GLU MOBILE INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data" of this report. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in Item 1A, "Risk Factors."
Our Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, includes the following sections:
? An Overview that discusses at a high level our operating results and some of
the trends that affect our business;
Critical Accounting Policies and Estimates that we believe are important to
? understanding the assumptions and judgments underlying our financial
statements;
? Recent Accounting Pronouncements;
? Results of Operations, including a more detailed discussion of our revenue and
expenses; and
? Liquidity and Capital Resources, which discusses key aspects of our statements
of cash flows, changes in our balance sheets and our financial commitments.
This MD&A section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSEC onFebruary 28 ,
2020. Merger Agreement OnFebruary 8, 2021 , we entered into a definitive Merger Agreement with Electronic Arts pursuant to which Electronic Arts has agreed to acquire us for$12.50 in cash for each share of our common stock issued and outstanding as of immediately prior to the closing of the transaction. This represents approximately$2.1 billion in enterprise value. Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, we will become a wholly owned subsidiary of Electronic Arts. The transaction is anticipated to close in the quarter endingJune 30, 2021 , subject to approval by our stockholders, the receipt of required regulatory approvals and other customary closing conditions. Overview
This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for 2020, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our consolidated financial statements and accompanying notes.
Impact of the COVID-19 Pandemic
The extent of the impact of the current COVID-19 pandemic on our operational and financial performance continues to depend on certain developments, including the duration and spread of the outbreak, the availability and effectiveness of a vaccine, the impact on our employees, and the effect on the global economy,
all
of which are uncertain
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and cannot be predicted. Although we were able to successfully launch two new
games, MLB Tap Sports Baseball 2020 and Disney Sorcerer's Arena, in March 2020
and have been publishing updates and running live operations for our games while
our global workforce has been working from home, we believe that if our
employees are required to continue to work exclusively or primarily from home
significantly into 2021 or beyond, it could ultimately negatively impact game
development. During the second quarter of 2020, we benefitted from a reduction
in CPIs (costs per install), particularly during the month of April, with CPIs
increasing beginning in May, though remaining below historical averages. In
response to this favorable CPI environment, we increased our investment in user
acquisition during the second quarter of 2020, which resulted in an increase in
the daily active users in many of our games and contributed to a significant
increase in our bookings. However, CPIs have since reverted to at or above
historical norms from the reduced levels we experienced in April and May 2020 .
As a result of the increased CPIs, we reduced our user acquisition spending in
the third and fourth quarters of 2020. This reduced spending contributed to a
decline in our bookings in the third and fourth quarters of 2020 compared with
the second quarter of 2020, as well as to a decline in the daily active users of
our games. In addition, we may continue to experience adverse impacts from
changes in how we and companies worldwide conduct business due to the COVID-19
pandemic, including restrictions on travel and in-person meetings. As of the
filing date of this Form 10-K, the extent to which COVID-19 may impact our
financial condition, results of operations or guidance is uncertain. The effects
of the COVID-19 pandemic may not be fully reflected in our results of operations
and overall financial performance until future periods. See "Risk Factors"
included elsewhere in this report for further discussion of the possible impact
of the COVID-19 pandemic on our business.
Financial Results and Trends
Revenue for 2020 was$540.5 million , a 31.4% increase compared to 2019, in which we reported revenue of$411.4 million . The increase in total revenue was primarily related to a$120.7 million increase in our revenue from micro-transactions (in-app purchases) and an$8.3 million increase in our revenue from advertisements and offers. The increase was primarily related to an increase in revenue from our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog gameKim Kardashian :Hollywood , as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer's Arena in the first quarter of 2020. These increases were partially offset by a decrease in revenue from some of our catalog games such as Cooking Dash, Deer Hunter 2018 (originally launched as Deer Hunter 2016), WWE Universe, Diner Dash and Restaurant Dash
withGordon Ramsay . We have concentrated our product development efforts towards developing games for smartphone and tablet devices. We generate the majority of our revenue from Apple's iOS platform, which accounted for 61.5% and 60.8% of our total revenue for the years endedDecember 31, 2020 and 2019, respectively. The majority of this iOS-related revenue was generated through theApple App Store , which represented 56.2% and 54.4% of our total revenue for the years endedDecember 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on theApple App Store . In addition, we generated approximately 38.4% and 39.1% of our total revenue for the years endedDecember 31, 2020 and 2019, respectively, from the Android platform. The majority of our Android-related revenue was generated through theGoogle Play Store , which represented 32.9% and 33.5% of our total revenue for the years endedDecember 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our Android-related revenue from other platforms that distribute apps that run the Android operating system (e.g., theAmazon App Store ) and through offers and advertisements in games distributed through theGoogle Play Store and other Android platforms. We currently publish titles primarily in four genres: lifestyle, casual, RPGs, and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game. Across genres, we view our titles as either growth games or catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements.
