level of talent that will support our growth and catalog games. We not only consolidated our studio footprint by moving into our creative center in San Francisco and relocating our Burlingame studio to our San Francisco headquarters, but have also significantly increased our investment in our low-cost, scaled center in Hyderabad, India which provides live operations for some of our catalog games, insourced art, quality assurance and low cost repeatable sales, marketing and general and administrative functions. As part of this consolidation, in the last several years, we closed or sold development studios in Beijing, China; Bellevue, Washington; Portland, Oregon; San Mateo and Long Beach, California; and Moscow, Russia.
Business Developments
Since January 1, 2020, we have taken the following actions to support our business:
●We continued to focus our efforts on developing and publishing games for smartphones and tablet devices. Our significant achievements related to these efforts include the following:
●We generated total revenue of $540.5 million for the year ended December 31, 2020, a 31.4% increase compared to total revenue of $411.4 million for the year ended December 31, 2019.
●As of December 31, 2020, we had approximately 2.5 million daily active users and 11.2 million monthly active users of our games on our primary distribution platforms, including Apple’s App Store and the Google Play Store.
●As of December 31, 2020, we had approximately 2.1 billion cumulative installs of our games on our primary distribution platforms, including approximately 13.6 million installs during the fourth quarter of 2020.
●We grew revenue on an annual basis from each of our growth games, as follows:
●Revenue from Design Home increased from $173.6 million in 2019 to $208.2 million in 2020;
●Revenue from Covet Fashion increased from $62.5 million in 2019 to $79.7 million in 2020;
●Revenue from our Tap Sports Baseball franchise increased from $86.2 million in 2019 to $96.1 million in 2020.
●In March 2020, the title Disney Sorcerer’s Arena was launched worldwide, which includes characters from the Disney and Pixar universes. Revenue from this title totaled $42.0 million in 2020.
●In April 2020, we extended the term of our license agreement with Ms. Kardashian West for an additional 3.5 years through the end of 2023. Revenue from our Kim Kardashian Hollywood title increased from $25.7 million in 2019 to $50.5 million in 2020.
●In June 2020, we completed a follow-on public offering of 17.3 million shares of our common stock at a public offering price of $9.25 per share. The aggregate gross proceeds from the offering, were approximately $159.6 million.
●In September 2020, we launched Design Home Inspired, a new mobile e-commerce store available within Design Home.
Across the globe our industry is experiencing a continuing trend in which hit games generally remain higher in the top grossing charts for longer. We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business position us to take advantage of these trends, as evidenced by the continued strength and year-over-year growth of our Design Home and Covet Fashion titles and the Tap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer periods of time. In addition, we plan to continue to invest in our creative leaders and the creative environments in which they and their teams work to increase our likelihood of creating significant hit growth games.
Our Products
We develop and publish a portfolio of mobile games designed to appeal to a broad cross section of the users of smartphones and tablet devices. Our portfolio of growth and catalog games is spread across the following genres:
oLifestyle
oDesign Home, which launched in November 2016 and was acquired as part of our acquisition of Crowdstar, has become our most successful growth game. Design Home allows users to participate in daily Design Challenges in which they style three dimensional spaces with real, high-end furniture and décor. We have continued to introduce key updates for Design Home, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, meta game functionality and the introduction of e-commerce functionality.
oCovet Fashion, which we acquired as part of our acquisition of Crowdstar, is a top grossing fashion title that was our third largest revenue contributor during 2020. Covet Fashion features continually changing content and daily Style Challenges to help drive engagement and monetization of its users. During 2020, we introduced our new customizable hair accessory feature, as well as our new Covet Collection Pass subscription, both of which provided additional opportunities for our users to express their creativity.
oWe expect to add to our portfolio of lifestyle titles in 2021 through the worldwide release of Table & Taste, a game that will allow users to play and engage with food pairings, aesthetic and décor to create immersive dining experiences, as well as our Crowdstar Moments suite of hypercasual games that we expect will help drive engagement across our lifestyle portfolio.
oCasual
oDiner DASH Adventures, launched in June 2019, is the latest title in our Dash franchise. Diner DASH Adventures offers world decoration, a deep story, and an innovative consolidation of different Dash time-management styles.
oKim Kardashian: Hollywood is a narrative role playing game featuring Kim Kardashian-West’s likeness, voice and creative influence as she guides players on their journey to success in Hollywood. We globally launched Kim Kardashian: Hollywood in June 2014.
oCooking Dash was launched in June 2015 and had its last significant content release in 2019. We utilized this release to help drive awareness and direct traffic to the launch of Diner DASH Adventures. While we are no longer developing new content for Cooking Dash, we have automated event features that are continuing in an effort to maximize revenue and reduce costs from this title, and we believe this title will maintain its position as one of our top catalog games in 2021.
oRestaurant Dash with Gordon Ramsay, launched in June 2016, utilizes Gordon Ramsay’s personality to guide users to become a restaurateur in the image of Mr. Ramsay. We are no longer developing content updates for this title, but have automated event features that are continuing in an effort to maximize revenue and reduce costs from this title.
oRPGs
oDisney Sorcerer’s Arena, which launched in the first quarter of 2020, is a strategy role playing game featuring dozens of characters from across the Disney and Pixar film franchises. Disney Sorcerer’s Arena continually provides updates to introduce new in-game content, challenges and events, including new characters from Disney and Pixar film franchises. Disney Sorcerer’s Arena was nominated for a Google Play Best of 2020 User’s Choice Award.
oSports and Outdoors
oMLB Tap Sports Baseball 2020, which launched in March 2020, was the seventh installment in our popular Tap Sports Baseball franchise in which we partnered with the MLB, the Major League Baseball Players Association, or the MLBPA, and the Major League Baseball Players Alumni Association, or the MLBPAA, to include real-world current and former baseball stars from each of the MLB’s 30 teams. The MLB Tap Sports franchise was our second largest revenue contributor and the highest ranked baseball title in the Apple App Store’s U.S. iPhone top grossing games rankings during 2020. We expect to launch MLB Tap Sports Baseball 2021 in March 2021 in more than 100 territories with significant new features, including a new event mode and World Ranking Season.
oDeer Hunter 2018, originally launched in September 2015 as Deer Hunter 2016, remained as one of our top action titles during 2020.
oWe expect to add to our portfolio of sports and outdoor titles in 2021 through the worldwide release of Deer Hunter World, the next iteration of our Deer Hunter franchise, as well as the expected release of a social fishing game, Tap Sports Fishing.
We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on the Apple and Google storefronts when they were commercially released, which we believe is the result of us being a good partner of Apple and Google.
We have continued to improve monetization in our games, with our most popular games remaining successful for longer periods of time. The longevity of our most successful games derives from strong core gameplay, deep meta game features, regular content updates and social and community features, such as the ability to join clans or clubs, tournaments, player-versus-player gameplay and live events.
Our Revenue
We generate the majority of our revenue through in-application purchases (“in-app-purchases”), with the balance
of our revenue primarily generated by offers and in-game advertising. When we incorporate licensed content into our games, we often share a portion of our revenue with the licensors featured in these titles.
In-App Purchases
Although users can download and play our games free of charge, they can purchase virtual currency, virtual items, other virtual benefits like time and energy or subscriptions to receive any of these benefits, to enhance their gameplay experience - we refer to these as “in-app purchases” or “micro-transactions.” Some of the benefits that players receive from their in-app purchases include:
●Play Longer Through Better Equipment - We generally design our games to become significantly more challenging as the player advances through the game. For example, for a game like Diner DASH Adventures, players can purchase higher-quality ingredients and various boosts that can help them complete increasingly difficult levels more easily.
●Play Longer Through Energy Replenishment - We design some of our games, such as Deer Hunter 2018 and Kim Kardashian: Hollywood, to have short playing sessions, the duration of which are limited by the energy available for each session. Players of Deer Hunter 2018 and Kim Kardashian: Hollywood can use their virtual currency to purchase items that will replenish their energy and enable them to extend their gameplay session.
●Accelerate Game Progress - Although some players are content to slowly “grind” their way through progressing in a game, others are willing to purchase items to accelerate their progression. For example, our Tap Sports Baseball titles enable players to spend their virtual currency to upgrade their roster of players and boost the effectiveness of such players, thus allowing the player to more quickly assemble a winning team.
●Customization - Our games generally enable players to express themselves by customizing their character, the world the character inhabits or a room. For example, Covet Fashion and Design Home each allow users to customize the look of their avatar or room, respectively, by purchasing clothing or home design elements. While in Covet Fashion users own a clothing or accessory item indefinitely after it is purchased and can use it in multiple events, Design Home limits the player to five uses of any purchased design element.
We sell virtual currency to consumers at various prices ranging from $0.99 to $299.99 depending on the available storefront pricing (adjusted for local currencies for sales to players in foreign countries) with the significant majority of player purchases occurring at the lower price points. The Digital Storefronts generally share with us 70% of the consumers’ payments for in-app purchases; we do not have any special agreement or arrangement with respect to pricing or terms with any of the Digital Storefronts. Consumers may also acquire virtual currency, other virtual items or virtual benefits through gameplay or by completing offers, as described below.
Offers and In-Game Advertising
In addition to in-app purchases of virtual currency, we also monetize our games through offers and in-game advertising. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising industry, particularly as brands continue to migrate budgets from web to mobile. Offers enable users to acquire virtual currency without paying cash but by instead taking specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. We work with third parties to provide these offers to players of our games, and we receive a payment from the third party offer provider based on consumer response to these offers. We also work with third party advertising aggregators who embed advertising, such as incented video ads, ads appearing within the game between content transitions and as pop-up ads; the aggregators typically pay us based on the number of impressions, which is the number of times an advertisement is shown to a player, or conversions, which is the number of times players complete an advertiser’s desired action. In addition, from time to time we work directly with other application developers to include advertising for their applications in our games, and the developers pay us based on either the number of impressions in our games or the number of users who download the developer’s application.
Licensed Content
Following the success of Kim Kardashian: Hollywood and games incorporating licensed third-party brands and properties, like our Tap Sports Baseball franchise, we increased our licensing efforts, both in terms of securing licenses to develop games based upon or significantly featuring celebrities and other third-party intellectual property and for cameo appearances or to otherwise incorporate third-party intellectual property into our games. However, we have more recently begun to emphasize developing new titles based on original intellectual property. In 2020, 2019, and 2018, games based on our own intellectual property accounted for approximately 63.8%, 69.9%, and 65.7%, of our revenue, respectively. The decrease in the percentage of revenue derived from original intellectual property from 2019 to 2020 was due primarily to the successful worldwide launch of Disney Sorcerer’s Arena in March 2020 and increased revenue from the Tap Sports Baseball franchise and Kim Kardashian: Hollywood, partially offset by growth in our annual revenue generated by Design Home, Covet Fashion, and Diner DASH Adventures, as well as the continued strength of some of our catalog games. We expect to launch at least four new titles in 2021, including the next iteration of our Deer Hunter franchise, Table & Taste, Tap Sports Fishing and our Crowdstar Moments suite of hypercasual games, each of which will be based on original intellectual property. We also intend to continue to selectively license and utilize key brands within our titles if we believe this will maximize their consumer appeal and revenue potential.
For games based on or significantly incorporating licensed brands, properties or other content, we share a portion of our revenue with the respective licensors. The average royalty rate that we paid on games based on licensed content (such as Disney Sorcerer’s Arena, Kim Kardashian: Hollywood and Restaurant Dash with Gordon Ramsay) or significantly incorporating licensed content (such as MLB Tap Sports Baseball 2020) was approximately 18.5% of gross revenue in 2020, 20.5% in 2019, and 20.2% in 2018. However, the individual royalty rates that we pay can be meaningfully above or below the average based on a variety of factors, such as the strength of the licensed brand, our development and porting obligations, and the platforms on which we are permitted to distribute the licensed content.
Sales, Marketing and Distribution
We market, sell, and distribute our games primarily through direct-to-consumer Digital Storefronts, such as Apple’s App Store and the Google Play Store. In addition to publishing our smartphone games on direct-to-consumer Digital Storefronts, we also publish some of our titles on other platforms, such as the Mac App Store and Facebook. In addition, we are exploring the extension of Tap Sports Baseball and Design Home to the PC web browser. The significant majority of our smartphone revenue has historically been derived from Apple’s iOS platform, which accounted for approximately 61.5%, 60.8%, and 63.1% of our total revenue in 2020, 2019, and 2018, respectively. We generated the majority of these iOS-related revenue from the Apple App Store, which represented 56.2%, 54.4%, and 54.7% of our total revenue in 2020, 2019, and 2018, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on the Apple App Store. In addition, we generated approximately 38.4%, 39.1%, and 36.6% of our total revenue in 2020, 2019, and 2018, respectively, from the Android platform. We generated the majority of our Android-related revenue through the Google Play Store, which represented 32.9%, 33.5%, and 31.3% of our total revenue in 2020, 2019, and 2018, respectively. We generated the balance of our Android-related revenue from other platforms that distribute apps for devices that run the Android operating system (e.g., the Amazon Appstore) and through offers and advertisements in games distributed through other Android platforms. No other customer or Digital Storefront accounted for more than 10% of our total revenue in 2020, 2019, and 2018.
As part of our efforts to successfully market our games on the direct-to-consumer Digital Storefronts, we attempt to educate the storefront owners about our title roadmap and seek to have our games featured or otherwise prominently placed within the storefront. We believe that the featuring or prominent placement of our games facilitates organic user discovery and is likely to result in our games achieving a greater degree of commercial success. We believe that a number of factors may influence the featuring or placement of a game, including:
●the perceived attractiveness and quality of the title, brand, or licensed intellectual property;
●the level of critical or commercial success of the game or of other games previously introduced by a publisher;
●incorporation of the storefront owner’s latest technology in the publisher’s title;
●how strong the consumer experience is on all of the devices that discover titles using any given Digital Storefront;
●the publisher’s relationship with the applicable storefront owner and future pipeline of quality titles for it; and
●the current market share of the publisher.
The majority of our games have been featured on the Apple and Google storefronts when they were commercially released, which we believe is in part due to our efforts to be a consistently good partner with Apple and Google. In addition to our efforts to secure prominent featuring or placement for our games, we have also undertaken a number of marketing initiatives designed to acquire players and increase downloads of our games and increase sales of virtual currency, including:
●using social networking websites, such as Facebook and Twitter, to build a base of fans and followers to whom we can quickly and easily provide information about our games;
●paying third parties, including advertising networks, social media channels and social influencers, to advertise or incentivize consumers to download our games through offers or recommendations;
●using “push” notifications to alert users of sales on virtual currency or items in our games; and
●cross-promoting our games through advertisements in our other games, as well as advertising our games in our competitors’ games;
In addition, certain of our games featuring celebrities or other licensed content like Kim Kardashian: Hollywood generate significant attention through word of mouth, particularly through social media channels. We look to leverage existing social media presences in order to increase the virality and commercial success of our games. Furthermore, social-based methods for promoting our games include in-game events where players compete with and against each other, in-game social promotions and regular content updates, including in-game content that leverages real world events, such as holiday promotions or current events in the life of our celebrity partners.
We have sought to deepen player engagement by fostering a sense of community in our games. As part of these efforts, we have organized player councils for certain of our games where we have invited some of our most dedicated players to special events to engage with the development teams and share their feedback about our games. For example, in 2020 we hosted nine virtual events, where hundreds of Covet players from all over the world participated in virtual chats with Covet designers, created content for the game, and celebrated Covet season launches,- bringing the best aspects of Covet to life, including creativity, fashion, and community.
Development Studios
Our creative leaders have primary responsibility for overseeing game development for our growth and catalog games. The internal studios that develop our games are located in San Francisco and Foster City, California; Orlando, Florida and Toronto, Canada. In addition, we run live operations and produce content updates for some of our catalog games from our Hyderabad, India location.
Our studios are generally supported by central services personnel in our San Francisco, California headquarters who provide expertise with respect to areas such as user experience, software development kit (SDK) development, analytics and product marketing, with each studio leveraging these services to varying degrees.
Our game development process involves a significant amount of creativity, particularly with respect to
developing original intellectual property franchises or games in which we license intellectual property from celebrities, Hollywood studios or other owners of brands, properties and other content. Creative and technical studio expertise is necessary to design games that appeal to players who typically play in short sessions and to develop games that work well on mobile phones and tablets with their inherent limitations, such as small screen sizes and control buttons. During 2021, we plan to hire additional game development personnel and invest in technical studio expertise to drive content and features in our growth games and to prototype ideas that we believe can become hit growth games.
Despite our efforts to reduce our geographical footprint and consolidate studios, our development personnel are located in five cities in three different countries, which results in certain inherent complexities. To address these issues, we instituted our Creative Leadership Summit program. The Creative Leadership Summit is designed to increase interaction among our studio teams, including having international studio team members regularly spend time in our U.S. studios. The goal of this program is to ensure that we increase the uniformity, quality and commercial success of our games. In addition, we believe that our strategy of focusing our development efforts on building and maintaining growth games will help ensure more efficient use of our talent and resources across our studios and further promote the sharing of expertise and best practices.
Product Development
Since the markets for our products are characterized by rapid technological change, particularly in the technical capabilities of mobile phones and tablets, and changing end-user preferences, continuous investment is required to innovate and publish new games, regularly update our games, and modify existing games for distribution on new platforms.
We have continued to utilize measures designed to ensure that we publish and launch games that have a greater likelihood of being commercially successful, while identifying earlier in the development process game concepts and designs that are unlikely to produce hits. Prior to developing a new game, a creative leader works with a small team to rapidly prototype new ideas that have the potential to become growth games. We expect our creative leaders to fail fast and to either continue to iterate on a game concept or to move on to rapidly prototyping a new concept. Once the creative leader and his or her team have sufficiently iterated on their concept and are satisfied that their game has the potential to be a growth game, the creative leader will submit a playable version of the game for greenlighting. If the game is greenlit, we then commit larger investments in terms of headcount and resources.
In addition, we plan to continue holding detailed post-mortems for all products to review and analyze the positive and negative results from each new game launch. These are in addition to our Creative Leadership Summit program where we formally share best practices and learnings amongst the leadership of all functions of our global studios and central services teams.
We use third-party development tools to create our games, including a game development engine licensed from Unity Technologies to create most of our newest games and our games in development. In addition, we rely on our own servers and third-party infrastructure to operate our games and to maintain and provide our analytics data. In particular, a significant portion of game traffic is hosted by Amazon Web Services (“AWS”), which provides us server redundancy by using multiple locations on various distinct power grids, and we expect to continue utilizing AWS for a significant portion of our hosting services for the foreseeable future.
Furthermore, we have made significant investments in building out a personalization and experimentation engine that seamlessly integrates with our proprietary analytics system, advertisement related activities, and game environment. We believe this new capability will greatly enhance our ability to segment and personalize our players’ in-game experience with a focus on further monetizing our highest spending and most engaged players. We aim to connect the data, insights and knowledge gained from our analytics and monetization techniques to every element of our business - from marketing to merchandising - in order to improve player retention and monetization.
Seasonality
Many new smartphones and tablets are released in, or shortly before, the fourth calendar quarter to coincide with
the holiday shopping season. Because many players download our games soon after they purchase or receive their new devices, we generally experience seasonal sales increases based on the holiday selling period. Although we believe that the majority of this holiday impact occurs during the fourth quarter, some of this seasonality also occurs for us in our first calendar quarter due to some lag between device purchases and game purchases. However, the impact of this seasonality on our operating results is significantly affected by our title release schedule. For example, we have historically released each year’s new version of our Tap Sports Baseball franchise late in the first quarter, which has resulted in revenue from this title peaking in the second or third quarter, with declining revenue in the fourth quarter and the first quarter of the following year leading up to the launch of the next version of the title. In addition, companies’ advertising budgets are generally strongest during the fourth quarter and decline significantly in the first quarter of the following year, which affects the revenue we derive from advertisements and offers in our games. Conversely, our cost per install and cost per ad view also increase in the fourth quarter, since demand for marketing is higher during the holiday season.
Competition
Developing, distributing and selling mobile games is a highly competitive business, characterized by frequent product introductions and rapidly emerging new platforms, technologies and storefronts. For players, we compete primarily on the basis of game quality, brand and customer reviews. We compete for space on user’s smartphones and tablet devices in terms of the number of applications on their device and the amount of storage consumed by such applications. We also compete more generally for the time, attention and discretionary spending of users of smartphones and tablet devices who are spending ever-increasing amounts of time on social media, messaging and music, movie and television streaming applications, personal computer and console games, sports and the Internet. We compete for promotional and Digital Storefront placement based on our relationship with the Digital Storefront owner, historical performance, game quality, perception of sales potential, customer reviews and relationships with licensors of brands and other content. For content licensors, we compete based on royalty and other economic terms, historical financial performance of prior licensed content titles, perceptions of development quality, speed of execution, distribution breadth and relationships with storefront owners. We also compete for experienced and talented employees.
We compete with a continually increasing number of companies, including Activision (the parent company of King Digital Entertainment), Disney, Electronic Arts (“EA Mobile”), Gameloft, Netmarble (including its Kabam Games subsidiary), Rovio, Stillfront, Warner Brothers, and Zynga and many well-funded private companies, including AppLovin, Epic Games, Jam City, Miniclip, Niantic, Playrix, Pocket Gems, Scopely, and Supercell. In addition, hyper-casual games published by companies such as Crazy Labs, Lion Studios, and Voodoo account for a significant and growing percentage of mobile gaming downloads.
We also face competition from online game developers and distributors who are primarily focused on specific international markets. We could also face increased competition if those companies choose to compete more directly in the United States or the other markets that are significant to us or if large companies with significant online presences such as Apple, Google, Amazon, Facebook, Microsoft or Verizon, choose to enter or expand in the games space or develop competing games. For example, in 2019 Apple launched its Apple Arcade subscription service in which users receive access to a curated selection of paid titles on the App Store. In addition, we also face competition from mobile applications and websites focused on the home design market, which may include games, e-commerce titles, design applications and others seeking to displace our Design Home title which is a leading title in the currently unsaturated home design application market. Competitors in this space include Redecor - Home Design Makeover published by Reworks Oy (“Reworks”), and may include established game developers, established real estate companies, interior design companies, e-commerce companies and other well-funded private companies looking to enter the home design market.
In addition, given the open nature of the development and distribution for smartphones and tablets and the relatively low barriers to entry, we also compete or will compete with a vast number of small companies and individuals who are able to create and launch games and other content for these devices using relatively limited resources and with relatively limited start-up time or expertise. As an example of the competition that we face, it has been estimated that more than 4.5 million applications, including nearly 1 million active games, were available on Apple’s U.S. App Store as of January 31, 2021. The proliferation of titles in these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for players without substantially increasing our marketing expenses and
development costs.
We also compete for downloads and time spent on mobile devices with companies that develop popular social media and messaging applications, such as Facebook (with its Facebook, Facebook Messenger, Instagram, WhatsApp and other applications), Pinterest, Reddit, Snapchat, TikTok, Twitter, and YouTube, companies that develop streaming music, movie and television applications, such as Pandora, Spotify, Tidal, Disney+, HBO Go, Netflix, Amazon Prime and Hulu, and with companies that create other non-gaming related software applications.
Some of our competitors and our potential competitors have one or more advantages over us, either globally or in particular geographic markets, which include:
●significantly greater financial resources;
●the ability or willingness to spend significantly more than we do to acquire new players, which may be due to competitors having games with higher lifetime values than our games (i.e., the amount of money the average paying player spends in the competitor’s game over the player’s lifetime is greater than in our games) or where a competitor is willing to pay to acquire users in a manner that does not have a positive return on investment in an effort to increase its revenue and/or user base;
●greater experience with free-to-play games, building and maintaining growth games, and building social and community features into mobile games, as well as more effective game monetization;
●stronger brand and consumer recognition regionally or worldwide;
●the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;
●larger installed user bases from their existing mobile games;
●larger installed user bases from related platforms, such as console gaming or social networking websites, to which they can market and sell mobile games;
●more substantial intellectual property of their own from which they can develop games without having to pay royalties;
●lower labor and development costs and better overall economies of scale;
●greater platform-specific focus, experience and expertise;
●broader global distribution and presence; and
●greater talent, both in overall headcount and in terms of experience in creating successful titles.
Intellectual Property
Our intellectual property is essential to our business. We rely on a combination of copyright, trademark, patent, trade secret and other intellectual property laws and contractual restrictions on disclosure to protect our intellectual property rights. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. We also vigorously defend our intellectual property. For example, we recently filed a lawsuit against Reworks, seeking a judgment finding that Reworks has infringed one of our patents as well as seeking injunctive relief and monetary damages for past and ongoing infringement. Despite our precautions, it may be possible for third parties to obtain and use without our consent
intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, including piracy, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. In addition, some of our competitors have in the past released games that are nearly identical to successful games released by their competitors in an effort to confuse the market and divert users from the competitor’s game to the copycat game. To the extent that these tactics are employed with respect to any of our games, it could reduce our revenue.
