NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data and percentages)
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 and publishes a
portfolio of action/adventure and casual games designed to appeal to a broad cross section of the users of smartphones and tablet devices who purchase our games through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play
store, Amazon Appstore, Microsoft Xbox Live marketplace and Samsung App Store. The Company creates games based on its own original intellectual property, as well as third-party licensed brands.
The Company has incurred recurring losses from operations since inception and had an accumulated deficit of $232,302 as of
December 31, 2012. For the year ended December 31, 2012, the Company incurred a net loss of $20,459. The Company may incur additional losses and negative cash flows in the future. Failure to generate sufficient revenues, reduce spending or
raise additional capital could adversely affect the Companys ability to achieve its intended business objectives.
Basis of Presentation
The Companys consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires the Companys management to make
judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant estimates and assumptions reflected in the financial statements include, but are not
limited to, the estimated lives that we use for revenue recognition, the allowance for doubtful accounts, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, fair value of stock awards issued and
contingent consideration issued to Blammo shareholders, accounting for business combinations, and evaluating goodwill and long-lived assets for impairment. Actual results may differ from these estimates and these differences may be material.
Revenue Recognition
The Company generates revenues through the sale of games on traditional feature phones and smartphones and tablets, such as Apples iPhone and iPad and other mobile devices utilizing Googles
Android operating system. Feature phone games are distributed primarily through wireless carriers and smartphone games are distributed primarily through digital storefronts such as the Apple App Store.
Smartphone revenue
The Company distributes its games for smartphones and tablets on digital storefronts such as the Apples App Store and the Google Play Store. Within these storefronts, users can download the
Companys freemium games and pay to acquire virtual currency which can be redeemed in the game for virtual goods. The Company recognizes revenue, when persuasive evidence of an arrangement exists, the service has been provided to the user, the
price paid by the user is fixed or determinable, and collectability is reasonably assured. Determining whether and when some of these criteria have been satisfied requires judgments that may have a significant impact on the timing and amount of
revenue the Company reports in each period. For the purposes of determining when the service has been provided to the player, the Company has determined that an implied obligation exists to the paying user to continue displaying the purchased
virtual goods within the game over the virtual goods estimated useful lives.
54
The Company sells both consumable and durable virtual goods and receives reports from the
digital storefronts, such as the Apple App Store, which breakdown the various purchases made from their games over a given time period. The Company reviews these reports to determine on a per-item basis whether the purchase was a consumable virtual
good or a durable virtual good. Consumable goods are items consumed at a predetermined time or otherwise have limitations on repeated use, while durable goods are items accessible to the user over an extended period of time. The Companys
revenues from consumable virtual goods have been immaterial over the previous two years and are one-time actions that can be purchased directly by the player through the digital storefront. The Company recognizes the revenues from these items
immediately, since it believes that the delivery obligation has been met and there are no further implicit or explicit performance obligations related to the purchase of that consumable virtual good. Revenues from durable virtual goods are generated
through the purchase of virtual coins by users through a digital storefront. Players convert the virtual coins within the game to durable virtual goods such as weapons, armor or other accessories to enhance their game-playing experience. The durable
virtual goods remain in the game for as long as the player continues to play. The Company believes this represents an implied service obligation, and accordingly, they recognize the revenues from the purchase of these durable virtual goods over the
estimated average playing period of paying users. Based on the Companys analysis, the estimated weighted average useful life of a paying user is approximately three months, and this estimate has been consistent since the Companys initial
analysis. If a new game is launched and only a limited period of paying player data is available, then the Company also considers other qualitative factors, such as the playing patterns for paying users for other games with similar characteristics.
While the Company believes its estimates to be reasonable based on available game player information, it may revise such estimates in the future as the games operation periods change. Any adjustments arising from changes in the estimates of
the lives of these virtual goods would be applied prospectively on the basis that such changes are caused by new information indicating a change in game player behavior patterns. Any changes in the Companys estimates of useful lives of these
virtual goods may result in revenues being recognized on a basis different from prior periods and may cause its operating results to fluctuate.
The Company also has relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertisers is generated through impressions, clickthroughs,
banner ads and offers. Revenue is recognized as advertisements are delivered, an executed contract exists, the price is fixed or determinable and collectability has been reasonably assured. Delivery generally occurs when the advertisement has been
displayed or the offer has been completed by the user. Certain offer advertisements that result in the user receiving virtual currency are deferred and recognized over the average playing period of paying users.
Feature phone revenue
The Companys feature phone revenues are derived primarily by licensing software products in the form of mobile games. The Company distributes its products primarily through mobile telecommunications
service providers (carriers), which market the games to end users. License fees are usually billed by the carrier upon download of the game by the end user and are generally billed monthly. Revenues are recognized from the Companys
games when persuasive evidence of an arrangement exists, the game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. Management considers a signed license agreement to be evidence of an
arrangement with a carrier and a clickwrap agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download of the game by the end user.
Other estimates and judgments
The Company estimates revenues from carriers and digital storefronts in the current period when reasonable estimates of these amounts can be made. Certain carriers and digital storefronts provide reliable
interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenues and therefore to recognize revenues during the
reporting period. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Companys estimates. When the
Company receives the final reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the
Company determines the actual amounts. Historically, the revenues on the final revenue report have not differed by more than one half of 1% of the reported revenues for the period, which the Company deemed to be immaterial.
In accordance with ASC 605-45,
Revenue Recognition: Principal Agent Considerations
, the Company recognizes as revenues the amounts
the carrier and digital storefronts reports as payable upon the sale of the Companys games. The Company has evaluated its carrier and digital storefront agreements and has determined that it is not the principal when selling its games. Key
indicators that it evaluated to reach this determination include:
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wireless subscribers directly contract with the carriers and digital storefronts, which have most of the service interaction and are generally viewed as the primary
obligor by the subscribers;
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carriers and digital storefronts generally have responsibility for fulfillment which includes delivery of the content and have significant control over the types of
games that they offer to their subscribers;
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the limited number of digital storefronts currently available in the marketplace;
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55
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carriers and digital storefronts are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
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carriers and digital storefronts generally pay the Company a fixed percentage of their revenues or a fixed fee for each game;
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carriers and digital storefronts generally must approve the price of the Companys games in advance of their sale to subscribers or provide tiered pricing
thresholds, and the Companys more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
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the Company has limited risks, including no inventory risk and limited credit risk.
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Deferred Licensing Fees and Related Costs
Certain premium licensed games sold on digital storefronts such as Apples App Store require the revenue to be deferred due to additional services and incremental unspecified digital content to be
delivered in the future without an additional fee. The Company is obligated to pay ongoing licensing fees in the form of royalties related to these games. As revenues are deferred, the related ongoing licensing fees and costs are also deferred. The
deferred licensing fees and related costs are recognized in the consolidated statements of operations in the period in which the related sales are recognized as revenue.
Cash and Cash Equivalents
The Company considers all investments
purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company deposits cash and cash equivalents with financial institutions that management believes are of high credit quality.
Deposits held with financial institutions 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 revenues earned from
customers located in the U.S. and other locations outside of the U.S. The Company performs ongoing credit evaluations of its customers financial condition and, generally, requires no collateral from its customers. The Company bases
its allowance for doubtful accounts on managements best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company reviews past due balances over a specified amount individually for
collectability on a monthly basis. It reviews all other balances quarterly. The Company charges off accounts receivable balances against the allowance when it determines that the amount will not be recovered.
The following table summarizes the revenues from customers in excess of 10% of the Companys revenues:
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Year Ended December 31,
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2012
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2011
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2010
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Apple
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35.7
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%
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20.7
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%
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%
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Google
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17.6
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Tapjoy
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13.2
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13.0
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Verizon Wireless
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15.2
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At December 31, 2012, Apple accounted for 44.3%, Medium Entertainment (PlayHaven) accounted for
13.2% and Google accounted for 10.8% of total accounts receivable. At December 31, 2011, Apple accounted for 26.6%, Tapjoy accounted for 18.0%, Telecomunicaciones Movilnet accounted for 11.7% and Google accounted for 10.3% of total accounts
receivable.
Fair Value
The Company accounts for fair value in accordance with ASC 820,
Fair Value Measurements and Disclosures
(ASC 820). Fair value is defined under ASC 820 as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used
to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a three tier hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1
- Quoted prices in active markets for identical assets or liabilities.
Level 2
- Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
- Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.
56
The first two levels in the hierarchy are considered observable inputs and the last is
considered unobservable. The Companys cash and investment instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources
with reasonable levels of price transparency. Level 3 liabilities consist of acquisition-related non-current liabilities for contingent consideration (i.e., earnouts). Please refer to Note 4 for further details.
Prepaid or Guaranteed Licensor Royalties
The Companys royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property, including trademarks and copyrights, in the development of the
Companys games. Royalty-based obligations are either paid in advance and capitalized on the balance sheet as prepaid royalties or accrued as incurred and subsequently paid. These royalty-based obligations are expensed to cost of revenues at
the greater of the revenues derived from the relevant game multiplied by the applicable contractual rate or an effective royalty rate based on expected net product sales. Advanced license payments that are not recoupable against future royalties are
capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
The Companys contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the
ultimate volume of sales to end users. In accordance with ASC 460-10-15,
Guarantees
(ASC 460), the Company recorded a minimum guaranteed liability of zero and approximately $300 as of December 31, 2012 and 2011, respectively.
When no significant performance remains with the licensor, the Company initially records each of these guarantees as an asset and as a liability at the contractual amount. The Company believes that the contractual amount represents the fair value of
the liability. When significant performance remains with the licensor, the Company records royalty payments as an asset when actually paid and as a liability when incurred, rather than upon execution of the contract. The Company classifies minimum
royalty payment obligations as current liabilities to the extent they are contractually due within the next twelve months.
Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized guarantees not yet paid to determine
amounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenues, cash flows and net margins to evaluate the future realization of prepaid royalties and guarantees. This evaluation considers multiple
factors, including the term of the agreement, forecasted demand, game life cycle status, game development plans, and current and anticipated sales levels, as well as other qualitative factors such as the success of similar games and similar genres
on mobile devices for the Company and its competitors and/or other game platforms (e.g., consoles, personal computers and Internet) utilizing the intellectual property and whether there are any future planned theatrical releases or television series
based on the intellectual property. To the extent that this evaluation indicates that the remaining prepaid and guaranteed royalty payments are not recoverable, the Company records an impairment charge to cost of revenues in the period that
impairment is indicated. The Company had no impairment charges in 2012. The Company recorded impairment charges to cost of revenues of $531 and $663 during the years ended December 31, 2011and 2010, respectively.
Goodwill and Intangible Assets
In accordance with ASC 350,
Intangibles-Goodwill and Other
(ASC 350), the Companys goodwill is not amortized but is tested for impairment on an annual basis or whenever
events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, the Company performs the annual impairment review of its goodwill balance as of September 30. This impairment review
involves a multiple-step process as follows:
Step 0 Under new accounting guidance adopted for 2011, the Company
evaluates qualitative factors and overall financial performance to determine whether it is necessary to perform the first step of the two-step goodwill test. This step is referred to as Step 0. Step 0 involves, among other qualitative
factors, weighing the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. After assessing those various factors, if it is determined that it is more likely than not that the fair value of
a reporting unit is less than its carrying amount, then the entity will need to proceed to the first step of the two-step goodwill impairment test.
Step 1 The Company compares the fair value of each of its reporting units to the carrying value including goodwill of that unit. For each reporting unit where the carrying value, including
goodwill, exceeds the units fair value, the Company moves on to step 2. If a units fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.