We established our leadership position in the lifestyle genre through our
acquisition of
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release of Design Home inNovember 2016 . We introduced key updates for Design Home in 2019 and 2020, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, meta game functionality, and the introduction of e-commerce functionality, and are planning further key updates for this title. We expect to add to our portfolio of lifestyle games in 2021 through the worldwide release of Table & Taste, a new game from ourCrowdstar studio that will focus on the food genre, as well as our Crowdstar Moments suite of hypercasual games that we expect will help drive engagement across our lifestyle portfolio. The casual genre includes ourKim Kardashian :Hollywood title; inApril 2020 , we extended the term of our license agreement withMs. Kardashian West for an additional 3.5 years through the end of 2023. The casual genre also includes our Cooking Dash and Diner DASH franchises, and our leadership position in this genre was bolstered by our worldwide launch of Diner DASH Adventures inJune 2019 . The RPG genre includes our Disney Sorcerer's Arena title that launched worldwide inMarch 2020 . Our leadership in the sports and outdoors category remains strong with our Tap Sports Baseball and Deer Hunter franchises. InMarch 2020 , we furthered our leadership in this genre with the launch of MLB Tap Sports Baseball 2020 in more than 100 countries; prior versions of the Tap Sports Baseball franchise were only available inthe United States ,Canada ,United Kingdom ,Germany andAustralia . MLB Tap Sports Baseball 2020 includes licensed content from MajorLeague Baseball , or MLB, together with current and former MLB players pursuant to our continuing agreements with theMajor League Baseball Players Association , andMajor League Baseball Players Alumni Association , contains new features and content, including authentic major league stadiums, a skill-based home run mode and a new cover athlete. We expect to add to our portfolio of sports and outdoor titles in 2021 through the worldwide releases of MLB Tap Sports Baseball 2021 andDeer Hunter World , the next iteration of our Deer Hunter franchise, as well as the expected release of a social fishing game, Tap Sports Fishing. We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on the Apple andKim Kardashian :Hollywood title utilizes transmedia storytelling, leveragingMs. Kardashian West's built-in social media fan base to drive installs and awareness of the game, and then attempting to surprise and delight those fans with real-world events and other game content based on her life. Our goal is for the game content to become entwined withMs. Kardashian West's persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2020 which features all MLB clubs and uniforms, current and former MLB players and real MLB stadiums, or with our Disney Sorcerer's Arena title, which includes characters from theDisney and Pixar universes. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity's fan base. For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. We have also made significant investments in our proprietary analytics and revenue technology infrastructure. With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players. We aim to connect our analytics and revenue technology infrastructure to multiple elements of our business - from marketing to merchandising - in order to improve player retention and monetization. We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features and through enhancing our live operations. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space. Continuing to drive installs and 53
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awareness of our games through licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games. Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners. We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization. Across the globe, our industry is evidencing that hit titles generally remain higher in the top grossing charts for longer. We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business position us to take advantage of these trends, as evidenced by the continued strength and year-over-year growth of Design Home, Covet Fashion and theTap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer periods of time. In addition, we plan to continue to invest in our creative leaders and the creative environments in which they and their teams work to increase our likelihood of creating significant hit growth games.