Our trademarks that have been registered with the U.S. Patent and Trademark Office include Glu, Crowdstar, our 2-D ‘g’ character logo, our 3-D ‘g’ character logo and several of our game titles, including Cooking Dash, Covet Fashion, Deer Hunter, Diner Dash, and Tap Sports. In addition, we have trademark applications pending with the U.S. Patent and Trademark Office for other of our game titles. For certain titles we do not yet have, and do not intend to seek, trademark registration. We also own, or have applied to own, one or more registered trademarks in certain foreign countries, depending on the relevance of each brand to other markets, including registrations for Design Home. Registrations of both U.S. and foreign trademarks are renewable every ten years.
To date, we have seventeen issued U.S. patents and two U.S. patent applications currently outstanding, including two that we inherited through acquisitions, thus precluding our ability to protect the majority of our technologies from independent invention by third parties. In addition, we have filed foreign patent applications on two of the issued U.S. patents.
We also use third-party development tools to create many of our games, including a game development engine licensed from Unity Technologies to create most of our newest games.
From time to time, we encounter disputes over rights and obligations concerning intellectual property. If we do not prevail in these disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of our games or other applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party, any of which would have a material adverse effect on our business, financial condition and results of operations.
Government Regulation
We are subject to various federal, state and international laws and regulations that affect our business, including those relating to the privacy and security of customer and employee personal information and those relating to the Internet, behavioral tracking, mobile applications, advertising and marketing activities, sweepstakes and contests, and gambling. Additional laws in all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with our customers, and deliver products and services, or may significantly increase our compliance costs. As our business expands to include new uses or collection of data that are subject to privacy or security regulations, our compliance requirements and costs will increase and we may be subject to increased regulatory scrutiny.
Human Capital
We foster and maintain a workplace that values the unique talents and contributions of every individual. We believe it is the diversity of our people, with varied skills, backgrounds and cultures, that shape our success and innovation. Our people-focused culture is driven by collaboration and global cross-functional connections. We recognize the success of Glu is dependent on our talent and the satisfaction of our global workforce, and we are greatly invested in their ability to succeed and thrive. The following discussions provide a description of our employees, and outline how we manage our human capital and how we invest in our employees’ success.
Headcount
As of December 31, 2020, we had 802 employees, of which 468 were based in the United States, 61 in Canada, and 273 in India. As of December 31, 2020, approximately 27% of the global team was female and 73% was male.
We have not experienced any employment-related work stoppages due to the COVID-19 pandemic and consider relations with our employees to be good. Specifically, in response to local government and health guidelines around the COVID-19 pandemic we shifted almost all of our employees to remote work and began offering tools and services for optimizing remote work. We believe that our future success depends in part on our continued ability to hire, motivate and retain qualified employees in any operating environment.
Recruiting
We believe in investing for the future, including the future of our workforce, and have several talent programs to recruit exceptional individuals who share our values. Our recruiting team and hiring managers begin with the creation of detailed job descriptions, which clearly outline the skills and experience necessary for success in each role. We believe these steps are essential to effectively interview for identifiable skillsets and not just “personality fits.” We strive to build our workforce from within whenever possible; however, if the best candidate for an available position is not identified from within our existing talent pool, we will look externally for the best talent. Our recruitment strategy is to initially search for candidates directly through our professional networks, university and mentorship programs, and through advertising with certain partners. We also occasionally use recruitment consultants and search firms.
Professional Development
We are committed to helping people realize their highest potential and fostering a culture that supports personal development for individuals, leaders and teams across the organization. Our employees enjoy ample opportunity to learn new skills to develop and advance their career, and we ensure that all our employees receive ongoing formal training to help foster their professional development. We also encourage continuing education programs by providing a tuition reimbursement program for employees wishing to pursue approved degree and non-degree programs through approved institutions and online learning providers such as Udemy.
Employee Feedback
We value the feedback from our employees to help us understand what we are doing well and where we need to improve. Our annual employee engagement survey asks all of our employees for their input on a variety of matters. The results of the employee survey are disseminated to all employees, and the results are used to design action plans to assist managers with actively responding to employees’ sentiments. The employee survey is an important tool that allows us to continuously improve, innovate and evolve through ongoing engagement and measurement. As a result of these steps and others, employee engagement has increased in the last year.
Diversity and Inclusion
We are committed to building an inclusive culture and team environment that supports current and future diversity in our industry, our games, and our talent. In the spirit of Glu’s core value - we Win Together when we respect, acknowledge and celebrate each other’s differences. We are committed to creating an inclusive environment that promotes equality, cultural awareness and respect by implementing policies, benefits, training, recruiting and recognition practices to support our colleagues. We believe that diversity and inclusion is about valuing our differences and continually identifying ways to improve our cultural intelligence which ultimately leads to better decision-making and a more tailored client experience. To help us achieve and maintain a diverse workforce, we globally monitor certain employee demographic data such as gender, ethnicity, tenure and age.
In late 2020, we launched our first-ever Diversity, Equity & Inclusion (“DE&I”) steering committee. In 2021, the committee’s task will be to review and address hiring and workforce priorities, promote DE&I learning and development opportunities for employees, and facilitate meaningful external partnerships. In an effort to support shared identities and interests and promote belonging, we are committed to facilitating the development of Business Resource Groups in the first half of 2021.
Employee Compensation, Benefits & Wellbeing
We strive to enrich and elevate the lives of our employees through a robust compensation and benefits package that is flexible to meet both individual and family needs, including but not limited to:
●Market competitive compensation packages;
●Robust health and well-being benefits, including a variety of medical, dental, and vision benefit offerings, and on-site physical and mental health programs, such as complimentary yoga classes, to address work life balance issues;
●Paid maternity/paternity leave;
●Commuter and parking benefits;
●Catered lunches, snacks and beverages in the office;
●Competitive paid time off and paid holidays;
●Retirement plan alternatives and education offerings; and
●Social activities and happy hours.
Our employee compensation structure is designed to attract, motivate and retain employees and we accomplish this through our competitive compensation and bonus structure.
Information about our Executive Officers
The following table shows Glu’s executive officers as of February 26, 2021 and their areas of responsibility. Their biographies follow the table.
Nick Earl has served as our President and Chief Executive officer since November 2016 and as a member of our board of directors since December 2016. Prior to November 2016, Mr. Earl was our President of Global Studios from November 2015 to November 2016. Before joining us, from November 2014 to September 2015, Mr. Earl served as President of Worldwide Studios at Kabam. From September 2001 to October 2014, Mr. Earl served in several management positions at Electronic Arts, including most recently as Senior Vice President & General Manager of EA Mobile. From 1999 to 2001, Mr. Earl served as VP Product Development at Eidos. From April 1993 to March 1999, Mr. Earl served as an executive producer / GM at The 3DO Company. Mr. Earl holds a B.A. in Economics from the University of California at Berkeley.
Eric R. Ludwig has served as our Chief Operating Officer since October 2014, as our Executive Vice President since October 2011, and as our Chief Financial Officer since August 2008. Mr. Ludwig previously held the position of Senior Vice President, Chief Financial Officer and Chief Administrative Officer from September 2010 to October 2011. Prior to becoming our Chief Financial Officer, Mr. Ludwig served as our Vice President, Finance, Interim Chief Financial Officer from May 2008 to August 2008, served as our Vice President, Finance from April 2005 to May 2008 and served as our Director of Finance from January 2005 to April 2005. In addition, Mr. Ludwig has served as our Assistant Secretary since July 2006. Prior to joining us, from January 1996 to January 2005, Mr. Ludwig held various positions at Instill Corporation, a software as a service company, most recently as Chief Financial Officer, Vice President, Finance and Corporate Secretary. Prior to Instill, Mr. Ludwig was Corporate Controller at Camstar Systems, Inc., an enterprise manufacturing execution and quality systems software company, from May 1994 to January 1996. He also worked at Price Waterhouse L.L.P. from May 1989 to May 1994. Mr. Ludwig holds a B.S. in Commerce from Santa Clara University and is a Certified Public Accountant (inactive).
Chris Akhavan has served as our Senior Vice President, Business Development, Corporate Development and Advertising since December 2019. Prior to this, Mr. Akhavan served as our Chief Revenue Officer from May 2016 to
December 2019 and as our President of Publishing from April 2013 to May 2016. Before joining us, from January 2010 to April 2013, Mr. Akhavan served in several management positions at Tapjoy, Inc., a provider of mobile advertising, most recently as Senior Vice President, Partnerships. From April 2009 to January 2010, Mr. Akhavan was a Manager, Publisher Network at RockYou!, a social gaming company, and from October 2007 to November 2008, he served as a Strategic Partner Manager at VideoEgg (now SAY Media), an advertising inventory and platform provider. Mr. Akhavan holds a B.A. in Economics from the University of California at Santa Cruz.
Becky Ann Hughes has served as our Senior Vice President of our Growth team (formerly known as our Revenue team) since December 2019. Prior to this, Ms. Hughes served as the head of our Glu Play game development studio since 2014, most recently in the position of Vice President and General Manager from September 2016 to December 2019. Prior to joining Glu, Ms. Hughes held various leadership roles in product marketing and product management at PlayFirst Inc., which was acquired by Glu in 2014. She holds a Bachelor of Science degree in Business Marketing from San Jose State University and is a 2021 MBA Candidate at The Wharton School.
Scott J. Leichtner has served as our Vice President, General Counsel and Corporate Secretary since September 2010. Mr. Leichtner joined Glu in June 2009 as our Senior Corporate Counsel. Prior to joining us, Mr. Leichtner was a corporate attorney at Fenwick & West LLP, a law firm focused on serving technology clients, from October 1997 to May 2009. Mr. Leichtner holds an A.B. in Political Science from Duke University and a J.D. from the University of Michigan.
Item 1A.
Item 1A. Risk Factors
Summary Risk Factors
The below summary risks provide an overview of many of the risks we are exposed to in the normal course of our business activities. As a result, the below summary risks do not contain all of the information that may be important to you, and you should read the summary risks together with the more detailed discussion of risks set forth following this section under the heading “Risk Factors,” as well as elsewhere in this Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional risks, beyond those summarized below or discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may apply to our activities or operations as currently conducted or as we may conduct them in the future or in the markets in which we operate or may in the future operate. Consistent with the foregoing, we are exposed to a variety of risks, including the following:
•The announcement and pendency of our agreement to be acquired by Electronic Arts Inc. could have an adverse effect on our business;
•The completion of the merger may be delayed or prevented. The failure to complete the merger with Electronic Arts could adversely affect our business.
If we fail to develop and timely publish new high-quality, engaging games and continue to enhance our existing games, particularly our most successful games, our revenue would suffer;
•Successfully developing and monetizing free-to-play games is a challenging business model;
•The markets in which we operate are highly competitive, many of our competitors have significantly greater resources than we do, and our players may prefer our competitors’ products or competing forms of entertainment;
•We rely on a very small portion of our total players for nearly all of our revenue that we derive from in-app purchases;
•We have depended on a small number of growth games for a significant portion of our revenue in recent fiscal periods. If these games do not continue to grow or we do not release highly successful new games, our revenue would decline;
•We derive the majority of our revenue from Apple’s App Store and the Google Play Store, and if we are unable to maintain a good relationship with each of Apple and Google or if either of these storefronts were unavailable for any prolonged period of time, our business will suffer;
•The operators of Digital Storefronts on which we publish our free-to-play games and the advertising channels through which we acquire some of our players in many cases have the unilateral ability to change and interpret the terms of our and others’ contracts with them;
•The manufacturers of mobile devices on which our free-to-play games can be played have the unilateral ability to change the hardware or software of their devices which may negatively affect our business;
•We derive a significant portion of our revenue from advertisements and offers that are incorporated into our free-to-play games through relationships with third parties. If we lose the ability to provide these advertisements and offers for any reason, if we become victim to advertising fraud or if any events occur that negatively impact the revenue we receive from these sources, it would negatively impact our operating results;
•It is becoming increasingly difficult and more expensive for us to acquire players for our games and we may not achieve a positive return on investment on our user acquisition efforts;
•We have a history of net losses, may incur substantial net losses in the future and may not achieve and sustain profitability or growth in future periods;
•Our financial results could vary significantly from quarter to quarter and are difficult to predict, which in turn could cause volatility in our stock price;
•Our business will suffer if our acquisition and strategic investment activities are unsuccessful or disrupt our ongoing business, which may involve increased expenses and may present risks not contemplated at the time of the transactions;
•We may not, or may be unable to, renew our existing content licenses when they expire and may not choose to obtain additional licenses or be able to obtain new licenses on favorable terms, which could negatively impact our revenue if we fail to replace such revenue with revenue from games based on our own intellectual property;
•Securing license agreements to develop, publish and market games based on or significantly incorporating celebrities, third-party licensed brands, properties, and other content typically requires that we make minimum guaranteed royalty and other payments to such licensors, and to the extent such payments become impaired, our operating results would be harmed;
•If we do not successfully establish and maintain awareness of our brand and games, if we fail to develop high-quality, engaging games that are differentiated from our prior games, if we incur excessive expenses promoting and maintaining our brand or our games or if our games contain defects or objectionable content, our operating results and financial condition could be harmed;
•We rely on a combination of our own servers and technology and third party infrastructure to operate our games. If we experience any system or network failures, unexpected technical problems, cyber-attacks or any other interruption to our games, it could reduce our sales, increase costs, or result in a loss of revenue or loss of end users of our games;
•Cyber-attacks, security breaches, and computer viruses could harm our business, reputation, brand and operating results;
•We use a game development engine licensed from Unity Technologies to create many of our games. If we experience any prolonged technical issues with this engine or if we lose access to this engine for any reason, it could delay our game development efforts and cause our financial results to fall below expectations for a quarterly or annual period, which would likely cause our stock price to decline;
•We rely on assumptions and estimates to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business;
•Our business and growth may suffer if we are unable to hire and retain key personnel;
•Any restructuring actions and cost reduction initiatives that we undertake may not deliver the results we expect, and these actions may adversely affect our business;
•We may not realize the benefits expected through our strategic relationship with Tencent and other aspects of the relationship could have adverse effects on our business;
•Our reported financial results could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves;
•If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected;
•Conversion of key internal systems and processes, particularly our ERP system, and problems with the design, implementation or operation of these systems and processes could interfere with, and therefore harm, our business and operations;
•Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results;
•We face added business, political, regulatory, operational, financial and economic risks as a result of our international operations and distribution, any of which could increase our costs and adversely affect our operating results;
•If the mobile games market is disrupted by new technologies and we are not able to appropriately adapt our business, our business will suffer;
•If we fail to deliver our games at the same time as new mobile devices are commercially introduced, our revenue may suffer;
•If the mobile gaming market does not continue to grow, our business could be adversely affected; and
•Changes to digital platforms’ rules relating to “loot boxes,” or the potential adoption of regulations or legislation impacting loot boxes, could require us to make changes to some of our games’ economies or design, which could negatively impact the monetization of these games reducing our revenue.
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.
Risk Factors
Risks Related to Our Business and Industry
The announcement and pendency of our agreement to be acquired by Electronic Arts Inc. could have an adverse effect on our business.
On February 8, 2021, we entered into the Merger Agreement with Electronic Arts, pursuant to which a wholly-owned subsidiary of Electronic Arts will, upon the terms and subject to regulatory and stockholder approval and the other conditions set forth in the Merger Agreement, merge with and into us, and we will be the surviving corporation of the Merger and will become a wholly owned subsidiary of Electronic Arts. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be cancelled and automatically converted into the right to receive $12.50 in cash, without interest and subject to any required withholding of taxes.
Uncertainty about the possible effect of the pendency of the Merger or termination of the Merger Agreement may have an adverse effect on our business and operations that may be material to our company. Factors that may affect our business include the effect of the announcement of the Merger on our ability to retain and hire key personnel and maintain relationships with players, partners and others with whom we do business, the occurrence of any circumstance or any other events that could give rise to the termination of the transactions, or the failure to obtain the approval of our stockholders or failure to satisfy any other conditions precedent to consummate the transactions, including the receipt of all necessary regulatory approvals on a timely basis or at all . Electronic Arts’ ability to successfully integrate our operations and employees, risks that the Merger disrupts current ongoing business operations, including diversion from day-to-day
operations and risks of litigation and/or regulatory actions related to the Merger (including stockholder litigation relating to the transactions).
Our players may experience uncertainty associated with the Merger, including with respect to possible changes to our games, services, or policies. Similarly, our key business partners may experience uncertainty associated with the Merger, including with respect to current or future business relationships with us. Uncertainty may cause players to refrain from playing or spending money in our games or downloading our games, and partners may seek to change existing business relationships, which could result in an adverse effect on our business, operations, and financial condition in a way that may be material to our company.
Pursuant to the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the Merger becomes effective or the Merger Agreement is terminated. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and may otherwise harm our business and operations.
The completion of the Merger may be delayed or prevented. The failure to complete the Merger with Electronic Arts could adversely affect our business.
Completion of the Merger with Electronic Arts is subject to conditions beyond our control that may prevent, delay, or otherwise adversely affect its completion in a material way, including the expiration or termination of applicable waiting periods under antitrust and competition laws, and similar competition approvals or consents that must be obtained from regulatory entities in the United States and Austria, as well as the approval of our stockholders and potential future stockholder litigation. If the Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price reflects an assumption that a transaction will be completed. In addition, the Merger Agreement provides that we will be required to pay Electronic Arts a termination fee of $78.9 million in certain circumstances, including if our board of directors changes or withdraws its recommendation of the Merger to our stockholders, or if we terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement). Further, a failure to complete the Merger may result in negative publicity and a negative impression of us in the investment community. Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our players and key business partners, could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, these relationships, or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
If we fail to develop and timely publish new high-quality, engaging games and continue to enhance our existing games, particularly our most successful games, our revenue would suffer.
Our business depends on developing and publishing mobile games that consumers will download and spend time and money playing. We must continue to invest significant resources in research and development, technology, analytics and marketing to introduce new games and continue to update our successful games, and we often must make decisions about these matters well in advance of a product’s release to timely implement them. Our success depends, in part, on unpredictable and volatile factors beyond our control, including consumer preferences and the number of applications they are willing to download to and maintain on their devices, competing gaming and non-gaming related applications, new mobile platforms and the availability of other entertainment activities. If our games do not meet consumer expectations, or they are not brought to market in a timely and effective manner, our business, operating results and financial condition would be harmed. It can be difficult for us to predict with certainty when we will launch a new game as games may require longer development schedules or beta testing periods to meet our quality standards and our players’ expectations. For example, in 2018, we decided to delay the worldwide launch dates of WWE Universe and Diner DASH Adventures to May and June 2019, respectively, in order to give the development teams additional time to work on these titles. In August 2019 and August 2020, respectively, we announced that we were delaying the expected worldwide launch dates of Disney Sorcerer’s Arena and Deer Hunter World for similar reasons. While Diner DASH Adventures and Disney Sorcerer’s Arena have been commercially successful, WWE Universe has performed significantly below our expectations and we announced in January 2021 that we will sunset the game in March 2021. Furthermore, our future
game launches could also be delayed, they may not be successful when launched, or we may decide to not globally launch a game at all if its performance during beta testing does not meet our quality standards (as was the case with our Originals title that we sunset during the third quarter of 2020), any of which would likely harm our business, operating results and financial condition.
Even if our games are successfully introduced in a timely fashion and initially adopted, a failure to continually update them with compelling content or a subsequent shift in the entertainment preferences of consumers could cause a decline in our games’ popularity that could materially reduce our revenue and harm our business, operating results and financial condition, which effect would be magnified for our most successful games and, in particular, Design Home. In connection with our product strategy, we have committed significant resources to updating, adding new features to and enhancing our existing titles as opposed to launching as many new titles as we have in prior years. However, we may not be successful in doing so, such as was the case with our update of Covet Fashion in the first quarter of 2017. It is difficult to predict when and how quickly the popularity and revenue of one of our games will decline, and if any of our key growth games experience any such unexpected declines, we may not meet our expectations or the expectations of securities analysts or investors for a given quarter. Furthermore, we compete for the discretionary spending of consumers, who face a vast array of entertainment choices, including social media and other non-gaming related apps, games played on personal computers and consoles, television, movies, sports and the Internet. If we are unable to sustain sufficient interest in our games compared to other forms of entertainment, our business and financial results would be seriously harmed.
In addition to the market factors noted above, our ability to successfully develop and launch games for mobile devices and their ability to achieve and maintain commercial success will depend on our ability to:
●minimize launch delays and cost overruns on the development of new games and features;
●successfully enhance and increase the revenue we generate from our existing growth games;
●effectively market and monetize our games;
●achieve a positive return on investment from our marketing and user acquisition efforts;
●sustain sufficient interest in our games compared to other forms of entertainment for our players;
●adapt to new technologies and feature sets for mobile and other devices;
●attract and retain experienced and talented employees;
●compete successfully against a large and growing number of existing market participants;
●minimize and quickly resolve bugs and outages; and
●acquire and successfully integrate high quality mobile game assets, personnel or companies.
We have implemented a work from home policy for all of our workforce as a result of the current COVID-19 pandemic, which may have a substantial impact on employee morale and productivity, disrupt access to facilities, equipment, networks, corporate systems, books and records and may add additional expenses and strain on our business. The duration and extent of the impact from the coronavirus outbreak on our business depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, the availability and effectiveness of a vaccine, and the impact of these and other factors on our employees. While we were able to successfully launch MLB Tap Sports Baseball 2020 and Disney Sorcerer’s Arena in March 2020 while our workforce was working from home and have been publishing updates and running live operations for our games, we believe that if our employees are required to continue to work exclusively or primarily from home during most or all of 2021 and beyond, it could ultimately negatively impact game development and potentially result in delays in launching new games or releasing significant product updates.
These and other uncertainties make it difficult to know whether we will succeed in continuing to develop, launch and enhance successful mobile games in accordance with our operating plan. If we do not succeed in doing so, our business, financial condition, results of operations and reputation will suffer.
Successfully developing and monetizing free-to-play games is a challenging business model.
We face significant challenges in achieving our goal of becoming the leading developer and publisher of free-to-play mobile games. Successful free-to-play games tend to include competitive gameplay, deep meta game features, player versus player activities, regularly updated content and other complex technological and creative attributes. While we are working to include such features in our games, we may not successfully update our games to include these features or they may not be well received by our players. For example, the significant update to Racing Rivals that we released in the fourth quarter of 2016 was poorly received by players, led to a significant decline in revenue and ultimately contributed to our decision to sunset this title in April 2019. If we are unable to successfully implement our product strategy, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected. Additionally, our existing games compete with our new offerings and the offerings of our competitors, and revenue from our existing catalog games has declined over time, a trend that we expect to continue.
Our efforts to develop new growth games and enhance our existing growth games may prove unsuccessful or, even if successful, it may take more time than we anticipate to achieve significant revenue because, among other reasons:
●our strategy assumes that a large number of players will download our games because they are free and that we will then be able to effectively monetize the games; however, players may not widely download our games for a variety of reasons, including:
●the increasing competition throughout the mobile gaming industry for downloads, not only with other mobile games but also with social media and other non-gaming related applications;
●limits on the number of mobile applications players are willing to download to and maintain on their devices;
●poor consumer reviews or other negative publicity;
●ineffective or insufficient marketing efforts, particularly in light of Apple’s decision to deprecate identifiers for advertisers (“IDFAs”) which we expect to occur early in the Spring of 2021;
●lack of sufficient social and community features;
●lack of prominent storefront featuring;
●failure to reach and maintain Top Free App Store rankings; and
●the relatively large file size of some of our games; in particular, our games often utilize a significant amount of the available memory on a user’s device and tend to consume additional space as players advance through our games, which may cause players to delete our games once the file size grows beyond the capacity of their devices’ storage limitations;
●even if our games are widely downloaded, we may fail to retain users or optimize the monetization of these games; this may occur for a variety of reasons, including poor game design or quality, lack of social and community features, gameplay issues such as game unavailability, long load times or an unexpected termination of the game due to data server or other technical issues, lack of differentiation from predecessor games or other competitive games, lack of innovative features that surprise and delight our players, differences in user demographics and purchasing power or our failure to effectively respond and adapt to changing user preferences through game updates;
●future games that we release may fail to resonate with consumers and games that incorporate licensed property may not be financially successful due to the minimum guaranteed royalty payments to our licensors;
●we intend to continue to develop games based upon our own intellectual property, in addition to well-known licensed brands and properties, and we may encounter difficulties in generating sufficient consumer interest in and downloads of our games;
●many well-funded public and private companies have released, or plan to release, games in the same genres as our growth games or games incorporating the same licensed brands that we use in our games (e.g., Disney/Pixar), and this competition will make it more difficult for us to differentiate our games and derive significant revenue from them;
●we may have difficulty hiring the experienced monetization, live operations, server technology, software and data engineer, game designer, data analyst, user experience, economist, and product management personnel that we require to develop our new games and support our existing growth and catalog games, particularly in the competitive hiring market in the San Francisco Bay Area where our headquarters is located, or may face difficulties in developing our technology platform and incorporating it into our products or developing unique gameplay;
●we depend on the proper and continued functioning of our own servers and third-party infrastructure to operate our connected games that are delivered as a service; and
● the impact of potential regulatory issues, including:
●various jurisdictions are assessing the legality of “loot boxes” which are commonly used in some of our top games. The Federal Trade Commission (“FTC”) held a public workshop in August 2019 to examine, and released a staff paper in August 2020 summarizing, consumer protection issues related to loot boxes. If the FTC or a comparable regulatory or legislative body in another jurisdiction determines that loot boxes constitute gambling or otherwise elects to regulate the use of loot boxes, we may be required to stop utilizing loot boxes within our games that are distributed in such jurisdictions, which would negatively impact our revenue;
●the FTC has previously indicated that it intends to review issues related to in-app purchases, particularly with respect to games that are marketed primarily to minors, and the FTC might issue rules significantly restricting or even prohibiting in-app purchases or name us as a defendant in a future regulatory action or lawsuit; and
●various legislators, administrative bodies and courts, primarily in Europe, have taken actions (including imposing fines) or may be considering taking actions (including antitrust enforcement) against Apple and Google, which are our primary distribution platforms, and Facebook, which is our primary user acquisition channel.