57
Step 2 The Company performs an allocation of the fair value of the reporting
unit to its identifiable tangible and intangible assets (other than goodwill) and liabilities. This allows the Company to derive an implied fair value for the units goodwill. The Company then compares the implied fair value of the reporting
units goodwill with the carrying value of the units goodwill. If the carrying amount of the units goodwill is greater than the implied fair value of its goodwill, an impairment charge would be recognized for the excess.
In 2012, the Company concluded that a portion of the goodwill attributed to the APAC reporting unit was impaired and recorded a $3,613
impairment charge. In 2011 and 2010, the Company did not record any goodwill impairment charges as the fair values of the reporting units exceeded their respective carrying values.
Purchased intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from one to
nine years and are reviewed for impairment in accordance with ASC 360,
Property, Plant and Equipment
(ASC 360).
Long-Lived Assets
The Company evaluates its long-lived assets,
including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable in accordance with ASC 360. Factors
considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, significant
negative industry or economic trends, and a significant decline in the Companys stock price for a sustained period of time. The Company recognizes impairment based on the difference between the fair value of the asset and its carrying value.
Fair value is generally measured based on either quoted market prices, if available, or a discounted cash flow analysis.
Property and Equipment
The Company states property and equipment at cost. The Company computes depreciation or amortization using the straight-line method over the estimated useful lives of the respective assets or, in the
case of leasehold improvements, the lease term of the respective assets, whichever is shorter.
The depreciation and
amortization periods for the Companys property and equipment are as follows:
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Computer equipment
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Three years
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Computer software
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Three years
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Furniture and fixtures
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Three years
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Leasehold improvements
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Shorter of the estimated useful life or remaining term of lease
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Research and Development Costs
The Company charges costs related to research, design and development of products to research and development expense as incurred. The
types of costs included in research and development expenses include salaries, contractor fees and allocated facilities costs.
Software Development Costs
The Company applies the principles of ASC 985-20,
Software-Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
(ASC 985-20). ASC 985-20 requires that software
development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be
capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The Company has adopted the tested working model approach to establishing technological feasibility for its games. Under this
approach, the Company does not consider a game in development to have passed the technological feasibility milestone until the Company has completed a model of the game that contains essentially all the functionality and features of the final game
and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a game for sale; thus, the Company has expensed all
software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile game market; the lack of pre-orders or sales history for its games; the
uncertainty regarding a games revenue-generating potential; and its historical practice of canceling games at any stage of the development process.
58
Internal Use Software
The Company recognizes internal use software development costs in accordance with ASC 350-40,
Intangibles-Goodwill and Other-Internal
Use Software
(ASC 350-40). Thus, the Company capitalizes software development costs, including costs incurred to purchase third-party software, beginning when it determines certain factors are present including, among others, that
technology exists to achieve the performance requirements and/or buy versus internal development decisions have been made. The Company capitalized certain internal use software costs totaling approximately $1,598, $1,787 and $117 during the years
ended December 31, 2012, 2011 and 2010, respectively. The estimated useful life of costs capitalized is generally three years. During the years ended December 31, 2012, 2011 and 2010, the amortization of capitalized software costs totaled
approximately $1,014, $507 and $262, respectively. Capitalized internal use software development costs are included in property and equipment, net.
Income Taxes
The Company accounts for income taxes in accordance
with ASC 740,
Income Taxes
(ASC 740), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns.
Under ASC 740, the Company determines deferred tax assets and liabilities based on the temporary difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which it
expects the differences to reverse. The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amount it expects to realize.
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 Companys policy is
to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with ASC
420,
Exit or Disposal Cost Obligations
(ASC 420). The Company records employee termination benefits as an operating expense when it communicates the benefit arrangement to the employee and it requires no significant future
services, other than a minimum retention period, from the employee to earn the termination benefits. In addition, termination benefits related to international employees are recognized when the amount of such termination benefits becomes estimable
and payment is probable.
Stock-Based Compensation
The Company applies the fair value provisions of ASC 718,
Compensation-Stock Compensation
(ASC 718). ASC 718
requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate the fair value of share-based payment awards on the
grant date using an option pricing model. The fair value of stock options and stock purchase rights granted pursuant to the Companys 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 and complex 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. Employee stock-based compensation
expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to
stock-based compensation expense will be recognized at that time. Changes to the assumptions used in the Black-Scholes option valuation calculation and the forfeiture rate, as well as future equity granted or assumed through acquisitions could
significantly impact the compensation expense the Company recognizes.
The Company has elected to use the with and
without approach as described in determining the order in which tax attributes are utilized. As a result, the Company will only recognize a tax benefit from stock-based awards in additional paid-in capital if an incremental tax benefit is
realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research tax credit,
through its statement of operations.
The Company accounts for equity instruments issued to non-employees in accordance with
the provisions of ASC 718 and ASC 505-50.
Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes
place. Advertising expense was $12,124, $6,114 and $3,184 in the years ended December 31, 2012, 2011 and 2010, respectively.
59
Comprehensive Income/(Loss)
Comprehensive income/(loss) consists of two components, net loss and other comprehensive income/(loss). Other comprehensive income/(loss)
refers to revenues, expenses, gains and losses that under GAAP are recorded as an element of stockholders equity but are excluded from net income/(loss). The Companys other comprehensive income/(loss) included only of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.
Foreign
Currency Translation
In preparing its consolidated financial statements, the Company translated the financial
statements of its foreign subsidiaries from their functional currencies, the local currency, into U.S. Dollars. This process resulted in unrealized exchange gains and losses, which are included as a component of accumulated other comprehensive loss
within stockholders deficit.
Cumulative foreign currency translation adjustments include any gain or loss associated
with the translation of a subsidiarys financial statements when the functional currency of a subsidiary is the local currency. However, if the functional currency is deemed to be the U.S. Dollar, any gain or loss associated with the
translation of these financial statements would be included within the Companys statements of operations. If the Company disposes of any of its subsidiaries, any cumulative translation gains or losses would be realized and recorded within the
Companys statement of operations in the period during which the disposal occurs. If the Company determines that there has been a change in the functional currency of a subsidiary relative to the U.S. Dollar, any translation gains or
losses arising after the date of change would be included within the Companys statement of operations.
Business
Combination
The Company applies the accounting standard related to business combinations, ASC 805,
Business
Combinations
(ASC 805). The standard has an expanded definition of a business and a business combination; requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the
acquisition date with subsequent changes recognized in earnings; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and
development to be capitalized at fair value as an indefinite-lived intangible asset until completion or abandonment; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the
measurement period be recognized as a component of provision for taxes.
The Company accounts for acquisitions of entities
that include inputs and processes and have the ability to create outputs as business combinations. The purchase price of the acquisition is allocated to tangible assets, liabilities, and identifiable intangible assets acquired based on their
estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred. While the Company uses its best estimates and assumptions as a
part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the
preliminary purchase price allocation period, which may be up to one year from the business combination date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the
preliminary purchase price allocation period, the Company records adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in its operating results in the period in which the adjustments were
determined.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04,
Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs, (ASU 2011-04).
ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The adoption of this standard did not materially
impact the Companys consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive
Income (Topic 220): Presentation of Comprehensive Income, (ASU 2011-05)
. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all
non-owner changes in stockholders equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of this standard did not materially impact the Companys
consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08,
Testing Goodwill for Impairment
(the revised standard). The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether
further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. An entity has the option to first assess qualitative
factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying
amount, the quantitative impairment test is required. Otherwise, no further testing is required. The adoption of this standard did not materially impact the Companys consolidated financial statements.
60
In February 2013, the FASB issued ASU 2013-2, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. This guidance requires the presentation of the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is
required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012. The Company does not believe that the adoption of ASU 2013-2
will have a material impact on the Companys consolidated financial statements.
NOTE 2 NET LOSS PER SHARE
The Company computes basic net loss per share by dividing its net loss for the period by the weighted average number of
common shares outstanding during the period less the weighted average unvested common shares subject to restrictions by the Company.
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Year Ended December 31,
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2012
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2011
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2010
|
|
Net loss
|
|
$
|
(20,459
|
)
|
|
$
|
(21,101
|
)
|
|
$
|
(13,423
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)
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Basic and diluted shares:
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|
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|
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|
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|
|
|
|
Weighted average common shares outstanding
|
|
|
64,932
|
|
|
|
57,834
|
|
|
|
35,439
|
|
Weighted average unvested common shares subject to restrictions
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|
|
(614
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)
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|
|
(316
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic and diluted net loss per share
|
|
|
64,318
|
|
|
|
57,518
|
|
|
|
35,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.38
|
)
|
The following weighted average options and warrants to purchase common stock and unvested shares of
common stock subject to restrictions have been excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Warrants to purchase common stock
|
|
|
4,187
|
|
|
|
5,344
|
|
|
|
2,435
|
|
Unvested common shares subject to restrictions
|
|
|
614
|
|
|
|
316
|
|
|
|
|
|
Options to purchase common stock
|
|
|
10,321
|
|
|
|
8,112
|
|
|
|
6,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,122
|
|
|
|
13,772
|
|
|
|
8,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 ACQUISITIONS
Acquisition of GameSpy Industries, Inc.
On August 2, 2012, the Company completed the acquisition of GameSpy pursuant to an Agreement and Plan of Merger (the GameSpy
Merger Agreement) by and among the Company, Galileo Acquisition Corp., a California corporation and wholly owned subsidiary of the Company (Galileo), IGN and GameSpy. Pursuant to the terms of the GameSpy Merger Agreement, Galileo
merged with and into GameSpy in a statutory reverse triangular merger (the GameSpy Merger), with GameSpy surviving the GameSpy Merger as a wholly owned subsidiary of the Company. GameSpy, which is based in California, provides technology
and services for multiplayer and server-based gaming. The Company acquired GameSpy as part of its efforts to enhance the monetization and retention of the Companys players by incorporating GameSpys technology that powers community
functionality, synchronous multiplayer and asynchronous player versus player mechanics into the Companys games.
Pursuant
to the terms of the GameSpy Merger Agreement, the Company issued to IGN, as GameSpys sole shareholder, in exchange for all of the issued and outstanding shares of GameSpy capital stock, a total of 600 shares of the Companys common stock,
for consideration of approximately $2,796, based on the $4.66 closing price of the Companys common stock on The NASDAQ Global Market on August 2, 2012; 90 shares of which will be held in escrow until November 2, 2013 as security to
satisfy indemnification claims under the GameSpy Merger Agreement. In addition, the Company, GameSpy and IGN entered into a Transition Services Agreement, pursuant to which IGN will provide to the Company and GameSpy certain backend data center
transition services related to GameSpys private cloud storage infrastructure for up to two years following the acquisition.
61
The allocation of the GameSpy purchase price was based upon valuations for certain assets
acquired and liabilities assumed. The valuation was based upon calculations and valuations, and the Companys estimates and assumptions are subject to change as the Company obtains additional information for its estimates during the respective
measurement periods (up to one year from the acquisition date). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
913
|
|
Accounts receivable, net
|
|
|
1,695
|
|
Property and equipment
|
|
|
485
|
|
Intangible assets:
|
|
|
|
|
Customer contracts and related relationships
|
|
|
250
|
|
Titles, content and technology
|
|
|
1,300
|
|
Goodwill
|
|
|
1,096
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,739
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Other accrued liabilities
|
|
|
(689
|
)
|
Deferred revenue
|
|
|
(1,684
|
)
|
Deferred tax liability
|
|
|
(570
|
)
|
|
|
|
|
|
Total liabilities acquired
|
|
|
(2,943
|
)
|
|
|
|
|
|
Net acquired assets
|
|
$
|
2,796
|
|
|
|
|
|
|
Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a
straight-line basis over their estimated lives of two to three years, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized.