If we do not achieve a sufficient return on our investment with respect to our free-to-play business model, it will negatively affect our operating results and may require us to formulate a new business strategy.
The markets in which we operate are highly competitive, many of our competitors have significantly greater resources than we do and our players may prefer our competitors’ products or competing forms of entertainment.
Developing, distributing and selling mobile games is a highly competitive business, characterized by frequent product introductions and rapidly emerging new platforms, technologies and storefronts. For players, we compete primarily on the basis of game quality, brand and customer reviews. We compete for space on user’s smartphones and tablet devices in terms of the number of applications on their device and the amount of storage consumed by such applications. We also compete more generally for the time, attention and discretionary spending of users of smartphones
and tablet devices who are spending ever-increasing amounts of time on social media, messaging and music, movie and television streaming applications, personal computer and console games, sports and the Internet. We compete for promotional and Digital Storefront placement based on our relationship with the Digital Storefront owner, historical performance, game quality, perception of sales potential, customer reviews and relationships with licensors of brands and other content. For content licensors, we compete based on royalty and other economic terms, historical financial performance of prior licensed content titles, perceptions of development quality, speed of execution, distribution breadth and relationships with storefront owners. We also compete for experienced and talented employees.
We compete with a continually increasing number of companies, including Activision (the parent company of King Digital Entertainment), Disney, Electronic Arts (“EA Mobile”), Gameloft, Netmarble (including its Kabam Games subsidiary), Rovio, Stillfront, Warner Brothers, and Zynga and many well-funded private companies, including AppLovin, Epic Games, Jam City, Miniclip, Niantic, Playrix, Pocket Gems, Scopely, and Supercell. In addition, hyper-casual games published by companies such as Crazy Labs, Lion Studios, and Voodoo account for a significant and growing percentage of mobile gaming downloads.
We also face competition from online game developers and distributors who are primarily focused on specific international markets. We could also face increased competition if those companies choose to compete more directly in the United States or the other markets that are significant to us or if large companies with significant online presences such as Apple, Google, Amazon, Facebook, Microsoft or Verizon, choose to enter or expand in the games space or develop competing games. For example, in 2019 Apple launched its Apple Arcade subscription service in which users receive access to a curated selection of paid titles on the App Store. In addition, we also face competition from mobile applications and websites focused on the home design market, which may include games, e-commerce titles, design applications and others seeking to displace our Design Home title which is a leading title in the currently unsaturated home design application market. Competitors in this space include Redecor - Home Design Makeover published by Reworks, and may include established game developers, established real estate companies, interior design companies, e-commerce companies and other well-funded private companies looking to enter the home design market. Given the open nature of the development and distribution for smartphones and tablets and the relatively low barriers to entry, we also compete or will compete with a vast number of small companies and individuals who are able to create and launch games and other content for these devices using relatively limited resources and with relatively limited start-up time or expertise. As an example of the competition that we face, it has been estimated that more than 4.5 million applications, including nearly 1 million active games, were available on Apple’s U.S. App Store as of January 31, 2021. The proliferation of titles in these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for players without substantially increasing our marketing expenses and development costs.
We also compete for downloads and time spent on mobile devices with companies that develop popular social media and messaging applications, such as Facebook (with its Facebook, Facebook Messenger, Instagram, WhatsApp and other applications), Pinterest, Reddit, Snapchat, TikTok, Twitter and YouTube, companies that develop streaming music, movie and television applications, such as Pandora, Spotify, Tidal, Disney+, HBO Go, Netflix, Amazon Prime and Hulu, and with companies that create other non-gaming related software applications, such as Kim Kardashian West’s own personal media application.
Some of our competitors and our potential competitors have one or more advantages over us, either globally or in particular geographic markets, which include:
●significantly greater financial resources;
●the ability or willingness to spend significantly more than we do to acquire new players, which may be due to competitors having games with higher lifetime values than our games (i.e., the amount of money the average paying player spends in the competitor’s game over the player’s lifetime is greater than in our games) or where a competitor is willing to pay to acquire users in a manner that does not have a positive return on investment in an effort to increase its revenue and/or user base;
●greater experience with free-to-play games, building and maintaining games, and building social and community features into mobile games, as well as more effective game monetization;
●stronger brand and consumer recognition regionally or worldwide;
●the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;
●larger installed user bases from their existing mobile games;
●larger installed user bases from related platforms, such as console gaming or social networking websites, to which they can market and sell mobile games;
●more substantial intellectual property of their own from which they can develop games without having to pay royalties;
●lower labor and development costs and better overall economies of scale;
●greater platform-specific focus, experience and expertise;
●broader global distribution and presence; and
●greater talent, both in overall headcount and in terms of experience in creating successful titles.
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.
We rely on a very small portion of our total players for nearly all of our revenue that we derive from in-app purchases.
We rely on a very small portion of our total players for nearly all of our revenue derived from in-app purchases (as opposed to advertisements and incentivized offers) and installation rates and user-growth have declined for us with our most recent product launches. The percentage of unique paying players for our largest revenue-generating free-to-play games has typically been less than 5%, when measured as the number of unique paying users on a given day divided by the number of unique users on that day, though this percentage fluctuates, and it may be higher than 5% for some of our games during specific, relatively short time periods, such as immediately following worldwide launch, during special events or following content updates or marketing campaigns. To significantly increase our revenue, we must increase the number of downloads of our games, increase the number of players who convert into paying players by making in-app purchases or enrolling in subscriptions, increase the amount that our paying players spend in our games and/or increase the length of time our players generally play our games. We might not succeed in our efforts to increase the monetization rates of our users, particularly if we do not increase the amount of social features in our games or otherwise improve our games though updates and live operations. In addition, if the current COVID-19 pandemic results in a prolonged economic downturn, our users may reduce their discretionary spending and our revenue could suffer. If we are unable to convert non-paying players into paying players, or if we are unable to retain our paying players or if the average amount of revenue that we generate from our players does not increase or declines, our business may not grow, our financial results will suffer, and our stock price may decline.
We have depended on a small number of growth games for a significant portion of our revenue in recent fiscal periods. If these games do not continue to grow or we do not release highly successful new games, our revenue would decline.
In the mobile gaming 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 revenue comes from a limited number of games, although the games in that group have shifted over time. Our top three titles for the year ended December 31, 2020, Design Home, the Tap Sports Baseball franchise, and Covet Fashion, each accounted for greater than 10% of our revenue in the period and collectively generated approximately 71.0% of our revenue during the period, while our top three titles for the year ended December 31, 2019, Design Home, the Tap Sports Baseball franchise, and Covet
Fashion, each accounted for greater than 10% of our revenue in the period and collectively generated approximately 78.4% of our revenue during the period. We expect our dependency on a small number of games, and in particular Design Home, for a majority of our revenue will continue for the foreseeable future. The current COVID-19 pandemic resulted in the delay and shortening of the 2020 Major League Baseball season, which we believe at least somewhat negatively impacted downloads of and revenue from our MLB Tap Sports Baseball 2020 game. If the 2021 Major League Baseball season is similarly affected by the COVID-19 pandemic, it could negatively impact the financial performance of our upcoming MLB Tap Sports Baseball 2021 game. In addition, if we are unable to grow bookings from Disney Sorcerer’s Arena or Diner DASH Adventures so that they become growth games, or if any games that we launch in the near future are not successful, it could result in an overall decline in our revenue and cause us to continue to rely primarily on our existing growth games for a significant majority of revenue for the foreseeable future.
We derive the majority of our revenue from Apple’s App Store and the Google Play Store, and if we are unable to maintain a good relationship with each of Apple and Google or if either of these storefronts were unavailable for any prolonged period of time, our business will suffer.
The majority of our smartphone revenue has historically been derived from Apple’s iOS platform, which accounted for 61.5% of our total revenue for the year ended December 31, 2020 compared with 60.8% for the year ended December 31, 2019. We generated the majority of this iOS-related revenue from the Apple App Store, which represented 56.2% and 54.4% of our total revenue for the year ended December 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on the Apple App Store. In addition, we derived approximately 38.4% and 39.1% of our total revenue for the year ended December 31, 2020 and 2019, respectively, from the Android platform. We generated the majority of our Android-related revenue from the Google Play Store, which represented 32.9% and 33.5% of our total revenue for the year ended December 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We believe that we have good relationships with each of Apple and Google, which have contributed to the majority of our games released in the last several years being featured on their respective storefronts upon worldwide commercial release. If we do not continue to receive prominent featuring, users may find it more difficult to discover our games and we may not generate significant revenue from them. We may also be required to spend significantly more on marketing campaigns to generate substantial revenue on these platforms. Additionally, our efforts to advertise through search advertisements in the Apple App Store may not be successful and may not result in additional users or monetization. In addition, currently neither Apple nor Google charge a publisher when it features one of their apps. If either Apple or Google were to charge publishers to feature an app, it could cause our marketing expenses to increase considerably. Accordingly, any change or deterioration in our relationship with Apple or Google could materially harm our business and likely cause our stock price to decline.
We also rely on the continued functioning of the Apple App Store and the Google Play Store. In the past, these Digital Storefronts have been unavailable for short periods of time or experienced issues with their in-app purchasing functionality. If such events recur on a prolonged basis or other similar issues arise that impact our ability to generate revenue from these storefronts, it would have a material adverse effect on our revenue and operating results. In addition, if the storefront operators fail to provide high levels of service, our players’ ability to access our games may be interrupted or players may not receive the virtual currency or goods for which they have paid, which may adversely affect our brand, revenue and operating results.
The operators of Digital Storefronts on which we publish our free-to-play games and the advertising channels through which we acquire some of our players in many cases have the unilateral ability to change and interpret the terms of our and others’ contracts with them.
We distribute our free-to-play games through direct-to-consumer Digital Storefronts, for which the distribution terms and conditions are often “click through” agreements that we are not able to negotiate with the storefront operator. For example, we are subject to each of Apple’s and Google’s standard click-through terms and conditions for application developers, which govern the promotion, distribution and operation of apps, including our games, on their storefronts. Each of Apple and Google can unilaterally change its standard terms and conditions, including platform commission fees, with no prior notice to us. In addition, the agreement terms can be vague and subject to changing interpretations by the storefront operator. Further, these storefront operators typically have the right to prohibit a
developer from distributing its applications on its storefront if the developer violates its standard terms and conditions. For example, in April 2019, Apple enforced new guidelines relating to offerwalls which has negatively impacted our revenue from offers in our games; Apple enforced similar guidelines with respect to offerwalls in January 2018 relating to Design Home. In addition, in the fourth quarter of 2017, Apple updated its terms of service to require publishers to disclose a player’s odds of winning the various items contained within loot boxes, and in May 2019 Google updated its terms of service to require substantially similar disclosure. Glu utilizes loot boxes in many of its current games and some of the games it intends to release in the future, and it is possible that these disclosure requirements will negatively impact the monetization of these titles. If Apple or Google, or any other key storefront operator, determines that we or one of our key vendors are violating its standard terms and conditions, by a new interpretation or otherwise, or prohibits us from distributing our games on its storefront, it would materially harm our business and likely cause our stock price to significantly decline.
Furthermore, any changes to the advertising channels through which we acquire some of our players, including any changes by Facebook of its advertising platform, which we rely on for a majority of our user acquisition activities, could negatively impact our revenue or otherwise materially harm our business, and we may not receive significant or any advance warning of such changes.
The manufacturers of mobile devices on which our free-to-play games can be played have the unilateral ability to change the hardware or software of their devices which may negatively affect our business.
Our games are played on mobile devices manufactured by third parties. We have no influence on the hardware or software of these devices and any changes to them might negatively impact our business. Mobile devices contain IDFAs which currently are shared with the publishers of the applications on a mobile device. Publishers use these IDFAs for a variety of business purposes, among others for measuring advertising, generating advertising revenue, performing application user level analytics, and targeting users in marketing campaigns. Apple has announced that starting in early Spring 2021, the IDFAs of Apple’s mobile devices will no longer be available by default to mobile application publishers. Instead, the IDFA will only be accessible to the application publisher if a user gives the publisher permission to access his or her IDFA by expressly consenting to this access. We expect only a minority of users will consent to us accessing their IDFA. This may lead to a number of challenges including:
●we may have difficulty measuring the effectiveness of individual user acquisition campaigns;
●we may have difficulty optimizing user acquisition campaigns to deliver return on investment;
●we may have difficulty projecting the potential return of individual user acquisition campaigns;
●we may see a negative impact to our advertising revenue;
●we may encounter challenges migrating from IDFA to other identifiers for the purposes of analytics thereby introducing risk to our core data infrastructure;
●we may have difficulties formulating new marketing strategies that are as effective as the IDFA-driven marketing strategies we currently employ; and
●we may encounter delays in obtaining Apple’s approval when submitting new games and updates to our existing games to the App Store, which may impact our live operations schedule and ability to deliver updated features and content to our players.
These challenges might negatively impact our revenue or otherwise materially harm our business. Other manufacturers of mobile devices may also implement similar changes, which could negatively impact our business.
We derive revenue from advertisements and offers that are incorporated into our free-to-play games through relationships with third parties. If we lose the ability to provide these advertisements and offers for any reason, if we become victim to advertising fraud or if any events occur that negatively impact the revenue we receive from these sources, it would negatively impact our operating results.
In addition to in-app purchases, we derive revenue from our free-to-play games through advertisements and offers; for the year ended December 31, 2020, we generated 10.9% of our total revenues from advertisements and offers. We incorporate advertisements and offers into our games by implementing third parties’ software development kits. We rely on these third parties to provide us with a sufficient inventory of advertisements and offers to meet the demand of our user base. If we exhaust the available inventory of these third parties, it will negatively impact our revenue. If our relationship with any of these third parties terminates for any reason, or if the commercial terms of our relationships do not continue to be renewed on favorable terms, we would need to locate and implement other third party solutions, which could negatively impact our revenue, at least in the short term. In addition, we may be susceptible to various types of advertising fraud, which could reduce the effectiveness of our advertising campaigns or cause us to pay money to advertising firms for installations that were wrongly attributed to such firms. While we have implemented measures to detect and prevent advertising fraud, such measures may not prove effective, which would harm our user acquisition efforts and could harm our revenue. Some players of our games also use various techniques in an attempt to circumvent limits on the number of advertisements that players can watch in a given period in order to earn extra virtual currency, which might negatively affect the economy of our games. Furthermore, the revenue that we derive from advertisements and offers is subject to seasonality, as companies’ advertising budgets are generally highest during the fourth quarter and decline significantly in the first quarter of the following year, which negatively impacts our revenue in the first quarter.
The actions of the storefront operators can also negatively impact the revenue that we generate from advertisements and offers. For example, in April 2019, Apple enforced new guidelines relating to offerwalls which has negatively impacted our revenue from offers in our games; Apple enforced similar guidelines with respect to offerwalls in January 2018 relating to Design Home. Any similar changes in the future that impact our revenue that we generate from advertisements and offers could materially harm our business.
It is becoming increasingly difficult and more expensive for us to acquire players for our games and we may not achieve a positive return on investment on our user acquisition efforts.
It is becoming increasingly difficult and more expensive for us to acquire players for our games for a variety of reasons, including the increasingly competitive nature of the mobile gaming industry and the significant amount of time and attention users are dedicating to competing entertainment options, including social media and other non-gaming applications. In addition, we believe that changes that Apple has implemented during the last several years to its platform, particularly the removal of the Top Grossing rankings and decreasing the prominence of the Top Free rankings, has negatively impacted the number of organic downloads of our games. These factors have contributed to an overall decline in our daily and monthly active users for our existing games as well as fewer players downloading our new games than in the past despite our substantially increased spending on user acquisition efforts. For example, our launch of Diner DASH Adventures in June 2019 resulted in significantly fewer downloads than prior versions of our Dash franchise such as Cooking Dash and Restaurant Dash with Gordon Ramsay. If the number of players who download our new title launches scheduled for 2021 does not meet our expectations, in particular for Table & Taste and the next iteration of our Deer Hunter franchise, our revenue and operating results will suffer. Our existing successful growth games are not immune to these trends, as we experienced significantly higher CPIs (costs per install) for Design Home and Covet Fashion during the first half of 2019 due to substantial increases in spending by several competitors, which negatively impacted the revenue and margins for these titles. Furthermore, our spending on user acquisition is designed so that we will achieve a positive return on investment - that is, we expect that the amount we spend to acquire users in our games will be less than the revenue we ultimately generate from such acquired users. In order to determine the expected revenue from acquired users who may play our games for multiple years, we often must make certain assumptions about their projected spending behavior, particularly for games like Disney Sorcerer’s Arena for which we did not have similar games in our portfolio to
aid us in our modeling efforts. To the extent that we do not achieve a positive return on investment on our user acquisition spending, it will negatively impact our margins and overall operating results.
Our financial results could vary significantly from quarter to quarter and are difficult to predict, which in turn could cause volatility in our stock price.
Our revenue and operating results could vary significantly from quarter to quarter due to 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 accurately predict our future revenue 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 revenue, and even a small shortfall in revenue could disproportionately and adversely affect financial results for that quarter.
In addition to other factors discussed in this section, factors that may contribute to the variability of our quarterly results and the volatility in our stock price include:
●our ability to increase the number of our paying players and the amount that each paying player spends in our games;
●the popularity and monetization rates of our new games released during the quarter and the ability of games released in prior periods to sustain their popularity and monetization rates;
●the number and timing of new games and significant updates released by us and our competitors, particularly those games that may represent a significant portion of our revenue in a quarter, which timing can be impacted by internal development delays, longer than anticipated beta testing periods, shifts in product strategy and how quickly Digital Storefront operators review and approve our games for commercial release;
●changes in the prominence of storefront featuring for our games and those of our competitors;
●the loss of, or changes to, one of our distribution platforms;
●changes to the Apple iOS platform or the Google Android platform to which we are not able to adapt our game offerings;
●fluctuations in the size and rate of growth of overall consumer demand for smartphones, tablets, games and related content;
●the amount and timing of charges related to any future impairments of goodwill, intangible assets, prepaid royalties and guarantees;
●changes in the mix of revenue derived from games based on original intellectual property versus licensed intellectual property;
●changes in the mix of revenue derived from in-app purchases, advertisements and offers, which mix often depends on the nature of new titles launched during the quarter;
●changes in the amount of money we spend marketing our titles in a particular quarter, including the average amount we pay to acquire each new user, as well as changes in the timing of these marketing expenses within the quarter;
●decisions by us to incur additional expenses, such as increases in research and development, restructuring expenses, or unanticipated increases in vendor-related costs, such as hosting fees;
●the timing of successful mobile device launches;
●the seasonality of our industry;
●changes in accounting rules, such as those governing recognition of revenue, including the period of time over which we recognize revenue for in-app purchases of virtual currency and goods within some of our games, as well as estimates of average playing periods and player life;
●the activities, announcements and performance of our commercial partners: and
●macro-economic fluctuations in the United States and global economies, including those that impact discretionary consumer spending such as may result from the current COVID-19 pandemic.
We may not, or may be unable to, renew our existing content licenses when they expire and may not choose to obtain additional licenses or be able to obtain new licenses on favorable terms, which could negatively impact our revenue if we fail to replace such revenue with revenue from games based on our own intellectual property.
During the year ended December 31, 2020, we generated 36.2% of our revenue from games that are based on or substantially incorporate third-party intellectual property, such as the Tap Sports Baseball franchise, Kim Kardashian: Hollywood, and Disney Sorcerer’s Arena. We expect to continue to derive significant revenue from these titles in 2021 and beyond. Certain of our licenses expire at various times during the next several years, and we may be unable to renew these licenses on terms favorable to us or at all, and we may have difficulties obtaining licenses from new content owners on terms acceptable to us, if at all. In addition, these licensors could decide to license to our competitors or develop and publish their own mobile games, competing with us in the marketplace. We also license certain brands and their assets for our Covet Fashion and Design Home titles without the provision of a license fee or royalty. These licensors could decide to no longer license their assets under the current terms, and to instead charge a one-time payment, ongoing royalty or both, which may adversely affect the profitability of these titles. Failure to maintain or renew our existing licenses or to obtain additional licenses would prevent us from continuing to offer our current licensed games and introducing new mobile games based on such licensed content, which could harm our business, operating results and financial condition.
Securing license agreements to develop, publish and market games based on or significantly incorporating celebrities, third-party licensed brands, properties, and other content typically requires that we make minimum guaranteed royalty and other payments to such licensors, and to the extent such payments become impaired, our operating results would be harmed.
In connection with partnerships with celebrities and other licensors of third-party brands, properties and content, we have incurred and may continue to incur significant minimum guaranteed royalty and other payments. As a result, we may incur impairments on such payments if our forecasts for these games are lower than we anticipated at the time we entered into the agreements. As of December 31, 2020, we had remaining prepaid royalty balances totaling $28.8 million. We expect to continue to selectively license third-party licensed brands, properties and other content and to pay minimum guaranteed royalty payments in connection with such deals. As a result, we may be required to take impairments in future periods if the games we are developing that have significant contractual minimum guarantee commitments associated with them are not successful.
If we do not successfully establish and maintain awareness of our brand and games, if we fail to develop high-quality, engaging games that are differentiated from our prior games, if we incur excessive expenses maintaining and promoting our brand or our games or if our games contain defects or objectionable content, our operating results and financial condition could be harmed.
We believe that establishing and maintaining our brand is critical to establishing, developing and maintaining favorable relationships with players, distributors, content licensors, platform providers, advertisers and key talent. Increasing awareness of our brand and recognition of our games is particularly important in connection with our strategic focus of developing games based on our own intellectual property. Our ability to promote the Glu brand and increase recognition of our games depends on our ability to develop high-quality, engaging games, including integrating the level
of social and community features appropriate for a game’s target audience and partnering with brands with fan bases that can support successful mobile games. If consumers, Digital Storefront owners, and branded content owners, do not perceive our existing games as high-quality, or if we introduce new games that are not favorably received by them, then we may not succeed in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our games is costly and involves extensive management time to execute successfully. Although we make significant sales and marketing expenditures in connection with the launch of our games, these efforts may not succeed in increasing awareness of our brand or the new games. If we fail to maintain and increase brand awareness and consumer recognition of our games, our potential revenue could be limited, our costs could increase and our business, operating results and financial condition could suffer.
In addition, if a game contains objectionable content, we could experience damage to our reputation and brand. Our games may contain violence or other content that some consumers may find objectionable, particularly in light of high-profile mass shootings. For example, many of our shooter games, including our Deer Hunter games, have a 17-and-older rating on the Apple App Store due to its violence. Despite these ratings, consumers may be offended by some of our game content and children to whom these games are not targeted may choose to play them without parental permission nonetheless. In addition, our employees or employees of outside developers could include hidden features in our games without our knowledge, which might contain profanity, graphic violence, sexually explicit or otherwise objectionable material. Users of our games, particularly games with social messaging features, may utilize these features for illegal purposes or target certain users through these features. If consumers believe that a game we published contains objectionable content or may expose them to nefarious individuals, it could harm our brand, consumers could refuse to download it or demand a refund for any in-app purchases and could pressure the Digital Storefront operators to no longer allow us to publish the game on their platforms. Similarly, if any of our games are introduced with defects, vulnerabilities or have playability issues, we may receive negative user reviews, our brand may be damaged, and our operating results and revenue negatively affected. For example, our attempt to relaunch our Racing Rivals title, which had experienced playability and user interface issues in the past, in the second quarter of 2018 by introducing new features and resetting the economy of the game resulted in the game crashing and not being available to most users for several days. As a result, the daily active users of Racing Rivals and the revenue that we generated from this title significantly decreased from peak levels which contributed to our decision to shut down the game effective April 2019. In addition, any issues relating to our games could be exacerbated if our customer service department does not timely and adequately address issues that our players have encountered with our games.
We use a game development engine licensed from Unity Technologies to create many of our games. If we experience any prolonged technical issues with this engine or if we lose access to this engine for any reason, it could delay our game development efforts and cause our financial results to fall below expectations for a quarterly or annual period, which would likely cause our stock price to decline.
We use a game development engine licensed from Unity Technologies to create many of our games, and we expect to continue to use this engine for the foreseeable future. Because we do not own this engine, we do not control its operation or maintenance, nor do we control how the engine is updated or upgraded. As a result, any prolonged technical issues with this engine might not be resolved quickly, despite the fact that we have contractual service level commitments from Unity. In addition, to the extent that we require any functionality that is not offered by Unity we are dependent on Unity to update or upgrade its engine to offer such functionality. Furthermore, although Unity cannot terminate our agreement absent an uncured material breach of the agreement by us, we could lose access to this engine under certain circumstances, such as a natural disaster that impacts Unity or a bankruptcy event. If we experience any prolonged issues with the operation of the Unity game development engine, if the Unity game development engine does not offer the functionality we require or if we lose access to this engine for any reason, it could delay our game development efforts and cause us to not meet revenue expectations for a quarterly or annual period, which would likely cause our stock price to decline. Further, if one of our competitors acquired Unity, the acquiring company would be less likely to renew our agreement, which could impact our game development efforts in the future, particularly with respect to sequels to games that were created on the Unity engine.
We rely on assumptions and estimates to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Certain of our key metrics, including the number of our daily and monthly active users, our average revenue per daily user and the average useful life of our paying players, is calculated using internal company data from multiple analytics systems that have not been independently verified. The calculation of these metrics is described in detail under the heading titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Operating Metrics.” While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring these metrics across our large user base around the world. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy, but these efforts may not prove successful and we may discover material inaccuracies. In addition, our methodology for calculating these metrics may differ from the methodology used by other companies to calculate similar metrics. For example, we currently treat an individual who plays two different Glu games on the same day or who plays the same game on two different devices during the same day (e.g., iPhone and an iPad) as two active users for each such day when we average or aggregate active users over time. As such, the calculations of our active users may not precisely reflect the actual number of people using our titles. We may also discover unexpected errors in our internal data that resulted from technical or other errors. Furthermore, our Crowdstar studio utilizes a separate analytics system from the rest of our company, which could result in internal inconsistencies or errors. If we determine that any of our metrics are not accurate, we may be required to revise or cease reporting such metrics and it may harm our reputation and business.
Our business and growth may suffer if we are unable to hire and retain key personnel.
Our future success will depend, to a significant extent, on our ability to attract, retain and motivate our key personnel, namely our management team, creative leaders and experienced game development personnel. In particular, Nick Earl, our President and Chief Executive Officer, is critical to our vision, strategic direction, products and technology, and the continued retention of the other members of our senior management team is important to our continued success. In addition, to grow our business, execute on our business strategy and replace departing employees, we must identify, hire and retain qualified personnel, particularly experienced monetization, live operations, server technology, software and data engineer, game designer, data analyst, user experience, economist, and product management personnel to develop and support our growth games. Attracting and retaining key personnel and other staff is difficult in a competitive hiring market, particularly in the San Francisco Bay Area where we are headquartered, and we may not succeed in doing so. The gaming and technology industries are also traditionally male dominated, so it may be difficult for us to recruit and retain talented female personnel who may be needed to help us optimize our games that are targeted to a more female-focused audience, including our games in the lifestyle and casual genres. Volatility of our stock price, changes in our compensation structure for our executive officers that significantly relies on performance linked stock awards, and previous headcount reductions may make it more difficult for us to attract and retain top talent. In particular, should our stock price decline it might be difficult for us to attract and retain qualified personnel, since individuals may elect to seek employment with other companies that they believe have better long-term prospects or that present better opportunities for earning equity-based compensation. Competitors have in the past and may in the future attempt to recruit our employees, and our management and key employees are not bound by agreements that could prevent them from terminating their employment at any time. In addition, uncertainty related to our recently announced planned acquisition by Electronic Arts may result in uncertainty for some of our employees and could increase the likelihood that other companies will be able to recruit away our key employees. We do not maintain a key-person life insurance policy on any of our officers. Our business and growth may suffer if we are unable to hire and retain key personnel.
We have a history of net losses, may incur substantial net losses in the future and may not achieve and sustain profitability or growth in future periods.
We have incurred significant losses since inception, and as of December 31, 2020, we had an accumulated deficit of $411.2 million. While we generated net income of $20.4 million in the year ended December 31, 2020, we may not be successful in sustaining profitability and growing our net income in future periods. We have conducted several restructurings in the past, which measures were aimed at reducing our fixed costs and operating more efficiently. However, our costs may continue to rise as we implement additional initiatives designed to increase revenue, potentially including: investing more heavily in our existing growth games as part of our product strategy; increasing our spending on
user acquisition efforts, particularly for our growth games and our new title launches, and on growth initiatives including customer relationship management and predictive analytics; hiring additional staff in all of our offices worldwide; developing new games with greater complexity, higher production values and deeper social features; running live operations on our games; and taking other steps to strengthen our company.
We anticipate that the costs of acquiring new players and otherwise marketing our games will continue to rise, particularly since advertising costs in our industry have generally been rising and we have encountered increasing difficulties in generating downloads of our games as users spend more time on alternative software applications, such as social media, messaging, and streaming applications. We may also continue to incur significant costs to acquire rights to third party intellectual property, including incurring significant minimum guaranteed royalty payments. If our revenue does not increase at a rate sufficient to offset these additional expenses, if the launch dates for our games are delayed, if we do not realize a sufficient return on our user acquisition spending for our growth games, if we experience unexpected significant increases in operating expenses or if we are required to take additional charges related to impairments or restructurings, we will continue to incur losses. Furthermore, given the significant amount of time and attention users are dedicating to social media and other non-gaming applications, increasing revenue may be challenging.
Our business will suffer if our acquisition and strategic investment activities are unsuccessful or disrupt our ongoing business, which may involve increased expenses and may present risks not contemplated at the time of the transactions.
We have acquired and invested in, and may in the future acquire and invest in, companies, products and technologies that complement our strategic direction. Acquisitions and investments involve significant risks and uncertainties, including:
●diversion of management’s time and a shift of focus from operating the business to issues related to negotiation of acquisition or investment terms, integration and administration;
●our ability to successfully integrate acquired technologies and operations into our business and maintain uniform standards, controls, policies and procedures;
●potential employee morale and retention issues resulting from any reductions in compensation, or changes in management, reporting relationships, or future prospects;
●potential product development delays resulting from any changes and disruptions that may follow the acquisition;
●significant competition from other acquirers and investors as the gaming industry consolidates and challenges in offering attractive consideration given the volatility of our stock price and potential difficulties in obtaining alternative financing;
●challenges retaining the key employees, customers and other business partners of the acquired or investee business;
●our ability to realize synergies expected to result from an acquisition or strategic investment;
●an impairment of acquired goodwill and other intangible assets or investments in future periods would result in a charge to earnings in the period in which the write-down occurs, such as the case with the impairment charge for acquired in-process research and development recorded in the third quarter of 2018;
●the internal control environment of an acquired or investee entity may not be consistent with our standards and may require significant time and resources to improve;
●in the case of foreign acquisitions or strategic investments, 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;
●liability for activities of the acquired or investee companies before the acquisition or investment, including violations of laws, rules and regulations, commercial disputes, tax liabilities, intellectual property and other litigation claims or disputes, accounting standards and other known and unknown liabilities;
●harm to our brand and reputation; and
●harm to our existing business relationships with business partners and advertisers as a result of the acquisition.
Acquisitions may be particularly challenging during the COVID-19 pandemic. For example, we would likely not be able to travel to conduct in-person meetings and due diligence sessions with potential target companies. In addition, if we issue equity securities as consideration in an acquisition or strategic investment, as we did for our acquisitions of Griptonite, Inc., Blammo Games Inc., GameSpy Industries, Inc., PlayFirst, Inc. and Cie Games, Inc., our current stockholders’ percentage ownership and earnings per share would be diluted. We may also need to raise additional capital in the event we use a significant amount of cash as consideration in an acquisition. Because acquisitions and strategic investments are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or financial condition.
Any restructuring actions and cost reduction initiatives that we undertake may not deliver the results we expect, and these actions may adversely affect our business.
During the last several years we have implemented restructuring actions and cost reduction initiatives to streamline operations and improve cost efficiencies. Some of our previous restructurings included reductions in personnel in Bellevue, Washington; San Francisco, California; Long Beach, California; Portland, Oregon; Toronto, Canada; and Beijing, China, as well as the divestiture of our Moscow, Russia game development studio. Any future restructurings or divestitures could result in disruptions to our operations and adversely affect our business. For example, in connection with the divestiture of our Moscow studio, we transitioned certain titles that were developed or operated by the Moscow studio, including Deer Hunter 2018, to our Hyderabad, India studio. We have seen a decline in revenue from Deer Hunter 2018, which may in part be related to this transition. In addition, we cannot be sure that any cost reduction and streamlining initiatives will be as successful in reducing our overall expenses as we expect or that additional costs will not offset any such reductions or streamlining. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our operating results will suffer.
We may not realize the benefits expected through our strategic relationship with Tencent and other aspects of the relationship could have adverse effects on our business.
In April 2015, we entered into a strategic relationship with Tencent, a leading Internet company in China and arguably the world’s largest gaming company. Tencent, through a controlled affiliate, agreed to invest $126.0 million in exchange for approximately 16.3% of our total outstanding common stock on a post-transaction basis. In November 2015, we entered into an agreement with an affiliate of Tencent to license and publish its game, WeFire, in the United States and international markets outside of Asia under the name Rival Fire, which we launched in July 2016. In light of the poor performance of the title in terms of monetization and downloads, and the related contractual prepaid royalty commitments and license fees under our agreement with the affiliate of Tencent, we impaired $14.5 million in the third quarter of 2016. We may not succeed in entering into any other agreements or operating partnerships with Tencent in the future. Even if we do enter into any operational partnerships, it could take months to years to fully realize the benefits of such partnerships or they may not be successful as was the case with WeFire.
Tencent, through its controlled affiliates, held approximately 12.1% of the aggregate voting power of our common stock as of December 31, 2020, and could acquire up to 25.0% of the voting power through open-market purchases of our common stock. While Tencent has agreed to cause these shares to be voted with the majority recommendation of the
independent members of our board of directors on most matters, Tencent could have considerable influence over matters such as approving a potential acquisition of us; Tencent has signed a voting agreement pursuant to which it has agreed to vote its shares of our common stock in favor of our acquisition by Electronic Arts. Tencent was also granted the right to designate a member of our board of directors, and currently Ben Feder, Tencent’s President of International Partnerships (North America), is Tencent’s representative on our board of directors. Mr. Feder or any future Tencent designee could have an actual or apparent conflict of interest in such matters.
Our reported financial results could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.
Our reported financial results are impacted by the accounting policies promulgated by the SEC and accounting standards bodies and the methods, estimates and judgments that we use in applying our accounting policies. The frequency of accounting policy changes may accelerate, including conversion to unified international accounting standards. Policies affecting revenue recognition have affected, and could further significantly affect, the way we account for revenue. For example, the accounting for revenue derived from free-to-play games, particularly with regard to revenue generated from online Digital Storefronts, is still evolving and, in some cases, uncertain. While we believe that we are correctly accounting for our revenue, this is an area that continues to involve significant discussion among accounting professionals and the future changes to the standard may cause our operating results to fluctuate. In addition, we currently defer revenue related to virtual goods and currency over the average playing period of paying users, which approximates the estimated weighted average useful life of the transaction. While we believe our estimates are reasonable based on available game player information, we may revise such estimates in the future in the event the average playing period of our paying users changes. Any adjustments arising from changes in the estimates of the lives of these virtual items would be applied to the current quarter and prospectively on the basis that such changes are caused by new information indicating a change in the game player behavior patterns of our paying users. Any changes in our estimates of useful lives of these virtual items may result in our revenue being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards could have a significant adverse effect on our reported results although not necessarily on our cash flows.
If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. If we are unable to maintain such internal controls, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls as required pursuant to the Sarbanes-Oxley Act, it could result in a material misstatement of our financial statements that would require a restatement, and investor confidence in the accuracy and timeliness of our financial reports and the market price of our common stock could be negatively impacted.
Conversion of key internal systems and processes, particularly our ERP system, and problems with the design or implementation of these systems and processes could interfere with, and therefore harm, our business and operations.
We underwent a multi-phase project that began in 2016 to convert certain key internal business systems and processes, including our enterprise resource planning, or ERP, system to a cloud based system. In connection with the transition to our new ERP system, we shutdown certain of our legacy ERP systems in the third quarter of 2016, which affected certain of our processes in the second half of 2016 and may continue to impact our processes. While we have transitioned to our new ERP system, we may need to resolve issues that arise in connection with this transition. We have invested, and will continue to invest, significant capital and human resources in the design and implementation of these business systems and processes. Any problems in the functioning of the new systems or processes, particularly any that impact our operations, could adversely affect our ability to process payments, record and transfer information in a timely and accurate manner, recognize revenue, file SEC reports in a timely manner, or otherwise run our business. Even if we encounter these adverse effects, as noted above, the design and implementation of these new systems and processes may be more time consuming than we anticipated and could negatively impact our business, financial condition, and results of operations.
If the mobile games market is disrupted by new technologies and we are not able to appropriately adapt our business, our business will suffer.
The mobile games market could be disrupted by new technologies that could impact our business. For example, the introduction of 5G wireless networking will offer technological advancements like faster download speeds and lower latency. While these technological advancements will provide opportunities for our business, it may also create risks if we do not adapt to these new technologies in a quick and timely manner. For example, 5G technology may result in the proliferation of game streaming services. Multiple instances of new cloud gaming services are already commercially available and new entrants like Google and Microsoft have announced their ability to stream games to mobile devices. Some of these new streaming entrants will also choose to publish first-party content on their platforms. Streaming technology could potentially disrupt the mobile gaming industry by enabling companies to publish cross-platform games that users can play across multiple platforms and devices. This could result in consumers choosing to play these cross-platform games rather than our games which are currently only available on mobile devices. If we do not appropriately adapt our business to new technologies, our business will suffer.
If we fail to deliver our games at the same time as new mobile devices are commercially introduced, our revenue may suffer.
Our business depends, in part, on the commercial introduction of new mobile devices with enhanced features, including larger, higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. For example, the introduction of new and more powerful versions of Apple’s iPhone and iPad and devices based on Google’s Android operating system, have helped drive the growth of the mobile games market. We do not control the timing of these device launches. Some manufacturers give us access to their new devices prior to commercial release. If one or more major manufacturers were to stop providing us access to new device models prior to commercial release, we might be unable to introduce games that are compatible with the new device when the device is first commercially released, and we might be unable to make compatible games for a substantial period following the device release. If we do not adequately build into our title plan the demand for games for a particular mobile device, experience game launch delays, or miss the opportunity to sell games when new mobile devices are shipped or our end users upgrade to a new mobile device, our revenue would likely decline and our business, operating results and financial condition would likely suffer.
If the mobile gaming market does not continue to grow, our business could be adversely affected.
Our future success is substantially dependent upon the continued growth of the mobile gaming market. The mobile gaming market has experienced significant revenue growth during the last several years despite an overall flattening of downloads of games on the appstores. The mobile gaming industry may not continue to grow at historical rates which could negatively impact our business. In addition, new and emerging technologies could make the mobile devices on which our games are currently released obsolete, requiring us to transition our business model to develop games for other next-generation platforms.
Changes to digital platforms’ rules relating to “loot boxes,” or the potential adoption of regulations or legislation impacting loot boxes, could require us to make changes to some of our games’ economies or design, which could negatively impact the monetization of these games and harm our revenue.
In December 2017, Apple updated its terms of service to require publishers of applications that include “loot boxes” to disclose the odds of receiving each type of item within each loot box to customers prior to purchase, and Google similarly updated its terms of service in May 2019. Loot boxes are a commonly used monetization technique in free-to-play mobile games in which a player can acquire a virtual loot box, typically through game play or by using virtual currency, but the player does not know which virtual item(s) he or she will receive (which may be a common, rare or extremely rare item, and may be a duplicate of an item the player already has in his or her inventory) until the loot box is opened. The player will always receive one or more virtual items when he or she opens the loot box, but the player does not know exactly which item(s) until the loot box is opened. We utilize loot boxes in some of our top games including our Tap Sports Baseball franchise, Kim Kardashian: Hollywood and Disney Sorcerer’s Arena, and we intend to use loot boxes in certain of our upcoming games that we expect to launch in 2021, including Deer Hunter World. We have
updated our applicable games to comply with Apple’s and Google’s rules relating to loot boxes and do not believe that this has had a material impact on the monetization of our games that utilize loot boxes. However, in the event that Apple or Google changes its terms of service to include more onerous requirements or if Apple or Google were to prohibit the use of loot boxes in games distributed on its digital platform, it would require us to redesign the economies of the affected games and would likely cause our revenue generated from these games to decline. In April 2018, each of the Belgian Gaming Commission and the Dutch Gambling Authority declared that loot boxes as implemented in certain of the games that they reviewed constituted illegal gambling under its respective laws. While neither of these bodies reviewed any of our games, we may be required to modify the implementation of loot boxes to continue utilizing loot boxes in these jurisdictions, remove loot boxes from our games published in these jurisdictions or cease publishing games containing loot boxes in these jurisdictions. In addition, the FTC held a public workshop in August 2019 to examine, and released a staff paper in August 2020 summarizing, consumer protection issues related to loot boxes, and various other jurisdictions, including Australia, the United Kingdom, and the states of California, Hawaii, Minnesota and Washington, are reviewing or have indicated that they intend to review the legality of loot boxes and whether they constitute gambling. Furthermore, in May 2019, U.S. Senators Josh Hawley, Ed Markey and Richard Blumenthal introduced a bill to the Senate that would prohibit loot boxes and pay-to-win micro-transactions in “minor oriented” games. To the extent that a federal law, the FTC, or other jurisdictions determine that loot boxes constitute gambling, or they otherwise elect to regulate the use of loot boxes, it could require us to stop utilizing loot boxes within our games that are distributed in such territories, which would negatively impact our revenue. We could also become subject to private litigation relating to loot boxes, as in August 2020, when a class action lawsuit was filed against Supercell in California alleging that the loot boxes in two of Supercell’s games violate California’s gambling statutes, and in September 2020, when a class action lawsuit was filed against Electronic Arts in Canada alleging that the loot boxes in more than 60 of Electronic Arts’ games violate Canadian gambling laws.
Our business is subject to increasing governmental regulation. If we do not successfully respond to these regulations, our business may suffer.
We are subject to a number of domestic and foreign laws and regulations that affect our business. Not only are these laws constantly evolving, which could result in their being interpreted in ways that could harm our business, but legislation is also continually being introduced that may affect both the content of our products and their distribution. In the United States, for example, numerous federal and state laws have been introduced which attempt to restrict the content or distribution of games. Legislation has been adopted in several states, and proposed at the federal level, regulating the ability to offer certain games to minors. If such legislation is adopted, it could harm our business by limiting the games we are able to offer to our customers or by limiting the size of the potential market for our games. In addition, there have been calls from U.S. government officials to examine violence in video games in light of high-profile mass shootings. We may also be required to modify certain games or alter our marketing strategies to comply with new and possibly inconsistent regulations, which could be costly or delay the release of our games, for example to comply with labeling requirements for our free-to-play games. Additionally, if the FTC or any other significant regulatory body issues rules significantly restricting or even prohibiting in-app purchases or any other key aspect of our business, it would significantly impact our business strategy. In addition, self-regulatory bodies in the United States (the Entertainment Software Rating Board) and foreign jurisdictions (such as the Pan European Game Information (PEGI) in the European Union) provide consumers with rating information on various products such as entertainment software similar to our games based on the content (for example, violence, sexually explicit content, language). Furthermore, as of December 31, 2020, Chinese law requires publishers to obtain an approval number from China’s National Press and Publication Administration in order to distribute games in mainland China. We are currently not seeking to obtain such approval numbers and therefore do not currently distribute our games through the Apple App Store in mainland China. Increasing governmental regulation could harm our business by limiting the products we are able to offer to our customers, by limiting the size of the potential market for our products, or by requiring costly additional differentiation between products for different territories to address varying regulations. Furthermore, the growth and development of free-to-play gaming and the sale of virtual goods may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours. We anticipate that scrutiny and regulation of our industry will increase and that we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency and banking institutions may be interpreted to cover virtual currency or goods. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may depend on us meeting certain capital and other requirements and we may be subject to additional
regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding these activities may dampen the growth of free-to-play gaming and impair our business.
We offer our players various types of sweepstakes, giveaways and promotional opportunities, and have in the past allowed players to compete against each other in tournaments for cash prizes. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games, many of which are still evolving and could be interpreted in ways that could harm our business. For example, a March 2018 ruling from the 9th Circuit found that the mobile social casino game Big Fish Casino constituted gambling under Washington state law, and in August 2020, the defendants in such lawsuit agreed to pay $155 million to settle the class action lawsuit. Any future court ruling or other governmental action that imposes liability on providers of online services could result in criminal or civil liability and could harm our business.
In addition, because our services are available worldwide, certain foreign jurisdictions and others may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees or infrastructure.
“Cheating” programs, scam offers, black-markets and other offerings or actions by unrelated third parties that seek to exploit our games and players affect the game-playing experience and may lead players to stop playing our games or divert revenue to unrelated third parties.
Unrelated third parties have developed, and may continue to develop, “cheating” programs, scam offers, black-markets and other offerings that may decrease our revenue generated from our virtual economies, divert our players from our games or otherwise harm us. Cheating programs enable players to exploit vulnerabilities in our games to obtain virtual currency or other items that would otherwise generate in-app purchases for us, play the games in automated ways or obtain unfair advantages over other players who do play fairly. Unrelated third parties attempt to scam our players with fake offers for virtual goods or other game benefits. In addition, we are exploring the extension of Tap Sports Baseball and Design Home to the PC web browser, and a browser-enabled version of these titles may contain vulnerabilities that we don’t anticipate which could significantly impact their revenue. We devote resources to discover and disable these programs and activities, but if we are unable to do so in a prompt and timely manner, our operations may be disrupted, our reputation damaged and players may play our games less frequently or stop playing our games altogether. This may lead to lost revenue from paying players, increased cost of developing technological measures to combat these programs and activities, legal claims, and increased customer service costs needed to respond to disgruntled players.
Some of our players may make sales or purchases of virtual goods used in our games through unauthorized or fraudulent third-party websites, which may reduce our revenue.
Virtual goods in our games have no monetary value outside of our games. Nonetheless, some of our players may make sales and/or purchases of our virtual goods, such as virtual currency for our Tap Sports Baseball games, through unauthorized third-party sellers in exchange for real currency. These unauthorized or fraudulent transactions are usually arranged on third-party websites and the virtual goods offered may have been obtained through unauthorized means such as exploiting vulnerabilities in our games, from scamming our players with fake offers for virtual goods or other game benefits, or from credit card fraud. We do not generate any revenue from these transactions. These unauthorized purchases and sales from third-party sellers could reduce our revenue by, among other things:
●decreasing revenue from authorized transactions;
●creating downward pressure on the prices we charge players for our virtual currency;
●increasing chargebacks from unauthorized credit card transactions;
●causing us to lose revenue from dissatisfied players who stop playing a particular game;
●increasing costs we incur to develop technological measures to curtail unauthorized transactions;
●resulting in negative publicity or harm our reputation with players and partners; and
●increasing customer support costs to respond to dissatisfied players.
To discourage unauthorized purchases and sales of our virtual goods, we state in our terms of service that the buying or selling of virtual currency and virtual goods from unauthorized third party sellers may result in bans from our games or legal action. We have banned players as a result of such activities. We have also employed technological measures to help detect unauthorized transactions and continue to develop additional methods and processes by which we can identify unauthorized transactions and block such transactions. However, there can be no assurance that our efforts to prevent or minimize these unauthorized or fraudulent transactions will be successful.
We are, and in the future may become a party to litigation and regulatory inquiries, which could result in an unfavorable outcome and have an adverse effect on our business, financial condition, results of operation and cash flows.
We are, and may become in the future, subject to various legal proceedings, claims and regulatory inquiries that arise out of the ordinary conduct of our business. The outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other factors. In addition, events may occur that give rise to a potential risk of litigation. The number and significance of regulatory inquiries have increased as our business has grown and evolved. Any proceedings, claims or inquiries initiated by or against us, whether successful or not, may be time consuming; result in costly litigation, damage awards, consent decrees, injunctive relief or increased costs of doing business, require us to change our business practices or products, require significant amounts of management time, result in diversion of significant operations resources or otherwise harm our business and future financial results.
Risks Related to Cybersecurity and Data Privacy
We rely on a combination of our own servers and technology and third party infrastructure to operate our games, and a significant portion of our game traffic is hosted by a single vendor. If we experience any system or network failures, unexpected technical problems, cyber attacks or any other interruption to our games, it could reduce our sales, increase costs, or result in a loss of revenue or loss of end users of our games.