In connection with the acquisition of GameSpy, the Company recorded net deferred tax liabilities of $570, which were primarily related to
identifiable intangible assets and net operating losses.
The Company allocated the residual value of $1,096 to goodwill.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350,
Intangibles Goodwill and Other
(ASC 350), goodwill will not be
amortized but will be tested for impairment at least annually. Goodwill created as a result of the GameSpy acquisition is not deductible for tax purposes.
Acquisition of Griptonite, Inc.
On August 2, 2011, the Company
completed the acquisition of Griptonite, Inc., a Washington corporation (Griptonite) and formerly a wholly owned subsidiary of Foundation 9 Entertainment, Inc., a Delaware corporation (Foundation 9), pursuant to an Agreement
and Plan of Merger, as amended on August 15, 2011 (the Merger Agreement), by and among the Company, Granite Acquisition Corp., a Washington corporation and wholly owned subsidiary of the Company (Sub), Foundation 9 and
Griptonite. Pursuant to the terms of the Merger Agreement, Sub merged with and into Griptonite in a statutory reverse triangular merger (the Merger), with Griptonite surviving the Merger as a wholly owned subsidiary of the Company.
Griptonite, which is based in Kirkland, Washington, is a developer of games for advanced platforms, including handheld devices. The Company acquired Griptonite to increase its studio development capacity and augment its existing development efforts
to accelerate the introduction of new titles on smartphones and tablets.
In connection with the Merger, the Company issued to
Foundation 9, as Griptonites sole shareholder, in exchange for all of the issued and outstanding shares of Griptonite capital stock, a total of 6,106 shares of the Companys common stock, for consideration of approximately $28,088, using
the $4.60 closing price of the Companys common stock on The NASDAQ Global Market on August 2, 2011. 600 of the initial shares that were held in escrow to satisfy potential indemnification claims under the Merger Agreement were released on
November 2, 2012. In addition, the Company may be required to issue additional shares (not to exceed 5,302 shares) or in specified circumstances pay additional cash (i) in satisfaction of indemnification obligations in the case of breaches
of the Companys and Subs representations, warranties and covenants in the Merger Agreement or (ii) pursuant to potential working capital adjustments.
62
The allocation of the Griptonite purchase price was based upon valuations for certain assets
acquired and liabilities assumed. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
10,300
|
|
Accounts receivable
|
|
|
1,558
|
|
Prepaid and other current assets
|
|
|
1,028
|
|
Property and equipment
|
|
|
796
|
|
Other long term assets
|
|
|
33
|
|
Intangible assets:
|
|
|
|
|
Non-compete agreements
|
|
|
3,200
|
|
Developed Technology
|
|
|
2,500
|
|
Goodwill
|
|
|
12,670
|
|
|
|
|
|
|
Total assets acquired
|
|
|
32,085
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
|
(1,226
|
)
|
Deferred tax liability and other long-term liabilities
|
|
|
(2,771
|
)
|
|
|
|
|
|
Total liabilities
|
|
|
(3,997
|
)
|
|
|
|
|
|
Net acquired assets
|
|
$
|
28,088
|
|
|
|
|
|
|
Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a
straight-line basis over their estimated lives ranging from three months to two years which approximates the pattern in which the economic benefits of the intangible assets are realized.
The Company allocated the residual value of $12,670 to goodwill. Goodwill represents the excess of the purchase price over the fair value
of the net tangible and intangible assets acquired. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the Griptonite acquisition is not deductible for tax
purposes.
Assumption of Griptonite Lease
In connection with the Merger, the Company assumed lease obligations related to the premises located in Kirkland, Washington (the Griptonite Lease). The Griptonite Lease covers approximately
54 rentable square feet and initially had a term that ended on September 30, 2015; however, in August 2012, the Company and the landlord entered into an amendment to the Griptonite Lease that changed the termination date to September 30,
2013. As part of the 2011 purchase accounting adjustments for Griptonite, the Company eliminated the existing deferred rent balance and recorded a fair value adjustment to reflect the current market value of the unfavorable operating lease
commitment. The fair value of the unfavorable operating lease obligation was $477 and $901, respectively, as of December 31, 2012 and 2011. The Griptonite Lease has been included in the future lease obligations disclosed in Note 7.
Acquisition of Blammo Games Inc.
On August 1, 2011, the Company completed the acquisition of Blammo Games Inc. (Blammo), by entering into a Share Purchase Agreement (the Share Purchase Agreement) by and among
the Company, Blammo and each of the owners of the outstanding share capital of Blammo (the Sellers). Blammo is a developer of freemium games located in Toronto, Canada.
Pursuant to the terms of the Share Purchase Agreement, the Company purchased from the Sellers all of the issued and outstanding share
capital of Blammo (the Share Purchase), and in exchange for such Blammo share capital, the Company (i) issued to the Sellers, in the aggregate, 1,000 shares of the Companys common stock (the Initial Shares), which
resulted in initial consideration of $5,070 using the $5.07 closing price of the Companys common stock on The NASDAQ Global Market on August 1, 2011, and (ii) agreed to issue to the Sellers, in the aggregate, up to an additional
3,313 shares of the Companys common stock (the Additional Shares) if Blammo achieves certain Net Revenue targets during the years ending March 31, 2013, March 31, 2014 and March 31, 2015, as more fully described
below under Contingent Consideration. 100 of the Initial Shares that were held in escrow to satisfy potential indemnification claims under the Share Purchase Agreement were released on August 1, 2012.
63
The allocation of the Blammo purchase price was based upon valuations for certain assets
acquired and liabilities assumed. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash and other assets
|
|
$
|
69
|
|
Intangible assets:
|
|
|
|
|
Non-compete agreements
|
|
|
1,400
|
|
In-process research and development
|
|
|
300
|
|
Goodwill
|
|
|
4,309
|
|
|
|
|
|
|
Total assets acquired
|
|
|
6,078
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
|
(287
|
)
|
Other long-term liabilities
|
|
|
(721
|
)
|
|
|
|
|
|
Total liabilities
|
|
|
(1,008
|
)
|
|
|
|
|
|
Net acquired assets
|
|
$
|
5,070
|
|
|
|
|
|
|
Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a
straight-line basis over their estimated lives ranging from one to four years which approximates the pattern in which the economic benefits of the intangible assets are realized.
In connection with the acquisition of Blammo, in 2011, the Company recorded net deferred tax liabilities of $416, with a corresponding
adjustment to goodwill. These deferred taxes were primarily related to identifiable intangible assets and net operating losses.
The Company allocated the residual value of $4,309 to goodwill. Goodwill represents the excess of the purchase price over the fair value
of the net tangible and intangible assets acquired. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the Blammo acquisition is not deductible for tax
purposes.
Contingent Consideration
The Additional Shares will be issued to the Sellers if, and to the extent that, Blammo achieves certain Net Revenue (as such term is defined in the Share Purchase Agreement) performance targets as
follows: (i) for fiscal 2013 (April 1, 2012 through March 31, 2013), (a) 227 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and
(b) up to an additional 682 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, (ii) for fiscal 2014 (April 1,
2013 through March 31, 2014), (a) 417 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and (b) up to an additional 833 Additional Shares
will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, and (iii) for fiscal 2015 (April 1, 2014 through March 31, 2015), (a) no
Additional Shares will be issued to the Sellers if Blammo does not meet its Baseline Net Revenue goal for such fiscal year and (b) up to 1,154 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net
Revenue goal and meets its Upside Net Revenue goal for such fiscal year. To the extent that Blammo meets its Baseline Net Revenue goal for a fiscal year but does not meet its Upside Net Revenue goal for such fiscal year, Additional Shares will be
issued to the Sellers on a straight-line basis based on the amount by which Blammo exceeded the Baseline Net Revenue goal. Blammos Baseline and Upside Net Revenue goals for fiscal 2013, 2014 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Baseline Net Revenue
|
|
|
Upside Net Revenue
|
|
Fiscal 2013
|
|
$
|
3,500
|
|
|
$
|
5,000
|
|
Fiscal 2014
|
|
$
|
5,500
|
|
|
$
|
10,000
|
|
Fiscal 2015
|
|
$
|
8,500
|
|
|
$
|
15,000
|
|
Three of the five Sellers are also employees of Blammo. If any of these employee Sellers voluntarily
terminates his employment with Blammo (other than because of a disability that prevents him or her from performing his job) or if the Company or Blammo terminates such Sellers employment for Cause (as such term is defined in the Share Purchase
Agreement), then such Seller will be eligible to receive Additional Shares if and when such Additional Shares are earned as described above only with respect to the fiscal year in which such termination of employment occurs (and all previous fiscal
years to the extent applicable), but not with respect to any Additional Shares issued in any subsequent fiscal year. In such an event, the Additional Shares that such Seller would have otherwise received will be forfeited and will not be issued by
the Company or distributed to the other Sellers, but the other Sellers rights to receive Additional Shares will not otherwise be affected. The fair value of the contingent consideration issued to the three Sellers who are also employees of
Blammo is not considered part of the purchase price, since vesting is contingent upon these employees continued service during the earn-out periods. The Company records the contingent consideration issued to these employees as a compensation
expense over the earn-out period of one to three years. See Note 10 for further details. At acquisition, in accordance with ASC 805,
Business Combinations
, the Company recorded $306 of the contingent consideration as part of the purchase
accounting allocation; this amount represents the fair value of the portion of the forecasted Additional Shares to be issued to the Sellers who are not employees of Blammo. This amount is fair valued in every reporting period. The total fair value
of this liability has been estimated at $412 and $245 as of December 31, 2012 and 2011, respectively, of which fair value expense adjustment of $167 and fair value benefit adjustment of $61 was recorded during the years ended December 31,
2012 and 2011, which represent the changes in fair since the date of acquisition for both respective periods. In accordance with ASC 805, changes in the fair value of non-employee contingent consideration are recognized in general and administrative
expense.
64
Valuation Methodology
The Company engaged a third-party valuation firm to aid management in its analyses of the fair value of GameSpy, Griptonite and Blammo.
All estimates, key assumptions and forecasts were either provided by or reviewed by the Company. While the Company chose to utilize a third-party valuation firm, the fair value analyses and related valuations represent the conclusions of management
and not the conclusions or statements of any third party.
Intangible assets acquired consist of non-compete agreements,
customer contracts, acquired technology and in-process research and development (IPR&D).
The Blammo and
Griptonite non-compete agreements were valued using the loss of income method, which is an income approach. Two separate cash flows were prepared, one to model the cash flow with the non-compete agreements in place, and one without the agreements.
The difference between the debt-free cash flow of the two models was then discounted to present value using the discount rate of 25%.
In the valuation of Griptonites developed technology, the replacement cost method of the cost approach was used. Although the Company does not expect to use the acquired technology, it was deemed
likely that a market participant would perceive value in acquiring and integrating these technologies into their own platforms. The value was determined based on the engineering costs to replace or recreate the developed technology. Key assumptions
used included, work hours to recreate, costs per month and remaining total and economic life.
As of the valuation date,
Blammo was in the process of developing one game, which was launched in December 2011. The Company estimated that the majority of the revenues associated with this game would be generated in 2012 and 2013. The fair value was calculated using the
multi-period excess earning method of the income approach, and significant assumptions used included the discount rate, forecasted revenues, forecasted cost of goods sold and forecasted operating expense. The Company capitalized approximately $300
of IPR&D costs associated with the above game at the acquisition date. These costs were reclassified to
Titles, Content and Technology
in the fourth quarter of 2011 upon launch of the game and amortized over the estimated life
of the game of two years.
In the valuation of GameSpy customer contracts, these contracts were valued over their remaining
terms, which included consideration of moderate anticipated renewals and is consistent with market participant considerations. These contracts were fair valued using the Multi-Period Excess Earnings (MPEE) method of the income approach
and key assumptions used included: projected revenue and operating expenses for GameSpys remaining contracts, the remaining contractual period of the contracts and a discount rate of 14%. The Company valued developed technology using the
replacement cost method of the cost approach and based on the perceived value that a market participant would ascribe to the GameSpy technology, which allows for hosting multi-player games on mobile devices and other platforms. Key assumptions used
included fully burdened headcount spending information. As of the valuation date, the fair value of GameSpys deferred revenue was $1,684, which reflects the costs including hosting fees, salaries and benefits, equipment and facilities to
support the contractual obligations associated with these revenues, plus a market participant margin. The deferred revenue will be recognized on a straight-line basis over 24 months.
In the valuation of the goodwill balance for Griptonite, Blammo and GameSpy, the Company gave consideration to the future economic
benefits of other assets that were not individually identified or separately recognized. The acquired studio workforce for each of these acquisitions was estimated to have value, and since the acquired workforce is not individually identified or
separately recognized, it was subsumed within the goodwill recognized as part of each business combination. The Company further planned to leverage its preexisting contractual relationships with digital storefronts to distribute new titles developed
by the Griptonite and Blammo studios and the expected synergies are reflected in the value of the goodwill recognized. The Company also plans to use the GameSpy technology to enhance the monetization and retention of the Companys players, and
these synergies are reflected in the value of goodwill recognized.
Pro Forma Financial Information (unaudited)
The results of operations for GameSpy, Griptonite and Blammo and the estimated fair market values of the assets
acquired and liabilities assumed have been included in the Companys consolidated financial statements since the date of each acquisition. During 2011, Griptonite contributed approximately $825 to the Companys net revenue and increased
net losses by $9,511. The results of the acquisitions resulted in an increase to the Companys net loss due to lower revenue generated from the work-for-hire contracts that were substantially completed during 2011 and due to the amortization of
acquired identified intangible assets.
65
The unaudited pro forma financial information in the table below summarizes the combined
results of the Companys operations and those of Griptonite for the periods shown as if the acquisition of Griptonite had occurred on January 1, 2010. The pro forma financial information includes the business combination accounting effects
of the acquisition, including amortization charges from acquired intangible assets. The pro forma financial information presented below is for informational purposes only, and is subject to a number of estimates, assumptions and other uncertainties.
In addition, the pro forma financial information presented below does not include the unaudited financial information of Blammo and GameSpy, since these were not material.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Total pro forma revenues
|
|
$
|
76,864
|
|
|
$
|
85,200
|
|
Pro forma net loss
|
|
|
(21,256
|
)
|
|
|
(16,620
|
)
|
Pro forma net loss per share basic and diluted
|
|
|
(0.35
|
)
|
|
|
(0.40
|
)
|
All of the goodwill related to the GameSpy, Blammo and Griptonite transactions was assigned to the
Companys Americas reporting unit. See Note 6 for additional information related to the changes in the carrying amount of goodwill.
NOTE 4 FAIR VALUE MEASUREMENTS
Fair Value Measurements
The Companys cash and cash equivalents, which were held in operating bank accounts, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. As of December 31, 2012 and December 31, 2011, the Company had $22,325 and $32,212 in cash and cash equivalents. The carrying value
of accounts receivable and payables approximates fair value due to the short time to expected receipt of payment or cash.
Liabilities for Contingent Consideration
Level 3 liabilities consist of acquisition-related non-current liabilities for contingent consideration (i.e., earnouts) related to the acquisition of Blammo. The former Blammo shareholders have the
opportunity to earn additional shares of the Companys common stock based on future net revenues generated by Blammo during the fiscal years ending March 31, 2013, March 31, 2014 and March 31, 2015. See Note 3 for further
details regarding the Blammo acquisition. The expected number of shares to be issued in each year depends on the probability of Blammo achieving the Net Revenue targets, and the Company used a risk-neutral framework to estimate the probability of
achieving these revenue targets for each year. The fair value of the contingent consideration was determined using a digital option, which captures the present value of the expected payment multiplied by the probability of reaching the revenue
targets for each year. Key assumptions for the year ended December 31, 2012 included a discount rate of 35.0%, volatility of 38.0%, risk-free rates of between 0.05% and 0.28% and probability-adjusted revenue levels. Key assumptions for the year
ended December 31, 2011 included a discount rate of 25.0%, volatility of 53.0%, risk-free rates of between 0.15% and 0.42% and probability-adjusted revenue levels. Probability-adjusted revenue is a significant input that is not observable in
the market, which ASC 820 refers to as a Level 3 input. The fair value of these contingent liabilities recorded on the Companys consolidated balance sheet as of December 31, 2012 and 2011, was $2,512 and $796, respectively. As of
December 31, 2012, the Company has recorded $1,855 of the total contingent consideration as a current liability in accrued compensation and the remainder has been recorded in other long-term liabilities since settlement is greater than one year
from the end of the reporting period.
66
NOTE 5 BALANCE SHEET COMPONENTS
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Computer equipment
|
|
$
|
6,255
|
|
|
$
|
5,318
|
|
Furniture and fixtures
|
|
|
566
|
|
|
|
485
|
|
Software
|
|
|
6,304
|
|
|
|
4,707
|
|
Leasehold improvements
|
|
|
2,227
|
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,352
|
|
|
|
12,273
|
|
Less: Accumulated depreciation and amortization
|
|
|
(10,326
|
)
|
|
|
(8,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,026
|
|
|
$
|
3,934
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization for the years ended December 31, 2012, 2011 and 2010 were $2,368,
$1,846 and $1,975, respectively.
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accounts receivable
|
|
$
|
12,313
|
|
|
$
|
12,621
|
|
Less: Allowance for doubtful accounts
|
|
|
(432
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,881
|
|
|
$
|
11,821
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates.
The movement in the Companys allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
|
|
|
End of
|
|
Description
|
|
Year
|
|
|
Additions
|
|
|
Deductions
|
|
|
Year
|
|
Year ended December 31, 2012
|
|
$
|
800
|
|
|
$
|
202
|
|
|
$
|
570
|
|
|
$
|
432
|
|
Year ended December 31, 2011
|
|
$
|
504
|
|
|
$
|
390
|
|
|
$
|
94
|
|
|
$
|
800
|
|
Year ended December 31, 2010
|
|
$
|
546
|
|
|
$
|
153
|
|
|
$
|
195
|
|
|
$
|
504
|
|
The Company had no significant write-offs or recoveries during the years ended December 31, 2012,
2011 and 2010.
Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Uncertain tax position obligations
|
|
$
|
3,859
|
|
|
$
|
5,264
|
|
Deferred income tax liability
|
|
|
647
|
|
|
|
1,150
|
|
Contingent earnout liability
|
|
|
657
|
|
|
|
796
|
|
Unfavorable lease obligations
|
|
|
|
|
|
|
664
|
|
Other
|
|
|
1,027
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,190
|
|
|
$
|
8,503
|
|
|
|
|
|
|
|
|
|
|
67
NOTE 6 GOODWILL AND INTANGIBLE ASSETS
Intangible Assets
The Companys intangible assets were acquired in connection with the acquisitions of Macrospace in 2004, iFone in 2006, MIG in 2007, Superscape in 2008, Griptonite and Blammo in 2011 and GameSpy in
2012, as well as in connection with the purchase of the Deer Hunter trademark and brand assets in 2012. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange
translation at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
|
Carrying
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Amortization
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
|
Expense
|
|
|
Value
|
|
|
Value
|
|
|
Expense
|
|
|
Value
|
|
|
|
|
|
(Including
|
|
|
(Including
|
|
|
(Including
|
|
|
(Including
|
|
|
(Including
|
|
|
(Including
|
|
|
|
Estimated
|
|
Impact of
|
|
|
Impact of
|
|
|
Impact of
|
|
|
Impact of
|
|
|
Impact of
|
|
|
Impact of
|
|
|
|
Useful
|
|
Foreign
|
|
|
Foreign
|
|
|
Foreign
|
|
|
Foreign
|
|
|
Foreign
|
|
|
Foreign
|
|
|
|
Life
|
|
Exchange)
|
|
|
Exchange)
|
|
|
Exchange)
|
|
|
Exchange)
|
|
|
Exchange)
|
|
|
Exchange)
|
|
Intangible assets amortized to cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titles, content and technology
|
|
2 yrs
|
|
$
|
12,781
|
|
|
$
|
(11,518
|
)
|
|
$
|
1,263
|
|
|
$
|
11,391
|
|
|
$
|
(11,097
|
)
|
|
$
|
294
|
|
Catalogs
|
|
1 yr
|
|
|
1,257
|
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
1,216
|
|
|
|
(1,216
|
)
|
|
|
|
|
ProvisionX Technology
|
|
6 yrs
|
|
|
207
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
200
|
|
|
|
(200
|
)
|
|
|
|
|
Carrier contract and related relationships
|
|
5 yrs
|
|
|
19,585
|
|
|
|
(16,421
|
)
|
|
|
3,164
|
|
|
|
19,206
|
|
|
|
(13,451
|
)
|
|
|
5,755
|
|
Licensed content
|
|
5 yrs
|
|
|
2,952
|
|
|
|
(2,952
|
)
|
|
|
|
|
|
|
2,924
|
|
|
|
(2,924
|
)
|
|
|
|
|
Service provider license
|
|
9 yrs
|
|
|
467
|
|
|
|
(262
|
)
|
|
|
205
|
|
|
|
463
|
|
|
|
(208
|
)
|
|
|
255
|
|
Trademarks
|
|
7 yrs
|
|
|
5,225
|
|
|
|
(760
|
)
|
|
|
4,465
|
|
|
|
222
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,474
|
|
|
|
(33,377
|
)
|
|
|
9,097
|
|
|
|
35,622
|
|
|
|
(29,318
|
)
|
|
|
6,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets amortized to operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emux Technology
|
|
6 yrs
|
|
|
1,341
|
|
|
|
(1,341
|
)
|
|
|
|
|
|
|
1,297
|
|
|
|
(1,297
|
)
|
|
|
|
|
Noncompete agreement
|
|
4 yrs
|
|
|
5,187
|
|
|
|
(3,395
|
)
|
|
|
1,792
|
|
|
|
5,167
|
|
|
|
(1,393
|
)
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,528
|
|
|
|
(4,736
|
)
|
|
|
1,792
|
|
|
|
6,464
|
|
|
|
(2,690
|
)
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles assets
|
|
|
|
$
|
49,002
|
|
|
$
|
(38,113
|
)
|
|
$
|
10,889
|
|
|
$
|
42,086
|
|
|
$
|
(32,008
|
)
|
|
$
|
10,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has included amortization of acquired intangible assets directly attributable to
revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. The Company acquired approximately $1,550 of
intangible assets as part of the GameSpy acquisition in the third quarter of 2012. The Company acquired approximately $7,400 of intangible assets as part of the Griptonite and Blammo acquisitions in the third quarter of 2011, which includes
approximately $300 of Blammo IPR&D that was reclassified as
Titles, Content and Technology
in the fourth quarter of 2011; see Note 3 for further details.
On April 1, 2012, the Company acquired from Atari, Inc. (Atari) its Deer Hunter trademark and associated domain names
and also took a license to the other intellectual property associated with the Deer Hunter brand for total consideration of $5,000 in cash (the Consideration). The License Agreement has a term equal to the longer of (i) 99 years and
ii) the expiration of the copyrights in and copyrightable elements of the Deer Hunter intellectual property assets. The acquisition price has been recorded as acquired intangible assets and classified within
Trademarks
in the
above table and will be amortized over the estimated useful life of seven years.