We rely on our own servers and third-party infrastructure to operate our games, and we expect that our reliance on such third-party infrastructure and our technology platform will increase as we continue to add additional social features and functionality into our games. We do not control these third parties and replacing them might require significant time and expense. In particular, a significant portion of our game traffic is hosted by Amazon Web Services, which service provides server redundancy and uses multiple locations on various distinct power grids. Amazon may terminate its agreement with us upon 30 days’ notice. In addition, Amazon has experienced brief power outages on occasion during the past several years that have affected the availability of certain of our games during such outages. While none of these events adversely impacted our business, a similar outage of a longer duration could. Any technical problem with cyber-attack on, or loss of access to these third parties’ or our systems, servers or other technologies, including our technology platform, could result in the inability of end users to download or play our games, cause interruption to gameplay, prevent the completion of billing for a game or result in the loss of users’ virtual currency or other in-app purchases, interfere with access to some aspects of our games or result in the theft of end-user personal information. For example, in the second quarter of 2018, our efforts to relaunch Racing Rivals resulted in the game crashing and not being available to most users for several days. If users are unable to access and play our games for any period of time, if virtual assets are lost, or if users do not receive their purchased virtual currency, we may receive negative publicity and game ratings, we may lose players of our games, we may be required to issue refunds, and we may become subject to regulatory investigation or class action litigation, any of which would negatively affect our business. Any of these problems could require us to incur substantial repair costs, distract management from operating our business and result in a loss of revenue. Furthermore, our disaster recovery systems and those of third-parties with which we do business may not function as intended or may fail to adequately protect our critical business information in the event of a significant business interruption, which may cause interruption in service of our games, security breaches or the loss of data or functionality, which could negatively affect our business, financial condition or results of operations.
Cyber attacks, security breaches, and computer viruses could harm our business, reputation, brand and operating results.
Cyber-attacks, security breaches, and computer viruses have occurred on our systems in the past and may occur on our systems in the future. We store sensitive information, including personal information about our employees. In addition, our games involve the storage and transmission of players’ personal information in our facilities and on our equipment, networks and corporate systems run by us or managed by third-parties including Apple, Google, Facebook, Microsoft, and Amazon. Our player data, corporate systems, third-party systems and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to our data, our employees’ data, our players’ data or any third party data we may possess. For example, we recently became aware of security breaches involving various government agencies and private companies caused by software developed by SolarWinds. While we are a customer of SolarWinds, we have not found any evidence of an impact from the SolarWinds incident. In addition, outside parties have in the past and may in the future attempt to fraudulently induce employees to disclose information in order to gain access to this data. Any such incidents, particularly of longer duration, could damage our brand and reputation and result in a material loss of revenue. Given the global nature of our business and the low cost, relative ease and proliferation of internet enabled devices, we may be at an increased risk for cyber-attacks and, specifically, denial of service attacks. In addition, the chat and other social features in our games could potentially be used by terrorist organizations or other criminals to communicate or for other nefarious purposes, which could severely damage our brand and reputation. If an actual or perceived security breach of our or a third-party system on which we rely occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose players and advertisers, and we could suffer significant legal and financial harm including loss of revenue due to such events or in connection with remediation efforts and costs, investigation costs or penalties, litigation, regulatory and enforcement actions, compliance with notification obligations, changed security and system protection measures. Any of these actions could have a material and adverse effect on our business, reputation and operating results.
The laws and regulations concerning data privacy and data security are continually evolving, and our actual or perceived failure to comply with these laws and regulations could harm our business.
We are subject to federal, state and foreign laws regarding privacy and the protection of the information that we collect regarding our users, which laws are currently in a state of flux and likely to remain so for the foreseeable future. The U.S. government, including the FTC and the Department of Commerce, is continuing to review the need for greater regulation over collecting information concerning consumer behavior on the Internet and on mobile devices. The European Union’s General Data Protection Regulation, which became effective in May 2018, the California Consumer Privacy Act of 2018, which became operative in January 2020 and was amended by the California Privacy Rights Act in December 2020, and other laws, like the Brazilian General Data Protection Law, create new individual privacy rights and impose worldwide obligations on companies handling personal data, which has resulted, or will result, in a greater compliance burden for us and other companies and could result in us incurring substantial monetary penalties if we are found to be in violation of these laws and regulations. Various U.S. state and federal regulators have also continued to expand the scope of data elements worthy of, and subject to, privacy protections, creating a multi-layered regulation regime that may be applicable to our business and will require time and resources to address. Additionally, the Children’s Online Privacy Protection Act requires companies to obtain parental consent before collecting personal information from children under the age of 13. If we do not follow existing laws and regulations, as well as the rules of the smartphone platform operators, with respect to privacy-related matters, or if consumers raise any concerns about our privacy practices, even if unfounded, it could damage our reputation and operating results. Furthermore, new or the interpretation of existing laws, policies, or industry codes could prevent us from offering, or make it costlier or more difficult to offer services in certain jurisdiction.
All of our games are subject to our privacy policy and our terms of service located on our corporate website. If we fail to comply with our posted privacy policy, terms of service or privacy-related laws and regulations, including with respect to the information we collect from users of our games, it could result in proceedings against us by governmental authorities or others, which could harm our business. In addition, interpreting and applying data protection laws to the mobile gaming industry is often unclear. These laws may be interpreted and applied in conflicting ways from state to state, country to country, or region to region, and in a manner, that is not consistent with our current data protection
practices. Complying with these varying requirements could cause us to incur additional costs and change our business practices. Additionally, a violation of applicable data privacy or data security laws by third parties we work with might also have an adverse effect on our business, financial condition or results of operations. Further, if we fail to adequately protect our users’ privacy and data, it could result in a loss of player confidence in our services and ultimately in a loss of users, which could adversely affect our business.
In the area of information security and data protection, many states and foreign jurisdictions have passed laws requiring notification to users when there is a security breach for personal data or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to implement. Costs to comply with these laws may increase as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities. The security measures we have in place to protect our data and the personal information of our employees, customers and partners could be breached due to cyber-attacks initiated by third party hackers, employee error or malfeasance, fraudulent inducement of our employees to disclose sensitive information or otherwise. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any breach or unauthorized access could materially interfere with our operations or our ability to offer our services or result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our data, which could have an adverse effect on our business and operating results.
Risks Related to our International Operations
Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results.
We currently transact business in more than 100 countries and in dozens of different currencies, with the Canadian Dollar and Indian Rupee being the primary international currencies in which we transact business. 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. We experienced significant fluctuations in currency exchange rates in the past and expect to experience continued significant fluctuations in the future. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency, and an increasing percentage of our international revenue is from customers who pay us in currencies other than the U.S. Dollar. Fluctuations in the exchange rates between the U.S. Dollar and those other currencies could result in the U.S. Dollar equivalent of these expenses being higher and/or the U.S. Dollar equivalent of the foreign-denominated revenue being lower than would be the case if exchange rates were stable. This could negatively impact our operating results. To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in the foreseeable future.
We face added business, political, regulatory, operational, financial and economic risks as a result of our international operations and distribution, any of which could increase our costs and adversely affect our operating results.
International sales represented approximately 21.4%, 22.1%, and 23.5% of our revenue during 2020, 2019 and 2018, respectively. To target international markets, we develop games that are customized for consumers in those markets. We have international offices located in Canada and India. We expect to increase our international presence, as we intend to increase the number of our employees in our Hyderabad, India office. Risks affecting our international operations include:
●our ability to develop games that appeal to the tastes and preferences of consumers in international markets;
●difficulties developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;
●multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations;
●our ability to develop, customize and localize games that appeal to the tastes and preferences of consumers in international markets;
●competition from local game developers that have significant market share in certain foreign markets and a better understanding of local consumer preferences;
●potential violations of the Foreign Corrupt Practices Act and local laws prohibiting improper payments to government officials or representatives of commercial partners;
●regulations that could potentially affect the content of our products and their distribution, such as in China where multiple governmental bodies must review and approve of any gaming application before it may be published;
●foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States;
●potential adverse foreign tax consequences, since due to our international operations, we must pay income tax in numerous foreign jurisdictions with complex and evolving tax laws;
●political, economic and social instability in some regions of the world;
●health epidemics or contagious diseases, such as the novel coronavirus, that negatively impact our customers or supply chain;
●restrictions on the export or import of technology;
●trade and tariff restrictions and variations in tariffs, quotas, taxes and other market barriers; and
●difficulties in enforcing intellectual property rights in certain countries.
These risks could harm our international operations, which, in turn, could materially and adversely affect our business, operating results and financial condition. We may also liquidate or cease operating some of our foreign subsidiaries in the future which may raise additional risks, including related to taxes and obtaining governmental approvals.
Risks Related to our Intellectual Property
If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperly use our intellectual property and our business and operating results may be harmed.
Our intellectual property is essential to our business. We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property laws and contractual restrictions on disclosure to protect our intellectual property rights. To date, we have only seventeen issued U.S. patents and two U.S. patent applications currently outstanding, including two that we inherited through acquisitions, so we will not be able to protect the majority of our technologies from independent invention by third parties. In addition, we have filed foreign patent applications on two of the issued U.S. patents.
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology and games, and some parties have distributed “jail broken” versions of our games where all of the content has been unlocked and made available for free. Further, some of our competitors have released games that are nearly identical to successful games released by their competitors in an effort to confuse the market and divert users from the competitor’s game to the copycat game. To the extent third parties copy our games, it could reduce the amount of revenue we are able to generate from any infringed 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 in certain international jurisdictions, such as China, where the laws may not protect our intellectual property rights as fully as in the United States. We may institute litigation to enforce our intellectual property rights. For example, in December 2020 we filed a complaint against Reworks alleging that their game, Redecor - Home Design Makeover, infringes at least one claim of one of our patents. This litigation, and any similar litigation in the future, could result in substantial costs and divert our management’s attention and our resources.
In addition, although we require our third-party developers to sign agreements not to disclose or improperly use our trade secrets, to acknowledge that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property and to assign to us any ownership they may have in those works, it may still be possible for third parties to obtain and improperly use our intellectual properties without our consent. This could harm our brand, business, operating results and financial condition.
We are, and in the future may become, involved in intellectual property disputes, which may disrupt our business, require us to pay significant damage awards and could limit our ability to use certain technologies in the future.
Third parties may sue us for intellectual property infringement, or initiate proceedings to invalidate our intellectual property, which, if successful, could disrupt our business, cause us to pay significant damage awards or require us to pay licensing fees. For example, in July 2018, SwiftLife, Inc. filed a complaint in the U.S. District Court for the Eastern District of New York against us, our wholly owned subsidiary Glu Games Inc., and Taylor Swift, Taylor Swift Productions, Inc. and TAS Rights Management, LLC. The complaint alleged eight causes of action, including that Glu and the other defendants infringe the plaintiff’s federally registered trademark, SwiftLife. While we were able to successfully resolve this matter without paying any amounts to the plaintiff, the outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other factors. In addition, any claims brought against us in the future could result in our being enjoined from using our intellectual property or licensed intellectual property, and we might incur significant licensing fees and could be forced to develop alternative technologies. We may also be required to pay penalties, judgments, royalties or significant settlement costs. If we fail or are unable to develop non-infringing technology or games or to license the infringed or similar technology or games on a timely basis, we may be forced to withdraw games from the market or be prevented from introducing new games. We might also incur substantial expenses in defending against third-party claims, regardless of their merit.
In addition, we use open source software in some of our games and expect to continue to use open source software in the future. We may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our games, any of which would have a negative effect on our business and operating results.
Risks Related to an Investment in our Common Stock
Our stock price has fluctuated and may continue to do so. Our stock price may be affected by third party data regarding our games.
The trading price of our common stock has fluctuated in the past and may continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control, such as changes in the operating performance and stock market valuations of other technology companies generally, or those in our industry in particular, such as Activision, Electronic Arts, and Zynga. We also experience stock price volatility as security analysts and investors base their views and monitor the performance of our games on third party data, like App Annie, AppData, Apptopia, comScore, or SensorTower. Third parties publish daily data about us and other mobile gaming companies with respect to downloads of our games, daily and monthly active users and estimated revenue generated by our games. These metrics can be volatile, particularly for specific games, and in many cases do not accurately reflect the actual levels of usage of our games across all platforms or the revenue generated by our games.
In addition, The Nasdaq Global Select Market on which our common stock is listed has in the past and more recently due to the COVID-19 pandemic experienced extreme price and volume fluctuations that have affected the market prices of many companies, some of which appear to be unrelated or disproportionate to their operating performance. These broad market fluctuations could and did adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class action litigation against us could result in substantial costs and divert our management’s attention and resources.
If securities or industry analysts do not publish research about our business, or publish negative or misinformed reports about our business, our share price and trading volume could decline and/or become more volatile.
The trading market for our common stock is affected by the research and reports that securities or industry analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or lower their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. In addition, our share price and the volatility of our shares can be affected by misinformed or mistaken research reports on our business.
Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce the price that our common stock might otherwise attain and may dilute existing stockholders’ voting power and ownership interest in us.
The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors and their affiliates, executive officers, employees and significant stockholders, under our current shelf registration statements, through a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. For example, Tencent is free to sell the 21,000,000 shares it acquired from us in the second quarter of 2015 on the open-market, subject only to our black-out periods and other limitations under our insider trading policy. On June 2, 2020, we filed with the SEC, a shelf registration statement on Form S-3, which became automatically effective upon filing. Under this shelf registration statement, we may, from time to time, sell common stock, such as our recent public offering of 17,250,000 shares of our common stock sold at $9.25 per share.
Some provisions in our certificate of incorporation and bylaws, as well as Delaware law, may deter third parties from seeking to acquire us.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:
●our board of directors is classified into three classes of directors with staggered three-year terms;
●only our chairman of the board, our lead independent director, our Chief Executive Officer, our president or a majority of our board of directors is authorized to call a special meeting of stockholders;
●our stockholders are able to take action only at a meeting of stockholders and not by written consent;
●only our board of directors and not our stockholders is able to fill vacancies on our board of directors;
●our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and
●advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before a meeting of stockholders.
In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder, although our board of directors waived this provision with respect to Tencent’s potential acquisition of greater than 15% of our shares in connection with the transaction in which we initially sold shares of our common stock to an affiliate of Tencent.
We have no plans to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not have any plans to pay cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
General Risk Factors
Unanticipated changes in our income tax rates or exposure to additional tax liabilities may affect our future financial results.
Our future effective income tax rates may be favorably or unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their interpretation. Determining our worldwide provision for income taxes requires significant judgments. The estimation process and applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. Our effective tax rate could also be adversely affected by a variety of factors, many of which are beyond our control. Recent and contemplated changes to U.S. tax laws, including limitations on a taxpayer’s ability to claim and utilize foreign tax credits and defer certain tax deductions until earnings outside of the United States are repatriated to the United States, could impact the tax treatment of our foreign earnings. Further, the taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business is not consistent with the manner in which we report our income to the jurisdictions, which could increase our worldwide effective tax rate and unfavorably impact our financial position and results of operations. Foreign tax authorities may also interpret or change tax regulations such that we may be subject to tax liabilities upon closure or liquidation of a foreign subsidiary. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and state and foreign tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine if our provision for income taxes is adequate. These continuous examinations may result in unforeseen tax-related liabilities, which may unfavorably impact our future financial results.
We must charge, collect and/or pay taxes other than income taxes, such as payroll, gross receipts, value-added, sales and use, net worth, property and goods and services taxes, in both the United States and foreign jurisdictions. If tax authorities assert that we have taxable nexus in a jurisdiction, they may seek to impose past as well as future tax liability and/or penalties. Any such impositions could also cause significant administrative burdens and decrease our future sales. Moreover, state and federal legislatures have been considering various initiatives that could change our tax position regarding sales and use taxes.
Finally, if we change our international operations, adopt new products and new distribution models, implement changes to our operating structure or undertake intercompany transactions in light of changing tax laws, our tax expense could increase.
Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other natural disaster could damage our facilities and equipment, which could require us to curtail or cease operations.
Our principal offices are located in the San Francisco Bay Area, an area known for earthquakes. We are also vulnerable to damage from other types of disasters, including power loss, fires, explosions, floods, communications
failures, terrorist attacks and similar events. If any natural or other disaster were to occur, our ability to operate our business could be impaired.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We lease our San Francisco, California corporate headquarters, an office building of approximately 61,400 square feet. The San Francisco facility currently accommodates our principal executive, marketing, business development, human resources, finance, legal, information technology and administrative activities, two of our development studios, and other development activities.
We lease additional domestic office space in Foster City and Burlingame, California and Orlando, Florida. We lease offices for our foreign operations in: Toronto, Canada and Hyderabad, India. These additional domestic and international facilities primarily accommodate development studios, and customer care activities, and total approximately 77,200 square feet.
We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations. For more information about our lease commitments, see Note 7 in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Item 3.
Item 3. Legal Proceedings
On December 17, 2020, we filed a lawsuit in the United States District Court for the Western District of Texas, Waco Division, against Reworks. The complaint alleges that Reworks infringes at least one claim of U.S. Patent No. 10,504,297, our patent relating to systems and methods for providing competitive scene completion in a mobile gaming application. We are pursuing a judgment finding that Reworks has infringed our patent and are seeking injunctive relief, as well as monetary damages for past and ongoing infringement.
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. We are not currently party to any pending litigation, the outcome of which will have a material adverse effect on our operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other factors.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock has been listed on The Nasdaq Global Select Market under the symbol “GLUU” since our initial public offering in March 2007.
Stock Price Performance Graph
The following graph shows a comparison from December 31, 2015 through December 31, 2020 of the cumulative total return for an investment of $100 (and the reinvestment of dividends) in our common stock, the Nasdaq Composite Index, S&P 500 Index, and RDG Technology Composite Index. Such returns are based on historical results and are not intended to suggest future performance.
The information under the heading “Stock Price Performance Graph” shall not be deemed “soliciting material” or to be “filed” for purposes of Section 18 of the Exchange Act of 1934, and shall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether made before or after the date of this report, regardless of any general incorporation language in such filing, except as expressly set forth by specific reference in such filing.
Stockholders
As of February 18, 2021, we had approximately 49 holders of record of our common stock and thousands of additional beneficial holders. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 8, “Financial Statements and Supplementary Data,” and other financial data included elsewhere in this report. Our historical results of operations are not necessarily indicative of results of operations to be expected for any future period.
For a discussion of factors such as impairment of prepaid royalties and guarantees, and any material uncertainties that may materially affect the comparability of the information reflected in selected financial data, described in Item 6 of this report, see Note 1, and Note 8 in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Item 8, “Financial Statements and Supplementary Data” of this report. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in Item 1A, “Risk Factors.”
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, includes the following sections:
●An Overview that discusses at a high level our operating results and some of the trends that affect our business;
●Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements;
●Recent Accounting Pronouncements;
●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.
This MD&A section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020.
Merger Agreement
On February 8, 2021, we entered into a definitive Merger Agreement with Electronic Arts pursuant to which Electronic Arts has agreed to acquire us for $12.50 in cash for each share of our common stock issued and outstanding as of immediately prior to the closing of the transaction. This represents approximately $2.1 billion in enterprise value. Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, we will become a wholly owned subsidiary of Electronic Arts. The transaction is anticipated to close in the quarter ending June 30, 2021, subject to approval by our stockholders, the receipt of required regulatory approvals and other customary closing conditions.
Overview
This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for 2020, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our consolidated financial statements and accompanying notes.
Impact of the COVID-19 Pandemic
The extent of the impact of the current COVID-19 pandemic on our operational and financial performance continues to depend on certain developments, including the duration and spread of the outbreak, the availability and effectiveness of a vaccine, the impact on our employees, and the effect on the global economy, all of which are uncertain
and cannot be predicted. Although we were able to successfully launch two new games, MLB Tap Sports Baseball 2020 and Disney Sorcerer’s Arena, in March 2020 and have been publishing updates and running live operations for our games while our global workforce has been working from home, we believe that if our employees are required to continue to work exclusively or primarily from home significantly into 2021 or beyond, it could ultimately negatively impact game development. During the second quarter of 2020, we benefitted from a reduction in CPIs (costs per install), particularly during the month of April, with CPIs increasing beginning in May, though remaining below historical averages. In response to this favorable CPI environment, we increased our investment in user acquisition during the second quarter of 2020, which resulted in an increase in the daily active users in many of our games and contributed to a significant increase in our bookings. However, CPIs have since reverted to at or above historical norms from the reduced levels we experienced in April and May 2020. As a result of the increased CPIs, we reduced our user acquisition spending in the third and fourth quarters of 2020. This reduced spending contributed to a decline in our bookings in the third and fourth quarters of 2020 compared with the second quarter of 2020, as well as to a decline in the daily active users of our games. In addition, we may continue to experience adverse impacts from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including restrictions on travel and in-person meetings. As of the filing date of this Form 10-K, the extent to which COVID-19 may impact our financial condition, results of operations or guidance is uncertain. The effects of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods. See “Risk Factors” included elsewhere in this report for further discussion of the possible impact of the COVID-19 pandemic on our business.
Financial Results and Trends
Revenue for 2020 was $540.5 million, a 31.4% increase compared to 2019, in which we reported revenue of $411.4 million. The increase in total revenue was primarily related to a $120.7 million increase in our revenue from micro-transactions (in-app purchases) and an $8.3 million increase in our revenue from advertisements and offers. The increase was primarily related to an increase in revenue from our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog game Kim Kardashian: Hollywood, as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer’s Arena in the first quarter of 2020. These increases were partially offset by a decrease in revenue from some of our catalog games such as Cooking Dash, Deer Hunter 2018 (originally launched as Deer Hunter 2016), WWE Universe, Diner Dash and Restaurant Dash with Gordon Ramsay.
We have concentrated our product development efforts towards developing games for smartphone and tablet devices. We generate the majority of our revenue from Apple’s iOS platform, which accounted for 61.5% and 60.8% of our total revenue for the years ended December 31, 2020 and 2019, respectively. The majority of this iOS-related revenue was generated through the Apple App Store, which represented 56.2% and 54.4% of our total revenue for the years ended December 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on the Apple App Store. In addition, we generated approximately 38.4% and 39.1% of our total revenue for the years ended December 31, 2020 and 2019, respectively, from the Android platform. The majority of our Android-related revenue was generated through the Google Play Store, which represented 32.9% and 33.5% of our total revenue for the years ended December 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our Android-related revenue from other platforms that distribute apps that run the Android operating system (e.g., the Amazon App Store) and through offers and advertisements in games distributed through the Google Play Store and other Android platforms.
We currently publish titles primarily in four genres: lifestyle, casual, RPGs, and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game. Across genres, we view our titles as either growth games or catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements.
We established our leadership position in the lifestyle genre through our acquisition of Crowdstar Inc. (“Crowdstar”) in November 2016 and its successful Covet Fashion title, and extended our leadership with our global
release of Design Home in November 2016. We introduced key updates for Design Home in 2019 and 2020, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, meta game functionality, and the introduction of e-commerce functionality, and are planning further key updates for this title. We expect to add to our portfolio of lifestyle games in 2021 through the worldwide release of Table & Taste, a new game from our Crowdstar studio that will focus on the food genre, as well as our Crowdstar Moments suite of hypercasual games that we expect will help drive engagement across our lifestyle portfolio. The casual genre includes our Kim Kardashian: Hollywood title; in April 2020, we extended the term of our license agreement with Ms. Kardashian West for an additional 3.5 years through the end of 2023. The casual genre also includes our Cooking Dash and Diner DASH franchises, and our leadership position in this genre was bolstered by our worldwide launch of Diner DASH Adventures in June 2019. The RPG genre includes our Disney Sorcerer’s Arena title that launched worldwide in March 2020. Our leadership in the sports and outdoors category remains strong with our Tap Sports Baseball and Deer Hunter franchises. In March 2020, we furthered our leadership in this genre with the launch of MLB Tap Sports Baseball 2020 in more than 100 countries; prior versions of the Tap Sports Baseball franchise were only available in the United States, Canada, United Kingdom, Germany and Australia. MLB Tap Sports Baseball 2020 includes licensed content from Major League Baseball, or MLB, together with current and former MLB players pursuant to our continuing agreements with the Major League Baseball Players Association, and Major League Baseball Players Alumni Association, contains new features and content, including authentic major league stadiums, a skill-based home run mode and a new cover athlete. We expect to add to our portfolio of sports and outdoor titles in 2021 through the worldwide releases of MLB Tap Sports Baseball 2021 and Deer Hunter World, the next iteration of our Deer Hunter franchise, as well as the expected release of a social fishing game, Tap Sports Fishing.
We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on the Apple and Google storefronts when they were commercially released, which we believe is the result of us being a good partner of Apple and Google.
We work closely with our celebrity and brand licensors to engage their social media audiences and build games that will resonate with their unique fan bases. For example, our Kim Kardashian: Hollywood title utilizes transmedia storytelling, leveraging Ms. Kardashian West’s built-in social media fan base to drive installs and awareness of the game, and then attempting to surprise and delight those fans with real-world events and other game content based on her life. Our goal is for the game content to become entwined with Ms. Kardashian West’s persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2020 which features all MLB clubs and uniforms, current and former MLB players and real MLB stadiums, or with our Disney Sorcerer’s Arena title, which includes characters from the Disney and Pixar universes. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity’s fan base.
For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. We have also made significant investments in our proprietary analytics and revenue technology infrastructure. With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players. We aim to connect our analytics and revenue technology infrastructure to multiple elements of our business - from marketing to merchandising - in order to improve player retention and monetization.
We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features and through enhancing our live operations. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space. Continuing to drive installs and
awareness of our games through licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games. Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners. We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization.
Across the globe, our industry is evidencing that hit titles generally remain higher in the top grossing charts for longer. We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business position us to take advantage of these trends, as evidenced by the continued strength and year-over-year growth of Design Home, Covet Fashion and the Tap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer periods of time. In addition, we plan to continue to invest in our creative leaders and the creative environments in which they and their teams work to increase our likelihood of creating significant hit growth games.