During the years ended December 31,
2012, 2011 and 2010, the Company recorded amortization expense in the amounts of $3,783, $5,447 and $4,226, respectively, in cost of revenues. During the years ended December 31, 2012, 2011 and 2010, the Company recorded amortization expense in
the amounts of $1,980, $825 and $205, respectively, in operating expenses. The Company recorded no impairment charges during the years ended December 31, 2012, 2011 and 2010.
As of December 31, 2012, the total expected future amortization related to intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Amortization
|
|
|
|
|
|
|
Included in
|
|
|
Included in
|
|
|
Total
|
|
|
|
Cost of
|
|
|
Operating
|
|
|
Amortization
|
|
Period Ending December 31,
|
|
Revenues
|
|
|
Expenses
|
|
|
Expense
|
|
2013
|
|
$
|
4,212
|
|
|
$
|
1,315
|
|
|
$
|
5,527
|
|
2014
|
|
|
1,495
|
|
|
|
382
|
|
|
|
1,877
|
|
2015
|
|
|
1,019
|
|
|
|
95
|
|
|
|
1,114
|
|
2016
|
|
|
764
|
|
|
|
|
|
|
|
764
|
|
2017
|
|
|
714
|
|
|
|
|
|
|
|
714
|
|
2018 and thereafter
|
|
|
893
|
|
|
|
|
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,097
|
|
|
$
|
1,792
|
|
|
$
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The Company has goodwill resulting from its MIG, GameSpy, Blammo and Griptonite acquisitions as of December 31, 2012. The Company attributed all of the goodwill resulting from the MIG acquisition to
its Asia and Pacific (APAC) reporting unit. The Company acquired $17,044 and $1,031 of goodwill during 2011 and 2012 respectively as part of the GameSpy, Blammo and Griptonite acquisitions, which was fully assigned to its Americas
reporting unit; see Note 3 for further details. The Company had fully impaired in prior years all goodwill allocated to its EMEA reporting unit related to the Superscape acquisition. The goodwill allocated to the Americas reporting unit is
denominated in U.S. Dollars (USD) and the goodwill allocated to the APAC reporting unit is denominated in Chinese Renminbi (RMB). As a result, the goodwill attributed to the APAC reporting unit is subject to foreign currency
fluctuations.
68
Goodwill by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Total
|
|
|
Americas
|
|
|
EMEA
|
|
|
APAC
|
|
|
Total
|
|
Balance as of January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
41,915
|
|
|
$
|
25,354
|
|
|
$
|
24,220
|
|
|
$
|
91,489
|
|
|
$
|
24,871
|
|
|
$
|
25,354
|
|
|
$
|
24,039
|
|
|
$
|
74,264
|
|
Accumulated Impairment Losses
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,044
|
|
|
|
|
|
|
|
4,947
|
|
|
|
21,991
|
|
|
|
|
|
|
|
|
|
|
|
4,766
|
|
|
|
4,766
|
|
Goodwill Acquired during the year
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
1,031
|
|
|
|
17,044
|
|
|
|
|
|
|
|
|
|
|
|
17,044
|
|
Effects of Foreign Currency Exchange
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
181
|
|
Impairment Losses
|
|
|
|
|
|
|
|
|
|
|
(3,613
|
)
|
|
|
(3,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of period ended:
|
|
|
18,075
|
|
|
|
|
|
|
|
1,365
|
|
|
|
19,440
|
|
|
|
17,044
|
|
|
|
|
|
|
|
4,947
|
|
|
|
21,991
|
|
Goodwill
|
|
|
42,946
|
|
|
|
25,354
|
|
|
|
24,251
|
|
|
|
92,551
|
|
|
|
41,915
|
|
|
|
25,354
|
|
|
|
24,220
|
|
|
|
91,489
|
|
Accumulated Impairment Losses
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(22,886
|
)
|
|
|
(73,111
|
)
|
|
|
(24,871
|
)
|
|
|
(25,354
|
)
|
|
|
(19,273
|
)
|
|
|
(69,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of period ended:
|
|
$
|
18,075
|
|
|
$
|
|
|
|
$
|
1,365
|
|
|
$
|
19,440
|
|
|
$
|
17,044
|
|
|
$
|
|
|
|
$
|
4,947
|
|
|
$
|
21,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 350, the Companys goodwill is not amortized but is tested for impairment on
an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, the Company performs the annual impairment review of its goodwill balance as of September 30
or more frequently if triggering events occur.
Under new accounting guidance adopted for 2011, the Company evaluates
qualitative factors and overall financial performance to determine whether it is necessary to perform the first step of the two-step goodwill test. This step is referred to as Step 0. Step 0 involves, among other qualitative factors,
weighing the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. After assessing those various factors, if it is determined that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, then the entity will need to proceed to the first step of the two-step goodwill impairment test. ASC 350 requires a multiple-step approach to testing goodwill for impairment for each reporting unit
annually, or whenever events or changes in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairment by applying the fair value-based tests at the reporting unit level. The second
step (if necessary) measures the amount of impairment by applying the fair value-based tests to individual assets and liabilities within each reporting unit. The fair value of the reporting units is estimated using a combination of the market
approach, which utilizes comparable companies data, and/or the income approach, which uses discounted cash flows.
The
Company has three reporting units comprised of the 1) Americas, 2) EMEA and 3) APAC regions. As of September 30, 2012, the Company had goodwill attributable to the APAC and Americas reporting units. The cash flows of these reporting units
reflect the income and expenses of assets directly employed by, and liabilities related to, the operations of the reporting unit, including revenue related to local contractual relationships, but excludes revenue related to global contractual
relationships such as digital store fronts which are owned by the U.S. and allocated directly to the Americas reporting unit. In performing its annual goodwill impairment assessment for 2012, the Company performed this qualitative assessment for its
Americas reporting unit; based on this qualitative assessment, the Company concluded that performing the two-step impairment test was unnecessary for its Americas reporting unit. The Company performed the first step of the goodwill impairment test
for its APAC reporting unit as prescribed in ASC 350 and concluded that it failed the step, since the estimated fair value of the reporting unit was less than its carrying value due to accelerated declines in the local feature phone business and the
recent restructuring of the Companys operations in the APAC region. In order to determine the fair value of the APAC reporting unit, the Company utilized the discounted cash flow method and market method. The Company has consistently utilized
both methods in its goodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests since it believes that both in conjunction provide a reasonable estimate of the determination of fair
value of the reporting unit the discounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Companys market sector including its competitors.
In step two of its impairment analysis, the Company allocated the fair value of the APAC reporting unit to all tangible and intangible
assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the reporting units goodwill. As a result of the step two analysis, the Company concluded that a portion of the goodwill remaining that had been
attributed to the APAC reporting unit was impaired. The total non-cash goodwill impairment charge recorded in the third quarter of 2012 was $3,613.
The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated
future cash flows of the reporting unit, including operating margins, long-term forecasts, discount rates and terminal growth rates, reflect the Companys best estimates. Changes in the Companys market capitalization, long-term forecasts
and industry growth rates could require additional impairment charges to be recorded in future periods for the remaining goodwill.
69
NOTE 7 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under non-cancelable operating facility leases with various expiration dates through January 2018. Rent expense for the years ended December 31, 2012, 2011 and 2010
was $2,704, $2,237 and $2,652, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid. The deferred rent balance was $632 and $223 at December 31, 2012 and 2011, respectively, and was included within other long-term liabilities.
At December 31, 2012, future minimum lease payments under non-cancelable operating leases were as follows:
|
|
|
|
|
|
|
Minimum
Operating
Lease
|
|
Period Ending December 31,
|
|
Payments
|
|
2013
|
|
$
|
3,195
|
|
2014
|
|
|
1,381
|
|
2015
|
|
|
1,457
|
|
2016
|
|
|
1,551
|
|
2017
|
|
|
880
|
|
2018 and thereafter
|
|
|
14
|
|
|
|
|
|
|
|
|
$
|
8,478
|
|
|
|
|
|
|
Income Taxes
As of December 31, 2012, unrecognized tax benefits and potential interest and penalties are classified within Other long-term liabilities on the Companys consolidated balance
sheets. As of December 31, 2012, the settlement of the Companys income tax liabilities could not be determined; however, the liabilities are not expected to become due within the next 12 months.
Indemnification Arrangements
The Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime for certain events or occurrences while the officer or director is or was
serving at the Companys request in that capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer
insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is
minimal. Accordingly, the Company had recorded no liabilities for these agreements as of December 31, 2012 or 2011.
In
the ordinary course of its business, the Company includes standard indemnification provisions in most of its license agreements with carriers and other distributors. Pursuant to these provisions, the Company generally indemnifies these parties for
losses suffered or incurred in connection with its games, including as a result of intellectual property infringement and viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of
the corresponding license agreement, and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited. The Company has never incurred costs to defend lawsuits or
settle indemnified claims of these types. As a result, the Company believes the estimated fair value of these indemnity provisions is minimal. Accordingly, the Company had recorded no liabilities for these provisions as of December 31, 2012 or
2011.
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 Companys 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
reasonable probable and the amount can be reasonable 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.
The Company does
not believe it is party to any currently pending litigation, the outcome of which is reasonably likely 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.
70
NOTE 8 DEBT
MIG Notes
In December 2007, the Company acquired MIG to accelerate its presence in China. In December 2008, the Company amended the MIG merger agreement to acknowledge the full achievement of the earnout milestones
and at the same time entered into secured promissory notes in the aggregate principal amount of $20,000 payable to the former MIG shareholders (the Earnout Notes) as full satisfaction of the MIG earnout. The Earnout Notes required that
the Company pay off the remaining principal and interest in installments. In December 2008, the Company also entered into secured promissory notes in the aggregate principal amount of $5,000 payable to two former shareholders of MIG (the
Special Bonus Notes) as full satisfaction of the special bonus provisions of their employment agreements. The Company had fully repaid both the Earnout Notes and Special Bonus Notes as of March 31, 2011.
Credit Facility
In December 2008, the Company entered into a revolving credit facility (the Credit Facility), the terms of the Credit Facility were amended in August 2009, February 2010, March 2010
and February 2011. The Credit Facility, as amended, provided for borrowings of up to $8.0 million, subject to a borrowing base equal to 80% of the Companys eligible accounts receivable. The Credit Facility expired on June 30, 2011 and all
borrowings were repaid in full.
NOTE 9 STOCKHOLDERS EQUITY/(DEFICIT)
Common Stock
At December 31, 2012, the Company was authorized to issue 250,000 shares of common stock. As of December 31, 2012, the Company had reserved 16,851 shares for future issuance under its stock
plans and outstanding warrants.
Preferred Stock
At December 31, 2012, the Company was authorized to issue 5,000 shares of preferred stock.
Acquisitions
On August 1, 2011, the Company issued an aggregate of 1,000 shares of its common stock to the Sellers in connection with the Companys acquisition of Blammo.
On August 2, 2011, the Company issued an aggregate of 6,106 shares of its common stock to Foundation 9 in connection with the
Companys acquisition of Griptonite.
On August 2, 2012, the Company issued an aggregate of 600 shares of its common
stock to IGN in connection with the Companys acquisition of GameSpy.
See Note 3 Business Combinations for
more information about these acquisitions.
Secondary Offering
In January 2011, the Company sold in an underwritten public offering an aggregate of 8,415 shares of its common stock at a public offering
price of $2.05 per share for net proceeds of approximately $15,661 after underwriting discounts and commissions and offering expenses. The underwriters of this offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman
Capital, Inc. and Northland Capital Markets.
Shelf Registration Statement
In December 2010, the Securities and Exchange Commission declared effective the Companys shelf registration statement which allows
the Company to issue various types of debt and equity instruments, including common stock, preferred stock and warrants. Issuances under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of
the securities to be issued. The ability to issue debt and equity is subject to market conditions and other factors impacting the Companys borrowing capacity. The Company has a $30,000 limit on the amount securities that can be issued under
this shelf registration statement and has already utilized $17,250 of this amount as of December 31, 2012 pursuant to the public offering in January 2011 described above.
71
Private Placement
In August, 2010, the Company completed the Private Placement in which it issued to the investors (i) an aggregate of 13,495 shares of
the Companys common stock at $1.00 per share and (ii) warrants initially exercisable to purchase up to 6,748 shares of the Companys common stock at $1.50 per share (the Warrants), for initial proceeds of approximately
$13,218 net of issuance costs (excluding any proceeds the Company may receive upon exercise of the Warrants). Of this amount, $2,198 was allocated to the value of the Warrants and $11,020 was allocated to the common stock. All amounts are recorded
within stockholders equity.
Warrants to Purchase Common Stock
The Warrants issued in connection with the 2010 Private Placement have an initial exercise price of $1.50 per share of common stock, can
be exercised immediately, have a five-year term and provide for weighted-average anti-dilution protection in addition to customary adjustment for dividends, reorganization and other common stock events. During the years ended December 31, 2012,
2011 and 2010, investors exercised warrants to purchase 413, 2,475 and zero shares of the Companys common stock, and the Company received gross proceeds of $619, $3,711 and zero in connection with these exercises.
Warrants outstanding at December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Exercise
Price
per
|
|
|
Number of
Shares
Outstanding
Under
|
|
Date of Issuance
|
|
(Years)
|
|
|
Share
|
|
|
Warrant
|
|
May 2006
|
|
|
7
|
|
|
$
|
9.03
|
|
|
|
106
|
|
August 2010
|
|
|
5
|
|
|
|
1.50
|
|
|
|
3,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 STOCK OPTION AND OTHER BENEFIT PLANS
2007 Equity Incentive Plan
In January 2007, the Companys Board of Directors adopted, and in March 2007 the stockholders approved, the 2007 Equity Incentive Plan (the 2007 Plan). At the time of adoption, there were
1,766 shares of common stock authorized for issuance under the 2007 Plan plus 195 shares of common stock from the Companys 2001 Stock Option Plan (the 2001 Plan) that were unissued. In addition, shares that were not
issued or subject to outstanding grants under the 2001 Plan on the date of adoption of the 2007 Plan and any shares issued under the 2001 Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options that expire
or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under the 2007 Plan. On June 3, 2010, at the Companys 2010 Annual Meeting of Stockholders, the Companys
stockholders approved an amendment to the 2007 Plan to increase the aggregate number of shares of common stock authorized for issuance under the 2007 Plan by 3,000 shares. Furthermore, the number of shares available for grant and issuance under the
2007 Plan will be increased automatically on January 1 of each of 2008 through 2012 by an amount equal to 3% of the Companys shares outstanding on the immediately preceding December 31, unless the Companys Board of Directors,
in its discretion, determines to make a smaller increase.
The Company may grant options under the 2007 Plan at prices no less
than 85% of the estimated fair value of the shares on the date of grant as determined by its Board of Directors, provided, however, that (i) the exercise price of an incentive stock option (ISO) or non-qualified stock options
(NSO) may not be less than 100% or 85%, respectively, of the estimated fair value of the underlying shares of common stock on the grant date, and (ii) the exercise price of an ISO or NSO granted to a 10% stockholder may not be less
than 110% of the estimated fair value of the shares on the grant date. Prior to the Companys IPO, the Board determined the fair value of common stock in good faith based on the best information available to the Board and Companys
management at the time of the grant. Following the IPO, the fair value of the Companys common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination. The stock options granted to
employees generally vest with respect to 25% of the underlying shares one year from the vesting commencement date and with respect to an additional 1/48 of the underlying shares per month thereafter. Stock options granted during 2007 prior to
October 25, 2007 have a contractual term of ten years and stock options granted on or after October 25, 2007 have a contractual term of six years.
The 2007 Plan also provides the Board of Directors the ability to grant restricted stock awards, stock appreciation rights, restricted stock units, performance shares and stock bonuses. As of
December 31, 2012, 740 shares were available for future grants under the 2007 Plan.
72
2007 Employee Stock Purchase Plan
In January 2007, the Companys Board of Directors adopted, and in March 2007 the Companys stockholders approved, the 2007
Employee Stock Purchase Plan (the 2007 Purchase Plan). The Company initially reserved 667 shares of its common stock for issuance under the 2007 Purchase Plan. On each January 1 for the first eight calendar years after the
first offering date, the aggregate number of shares of the Companys common stock reserved for issuance under the 2007 Purchase Plan will be increased automatically by the number of shares equal to 1% of the total number of outstanding shares
of the Companys common stock on the immediately preceding December 31, provided that the Board of Directors may reduce the amount of the increase in any particular year and provided further that the aggregate number of shares issued over
the term of this plan may not exceed 5,333. The 2007 Purchase Plan permits eligible employees, including employees of certain of the Companys 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 January 2009, the 2007 Purchase Plan was amended to provide that the Compensation Committee of the Companys Board of Directors
may fix a maximum number of shares that may be purchased in the aggregate by all participants during any single offering period (the Maximum Offering Period Share Amount). The Committee may later raise or lower the Maximum Offering
Period Share Amount. The Committee established the Maximum Offering Period Share Amount of 500 shares for the offering period that commenced on February 15, 2009 and ended on August 14, 2009, and a Maximum Offering Period Share Amount of
200 shares for each offering period thereafter. In October 2011, the Committee increased the Maximum Offering Period Share Amount for the offering period that commenced on August 22, 2011 and for each offering period thereafter to 300 shares.
As of December 31, 2012, 786 shares were available for issuance under the 2007 Purchase Plan.
2008 Equity Inducement Plan
In March 2008, the Companys Board of Directors adopted the 2008 Equity Inducement Plan (the Inducement Plan) to augment the shares available under its existing 2007 Plan. The Inducement
Plan did not require the approval of the Companys stockholders. The Company initially reserved 600 shares of its common stock for grant and issuance under the Inducement Plan. On December 28, 2009, the Companys Board of
Directors appointed Niccolo de Masi as the Companys President and Chief Executive Officer and the Compensation Committee of the Companys Board of Directors awarded him a non-qualified stock option to purchase 1,250 shares of the
Companys common stock, which was issued on January 4, 2010 under the Inducement Plan. Immediately prior to the grant of this award, the Compensation Committee amended the Inducement Plan to increase the number of shares available for
grant under the plan by 819 shares to 1,250 shares. In August 2011, the Compensation Committee of the Companys Board of Directors increased the number of shares reserved for issuance under the Companys 2008 Equity Inducement
Plan by 1,050 shares. The Company utilized these additional shares to grant stock options to certain of the new non-executive employees of Griptonite and Blammo to purchase shares of the Companys common stock. In November 2012, the
Compensation Committee amended the Inducement Plan to increase the number of shares available for grant under the plan by 300 shares. In each case, all of the newly authorized shares were granted promptly following each such increase. The
Company may only grant NSOs under the Inducement Plan. Grants under the Inducement Plan may only be made to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material
to such individuals entering into employment with the Company and to provide incentives for such persons to exert maximum efforts for the Companys success. The Company may grant NSOs under the Inducement Plan at prices less than 100% of
the fair value of the shares on the date of grant, at the discretion of its Board of Directors. The fair value of the Companys common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of
determination.
As of December 31, 2012, 438 shares were reserved for future grants under the Inducement Plan.
73
Stock Option Activity
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Available
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Balances at December 31, 2009
|
|
|
2,654
|
|
|
|
4,841
|
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(4,841
|
)
|
|
|
4,841
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
2,424
|
|
|
|
(2,424
|
)
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(330
|
)
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
4,148
|
|
|
|
6,928
|
|
|
|
2.02
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
2,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(4,925
|
)
|
|
|
4,925
|
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
1,250
|
|
|
|
(1,250
|
)
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(859
|
)
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2011
|
|
|
2,861
|
|
|
|
9,744
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(3,399
|
)
|
|
|
3,399
|
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
1,416
|
|
|
|
(1,416
|
)
|
|
|
3.89
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(806
|
)
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2012
|
|
|
1,178
|
|
|
|
10,921
|
|
|
$
|
3.07
|
|
|
|
4.17
|
|
|
$
|
3,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2012
|
|
|
|
|
|
|
9,429
|
|
|
$
|
3.03
|
|
|
|
4.03
|
|
|
$
|
3,523
|
|
Options exercisable at December 31, 2012
|
|
|
|
|
|
|
4,705
|
|
|
$
|
2.92
|
|
|
|
3.33
|
|
|
$
|
2,517
|
|
At December 31, 2012, the options outstanding and currently exercisable by exercise price were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.42 $ 1.19
|
|
|
1,345
|
|
|
|
2.82
|
|
|
$
|
1.03
|
|
|
|
986
|
|
|
$
|
1.00
|
|
$1.21 $ 1.23
|
|
|
1,110
|
|
|
|
3.03
|
|
|
|
1.22
|
|
|
|
764
|
|
|
|
1.22
|
|
$1.30 $ 2.03
|
|
|
1,302
|
|
|
|
3.66
|
|
|
|
1.67
|
|
|
|
691
|
|
|
|
1.66
|
|
$2.16 $ 2.83
|
|
|
380
|
|
|
|
5.71
|
|
|
|
2.30
|
|
|
|
18
|
|
|
|
2.45
|
|
$2.90 $ 2.90
|
|
|
1,273
|
|
|
|
4.78
|
|
|
|
2.90
|
|
|
|
376
|
|
|
|
2.90
|
|
$2.98 $ 3.29
|
|
|
1,130
|
|
|
|
5.69
|
|
|
|
3.28
|
|
|
|
31
|
|
|
|
3.17
|
|
$3.39 $ 3.78
|
|
|
1,098
|
|
|
|
4.05
|
|
|
|
3.72
|
|
|
|
497
|
|
|
|
3.71
|
|
$3.88 $ 4.30
|
|
|
1,209
|
|
|
|
4.95
|
|
|
|
4.25
|
|
|
|
132
|
|
|
|
4.06
|
|
$4.35 $ 4.66
|
|
|
1,123
|
|
|
|
4.41
|
|
|
|
4.53
|
|
|
|
465
|
|
|
|
4.52
|
|
$4.72 $ 11.88
|
|
|
951
|
|
|
|
3.73
|
|
|
|
6.33
|
|
|
|
745
|
|
|
|
6.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.42 $ 11.88
|
|
|
10,921
|
|
|
|
4.17
|
|
|
$
|
3.07
|
|
|
|
4,705
|
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has computed the aggregate intrinsic value amounts disclosed in the above table based on the
difference between the original exercise price of the options and the fair value of the Companys common stock of $2.28 per share at December 31, 2012. The total intrinsic value of awards exercised during the years ended December 31,
2012, 2011 and 2010 was $2,114, $2,065 and $142, 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 table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Risk-free interest rate
|
|
|
0.60
|
%
|
|
|
1.06
|
%
|
|
|
1.15
|
%
|
Expected term (years)
|
|
|
4.00
|
|
|
|
4.02
|
|
|
|
3.12
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
77
|
%
|
74
The Company based its expected volatility on its own historic volatility and the historical
volatility of a peer group of publicly traded entities. The expected term of options gave consideration to early exercises, post-vesting cancellations and the options six-year contractual term. The risk-free interest rate for the expected term
of the option is based on the U.S. Treasury Constant Maturity Rate as of the date of grant. The weighted-average fair value of stock options granted during the year ended December 31, 2012, 2011 and 2010 was $1.90, $1.81 and $0.67 per share,
respectively.