Our net income in the year ended December 31, 2020 was $20.4 million versus net income of $8.9 million in the year ended December 31, 2019. This change was primarily due to an increase in revenue of $129.1 million. This change was partially offset by an increase in cost of sales of $46.1 million, an increase in sales and marketing expenses of $36.9 million, an increase in research and development expenses of $24.6 million, and an increase in general and administrative expenses of $8.3 million. Our operating results were also affected by declines of interest of income and fluctuations in foreign currency exchange rates of the currencies in which we incurred meaningful operating expenses (principally the Canadian Dollar, and Indian Rupee), and our customers’ reporting currencies.
Our ability to sustain and increase profitability depends not only on our ability to grow our revenue, but also on our ability to manage our operating expenses. We significantly increased our sales and marketing expenditures during 2020 compared to 2019. This increase largely related to higher marketing spend for most of our successful titles as well as for user acquisition expenditures related to the global launch of Disney Sorcerer’s Arena, and we increased our planned user acquisition spend during the second quarter of 2020 to capitalize on the lower CPI environment that resulted from the COVID-19 pandemic. Our increased sales and marketing expenses may impair our ability to sustain and increase profitability if this spending does not result in increased revenue over the longer term. Additionally, the largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation.
Cash and cash equivalents at December 31, 2020 totaled $364.4 million, an increase of $237.3 million from the $127.1 million balance at December 31, 2019. This increase was primarily related to $168.3 million of cash provided by financing activities, $76.1 million of cash generated from operations, which was partially offset by $7.1 million of cash used in investing activities.
Key Financial Metrics
Revenue and Bookings
GAAP revenue increased $129.1 million, or 31.4%, from $411.4 million for the year ended December 31, 2019 to $540.5 million for the year ended December 31, 2020. The increase was primarily related to our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog game Kim Kardashian: Hollywood, as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer’s Arena in the first quarter of 2020.
Bookings is a non-GAAP financial measure that is equal to the total revenue we recognize in a given period, plus the net change in deferred revenue during the period. We initially record the sale of virtual items within our games as deferred revenue and then recognize that revenue over the estimated average playing period of paying users. Revenue from advertisements and offers are recognized at the point in time the advertisements are displayed in the game or the
offer has been completed by the user, as the user simultaneously receives and consumes the benefits provided from these services. We believe bookings is a useful indicator of the sales activity in a given period and use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company.
While we believe that bookings are useful in evaluating our business, this information should be considered as supplemental in nature and is not intended to be considered in isolation of, as a substitute for, or as superior to, revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which may reduce its usefulness as a comparative measure.
The following table presents a reconciliation of total revenue to total bookings for each of the years ended December 31, 2020 and 2019:
Key Operating Metrics
We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The four metrics that we use most frequently are Daily Active Users (DAU), Monthly Active Users (MAU), Average Bookings Per Daily Active User (ABPDAU) and Average Revenue Per Daily Active User (ARPDAU). Our methodology for calculating DAU, MAU, ABPDAU and ARPDAU may differ from the methodology used by other companies to calculate similar metrics.
DAU is the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players have downloaded.
MAU is the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention.
ABPDAU is total free-to-play smartphone bookings - consisting of micro-transactions, advertisements and offers - for the measurement period, divided by the number of days in that period, divided by the number of DAU during the period. ABPDAU reflects game monetization based on bookings which does not reflect any deferral of revenue derived from the sale of virtual items within our games.
ARPDAU is total free-to-play smartphone revenue - consisting of micro-transactions, advertisements and offers - for the measurement period divided by the number of days in the measurement period divided by the DAU for the measurement period. ARPDAU reflects game monetization. Under our revenue recognition policy, we recognize this revenue over the estimated average playing period of a user, but our methodology for calculating our DAU does not align with our revenue recognition policy for micro-transactions and offers, under which we defer revenue. For example, if a title is introduced in the last month of a quarter, we defer a substantial portion of the micro-transaction and offer revenue to future months, but the entire DAU for the newly released title is included in the month of launch.
We calculate DAU, MAU, ABPDAU and ARPDAU for only our primary distribution platforms, Apple’s App
Store, the Google Play Store and Amazon’s Appstore, as well as from Facebook for certain titles; we are not able to calculate these metrics across all of our distribution channels. In addition, the platforms that we include for purposes of this calculation have changed over time, and we expect that they will continue to change as our business evolves, but we do not expect that we will adjust prior metrics to take any such additions or deletions of distribution platforms into account. We believe that calculating these metrics for only our primary distribution platforms at a given period is generally representative of the metrics for all of our distribution platforms. Moreover, we rely on the data analytics software that we incorporate into our games to calculate and report the DAU, MAU, ABPDAU and ARPDAU of our games, and we make certain adjustments to the analytics data to address inconsistencies between the information as reported and our DAU and MAU calculation methodology.
We have estimated the DAU and MAU for certain older titles because the analytics tools incorporated into those titles are incompatible with newer device operating systems (e.g., iOS 14), preventing us from collecting complete data. For these titles, we estimate DAU and MAU by extrapolating from each affected title’s historical data using a fixed decay rate in light of the behavior of similar titles for which we had complete data.
As of January 1, 2019, we began calculating DAU and MAU using the average of each month during the period rather than our historical practice of calculating these metrics based on the last month of the period. For example, DAU for the three months ended December 31, 2020 is calculated as an average of aggregate daily DAU for the months of October 2020, November 2020 and December 2020 calculated for all active smartphone free-to-play titles during those months across the distribution platforms for which we calculate the metric. We adopted this new methodology because we believe that it provides a more accurate representation of overall DAU and MAU for the applicable period and more closely aligns with the methodology used by other companies in the gaming industry to calculate similar metrics.
The decrease in aggregate DAU and MAU for the three months ended December 31, 2020 as compared to the same period of the prior year was primarily related to fewer downloads across our portfolio of games, partially offset by an increase in aggregate DAU and MAU attributable to our new title launches in 2020, MLB Tap Sports Baseball 2020 and Disney Sorcerer’s Arena.
Our aggregate ABPDAU and ARPDAU increased for the three months ended December 31, 2020 as compared to the same period of the prior year, as we improved monetization on certain titles, particularly through increased content updates and use of social features in those games. Future increases in our aggregate DAU, MAU, ABPDAU and ARPDAU will depend on our ability to retain current players, attract new paying players, launch new games and expand into new markets and distribution platforms.
We rely on a very small portion of our total users for nearly all of our revenue derived from in-app purchases. Since the launch of our first free-to-play titles in the fourth quarter of 2010, the percentage of unique paying users for our largest revenue-generating free-to-play games has typically been less than 5%, when measured as the number of unique paying users on a given day divided by the number of unique users on that day, though this percentage fluctuates, and it may be higher than 5% for certain of our games during specific, relatively short time periods, such as immediately following worldwide launch or the week following content updates, marketing campaigns or certain other events.
Significant Transactions
Follow-on Public Offering
In June 2020, we completed a follow-on public offering of 17,250,000 shares of our common stock, which included an over-allotment option to purchase an additional 2,250,000 shares, at a public offering price of $9.25 per share. The aggregate gross proceeds from the offering, including the exercise of the over-allotment option, were approximately $159.6 million, and net proceeds received after underwriting fees and offering expenses totaled approximately $151.8 million. We do not have specific uses of the net proceeds from the offering but intend to use the net proceeds for working capital and other general corporate purposes, which may include potential acquisitions and strategic transactions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our estimates and judgments are reasonable under the circumstances existing at the time these estimates and judgments are made, actual results may differ from those estimates, which could affect our consolidated financial statements.
Our significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Some of these accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements:
●revenue recognition;
●prepaid or guaranteed licensor royalties; and
●stock-based compensation.
Revenue Recognition
We generate revenue through in-application purchases (“in-app purchases”) within our games on smartphones and tablet devices, such as Apple’s iPhone and iPad, and mobile devices utilizing Google’s Android operating system. Users can download our free-to-play games through Digital Storefronts. We also have relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertising providers is generated through impressions, clickthroughs, banner ads and offers.
In accordance with Accounting Standard Codification 606, Revenue from Contracts with Customers, (Topic 606), revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration we expect to receive in exchange for these services. A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
In-App Purchases
Users can download our free-to-play games within the Digital Storefronts and pay to acquire virtual currency, which can be redeemed in the game for virtual goods, or virtual goods directly (together, defined as “virtual items”) to enhance their game-playing experience. We sell both consumable and durable virtual items and receive reports from the Digital Storefronts, which breakdown the various purchases made from our games over a given time period. We review these reports and determine on a per-item basis whether the purchase was a consumable virtual item or a durable virtual item. Consumable virtual items are items that are consumed at a predetermined time or otherwise have limitations on
repeated use. Durable virtual items are items, such as furniture, clothes, etc. that are accessible to the player over an extended period of time and that remain in the game for as long as the player continues to play.
The initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance. However, the separate election by the player to make an in-application purchase satisfies the criteria, thus creating a contract under ASC 606. We have identified the following performance obligations in these contracts:
(1)Ongoing game related services such as hosting of game play, storage of customer content, when and if available content updates, maintaining the virtual currency management engine, tracking gameplay statistics, matchmaking as it relates to multiple player gameplay, etc.
(2)Obligation to the paying player to continue displaying and providing access to the virtual items within the game.
Neither of these obligations are considered distinct since the actual mobile game and the related ongoing services are both required to purchase and benefit from the related virtual items. As such, our performance obligations represent a single combined performance obligation which is to make the game and the ongoing game related services available to the players. The transaction price, which is the amount paid for the virtual items by the player, is allocated entirely to the single combined performance obligation. We recognize revenue for durable virtual items over the estimated average playing period of paying users on a per title basis. Our revenue from consumable virtual items has been insignificant. Based on our analysis, the estimated weighted average useful life of a paying user ranges from four to eight months.
Advertisements and Offers
We have relationships with certain advertising service providers for advertisements within our mobile games. Revenue from these advertising service providers is generated through impressions, clickthroughs, offers and banner ads. Offers are the type of advertisements where the players are rewarded with virtual currency for completing specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. We have determined the advertising buyer to be our customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.
Other Estimates and Judgments
We compute our estimated average playing period of paying users at least twice each year. We have examined the playing patterns of paying users across a representative sample of our games across various genres.
We use the “survival analysis” model to estimate the average playing period for paying users. This model provides for a singular approach to estimating the average playing period of paying users on a title by title basis for our diverse portfolio of games. It is a statistical model that analyzes time duration until one or more events happens and is commonly used in various industries for estimating lifespans. We believe this is an appropriate model to estimate the average playing period of paying users for our titles as this model statistically estimates the average playing period of each title by analyzing the historical behavior patterns of paying users.
This model requires the stratification of user data into active and inactive paying users on a per title basis. Active users are those who are active in the game for the past 30 days as of the evaluation date. The remaining users are considered inactive and deemed to have churned from the game. These users are treated mathematically differently in the model than those who are still active. A distribution curve is then fit to the user data to estimate the average playing period of paying users on a per title basis.
We have selected a threshold of 120 days from the commercial launch of a title as the minimum number of days of data required for this model. This threshold was deemed to be appropriate as we tested the model using lower thresholds which resulted in inconsistencies in the estimate of the average playing period of paying users. For new titles with less
than 120 days of data that share similar attributes with an existing title and/or prequel titles, the average playing period is determined based on the average playing period of that existing title or prequel title, as applicable. For all other titles with less than 120 days of data, the average playing period is determined based on the average playing period of all other remaining existing titles.
While we believe our estimates to be reasonable based on available game player information, we may revise such estimates in the future if a titles’ user characteristics change. Any adjustments arising from changes in the estimates of the average playing period for paying users would be applied to the current quarter and prospectively on the basis that such changes are caused by new information that indicates a change in user behavior patterns compared to historical titles. Any changes in our estimates of the useful life of virtual items in a certain title may result in revenue being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.
Principal Agent Considerations
We evaluated our Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if we are acting as the principal or as an agent when selling virtual items or advertisements within our games. We primarily use Digital Storefronts for distributing our smartphone games and for enabling players to purchase virtual items and advertising service providers to serve advertisements within our games. We evaluated the following factors to assess whether we control each specified good or service before that good or service is transferred to the customer:
●the party responsible for the fulfillment of the virtual items, game related services, or serving of advertisements;
●the party having the discretion to set pricing with the end-users; and
●the party having inventory risk before the specified good or service have been transferred to a customer.
Based on the evaluation of the above indicators, we determined that we have control of the services before they are transferred to the end-user. Thus, we are generally acting as a principal and are the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through our advertising service providers. Therefore, we recognize revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers. In situations where the price paid by the end-user of the advertising service provider is not known, we account for these transactions on a net basis.
Deferred Platform Commissions and Royalties
Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. We are also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and our plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in “Cost of revenue” in the period in which the related sales are recognized as revenue.
Prepaid or Guaranteed Licensor Royalties
Our royalty expenses consist of fees that we pay to content owners for the use of their brands, properties and other licensed content, including trademarks and copyrights, in the development of our games. Royalty-based obligations are either paid in advance and capitalized on the balance sheet as prepaid royalties or accrued as incurred and subsequently paid. These royalty-based obligations are expensed to cost of revenue at the greater of the revenue derived from the relevant game multiplied by the applicable contractual rate or an effective royalty rate based on expected net product sales.
Our contracts with certain licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of sales to end users, in accordance with ASC 440-10, Commitments, or ASC 440. When no
significant performance remains with the licensor, we initially record each of these guarantees as an asset and as a liability at the contractual amount. We believe that the contractual amount represents the fair value of the liability. When significant performance remains with the licensor, we record royalty payments as an asset when actually paid and as a liability when incurred, rather than upon execution of the contract. The classification of minimum royalty payment obligations between long-term and short-term is determined based on the expected timing of recoupment of earned royalties calculated on projected revenue for the games that include content licensed from third parties.
Each quarter, we evaluate the realization of our prepaid and guaranteed royalties as well as any unrecognized guarantees not yet paid to determine amounts that we deem unlikely to be realized through product sales. We use estimates of undiscounted revenue and net margins to evaluate the future realization of prepaid royalties, license fees, and guarantees. This evaluation is performed at the title level and considers multiple factors, such as, the term of the agreement, forecasted demand, game life cycle status, game development plans, level of social media activity, 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 published by us and our competitors and/or other game platforms (e.g., consoles and personal computers) utilizing the intellectual property. To the extent that this evaluation indicates that the remaining prepaid and guaranteed royalty payments are not recoverable, we record an impairment charge to cost of revenue in the period that impairment is indicated.
Stock-Based Compensation
We apply the fair value provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock-based payments including stock options, restricted stock units (“RSUs”), performance-based stock units (“PSUs”), and performance-based stock options (“PSOs”). The number of PSUs and PSOs earned and eligible to vest will be determined based on achievement of specified financial performance measures. ASC 718 requires companies to estimate the fair value of stock-option awards on the grant date using an option pricing model. The fair value of stock options and PSOs and stock purchase rights granted pursuant to our equity incentive plans and 2007 Employee Stock Purchase Plan (“ESPP”), respectively, is determined using the Black-Scholes valuation model. The determination of fair value is affected by the stock price, as well as assumptions regarding subjective variables such as expected employee exercise behavior and expected stock price volatility over the expected term of the award. Generally, these assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes.
Effective January 1, 2017 we no longer estimate forfeitures but account for them as and when they occur. Changes to the assumptions used in the Black-Scholes option valuation calculation, as well as future equity granted or assumed through acquisitions could significantly impact the compensation expense we recognize. The cost of RSUs and PSUs is determined using the fair value of the common stock based on the quoted closing price of our common stock on the date of grant. Compensation cost for stock options and RSUs is amortized ratably over the requisite service period. For performance-based awards that have multiple vesting dates, the compensation cost is recognized ratably over the requisite service period for each tranche, whereby each vesting tranche is treated as a separate award for determining the requisite service period. The compensation cost for performance-based awards may be adjusted over the vesting period based on interim estimates of performance against the pre-set financial performance measures.
Results of Operations
The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.
Comparison of the Years Ended December 31, 2020 and 2019
Revenue
Our revenue increased $129.1 million, or 31.4%, from $411.4 million for the year ended December 31, 2019 to $540.5 million for the year ended December 31, 2020, which was primarily related to a $120.7 million increase in our revenue from micro-transactions (in-app purchases) and an $8.3 million increase in our revenue from advertisements and offers. The increase was primarily related to an increase in revenue from our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog game Kim Kardashian: Hollywood, as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer’s Arena in the first quarter of 2020. Revenue from our three growth games increased by $61.7 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. Revenue from the new titles launched in 2020 and 2019 increased by $57.6 million during the year ended December 31, 2020 compared to the year ended 2019. Revenue from our catalog titles increased by a net of approximately $9.8 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, mainly due to increased revenue from Kim Kardashian: Hollywood that was partially offset by declining revenue from our other catalog titles. The increase in revenue from advertisements and offers was primarily due to more efficient advertisement monetization capabilities.
In 2020, Design Home, the Tap Sports Baseball franchise and Covet Fashion were our top three revenue-generating games and comprised 38.5%, 17.8% and 14.7%, respectively, of our revenue for the period. In 2019, Design Home, the Tap Sports Baseball franchise and Covet Fashion were our top three revenue-generating games and comprised 42.2%, 21.0% and 15.2%, respectively, of our revenue for the period. No other game generated more than 10% of revenue during either period.
International revenue (defined as revenue generated from distributors and advertising service providers whose principal operations are located outside the United States or, in the case of the Digital Storefronts, the revenue generated from end-user purchases made outside of the United States) increased by $24.6 million, from $91.0 million in the year ended December 31, 2019 to $115.6 million in the year ended December 31, 2020. This was primarily related to an $11.6 million increase in our EMEA revenue, a $6.8 million increase in our revenue from Americas, excluding the United States, and a $6.2 million increase in our APAC revenue. These increases were primarily related to increased revenue from our growth games.
Cost of Revenue
Our cost of revenue increased $46.1 million, or 31.7%, from $145.5 million in the year ended December 31, 2019 to $191.6 million in the year ended December 31, 2020. This increase was primarily due to an increase of $36.0 million in platform commissions due to a higher volume of revenue transactions through the Digital Storefronts, a $10.7 million net increase in royalties we paid to licensors due to growth in revenue from royalty burdened titles, and a $477,000 increase in hosting costs. These increases were partially offset by a $1.1 million decrease in amortization of intangible assets. We expect our cost of revenue to increase in 2021 primarily due to higher royalty payments and hosting fees.
Research and Development Expenses
Our research and development expenses increased $24.6 million, or 25.9%, from $95.1 million in the year ended December 31, 2019 to $119.7 million in the year ended December 31, 2020. This was primarily attributable to a net increase in payroll related costs of $15.2 million mainly due to an increase in headcount, payroll taxes, severance and certain employee benefit costs, a $9.6 million increase in stock-based compensation expense mainly related to lower expense recorded in the year ended December 31, 2019 due to the decrease in vesting probability of certain performance-based equity awards combined with additional expense recorded from the acceleration of performance-based awards in December 2020, a $2.0 million increase in professional and outside service fees, and a $250,000 increase in allocated charges for equipment, facilities and depreciation. These increases were partially offset by a $1.4 million increase in research and development tax credit benefit received during 2020, and a $1.1 million decrease in business travel and entertainment expenses due to shelter in place orders resulting from the COVID-19 pandemic. As a percentage of revenue, research and development expenses decreased from 23.1% in the year ended December 31, 2019 to 22.1% in the year ended December 31, 2020. We expect our research and development expenditures to increase in absolute dollars in 2021 primarily due to an increase in headcount.
Sales and Marketing Expenses
Our sales and marketing expenses increased $36.9 million, or 26.3%, from $140.3 million in the year ended December 31, 2019 to $177.2 million in the year ended December 31, 2020. This was primarily attributable to an increase of $28.3 million in user acquisition and other marketing expenditures primarily related to a significant investment in user acquisition for Disney Sorcerer’s Arena following the global launch in March 2020, as well as increased marketing expenditures for Design Home, the Tap Sports Baseball franchise, and Kim Kardashian: Hollywood, as we sought to capitalize on the lower CPI environment that existed in April and May 2020, a $4.6 million increase in net payroll related costs mainly due to the increase in headcount and certain employee benefit costs, a $2.2 million increase in stock-based compensation expense mainly related to lower expense recorded in the year ended December 31, 2019 due to the decrease in vesting probability of certain performance-based equity awards combined with additional expense recorded from the acceleration of performance-based awards during December 2020, a $1.3 million increase in professional and outside service fees, and a $673,000 increase related to software and equipment purchases. These increases were partially offset by a $353,000 decrease in business travel and entertainment expenses due to shelter in place orders resulting from the COVID-19 pandemic. As a percentage of revenue, sales and marketing expenses decreased from 34.1% in the year ended December 31, 2019 to 32.8% in the year ended December 31, 2020. We expect our sales and marketing expenses to increase in absolute dollars in 2021 primarily due to higher user acquisition expenditures related to the expected launch of new titles such as Table & Taste, Tap Sports Fishing, Deer Hunter World, Crowdstar Moments and the next iteration of Tap Sports Baseball during 2021.
General and Administrative Expenses
Our general and administrative expenses increased $8.3 million, or 35.6%, from $23.2 million in the year ended December 31, 2019 to $31.5 million in the year ended December 31, 2020. This was primarily attributable to a $2.7 million increase in stock-based compensation expense mainly related to lower expense recorded in the year ended December 31, 2019 due to the decrease in vesting probability of certain performance-based equity awards combined with additional expense from the acceleration of performance-based awards during December 2020, a $2.6 million increase in professional fees and consulting expenses, a $1.7 million increase in payroll related costs mainly due to an increase in headcount and certain employee benefit costs, a $1.1 million increase in allocated charges for equipment, facilities and depreciation, and a $449,000 increase in tax related expenses. These increases were partially offset by a decrease of $364,000 in business travel and entertainment expenses due to shelter in place orders resulting from the COVID-19 pandemic. As a percentage of revenue, general and administrative expenses increased from 5.6% in the year ended December 31, 2019 to 5.8% in the year ended December 31, 2020. We expect our general and administrative expenses to decrease slightly in absolute dollars in 2021 as compared to 2020 primarily due to a decrease in headcount.
Interest and Other Income, Net
Interest and other income decreased $1.0 million from $2.1 million in the year ended December 31, 2019 to $1.1 million in the year ended December 31, 2020. This was primarily attributable to a decrease of $1.5 million in interest income due to decline in interest rates, partially offset by $478,000 in foreign translation gains.
Income Tax Provision
Our income tax expense increased from $471,000 in the year ended December 31, 2019 to $1.1 million in the year ended December 31, 2020. The income tax expense in 2020 was mainly attributable to changes in pre-tax income in the United States and certain foreign entities reduced by a benefit as a result of releasing the tax reserves in relation to closing a foreign subsidiary in 2019. The provision for income taxes differs from the amount computed by applying the statutory U.S. federal rate principally due to the effect of our non-U.S. operations, non-deductible stock-based compensation expense, and change in foreign withholding taxes.
Our effective income tax rates for future periods will depend on a variety of factors, including changes in the deferred tax valuation allowance, as well as changes in our business such as intercompany transactions, any acquisitions, any changes in our international structure, any changes in the geographic location of our business functions or assets, changes in the geographic mix of our income, any changes in or termination of our agreements with tax authorities, changes in applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.
Liquidity and Capital Resources
Since our inception, we have generally incurred recurring losses and negative annual cash flows from operating activities. However, we recorded net income of $20.4 million and $8.9 million in the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $411.2 million.
Operating Activities
In 2020, net cash provided by operating activities was $76.1 million. Our net income of $20.4 million was our primary source of cash, which included the following non-cash adjustments: $31.8 million in stock based compensation, $5.4 million in depreciation expense, $4.1 million in non-cash lease expense, $3.3 million in amortization of intangible assets, and other miscellaneous items totaling $212,000. Net cash provided by operating activities also increased primarily due to an increase in deferred revenue of $20.0 million mainly attributable to an increase in revenue from titles with longer useful lives, a $10.0 million increase in accrued compensation due to higher variable compensation expense, and a $1.0 million increase in non-current liabilities. The increase in net cash provided by operating activities was partially offset by a $6.0 million increase in deferred platform commission fees attributable to higher bookings, a $4.9 million increase in accounts receivable mainly due to increased bookings and the timing of payments from our customers, a $3.1 million increase in prepaid and other assets, a $1.9 million net decrease in lease liability, and a $4.6 million increase in prepaid and deferred royalties due to prepayments to licensors and increase in revenue generated from royalty burdened titles.
In 2019, net cash generated from operating activities was $35.2 million, which was primarily due to an increase in deferred revenue of $11.9 million mainly attributable to an increase in revenue from titles with longer useful lives, net income of $8.9 million, an increase in accounts payable and accrued liabilities of $3.1 million mainly due to the timing of payments to our vendors, and other assets and adjustments for non-cash items including stock based compensation expense of $17.4 million, amortization and impairment of intangible assets of $4.4 million, depreciation of $4.2 million and non-cash lease expense of $3.3 million. These changes were partially offset by a $6.6 million decrease in accrued compensation due to lower variable compensation expense, a $3.4 million increase in deferred platform commission fees attributable to higher bookings, a decrease of $3.0 million in lease liability, a $2.0 million increase in accounts receivable due to the timing of payments from our customers, and a $2.0 million increase in other prepaid expenses.