The Company calculated employee stock-based compensation expense based on awards ultimately expected to vest
and reduced it for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes the consolidated stock-based compensation expense by line items in the consolidated statement of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Research and development
|
|
$
|
3,491
|
|
|
$
|
1,387
|
|
|
$
|
480
|
|
Sales and marketing
|
|
|
386
|
|
|
|
351
|
|
|
|
217
|
|
General and administrative
|
|
|
1,945
|
|
|
|
1,372
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,822
|
|
|
$
|
3,110
|
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table includes compensation expense attributable to the contingent consideration potentially
issuable to the Blammo employees who were former shareholders of Blammo, which is recorded as research and development expense over the term of the earn-out periods, since these employees are primarily employed in product development. The Company
re-measures the fair value of the contingent consideration each reporting period and only records a compensation expense for the portion of the earn-out target which is likely to be achieved. In addition, the Company is exposed to potential
continued fluctuations in the fair market value of the contingent consideration in each reporting period, since re-measurement is impacted by changes in the Companys share price and the assumptions used by the Company; see Note 3 for further
details. The total fair value of this liability has been estimated at $2,242 and $1,176 as of December 31, 2012 and 2011, respectively, of which $1,549 and $551 of stock-based compensation expense has been recorded during the years ended
December 31, 2012 and 2011, respectively.
Consolidated net cash proceeds from option exercises were $1,357, $1,633 and
$287 for the year ended December 31, 2012, 2011 and 2010, respectively. The Company realized no significant income tax benefit from stock option exercises during the year ended December 31, 2012, 2011 and 2010. As required, the Company
presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.
At December 31, 2012, the Company had $7,300 of total unrecognized compensation expense under ASC 718, net of estimated forfeitures and excluding unvested Blammo stock-based contingent consideration
expense, which will be recognized over a weighted-average period of 2.73 years. As permitted by ASC 718, the Company has deferred the recognition of its excess tax benefit from non-qualified stock option exercises.
Restricted Stock
The Company did not grant any restricted stock options during the years ended December 31, 2012, 2011 or 2010.
401(k) Defined Contribution Plan
The Company sponsors a 401(k)
defined contribution plan covering all employees. The Company does not match the contributions made by its employees.
NOTE 11 INCOME TAXES
The components of loss before income taxes by tax jurisdiction were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
(6,745
|
)
|
|
$
|
(25,159
|
)
|
|
$
|
(14,527
|
)
|
Foreign
|
|
|
(15,708
|
)
|
|
|
4,672
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(22,453
|
)
|
|
$
|
(20,487
|
)
|
|
$
|
(12,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
The components of income tax provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Foreign
|
|
|
913
|
|
|
|
(2,698
|
)
|
|
|
(1,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
|
|
(2,700
|
)
|
|
|
(1,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
497
|
|
|
|
1,452
|
|
|
|
|
|
State
|
|
|
64
|
|
|
|
211
|
|
|
|
|
|
Foreign
|
|
|
524
|
|
|
|
423
|
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
|
|
2,086
|
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
497
|
|
|
|
1,452
|
|
|
|
|
|
State
|
|
|
60
|
|
|
|
209
|
|
|
|
(3
|
)
|
Foreign
|
|
|
1,437
|
|
|
|
(2,275
|
)
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,994
|
|
|
$
|
(614
|
)
|
|
$
|
(709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the actual rate and the federal statutory rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State tax, net of federal benefit
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
|
|
Foreign rate differential
|
|
|
(0.6
|
)
|
|
|
1.4
|
|
|
|
0.4
|
|
Research and development credit
|
|
|
|
|
|
|
2.1
|
|
|
|
1.5
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
United Kingdom research and development refund
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Withholding taxes
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(3.7
|
)
|
Goodwill impairment
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
(2.7
|
)
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
Non-deductible intercompany bad debt
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
FIN 48 interest and release
|
|
|
10.0
|
|
|
|
(0.4
|
)
|
|
|
(1.8
|
)
|
Other
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)
|
|
|
1.7
|
|
Valuation allowance
|
|
|
(9.1
|
)
|
|
|
(39.3
|
)
|
|
|
(38.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
8.9
|
%
|
|
|
(3.0
|
)%
|
|
|
(5.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2012, the Companys United Kingdom subsidiary recognized an intercompany bad debt expense of
approximately $10,870 that is non-tax deductible for United Kingdom tax purposes.
Deferred tax assets and liabilities consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
US
|
|
|
Foreign
|
|
|
Total
|
|
|
US
|
|
|
Foreign
|
|
|
Total
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
571
|
|
|
$
|
1,501
|
|
|
$
|
2,072
|
|
|
$
|
644
|
|
|
$
|
1,587
|
|
|
$
|
2,231
|
|
Net operating loss carryforwards
|
|
|
32,795
|
|
|
|
12,207
|
|
|
|
45,002
|
|
|
|
31,318
|
|
|
|
13,677
|
|
|
|
44,995
|
|
Accruals, reserves and other
|
|
|
3,605
|
|
|
|
121
|
|
|
|
3,726
|
|
|
|
4,821
|
|
|
|
96
|
|
|
|
4,917
|
|
Foreign tax credit
|
|
|
6,086
|
|
|
|
|
|
|
|
6,086
|
|
|
|
5,767
|
|
|
|
|
|
|
|
5,767
|
|
Stock-based compensation
|
|
|
2,723
|
|
|
|
58
|
|
|
|
2,781
|
|
|
|
1,748
|
|
|
|
65
|
|
|
|
1,813
|
|
Research and development credit
|
|
|
2,839
|
|
|
|
|
|
|
|
2,839
|
|
|
|
3,143
|
|
|
|
|
|
|
|
3,143
|
|
Other
|
|
|
2,873
|
|
|
|
11
|
|
|
|
2,884
|
|
|
|
2,573
|
|
|
|
12
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
51,492
|
|
|
$
|
13,898
|
|
|
$
|
65,390
|
|
|
$
|
50,014
|
|
|
$
|
15,437
|
|
|
$
|
65,451
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macrospace, MIG and iFone intangible assets
|
|
$
|
|
|
|
$
|
(498
|
)
|
|
$
|
(498
|
)
|
|
$
|
|
|
|
$
|
(931
|
)
|
|
$
|
(931
|
)
|
GameSpy intangible assets
|
|
|
(506
|
)
|
|
|
|
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Blammo intangible assets
|
|
|
|
|
|
|
(261
|
)
|
|
|
(261
|
)
|
|
|
|
|
|
|
(429
|
)
|
|
|
(429
|
)
|
Griptonite intangible assets
|
|
|
(949
|
)
|
|
|
|
|
|
|
(949
|
)
|
|
|
(2,149
|
)
|
|
|
|
|
|
|
(2,149
|
)
|
Fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
50,037
|
|
|
|
13,130
|
|
|
|
63,167
|
|
|
|
47,865
|
|
|
|
14,067
|
|
|
|
61,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(50,037
|
)
|
|
|
(13,674
|
)
|
|
|
(63,711
|
)
|
|
|
(47,865
|
)
|
|
|
(15,150
|
)
|
|
|
(63,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
(544
|
)
|
|
$
|
(544
|
)
|
|
$
|
|
|
|
$
|
(1,083
|
)
|
|
$
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
The Company has not provided deferred taxes on unremitted earnings attributable to foreign
subsidiaries because these earnings are intended to be reinvested indefinitely. No deferred tax asset was recognized since the Company does not believe the deferred tax asset will reverse in the foreseeable future. The amount of accumulated foreign
earnings of the Companys foreign subsidiaries total $2,536 as of December 31, 2012. If the Companys 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. The Company recorded a release of its valuation allowance of $562 and $1,702 during 2012 and 2011. This
release is associated with the acquisitions of GameSpy in August 2012 and Griptonite in August 2011. Pursuant to ASC 805-740, changes in the Companys valuation allowance that stem from a business combination should be recognized as an element
of the Companys deferred income tax expense or benefit. In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that, it is more likely than not that its deferred tax assets will not be
utilized, and has recorded a full valuation allowance against its net deferred tax assets in each of its jurisdictions except for one entity in China. The Company assesses on a periodic basis the likelihood that it will be able to recover its
deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income or losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance. If it is not more likely than not that the Company expects to recover its deferred tax assets, the Company will increase its provision for taxes by recording a
valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The available negative evidence at December 31, 2012 included historical and projected future operating losses. As a result, the Company
concluded that an additional valuation allowance of $696, net of the described releases, was required to reflect the gross increase in its deferred tax assets prior to valuation allowance during 2012. As of December 31, 2012, the Company
considered it more likely than not that its deferred tax assets would not be realized with their respective carryforward periods.
At December 31, 2012, the Company has net operating loss carryforwards of approximately $86,265 and $78,694 for federal and state tax purposes, respectively. These carryforwards will expire from 2013
to 2032. In addition, the Company has research and development tax credit carryforwards of approximately $2,839 for federal income tax purposes and $3,369 for California tax purposes. The federal research and development tax credit carryforwards
will begin to expire in 2022. The California state research credit will carry forward indefinitely. The Company has approximately $6,078 of foreign tax credits that will begin to expire in 2017, and approximately $12 of state alternative minimum tax
credits that will carryforward indefinitely. The Companys ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to
restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.
In addition, at December 31, 2012, the Company has net operating loss carryforwards of approximately $49,829 for United Kingdom tax purposes that are all limited and can only offset a portion of the
annual combined profits in the United Kingdom until the net operating losses are fully utilized.
A reconciliation of the
total amounts of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
4,034
|
|
|
$
|
3,326
|
|
Reductions of tax positions taken during previous years
|
|
|
(631
|
)
|
|
|
(82
|
)
|
Additions based on uncertain tax positions related to the current period
|
|
|
410
|
|
|
|
740
|
|
Additions based on uncertain tax positions related to prior periods
|
|
|
813
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,626
|
|
|
$
|
4,034
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized tax benefits as of December 31, 2012 and 2011 include approximately $3,104
and $2,694, respectively of unrecognized tax benefits that have been netted against deferred tax assets. As of December 31, 2012, approximately $817 of unrecognized tax benefits, if recognized, would impact the Companys effective tax
rate. A portion of this amount, if recognized, would adjust the Companys deferred tax assets which are subject to valuation allowance. As of December 31, 2011, approximately $19 of unrecognized tax benefits, if recognized, would impact
the Companys effective tax rate. In addition, as of December 31, 2012, the liability for uncertain tax positions decreased by approximately $631 due to the release of uncertain tax positions in the second quarter of 2012, as certain
statutes of limitation in foreign jurisdictions in which the Company does business expired. Furthermore, as of December 31, 2012, the liability for uncertain tax positions increased by approximately $813 due to utilization of net operating
losses related to prior periods in one of the Companys foreign jurisdictions in the fourth quarter of 2012. At December 31, 2012, the Company anticipated that the liability for uncertain tax positions, excluding interest and penalties,
could decrease by approximately $1,516 within the next twelve months due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business.
The Companys policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company
has accrued $2,348 of interest and penalties on uncertain tax positions as of December 31, 2012, as compared to $3,935 as of December 31, 2011. Approximately $182, $248 and $239 of accrued interest and penalty expense related to estimated
obligations for unrecognized tax benefits was recognized during 2012, 2011 and 2010 respectively. During 2012, the Company released $1,798 of interest and penalties on uncertain tax positions due to the expiration of certain statutes of limitation
in foreign jurisdictions in which the Company does business.
77
The Company is subject to taxation in the United States and various foreign jurisdictions.