Investing Activities
Our primary investing activities have consisted of acquisition/divestiture of mobile gaming companies and purchases of property and equipment and leasehold improvements for our offices.
In 2020, we used $7.1 million of cash for investing activities primarily related to leasehold improvements and equipment purchases.
In 2019, we used $5.4 million of cash for investing activities primarily related to property and equipment purchases.
Financing Activities
In 2020, net cash provided by financing activities was $168.3 million, which was primarily due to $151.8 million received from the Offering, net of issuance costs, and $23.3 million in proceeds received from option exercises and purchases under our employee stock purchase plan, partially offset by $6.7 million of taxes paid related to net share settlement of equity awards.
In 2019, net cash used from financing activities was $443,000 which was primarily due to $8.4 million of taxes paid related to net share settlement of RSUs. These cash outflows were partially offset by $8.0 million in proceeds received from option exercises and purchases under our employee stock purchase plan.
Sufficiency of Current Cash and Cash Equivalents
Our cash and cash equivalents were $364.4 million as of December 31, 2020. Cash and cash equivalents held outside of the U.S. in various foreign subsidiaries were $3.3 million as of December 31, 2020, most of which were held by our Canadian and Indian subsidiaries. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are distributed to the U.S. in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes. We have not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, because their earnings are intended to be reinvested indefinitely. However, if any such balances were to be
repatriated, additional U.S. federal income tax payments could result. Computation of the potential deferred tax liabilities associated with unremitted earnings deemed to be indefinitely reinvested is not practicable.
We expect to fund our operations, grow our business and satisfy our contractual obligations during the next 12 months primarily through our cash and cash equivalents and cash generated by our operations. We believe our cash and cash equivalents and cash generated by our operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this report; however, our cash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, revenue that is lower than we currently anticipate, greater than expected operating expenses, particularly with respect to our research and development and sales and marketing initiatives, use of cash to pay minimum guaranteed royalties, use of cash to fund our foreign operations and the impact of foreign currency rate changes, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries or any investments or acquisitions that we may decide to pursue. We expect to continue to use cash to fund minimum guaranteed royalty payments during 2021 as milestone payments become due on games we publish and/or develop that incorporate licensed property, as well as to fund the purchase price of any acquisitions. If the games we develop based on such licensing arrangements fail to perform in accordance with our expectations, we may not fully recoup these minimum guaranteed royalty payments.
If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital. However, we may be unable to do so on terms that are favorable to us or at all.
Contractual Obligations
The following table is a summary of our contractual obligations as of December 31, 2020:
(1)We have entered into license and publishing agreements with various celebrities and other owners of brands, properties and other content to develop and publish games and other software applications for mobile devices. These agreements typically require us to make non-refundable, but recoupable payments of minimum guaranteed royalties or license fees as up-front payments or over the term of the agreement.
Off-Balance Sheet Arrangements
At December 31, 2020, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that are not already disclosed in this report.
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 fully offset these higher costs through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.
Recent Accounting Pronouncements
For further information on recent accounting pronouncements, see Note 1 in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate and Credit Risk
Our exposure to interest rate risk relates primarily to our investment portfolio and the potential losses arising from changes in interest rates.
We are potentially exposed to the impact of changes in interest rates as they affect interest earned on our investment portfolio. As of December 31, 2020, $364.4 million of our cash and cash equivalents was held in operating bank accounts and money market funds earning nominal interest. Accordingly, we do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results or liquidity related to these amounts.
The primary objectives of our investment activities are, in order of importance, to preserve principal, provide liquidity and maximize income without significantly increasing risk. We do not currently use or plan to use derivative financial instruments in our investment portfolio.
As of December 31, 2020, our cash and cash equivalents were primarily maintained by financial institutions in the United States, Canada, India and Hong Kong, and our current deposits are likely in excess of insurance limits.
Our accounts receivable primarily relate to revenue earned from Digital Storefront operators and advertising platforms. We perform ongoing credit evaluations of our customers’ and the Digital Storefronts’ financial condition but generally require no collateral from them. At December 31, 2020, Apple Inc., or Apple, accounted for 42.7%, Google Inc., or Google, accounted for 28.8% and Tapjoy Inc., or Tapjoy accounted for 22.0% of total accounts receivable. At December 31, 2019, Apple accounted for 47.2%, Google accounted for 28.5% and Tapjoy accounted for 17.8% of total accounts receivable. No other customer or Digital Storefront represented more than 10% of our total accounts receivable as of these dates.
Foreign Currency Exchange Risk
We transact business in more than 100 countries in more than 30 different currencies, and in 2020 and 2019, some of these currencies fluctuated significantly. Our operations outside of the United States are maintained in their local currency, with the significant operating currencies consisting of the Indian Rupee and Canadian Dollar. Although recording operating expenses in the local currency of our foreign operations mitigates some of the exposure of foreign currency fluctuations, variances among the currencies of our customers and our foreign operations relative to the United States Dollar, or USD, could have and have had a material impact on our results of operations.
Our foreign currency exchange gains and losses have been generated primarily from fluctuations the Indian Rupee versus the USD and the Canadian Dollar versus the USD. At month-end, non-functional currency-denominated accounts receivable and intercompany balances are marked to market and unrealized gains and losses are included in interest and other income/(expense), net. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income/(loss) in stockholders’ equity. We have in the past experienced, and in the future expect to experience, foreign currency exchange gains and losses on our accounts receivable and intercompany receivables and payables. Foreign currency exchange gains and losses could have a material adverse effect on our business, operating results and financial condition.
To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in the foreseeable future.
Item 8.
Item 8. Financial Statements and Supplementary Data
GLU MOBILE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Glu Mobile Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income/(Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Glu Mobile Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Glu Mobile Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income/(loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Estimation of the Average Playing Period of Paying Users Associated with Durable Virtual Items
As described in Notes 1 and 3 to the consolidated financial statements, the Company generates revenue through in-application purchases within its games. The Company sells both consumable and durable virtual items. The Company’s revenue from consumable virtual items has been insignificant. Durable virtual items are items that are accessible to the player over an extended period of time and that remain in the game for as long as the player continues to play. Revenue from durable virtual items amounted to $481 million for the year ended December 31, 2020. The Company’s performance obligations represent a single combined performance obligation, which is to make the game and the ongoing game related services available to the players. The Company recognizes revenue from durable virtual items over the estimated average playing period of paying users on a per title basis. Management uses the “survival analysis” model to estimate the average playing period for paying users, which statistically estimates the average playing period of each title by analyzing the historical behavior patterns of paying users.
The principal considerations for our determination that performing procedures relating to the estimation of the average playing period of paying users associated with durable virtual items is a critical audit matter are (i) the significant judgment by management in the application of the “survival analysis” model; (ii) a high degree of auditor judgment and effort in performing procedures and evaluating management’s application of the “survival analysis” model, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of the average playing period of paying users associated with durable virtual items. These procedures also included, among others (i) testing management’s process for estimating the average playing period of paying users associated with durable virtual items, (ii) testing management’s method of obtaining and analyzing the data in the “survival analysis” model; and (iii) testing the completeness and accuracy of the user data. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the “survival analysis” model.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 26, 2021
We have served as the Company’s auditor since 2003, which includes periods before the Company became subject to SEC reporting requirements.
GLU MOBILE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
GLU MOBILE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
GLU MOBILE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GLU MOBILE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GLU MOBILE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands, except per share data)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Glu Mobile Inc. (the “Company” or “Glu”) was incorporated in Nevada in May 2001 and reincorporated in the state of Delaware in March 2007. The Company develops, publishes, and markets a portfolio of games designed for users of smartphones and tablet devices who download and make purchases within its games through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play Store, and others (“Digital Storefronts”). The Company creates games based on its own original brands, as well as third-party licensed brands, properties and other content.
Basis of Presentation
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s 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. Estimates and assumptions reflected in the consolidated financial statements include, but are not limited to, estimation of the average playing period of paying users associated with durable virtual items, the allowance for doubtful accounts, useful lives of property and equipment and intangible assets, valuation and realizability of deferred tax assets and uncertain tax positions, fair value of stock awards issued, fair value of warrants issued, accounting for business combinations, evaluating goodwill, long-lived assets for impairment, and realization of prepaid royalties and fair value of investments. Actual results may differ from these estimates due to risks and uncertainties, and these differences may be material, including uncertainty in the current economic environment due to the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”) pandemic. Management will continue to actively monitor the impact of the COVID-19 pandemic on the Company’s assumptions and estimates.
Revenue Recognition
The Company generates revenue through in-application purchases (“in-app purchases”) within its games on smartphones and tablet devices, such as Apple’s iPhone and iPad, and mobile devices utilizing Google’s Android operating system. Users can download the Company’s free-to-play games through Digital Storefronts. The Company also has relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertising providers is generated through impressions, clickthroughs, banner ads, and offers.
The Company adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”) and its related amendments effective January 1, 2018 using a modified retrospective method and recorded a cumulative impact to retained earnings of $8,826. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised services. The amount of revenue recognized reflects the consideration which the Company expects to receive in exchange for these services. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred
and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
ASC 606 requires an entity to disclose the revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, due to changes in transaction price). Revenue recognized relating to performance obligations satisfied in prior periods was $0 for the year ended December 31, 2020 and December 31, 2019, respectively.
The Company elects to use the practical expedient under 606-10-50-14 which states an entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if the following criteria are met:
1.the performance obligation is part of a contract that has an original expected duration of one year or less; and
2.the entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18 (right to invoice).
Since all of the Company’s contracts have an original expected duration of one year or less, the Company elects to use this practical expedient and does not disclose the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations.
In-App Purchases
Users can download the Company’s free-to-play games within the Digital Storefronts and pay to acquire virtual currency, which can be redeemed in the game for virtual goods, or virtual goods directly (together, defined as “virtual items”) to enhance their game-playing experience. The Company sells both consumable and durable virtual items and receives reports from the Digital Storefronts, which breakdown the various purchases made from the Company’s games over a given time period. The Company reviews these reports and determines on a per-item basis whether the purchase was a consumable virtual item or a durable virtual item. Consumable virtual items are items that are consumed at a predetermined time or otherwise have limitations on repeated use. Durable virtual items are items, such as furniture, clothes, etc. that are accessible to the player over an extended period of time and that remain in the game for as long as the player continues to play.
The initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance; however, the separate election by the player to make an in-application purchase satisfies the criterion thus creating a contract under ASC 606. The Company has identified the following performance obligations in these contracts:
1.Ongoing game related services such as hosting of game play, storage of customer content, when and if available content updates, maintaining the virtual currency management engine, tracking gameplay statistics, matchmaking as it relates to multiple player gameplay, etc.
2.Obligation to the paying player to continue displaying and providing access to the virtual items within the game.
Neither of these obligations are considered distinct since the actual mobile game and the related ongoing services are both required to purchase and benefit from the related virtual items. As such, the Company’s performance obligations represent a single combined performance obligation which is to make the game and the ongoing game related services available to the players. The transaction price, which is the amount paid for the virtual items by the player, is allocated entirely to the single combined performance obligation. The Company recognizes revenue for durable virtual items over the estimated average playing period of paying users on a per title basis. The Company’s revenue from consumable virtual items has been insignificant over the previous three years. The Company has estimated the useful life of a paying user between four and eight months.
Advertisements and Offers
The Company has relationships with certain advertising service providers for advertisements within its mobile games. Revenue from these advertising service providers is generated through impressions, clickthroughs, offers and banner ads. Offers are the type of advertisements where the players are rewarded with virtual currency for completing specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. The Company has determined the advertising buyer to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.
Other Estimates and Judgments
The Company computes its estimated average playing period of paying users at least twice each year. It has examined the playing patterns of paying users across a representative sample of its games across various genres.
The Company uses the “survival analysis” model to estimate the average playing period for paying users. This model provides for a singular approach to estimating the average playing period of paying users on a title by title basis for the Company’s diverse portfolio of games. It is a statistical model that analyzes time duration until one or more events happens and is commonly used in various industries for estimating lifespans. The Company believes this is an appropriate model to estimate the average playing period of paying users for its titles as this model statistically estimates the average playing period of each title by analyzing the historical behavior patterns of paying users.
This model requires the stratification of user data into active and inactive paying users on a per title basis. Active users are those who are active in the game for the past 30 days as of the evaluation date. The remaining users are considered inactive and deemed to have churned from the game. These users are treated mathematically differently in the model than those who are still active. A distribution curve is then fit to the user data to estimate the average playing period of paying users on a per title basis.
The Company has selected a threshold of 120 days from the commercial launch of a title as the minimum number of days of data required for this model. This threshold was deemed to be appropriate as the Company tested the model using lower thresholds which resulted in inconsistencies in the estimate of the average playing period of paying users. For new titles with less than 120 days of data that share similar attributes with an existing title and/or prequel titles, the average playing period is determined based on the average playing period of that existing title or prequel title, as applicable. For all other titles with less than 120 days of data, the average playing period is determined based on the average playing period of all other remaining existing titles.
While the Company believes its estimates to be reasonable based on available game player information, it may revise such estimates in the future if a titles’ user characteristics change. Any adjustments arising from changes in the estimates of the average playing period for paying users would be applied to the current quarter and prospectively on the basis that such changes are caused by new information that indicates a change in user behavior patterns compared to historical titles. Any changes in the Company’s estimates of the useful life of virtual items in a certain title may result in revenue being recognized on a basis different from prior periods’ and may cause its operating results to fluctuate.
Principal Agent Considerations
The Company evaluated its Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if it is acting as the principal or as an agent when selling virtual items or advertisements within its games. The Company primarily uses Digital Storefronts for distributing its smartphone games and for enabling players to purchase virtual items and advertising service providers to serve advertisements within its games. The Company evaluated the following factors to assess whether it controls each specified good or service before that good or service is transferred to the customer:
●the party responsible for the fulfillment of the virtual items, game related services, or serving of advertisements;
●the party having the discretion to set pricing with the end-users; and
●the party having inventory risk before the specified good or service have been transferred to a customer.
Based on the evaluation of the above indicators, the Company determined that it has control of the services before they are transferred to the end-user. Thus, the Company is generally acting as a principal and is the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through its advertising service providers. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers. In situations where the price paid by the end-user of the advertising service provider is not known, the Company accounts for these transactions on a net basis.
Deferred Platform Commissions and Royalties
Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. The Company is also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and the Company plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in “Cost of revenue” in the period in which the related sales are recognized as revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market funds. The Company considers all investments purchased with original maturities of three months or less from the date of purchase to be cash equivalents. The Company deposits cash and cash equivalents with financial institutions that management believes are of high credit quality. Deposits held with financial institutions often exceed the amount of insurance on these deposits.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable.
The Company derives its accounts receivable from revenue earned from customers located worldwide. 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 management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company writes off accounts receivable balances against the allowance when it determines that the amount will not be recovered.
The following table summarizes the revenue from customers or aggregate purchases through Digital Storefronts in excess of 10% of the Company’s revenue:
At December 31, 2020, Apple Inc. (“Apple”), Google Inc. (“Google”), and Tapjoy Inc. (“Tapjoy”) accounted for 42.7%, 28.8%, and 22.0%, respectively, of total accounts receivable. At December 31, 2019, Apple, Google and Tapjoy accounted for 47.2%, 28.5%, and 17.8%, respectively, of total accounts receivable. No other customer represented more than 10% of the Company’s total accounts receivable as of these dates.
Fair Value
The Company accounts for fair value in accordance with Accounting Standard Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a three-tier hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Foreign Currencies
The functional currency of each of the Company’s wholly owned subsidiaries is either the applicable local currency or the U.S. dollar. In preparing its consolidated financial statements, the Company translates the financial statements of its foreign subsidiaries from their functional currencies, the local currency, into U.S. Dollars. The translation of foreign currencies into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Capital accounts are translated at historical foreign currency exchange rates. Translation gains and losses are included as a component of accumulated other comprehensive income/(loss) within stockholders’ equity. However, if adjustments arise from foreign currency exchange rate changes on transactions denominated in a currency other than the functional currency, any gain or loss associated with the translation of these financial statements would be included in interest and other income/(expense), net within the Company’s consolidated statements of operations. The foreign currency translation adjustments were not material for the year ended December 31, 2020.
Cumulative foreign currency translation adjustments include any gain or loss associated with the translation of a subsidiary’s financial statements when the functional currency of a subsidiary is the local currency. If the Company disposes of any of its subsidiaries, any cumulative translation gains or losses would be realized and recorded in other income (expense) within the Company’s consolidated statement of operations in the period during which the disposal occurs. If the Company determines that there has been a change in the functional currency of a subsidiary from a local currency to the U.S. Dollar, any translation gains or losses arising after the date of change would be included in interest and other income/(expense), net within the Company’s consolidated statement of operations.
Prepaid or Guaranteed Licensor Royalties
The Company’s royalty expenses consist of fees that it pays to content owners for the use of their brands, properties and other licensed content, including trademarks and copyrights, in the development of the Company’s games. Royalty-based obligations are either paid in advance and capitalized on the balance sheet as prepaid royalties or accrued as incurred and subsequently paid. These royalty-based obligations are expensed to cost of revenue at the greater of the revenue derived from the relevant game multiplied by the applicable contractual rate or an effective royalty rate based on expected net product sales.
The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate revenue generated from end users. In accordance with Accounting Standard Codification 440-10, Commitments (“ASC 440-10”), the Company recorded a minimum guaranteed royalty liability of $28,807 and $40,150 as of December 31, 2020 and 2019, respectively. The balance is included in accrued royalties and long-term
accrued royalties on the Company’s consolidated balance sheet. 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. 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 classification of minimum royalty payment obligations between long-term and short-term is determined based on the expected timing of recoupment of earned royalties calculated on projected revenue for the licensed IP games.
Each quarter, the Company evaluates the realization of its prepaid royalties as well as any recognized guarantees not yet paid to determine amounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenue, cash flows and net margins to evaluate the future realization of prepaid royalties, license fees, and guarantees. This evaluation considers multiple factors such as 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 published by the Company and its competitors and/or other game platforms (e.g., consoles and personal computers) utilizing 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 revenue in the period in which impairment is indicated. The Company recorded impairment charges to cost of revenue of $186, $457, and $711 related to prepaid guaranteed royalties for certain of its celebrity license agreements, and certain other prepaid royalties during the years ended December 31, 2020, 2019, and 2018, respectively.
Goodwill and Intangible Assets
In accordance with Accounting Standard Codification 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company performs its annual impairment test as of September 30th each year, at the reporting unit level, which is at the company level as a whole, since it operates in a single reporting segment. The impairment review involves assessments as follows:
Qualitative assessment - The Company evaluates qualitative factors and overall financial performance to determine whether it is necessary to perform a quantitative assessment. A qualitative assessment involves consideration of: (i) past, current and projected future earnings; (ii) recent trends and macroeconomic and market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. After assessing those various factors, if it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if the Company decides to bypass this option, it proceeds to the quantitative assessment.
Quantitative assessment - The Company compares the fair value of its reporting unit to its carrying value including goodwill. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. If a unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary. Where the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
When necessary, to determine the reporting unit’s fair value under the quantitative approach, the Company uses a combination of income and market approaches, such as estimated discounted future cash flows of that reporting unit, multiples of earnings or revenue, and an analysis of recent sales or offerings of comparable entities. The Company also considers its market capitalization on the date of the analysis to ensure the reasonableness of the reporting unit’s fair value.
In 2020, 2019, and 2018, the Company did not record any goodwill impairment charges as it was determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
Purchased intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from three to five years and are reviewed for impairment in accordance with Accounting Standard Codification
360, Property, Plant and Equipment (“ASC 360”).
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, significant negative industry or economic trends, and a significant decline in the Company’s stock price for a sustained period of time. Impairment exists if the carrying amounts of such assets exceed the estimates of future undiscounted cash flows expected to be generated by such assets. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over expected discounted future cash flows, or if applicable, the quoted market price from those assets. The Company has not recorded any such impairment charge during the years presented.
Property and Equipment
The Company states property and equipment at cost less accumulated depreciation and amortization. The Company computes depreciation or amortization using the straight-line method over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the lease term of the respective assets, whichever is shorter. Cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
The depreciation and amortization periods for the Company’s property and equipment are as follows:
Internal Use Software
The Company capitalizes internal use software development costs in accordance with Accounting Standard Codification 350-40, Intangibles-Goodwill and Other-Internal Use Software (“ASC 350-40”) and Accounting Standards Update 2015-05, Cloud Computing Arrangements (“ASU 2015-05”). The Company capitalizes software development costs, including costs incurred to purchase third-party software, beginning when it determines certain factors are present including, among others, that technology exists to achieve the performance requirements and/or buy versus internal development decisions, which the Company equates to the application development stage. Capitalized costs are amortized using the straight-line method over the estimated useful life of the software once it is ready for its intended use. The Company believes the straight-line recognition method best approximates the manner in which the expected benefit will be derived. The Company capitalized certain internal use software costs totaling approximately $247, $1,216, and $65 during the years ended December 31, 2020, 2019, and 2018, respectively. The estimated useful life of costs capitalized is generally three years. During the years ended December 31, 2020, 2019, and 2018, the amortization of capitalized software costs totaled approximately $690, $809, and $896, respectively. Capitalized internal use software development costs are included in property and equipment, net.
Research and Development Costs
The Company charges costs related to research, design and development of products to research and development expense as incurred. The types of costs included in research and development expenses include personnel-related expenses such as salaries and benefits related to product development employees, third party development cost, contractor fees, and allocated facilities costs.
Software Development Costs
The Company applies the principles of Accounting Standard Codification 985-20, Software-Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development for software to be sold, leased or otherwise marketed be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The Company has adopted the “tested working model” approach to establishing technological feasibility for its games. Under this approach, the Company does not consider a game in development to have passed the technological feasibility milestone until the Company has completed a model of the game that contains essentially all the functionality and features of the final game and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a game for sale; thus, the Company has expensed all software development costs as incurred.
Stock-Based Compensation
The Company applies the fair value provisions of Accounting Standard Codification 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock-based payments including stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”), performance stock options (“PSOs”), and employee stock purchase plan (“ESPP”). The number of PSUs and PSOs earned and eligible to vest is determined based on achievement of specified financial performance measures. The fair value of stock options and PSOs and stock purchase rights granted pursuant to the Company’s equity incentive plans and 2007 Employee Stock Purchase Plan, respectively, is determined using the Black-Scholes valuation model. The determination of fair value is affected by the stock price, as well as assumptions regarding subjective variables such as expected employee exercise behavior and expected stock price volatility over the expected term of the award. Generally, these assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. The Company accounts for forfeitures as they occur.
The cost of RSUs and PSUs is determined using the fair value of the Company’s common stock based on the quoted closing price of the Company’s common stock on the date of grant. Compensation cost for stock options, RSUs and performance-based awards with a single vesting date is amortized ratably over the requisite service period. For performance-based awards that have multiple vesting dates, the compensation cost is recognized ratably over the requisite service period for each tranche, whereby each vesting tranche is treated as a separate award for determining the requisite service period. The compensation cost for performance-based awards may be adjusted over the vesting period based on interim estimates of performance against the pre-set financial performance measures.
Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes place. Advertising expense was $146,207, $117,979, and $95,037 in the years ended December 31, 2020, 2019, and 2018, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standard Codification 740, Income Taxes (“ASC 740”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under ASC 740, the Company determines deferred tax assets and liabilities based on the temporary difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which it expects the differences to reverse. The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amount it expects to realize.
The Company accounts for uncertain tax positions in accordance with ASC 740, which requires companies to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. ASC 740
prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Comprehensive Income/(Loss)
Comprehensive income/(loss) consists of two components, net income/(loss) and other comprehensive income/(loss). Other comprehensive income/(loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income/(loss). The Company’s other comprehensive income/(loss) included foreign currency translation adjustments from those subsidiaries not using the U.S. Dollar as their functional currency, and a reclassification to net income/(loss) from the write-off of cumulative translation adjustment.
Operating Leases
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and its related amendments. According to ASC 842, the Company determines if an arrangement is a lease at inception. Its operating lease agreements are primarily for real estate space and are included within operating lease right of use (“ROU”) assets and operating lease liabilities on the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, determined as the rate it would have incurred to borrow based on its credit quality at the inception of the lease over a similar term and in the economic environment where the leased asset is located, to calculate the present value of lease payments. ROU assets also exclude lease incentives. Many of the Company’s lease agreements include options to extend the lease, which the Company does not include in the minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Certain of the Company’s lease agreements contain lease components (for example, fixed payments such as rent) and non-lease components such as common-area maintenance costs. Both of these types of provisions are accounted for as a single lease component. For such arrangements, there may be a variability in future lease payments as the amount of the non-lease components is typically revised from one period to the next. These variable lease payments, which are primarily comprised of common-area maintenance, utilities, and real estate taxes that are passed on from the lessor in proportion to the space leased by the Company within the entire building or building complex, are recognized in the period in which the obligation for those payments is incurred
For leases that have greater than 12-month lease term, ROU assets and lease liabilities are recognized on the consolidated balance sheet at commencement date based on the present value of remaining fixed lease payments. The Company considers only payments that are fixed and determinable at the time of commencement. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company combines fixed lease and non-lease components and account for them as a single lease component.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost and replaces the existing incurred loss impairment model with an expected loss methodology, which will result in earlier recognition of credit losses. The ASU requires a cumulative-effect adjustment to retained earnings transition approach and
is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the amount of goodwill. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The update of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The Company will adopt ASU 2020-10 as of the reporting period beginning January 1, 2021. The update of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
NOTE 2 - NET INCOME/(LOSS) PER SHARE
The Company computes basic net income/(loss) per share by dividing its net income/(loss) for the period by the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, including potential dilutive common stock instruments. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common
shares outstanding during each period, without consideration for common share equivalents as their effect would have been antidilutive.