The material jurisdictions subject to examination by tax authorities are primarily the State of California, United States, United Kingdom Canada and China. The Companys federal and California tax returns are open by statute for tax years 2002
and forward and could be subject to examination by the tax authorities. The statute of limitations for the Companys 2010 and 2011 tax returns for the various entities in the United Kingdom will close in 2013. The Companys China income
tax returns are open by statute for tax years 2007 and forward.
NOTE 12 SEGMENT REPORTING
ASC 280,
Segment Reporting
(ASC 280), establishes standards for reporting information about
operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The Companys chief operating decision-maker is its Chief Executive Officer. The Companys Chief Executive Officer reviews selected financial information on a geographic basis; however this
information is included within one operating segment for purposes of allocating resources and evaluating financial performance.
Accordingly, the Company reports as a single reportable segmentmobile games. For purpose of enterprise-wide disclosures, a
breakdown of the Companys total sales to customers in the feature phone and smartphone markets is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Feature phone
|
|
$
|
13,135
|
|
|
$
|
31,091
|
|
|
$
|
54,475
|
|
Smartphone
|
|
|
74,358
|
|
|
|
35,094
|
|
|
|
9,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,493
|
|
|
$
|
66,185
|
|
|
$
|
64,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of enterprise-wide disclosures, the Company attributes revenues to geographic areas based on
the country in which the distributors, advertising service providers or carriers principal operations are located. In the case of digital storefronts, revenues are attributed to the geographic location where the end-user makes the
purchase. The Company generates its revenues in the following geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States of America
|
|
$
|
48,172
|
|
|
$
|
32,998
|
|
|
$
|
28,909
|
|
Americas, excluding the USA
|
|
|
4,142
|
|
|
|
6,085
|
|
|
|
9,385
|
|
EMEA
|
|
|
17,971
|
|
|
|
18,526
|
|
|
|
17,332
|
|
APAC
|
|
|
17,208
|
|
|
|
8,576
|
|
|
|
8,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,493
|
|
|
$
|
66,185
|
|
|
$
|
64,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company attributes its long-lived assets, which primarily consist of property and equipment, to a
country primarily based on the physical location of the assets. Property and equipment, net of accumulated depreciation and amortization, summarized by geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Americas
|
|
$
|
3,649
|
|
|
$
|
3,101
|
|
|
$
|
1,013
|
|
EMEA
|
|
|
1,092
|
|
|
|
420
|
|
|
|
714
|
|
APAC
|
|
|
285
|
|
|
|
413
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,026
|
|
|
$
|
3,934
|
|
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
NOTE 13 RESTRUCTURING
Restructuring information as of December 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Workforce
|
|
|
Workforce
|
|
|
Facilities
Related
|
|
|
Workforce
|
|
|
Facilities
Related
|
|
|
Facilities
Related
|
|
|
Total
|
|
Balance as of January 1, 2011
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
296
|
|
|
|
1,585
|
|
|
|
581
|
|
|
$
|
2,462
|
|
Charges to operations
|
|
|
|
|
|
|
548
|
|
|
|
96
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
Non Cash Adjustments
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
(23
|
)
|
|
|
(226
|
)
|
Charges settled in cash
|
|
|
|
|
|
|
(548
|
)
|
|
|
(10
|
)
|
|
|
(220
|
)
|
|
|
(932
|
)
|
|
|
(324
|
)
|
|
|
(2,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
653
|
|
|
|
234
|
|
|
|
887
|
|
Charges to operations
|
|
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,371
|
|
Charges settled in cash
|
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
|
|
(234
|
)
|
|
|
(2,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, 2010, 2011 and 2012, the Companys management approved restructuring plans to improve
the effectiveness and efficiency of its operating model and reduce operating expenses around the world. The 2012 restructuring plans included $1,371 of restructuring charges relating to employee termination costs in the Companys APAC, Brazil
and Kirkland, Washington offices and a reduction of executive sales and marketing headcount in the United States and Spain. The 2011 restructuring plans included $548 of restructuring charges relating to employee termination costs in the
Companys APAC, Latin America, Russia and United Kingdom offices. The remaining restructuring charge of $96 related primarily to facility-related charges resulting from vacating a portion of the Companys Moscow offices. Since the
inception of the 2010 restructuring plan through December 31, 2012, the Company incurred $1,581 of restructuring charges relating to employee termination costs in the Companys United States, APAC, Latin America and United Kingdom offices.
The Company also incurred additional facility-related restructuring charges of $1,854 related primarily to the relocation of the Companys corporate headquarters to San Francisco. The Company does not expect to incur any additional charges
under the 2011, 2010 and 2009 restructuring plans.
As of December 31, 2012, the Companys remaining restructuring
liability of $4 was comprised primarily of employee termination costs which were fully paid in the first quarter of 2013. As of December 31, 2011, the Companys remaining restructuring liability of $887 was comprised of facility related
costs and was fully paid down during 2012. The Company anticipates incurring additional termination costs of approximately $450 in 2013 in connection with other restructuring activities implemented in the first quarter of 2013 in order to better
align sales and marketing and research and development expenses with the Companys current business strategy and to finalize the closure of its Brazil office.
NOTE 14 QUARTERLY FINANCIAL DATA (unaudited, in thousands)
The following table sets forth unaudited quarterly consolidated statements of operations data for 2011 and 2012. The
Company derived this information from its unaudited consolidated financial statements, which it prepared on the same basis as its audited consolidated financial statements contained in this report. In its opinion, these unaudited statements include
all adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair statement of that information when read in conjunction with the consolidated financial statements and related notes included elsewhere
in this report. The operating results for any quarter should not be considered indicative of results for any future period.
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
2011
|
|
|
2012
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
16,426
|
|
|
$
|
17,680
|
|
|
$
|
16,905
|
|
|
$
|
15,174
|
|
|
$
|
21,544
|
|
|
$
|
23,621
|
|
|
$
|
21,347
|
|
|
$
|
20,981
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties and other cost of revenues
|
|
|
3,469
|
|
|
|
3,121
|
|
|
|
3,223
|
|
|
|
2,576
|
|
|
|
2,557
|
|
|
|
2,137
|
|
|
|
2,194
|
|
|
|
2,052
|
|
Impairment of prepaid royalties and guarantees
|
|
|
371
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
817
|
|
|
|
703
|
(a)
|
|
|
2,375
|
|
|
|
1,552
|
|
|
|
753
|
|
|
|
932
|
|
|
|
1,025
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
4,657
|
|
|
|
3,824
|
|
|
|
5,758
|
|
|
|
4,128
|
|
|
|
3,310
|
|
|
|
3,069
|
|
|
|
3,219
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,769
|
|
|
|
13,856
|
|
|
|
11,147
|
|
|
|
11,046
|
|
|
|
18,234
|
|
|
|
20,552
|
|
|
|
18,128
|
|
|
|
17,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,166
|
|
|
|
8,439
|
(b)
|
|
|
10,808
|
(b)
|
|
|
12,660
|
(d)
|
|
|
15,033
|
|
|
|
15,697
|
(d)
|
|
|
9,979
|
|
|
|
13,566
|
|
Sales and marketing
|
|
|
3,757
|
|
|
|
3,344
|
|
|
|
3,576
|
|
|
|
3,930
|
|
|
|
4,375
|
|
|
|
4,701
|
|
|
|
5,545
|
|
|
|
6,272
|
|
General and administrative
|
|
|
2,934
|
|
|
|
3,506
|
|
|
|
3,748
|
|
|
|
3,814
|
|
|
|
4,366
|
|
|
|
4,556
|
|
|
|
2,466
|
|
|
|
3,356
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
495
|
|
|
|
495
|
|
|
|
495
|
|
|
|
495
|
|
|
|
495
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
|
|
3,613
|
|
|
|
|
|
Restructuring charge
|
|
|
490
|
|
|
|
147
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
320
|
|
|
|
213
|
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,347
|
|
|
|
15,436
|
|
|
|
18,462
|
|
|
|
20,807
|
|
|
|
24,269
|
|
|
|
25,769
|
|
|
|
22,311
|
|
|
|
24,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,578
|
)
|
|
|
(1,580
|
)
|
|
|
(7,315
|
)
|
|
|
(9,761
|
)
|
|
|
(6,035
|
)
|
|
|
(5,217
|
)
|
|
|
(4,183
|
)
|
|
|
(6,671
|
)
|
Interest and other income (expense), net
|
|
|
180
|
|
|
|
329
|
|
|
|
344
|
|
|
|
(106
|
)
|
|
|
(366
|
)
|
|
|
210
|
|
|
|
(455
|
)
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,398
|
)
|
|
|
(1,251
|
)
|
|
|
(6,971
|
)
|
|
|
(9,867
|
)
|
|
|
(6,401
|
)
|
|
|
(5,007
|
)
|
|
|
(4,638
|
)
|
|
|
(6,407
|
)
|
Income tax benefit (provision)
|
|
|
(774
|
)
|
|
|
(501
|
)(c)
|
|
|
813
|
|
|
|
(152
|
)
|
|
|
(440
|
)(e)
|
|
|
2,019
|
(e)
|
|
|
1,075
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,172
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(6,158
|
)
|
|
$
|
(10,019
|
)
|
|
$
|
(6,841
|
)
|
|
$
|
(2,988
|
)
|
|
$
|
(3,563
|
)
|
|
$
|
(7,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
(a)
|
Amortization of intangible assets of $2,375 in the third quarter of 2011 was driven by increased amortization expense associated with intangible assets acquired in the
acquisitions of Griptonite and Blammo.
|
(b)
|
Research and development expense of $10,808 and $12,660 in the third and fourth quarters of 2011 were related to additional personnel and facility costs associated with
the acquisitions of Griptonite and Blammo.
|
(c)
|
The income tax benefit of $813 in the third quarter of 2011 was due primarily to the release of the valuation allowance associated with the acquisition of Griptonite.
|
(d)
|
Changes in the research and development expense from $15,033 in the first quarter of 2012 and $9,979 in the third quarter of 2012 was due primarily to changes in the
fair market value of contingent consideration issued to employees who are former shareholders of Blammo.
|
(e)
|
The income tax benefit of $2,019 in the second quarter of 2012 was due primarily to the release of uncertain tax positions in certain foreign jurisdictions due to the
expiration of the statute of limitations. The income tax benefit of $1,075 in the third quarter of 2012 was due primarily to the release of the GameSpy valuation allowance upon acquisition and changes in pre-tax income in certain foreign entities.
|
(f)
|
The goodwill impairment charge of $3,613 in the third quarter of 2012 was due to a decline in the estimated fair value of the APAC reporting unit attributable to an
accelerated decline in the local feature phone business and the recent restructuring of the Companys operations in the region.
|
NOTE 15 RELATED PARTY TRANSACTIONS
Hany Nada, one of the Companys directors, serves as one of the seven managing directors of Granite Global
Ventures II L.L.C., the general partner of each of Granite Global Ventures II L.P. and GGV II Entrepreneurs Fund L.P., which together beneficially owned approximately 8.7% of the Companys stock as of December 31, 2012. Hany Nada also
serves as one of the seven managing directors of GGV Capital IV L.L.C., the general partner of each of GGV Capital IV L.P. and GGV Capital IV Entrepreneurs Fund L.P. (together, GGV IV). During October and December 2012, GGV IV acquired
an approximate 33.7% shareholding in Medium Entertainment, which does business as PlayHaven (Medium) and Hany Nada became a member of the Board of Directors. The Company had a preexisting relationship with Medium as of the date of GGV
IVs investment in Medium, and for 2012, the Company generated revenues of $6,285 from Medium. As of December 31, 2012, Medium accounted for 13.2% of the Companys total accounts receivable balance.
80