The following equity awards outstanding at the end of each period presented have been excluded from the computation of net income/(loss) per share of common stock for the periods presented because including them would have had an anti-dilutive effect:
(1)Outstanding PSOs and PSUs for which performance conditions have not been met as of the relevant reporting dates, have not been included in the calculation of the weighted average number of shares used to compute diluted net income/(loss) per share or in the table above.
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the year ended December 31, 2020:
The Company operates in a single reportable segment. In the table above, revenue is disaggregated by type of revenue stream, indicating whether it is recognized over-time or at a point-in-time.
Contract Balances
The following table provides information about receivables, contracts assets, and contract liabilities from contracts with customers:
The Company receives payments from customers based on billing terms established in the Company’s contracts. Contract asset relates to the Company’s right to consideration for its completed performance under the contract. At December 31, 2020 and December 31, 2019, there were no contract assets recorded in the Company’s consolidated balance sheet. Accounts receivable are recorded when the right to consideration becomes unconditional.
Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as the Company performs under the contract. The Company had $97,629 in deferred revenue as of December 31, 2019, which was all earned in the year ended December 31, 2020. The Company had $85,736 in deferred revenue as of December 31, 2018, which was all earned in the year ended December 31, 2019.
NOTE 4 - FAIR VALUE MEASUREMENTS
As of December 31, 2020, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows:
As of December 31, 2019, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows:
The Company’s cash and cash equivalents, which were held in operating bank accounts and money market funds, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The carrying value of accounts receivable and payables approximates fair value due to the short time to expected payment or receipt of cash. The carrying value of other investments approximates fair value, as there have been no events or changes in circumstances that would have had a significant effect on the fair value of these investments at December 31, 2020.
NOTE 5 - BALANCE SHEET COMPONENTS
Accounts Receivable, Net
Accounts receivable include amounts billed and unbilled as of the respective balance sheet dates, but net of platform commissions to the Digital Storefronts. The Company had no bad debts as of the years ended December 31, 2020, 2019, and 2018.
Property and Equipment, Net
Depreciation for the years ended December 31, 2020, 2019, and 2018 was $5,421, $4,225, and $3,855, respectively.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Intangible Assets
The following table sets forth carrying amounts and accumulated amortization expense of acquired intangible assets that are not already fully amortized:
Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximate the pattern in which the economic benefits of the intangible assets are realized. The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenue.
During the years ended December 31, 2020 and 2019, the Company recorded amortization expense in cost of revenue of $3,258 and $4,387, respectively. During the year ended December 31, 2018, the Company recorded amortization and impairment expense in cost of revenue of $9,119. As of December 31, 2020, the Company expects to fully amortize its intangible assets in 2021.
Goodwill
The Company had $116,227 in goodwill as of December 31, 2020 and December 31, 2019, respectively.
During the third quarters of fiscal 2020 and 2019, the Company performed the qualitative impairment assessment for its reporting unit. Based on the assessment, the Company concluded that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount, and as a result, it did not proceed with the quantitative impairment assessment. Accordingly, the Company did not recognize an impairment of goodwill during the years ended December 31, 2020 and December 31, 2019.
NOTE 7 - LEASES
The Company currently leases real estate space under non-cancelable operating lease agreements for its corporate headquarters in San Francisco, California and its operations in Toronto, Canada, Hyderabad, India, Foster City, California, Burlingame, California and Orlando, Florida. These operating leases have remaining lease terms ranging from 4 months to 6.92 years, some of which include the option to extend the lease, with the longest extension option being 6 years.
The Company does not include any of its renewal options when calculating its lease liability as the Company is not reasonably certain whether it will exercise these renewal options at this time. Rent expense for the year ended December 31, 2020, 2019, and 2018 was $6,307, $5,311, and $5,759, respectively.
The future minimum lease payments to be paid under noncancelable leases in effect at December 31, 2020, are as follows:
Supplemental information related to the Company’s leases for the year ended December 31, 2020 is as follows:
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Minimum Guaranteed Royalties and Developer Commitments
The Company has entered into license and publishing agreements with various celebrities, athletes, sports and entertainment organizations, and other well-known brands and properties to develop and publish games for mobile devices. Pursuant to some of these agreements, the Company is required to make minimum guaranteed royalty payments regardless of revenue generated by the applicable game, which may not be dependent on any deliverables. The significant majority of these minimum guaranteed royalty payments are recoupable against future royalty obligations that would otherwise become payable, or in certain circumstances, where not recoupable, are capitalized and amortized over the lesser of (1) the estimated life of the title incorporating licensed content or (2) the term of the license agreement.
At December 31, 2020, future unpaid minimum guaranteed royalty commitments were as follows:
The amounts represented in the table above reflect the Company’s minimum cash obligations for the respective calendar years, but do not necessarily represent the periods in which they will be expensed in the Company’s consolidated financial statements.
Licensor commitments include $28,807 of commitments due to licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets because payment is not contingent upon performance by the licensor. The classification of commitments between long-term and short-term is determined based on the timing of recoupment of earned royalties calculated on projected revenue for the licensed intellectual property games.
Income Taxes
As of December 31, 2020, unrecognized tax benefits have been netted against deferred tax assets and potential interest and penalties are classified within “other long-term liabilities” on the Company’s consolidated balance sheets.
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 Company’s 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. Accordingly, the Company had recorded no liabilities for these agreements as of December 31, 2020, and 2019.
In the ordinary course of its business, the Company includes standard indemnification provisions in most of its commercial agreements with Digital Storefronts and licensors. Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered or incurred in connection with its games, including as a result of intellectual property infringement, viruses, worms and other malicious software, and legal or regulatory violations. 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 provisions is often unlimited. To date, the Company has not incurred costs to defend lawsuits or settle indemnified claims of these types. As a result, the Company believes the estimated fair value of these indemnity provisions is minimal. Accordingly, the Company had recorded no liabilities for these provisions as of December 31, 2020 and 2019.
Contingencies
From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company’s estimate of losses is developed in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. After taking all of the above factors into account, the Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed reasonably probable and the amount can be reasonably estimated. The Company further determines whether an estimated loss from a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible. Such disclosure will include an estimate of the additional loss or range of loss or will state that an estimate cannot be made.
On December 17, 2020, the Company filed a lawsuit in the United States District Court for the Western District of Texas, Waco Division, against Reworks Oy (“Reworks”). The complaint alleges that Reworks infringes at least one claim of U.S. Patent No. 10,504,297, the Company’s patent relating to systems and methods for providing competitive scene completion in a mobile gaming application. The Company is pursuing a judgment finding that Reworks has infringed the Company’s patent and is seeking injunctive relief, as well as monetary damages for past and ongoing infringement.
The Company does not believe it is party to any currently pending litigation, the outcome of which is reasonably possible to have a material adverse effect on its operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors.
NOTE 9- STOCKHOLDERS’ EQUITY
Common Stock
At December 31, 2020, the Company was authorized to issue 250,000 shares of common stock. As of December 31, 2020, the Company had reserved 34,468 shares for future issuance under its stock plans and outstanding warrants.
Follow-on Public Offering
In June 2020, the Company completed a follow-on public offering of 17,250 shares of its common stock, which included an over-allotment option to purchase an additional 2,250 shares, at a public offering price of $9.25 per share (the “Offering”). The aggregate gross proceeds from the Offering, including the exercise of the over-allotment, were approximately $159,563, and net proceeds received after underwriting fees and offering expenses totaled approximately $151,773. The Company does not have specific uses of the net proceeds from the Offering but intends to use the net proceeds for working capital and other general corporate purposes, which may include potential acquisitions and strategic transactions.
Warrants to Purchase Common Stock
Warrants outstanding at December 31, 2020 were as follows:
No expenses with respect to these warrants were recognized during the years ended December 31, 2020 and 2019. During the year ended December 31, 2018, the Company recorded $1,046 of non-cash warrant related expense in cost of revenue as the mobile games featuring these celebrities licensors were not expected to generate meaningful revenue over their lifetime.
The Company estimated the fair value of the warrants using the Black-Scholes valuation model and the weighted average assumptions noted in the following table:
Preferred Stock
At December 31, 2020, the Company was authorized to issue 5,000 shares of preferred stock.
NOTE 10 - STOCK INCENTIVE AND OTHER BENEFIT PLANS
2007 Equity Incentive Plan
In 2007, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan permits the Company to grant stock options, RSUs, PSUs, PSOs and other stock-based awards to employees, non-employee directors and consultants.
In April 2020, the Company’s Board of Directors approved, and in June 2020, the Company’s stockholders approved, the Sixth Amended and Restated 2007 Equity Incentive Plan (the “Sixth Amended 2007 Plan”). The Sixth Amended 2007 Plan included an increase of 7,000 shares in the aggregate number of shares of common stock authorized for issuance under the plan. As of December 31, 2020, 7,459 shares were available for future grants under the Sixth Amended 2007 Plan.
Performance-based equity awards
The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) has awarded PSOs and/or PSUs to the Company’s executives and certain other employees. These performance-based awards are subject to the achievement of specified annual performance goals. They become eligible to vest only if the applicable performance goals are achieved and will vest only if the grantee remains employed with the Company through each applicable vesting date. The number of shares that may vest depend on the extent to which the Company achieves the
specified annual performance goals. The fair value of these awards is estimated on the date of grant. The PSOs have a contractual term of 10 years. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized, and any previously recognized expense is reversed. The expected cost is based on the awards that are probable to vest and is recognized over the service period.
2007 Employee Stock Purchase Plan
In 2007, the Company’s Board of Directors adopted and the Company’s stockholders approved, the 2007 Employee Stock Purchase Plan (the “2007 Purchase Plan”). The Company initially reserved 667 shares of its common stock for issuance under the 2007 Purchase Plan. The 2007 Purchase Plan permits eligible employees, including employees of certain of the Company’s subsidiaries, to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or after a purchase period ends.
In April 2017, the Company’s Board of Directors approved, and in June 2017, the Company’s stockholders approved the Amended and Restated 2007 Employee Stock Purchase Plan (the “Amended 2007 Purchase Plan”). The Amended 2007 Purchase Plan includes an increase of 4,000 shares in the aggregate number of shares of common stock authorized for issuance under the plan and removal of the expiration date of the plan.
As of December 31, 2020, 2,003 shares were available for issuance under the 2007 Purchase Plan.
2018 Equity Inducement Plan
In April 2018, the Compensation Committee of the Company’s Board of Directors adopted the 2018 Equity Inducement Plan (the “2018 Plan”). The 2018 Plan replaced the Company’s 2008 Equity Inducement Plan that expired by its terms in March 2018, and is intended to augment the shares available for issuance under the Sixth Amended 2007 Plan. The Company did not seek stockholder approval for the 2018 Plan. As such, awards under the 2018 Plan will be granted in accordance with Nasdaq Listing Rule 5635(c)(4) and only to persons not previously considered 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. The Company initially reserved 400 shares of common stock for issuance under the 2018 Plan.
As of December 31, 2020, 194 shares were reserved for future grants under the 2018 Plan.
RSU Activity
A summary of the Company’s RSU activity is as follows:
(1) As of December 31, 2020, granted awards included 293 unvested RSUs with an intrinsic value of $2,638, for which the Company and certain employees reached mutual understanding of the awards key terms and conditions in February 2021. Such awards were legally granted in November 2020.
PSU Activity
The following table summarizes the Company’s PSU activity:
(1) As of December 31, 2020, granted awards included 444 unvested PSUs with an intrinsic value of $3,997, for which the Company and certain employees reached mutual understanding of the awards key terms and conditions in February 2021. Such awards were legally granted in November 2020.
PSO Activity
The following table summarizes the Company’s PSO activity:
Stock Option Activity
The following table summarizes the Company’s stock option activity:
The Company has computed the aggregate intrinsic value amounts disclosed in the above table based on the difference between the original exercise price of the options and the fair value of the Company’s common stock of $9.01 per share at December 31, 2020. The total intrinsic value of awards exercised during the years ended December 31, 2020, 2019, and 2018 was $23,991, $7,806, and $10,957, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation expense in accordance with ASC 718, and has 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 tables.
The expected term of stock options gave consideration to early exercises, post-vesting cancellations and the options’ contractual term ranging from 6 to 10 years. The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for the PSOs as the Company has not granted such awards in the past. As a result, the Company used the simplified method to calculate the expected term estimate based on the vesting and contractual terms of the PSOs. Under the simplified method, the expected term is equal to the average of the stock-based awards vesting period and their contractual term. The PSOs have a contractual term of 10 years. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Constant Maturity Rate as of the date of grant. The Company based its expected volatility on its own historical volatility for the year ended December 31, 2020, 2019, and 2018, respectively. The weighted-average fair value of stock options granted during the year ended December 31, 2020, 2019, and 2018 was $4.63, $3.44, and $2.25 per share, respectively. The Company did not grant any PSOs in the year ended December 31, 2020 and 2019, respectively. The weighted average fair value of the PSOs granted during the year ended December 31, 2018 was $3.38.
The cost of RSUs and PSUs are determined using the fair value of the Company’s common stock based on the quoted closing price of the Company’s common stock on the date of grant. RSUs typically vest and are settled over approximately a four-year period with 25% of the shares vesting on or around the one-year anniversary of the grant date and the remaining shares vesting quarterly thereafter. Compensation cost for RSUs is amortized on a straight-line basis over the requisite service period. Compensation cost for PSUs is amortized on an accelerated attribution basis over the requisite service period of the award.
The following table summarizes the consolidated stock-based compensation expense by line items in the consolidated statement of operations:
(1) For the year ended December 31, 2020, stock-based compensation expense recorded in research and development includes $739 from PSUs classified as liabilities.
(2) Stock-based compensation expense for the year ended December 31, 2019 included a reversal of previously accrued expense of $2,455 due to a decrease in the vesting probability of certain performance-based equity awards.
The following table summarizes total compensation expense related to unvested awards not yet recognized as of December 31, 2020:
(1)The unrecognized compensation expense for PSUs vesting in FY2023 and FY2024 is not included in the table above as the Company does not have a reasonable basis upon which to estimate the vesting probability of such awards in those future periods.
The unrecognized compensation expense related to stock options and RSUs will be recognized over a weighted average period of 1.26 years and 3.20 years, respectively. The unrecognized stock compensation expense related to unvested PSUs and PSOs will be recognized over a weighted average period of 0.52 and 0.13 years, respectively.
Stock-based compensation expense in the year ended December 31, 2020, was approximately $31,809 (comprising approximately $6,068 related to stock options, $12,732 related to performance-based awards, $11,177 related to RSUs and $1,832 related to the 2007 Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2019, was approximately $17,383 (comprising approximately $7,043 related to stock options, $2,421 related to performance-based awards, $6,559 related to RSUs and $1,360 related to the 2007 Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2018, was approximately $24,592 (comprising approximately $6,386 related to stock options, $9,195 related to performance-based awards, $8,084 related to RSUs and $927 related to the 2007 Purchase Plan).
Cash proceeds, net of taxes, from option exercises were $19,463, $3,305, and $5,643 for the years ended December 31, 2020, 2019, and 2018, respectively. The Company realized no significant income tax benefit from stock option exercises during the year ended December 31, 2020, 2019, and 2018. As permitted by ASC 718, the Company has deferred the recognition of its excess tax benefit from non-qualified stock option exercises.
401(k) Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering certain eligible employees. In 2019, the Company started matching a portion of the contribution made by participants who met certain employment criteria. For the years ended December 31, 2020 and 2019, the matching contributions made by the Company were not material. The Company did not match the contributions made by its employees for the year ended December 31, 2018.
NOTE 11 - INCOME TAXES
The components of income (loss) before income taxes by tax jurisdiction were as follows:
The components of income tax benefit/(provision) were as follows:
The difference between the actual rate and the federal statutory rate was as follows:
Deferred tax assets and liabilities consist of the following:
The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, because their earnings are intended to be reinvested indefinitely. The amount of accumulated foreign earnings of the Company’s foreign subsidiaries totaled $3,734 as of December 31, 2020. If the Company's foreign earnings were
repatriated, additional tax expense might result. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings attributable to foreign subsidiaries is not practicable.
After considering all available positive and negative evidence, the Company has determined it is more likely than not that deferred tax assets in the U.S. and a certain foreign entity will not be realized as a result of cumulative losses incurred in these jurisdictions, except for Canada and India. Therefore, the Company maintains a full valuation allowance against the net deferred tax assets in these jurisdictions. As of December 31, 2020 and 2019, the Company concluded that an additional valuation allowance of $2,450 and $2,334 was required to reflect the change in its deferred tax assets prior to valuation allowance during 2020 and 2019, respectively. It is reasonably possible that within the next 12 months, there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of the valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings.
At December 31, 2020, the Company had net operating loss carryforwards of approximately $182,400 and $90,547 for federal and state tax purposes, respectively. If not utilized, these carryforwards will expire at various times between 2026 and 2040. In addition, the Company has research and development tax credit carryforwards of approximately $19,515 for federal income tax purposes and $28,010 for California tax purposes. If not utilized, the federal research and development tax credit carryforwards will begin to expire in 2023. The California state research credit will carry forward indefinitely. The Company has approximately $1,128 of foreign tax credits that will begin to expire in 2021. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.
A reconciliation of the total amounts of unrecognized tax benefits was as follows:
The total unrecognized tax benefits as of December 31, 2020 and 2019 included approximately $19,035 and $15,084, respectively, of unrecognized tax benefits that have been netted against deferred tax assets. As of December 31, 2020, the Company does not expect the unrecognized tax benefits, if recognized, to have a material impact on its financial statements.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The current and accumulated accrual of interest and penalties on uncertain tax positions is immaterial.
The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the State of California, the United States, Canada and India. The Company’s federal tax returns are open by statute for tax years 1998 and California tax returns are open by statute for tax years 2003 and forward and could be subject to examination by the tax authorities.
On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security ("CARES") Act, which contains several income tax provisions, as well as other measures, aimed at assisting businesses impacted by the economic effects of the COVID-19 pandemic. Among other provisions, the CARES Act removes certain limitations on utilization of net operating losses ("NOLs") and allows for carrybacks of certain past and future NOLs. The Company does not anticipate the income tax provisions of the CARES Act to have a material impact on its financial statements.
NOTE 12 - SEGMENT INFORMATION AND OPERATIONS BY GEOGRAPHIC AREA
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its Chief Executive Officer as the CODM. The Company operates in a single operating segment. The financial information reviewed by the CODM is included within one operating segment for purposes of allocating resources and evaluating financial performance.
The following tables set forth revenue and long-lived assets based on geography:
Revenue
Revenue by geography is primarily based on the geographic location of the Company’s payers. International revenue is revenue generated from distributors and advertising service providers whose principal operations are located outside the United States or, in the case of the Digital Storefronts, the revenue generated from end-user purchases made outside of the United States.
Long-Lived Assets
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:
NOTE 13 - SUBSEQUENT EVENTS
On February 8, 2021, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Electronic Arts Inc. (“Electronic Arts”) pursuant to which Electronic Arts has agreed to acquire the Company for $12.50 in cash for each share of the Company’s common stock issued and outstanding as of immediately prior to the closing of the transaction (the “Merger”). This represents approximately $2,100,000 in enterprise value. Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, the Company will become a wholly owned subsidiary of Electronic Arts. The transaction is anticipated to close in the quarter ending June 30, 2021, subject to approval by the Company’s stockholders, the receipt of required regulatory approvals and other customary closing conditions.
NOTE 14 - QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth unaudited quarterly consolidated statements of operations data for 2020 and 2019. The Company derived this information from its unaudited condensed consolidated financial statements, which it prepared on the same basis as its audited consolidated financial statements contained in this report. These unaudited statements include all adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair statement of that information for the periods presented.
.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures are designed to provide reasonable assurance and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the guidelines established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page 67.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2021 Annual Meeting of Stockholders. For information with respect to our executive officers, see “Executive Officers” at the end of Part I, Item 1 of this report.
We maintain a Code of Business Conduct and Ethics that applies to all employees, officers and directors. Our Code of Business Conduct and Ethics is published on our website at www.glu.com/investors. We disclose on our website amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors.
Item 11.
Item 11. Executive Compensation
The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2021 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” contained in our Proxy Statement to be filed for our 2021 Annual Meeting of Stockholders is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth certain information, as of December 31, 2020, concerning securities authorized for issuance under all of our equity compensation plans: our 2007 Equity Incentive Plan (the “2007 Plan”), 2007 Employee
Stock Purchase Plan (the “ESPP”), 2008 Equity Inducement Plan (the “2008 Inducement Plan”), and 2018 Equity Inducement Plan (the “2018 Inducement Plan”).
(1)The weighted average exercise price does not take into account the shares subject to outstanding RSUs and PSUs, which have no exercise price.
(2)Represents 7,458,850 shares available for issuance under the 2007 Plan, which plan permits the grant of incentive and non-qualified stock options (including PSOs), stock appreciation rights, restricted stock, stock awards and RSUs; and 2,003,032 shares available for issuance under the ESPP.
(3)Represents outstanding options and RSUs under the 2008 Inducement Plan and 2018 Inducement Plan.
(4)Represents shares available for issuance under the 2018 Inducement Plan, under which we may only grant non-qualified stock options and RSUs.
The Compensation Committee of our Board of Directors adopted the 2008 Inducement Plan in March 2008 to augment the shares available under our 2007 Plan, and in April 2018, the Compensation Committee adopted the 2018 Inducement Plan to replace the 2008 Inducement Plan which expired by its terms in March 2018. We have not sought stockholder approval for either the 2008 Inducement Plan or the 2018 Inducement Plan. As such, awards under these plans have been granted in accordance with Nasdaq Listing Rule 5635(c)(4) and only to persons not previously an employee or director, or following a bona fide period of non-employment, as an inducement material to such individuals entering into employment with us. As of December 31, 2020, we had reserved a total of 400,000 shares under the 2018 Inducement Plan, of which 182,315 shares were subject to outstanding stock options and RSUs, 194,146 shares remained available for issuance, and 5,179 shares had been exercised. In addition, as of December 31, 2020, 1,235,592 shares issued from our 2008 Inducement Plan remained subject to outstanding stock options and RSUs.
We may grant non-qualified stock options under the 2018 Inducement Plan at prices less than 100% of the fair value of the shares on the date of grant, at the discretion of our Board of Directors. The fair value of our common stock is determined by the last sale price of our stock on The Nasdaq Global Select Market on the date of determination. If any option or RSU granted under the 2018 Inducement Plan expires or terminates for any reason without being exercised in full, are used to satisfy tax withholding obligations with respect to the award, or otherwise terminate without the underlying shares being issued, such unexercised, tax-settled, or otherwise terminated shares will be available for grant under the 2018 Inducement Plan. All outstanding awards are subject to adjustment for any future stock dividends, splits, combinations, or other changes in capitalization as described in the 2018 Inducement Plan. If we were acquired and the acquiring corporation did not assume or replace the awards granted under the 2018 Inducement Plan, or if we were to liquidate or dissolve, all outstanding awards will expire on such terms as our Board of Directors determines.
For more information regarding the 2018 Inducement Plan, see Note 10 in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2021 Annual Meeting of Stockholders.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2021 Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements: The financial statements filed as part of this report are listed on the index to financial statements on page 64.
(2) Financial Schedules: All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.
(b) Exhibits. The exhibits listed on the Exhibit Index are included, or incorporated by reference, in this report.
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
#
Indicates a management compensatory plan or arrangement.
+
Certain portions of this exhibit have been omitted and have been filed separately with the SEC pursuant to an order granting confidential treatment issued by the SEC under Rule 24b-2 as promulgated under the Exchange Act.
++
Certain portions of this exhibit have been omitted as permitted under Item 601(b)(10) of Regulation S-K.
* This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Act of 1934, except to the extent that Glu Mobile Inc. specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
By signing this Annual Report on Form 10-K below, I hereby appoint each of Nick Earl, Eric R. Ludwig and Scott J. Leichtner as my attorney-in-fact to sign all amendments to this Form 10-K on my behalf, and to file this Form 10-K (including all exhibits and other documents related to the Form 10-K) with the Securities and Exchange Commission. I authorize each of my attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and (2) perform any actions that he believes are necessary or appropriate to carry out the intention and purpose of this Power of Attorney. I ratify and confirm all lawful actions taken directly or indirectly by my attorneys-in-fact and by any properly appointed substitute attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.