Our net income in the year endedDecember 31, 2020 was$20.4 million versus net income of$8.9 million in the year endedDecember 31, 2019 . This change was primarily due to an increase in revenue of$129.1 million . This change was partially offset by an increase in cost of sales of$46.1 million , an increase in sales and marketing expenses of$36.9 million , an increase in research and development expenses of$24.6 million , and an increase in general and administrative expenses of$8.3 million . Our operating results were also affected by declines of interest of income and fluctuations in foreign currency exchange rates of the currencies in which we incurred meaningful operating expenses (principally the Canadian Dollar, and Indian Rupee), and our customers' reporting currencies. Our ability to sustain and increase profitability depends not only on our ability to grow our revenue, but also on our ability to manage our operating expenses. We significantly increased our sales and marketing expenditures during 2020 compared to 2019. This increase largely related to higher marketing spend for most of our successful titles as well as for user acquisition expenditures related to the global launch of Disney Sorcerer's Arena, and we increased our planned user acquisition spend during the second quarter of 2020 to capitalize on the lower CPI environment that resulted from the COVID-19 pandemic. Our increased sales and marketing expenses may impair our ability to sustain and increase profitability if this spending does not result in increased revenue over the longer term. Additionally, the largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation. Cash and cash equivalents atDecember 31, 2020 totaled$364.4 million , an increase of$237.3 million from the$127.1 million balance atDecember 31, 2019 . This increase was primarily related to$168.3 million of cash provided by financing activities,$76.1 million of cash generated from operations, which was partially offset by$7.1 million of cash used in investing activities. Key Financial Metrics Revenue and Bookings GAAP revenue increased$129.1 million , or 31.4%, from$411.4 million for the year endedDecember 31, 2019 to$540.5 million for the year endedDecember 31, 2020 . The increase was primarily related to our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog gameKim Kardashian :Hollywood , as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer's Arena in the first quarter of 2020. Bookings is a non-GAAP financial measure that is equal to the total revenue we recognize in a given period, plus the net change in deferred revenue during the period. We initially record the sale of virtual items within our games as deferred revenue and then recognize that revenue over the estimated average playing period of paying users. Revenue from advertisements and offers are recognized at the point in time the advertisements are displayed in the game or the 54 Table of Contents offer has been completed by the user, as the user simultaneously receives and consumes the benefits provided from these services. We believe bookings is a useful indicator of the sales activity in a given period and use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that bookings are useful in evaluating our business, this information should be considered as supplemental in nature and is not intended to be considered in isolation of, as a substitute for, or as superior to, revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which may reduce its usefulness as a comparative measure.
The following table presents a reconciliation of total revenue to total bookings
for each of the years ended
Year Ended
December 31,
2020 2019
Reconciliation of Revenue to Bookings:
Revenue $ 540,522 $ 411,381
Change in deferred revenue 20,043 11,893
Bookings $ 560,565 $ 423,274
Key Operating Metrics
We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The four metrics that we use most frequently are Daily Active Users (DAU), Monthly Active Users (MAU),Average Bookings Per Daily Active User (ABPDAU) and Average Revenue Per Daily Active User (ARPDAU). Our methodology for calculating DAU, MAU, ABPDAU and ARPDAU may differ from the methodology used by other companies to calculate similar metrics. DAU is the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players
have downloaded.
MAU is the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention. ABPDAU is total free-to-play smartphone bookings - consisting of micro-transactions, advertisements and offers - for the measurement period, divided by the number of days in that period, divided by the number of DAU during the period. ABPDAU reflects game monetization based on bookings which does not reflect any deferral of revenue derived from the sale of virtual items within our games. ARPDAU is total free-to-play smartphone revenue - consisting of micro-transactions, advertisements and offers - for the measurement period divided by the number of days in the measurement period divided by the DAU for the measurement period. ARPDAU reflects game monetization. Under our revenue recognition policy, we recognize this revenue over the estimated average playing period of a user, but our methodology for calculating our DAU does not align with our revenue recognition policy for micro-transactions and offers, under which we defer revenue. For example, if a title is introduced in the last month of a quarter, we defer a substantial portion of the micro-transaction and offer revenue to future months, but the entire DAU for the newly released title is included in the month of launch.
We calculate DAU, MAU, ABPDAU and ARPDAU for only our primary distribution platforms, Apple's App
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Store, the Google Play Store and Amazon's Appstore, as well as from Facebook for
certain titles; we are not able to calculate these metrics across all of our
distribution channels. In addition, the platforms that we include for purposes
of this calculation have changed over time, and we expect that they will
continue to change as our business evolves, but we do not expect that we will
adjust prior metrics to take any such additions or deletions of distribution
platforms into account. We believe that calculating these metrics for only our
primary distribution platforms at a given period is generally representative of
the metrics for all of our distribution platforms. Moreover, we rely on the data
analytics software that we incorporate into our games to calculate and report
the DAU, MAU, ABPDAU and ARPDAU of our games, and we make certain adjustments to
the analytics data to address inconsistencies between the information as
reported and our DAU and MAU calculation methodology.
We have estimated the DAU and MAU for certain older titles because the analytics tools incorporated into those titles are incompatible with newer device operating systems (e.g., iOS 14), preventing us from collecting complete data. For these titles, we estimate DAU and MAU by extrapolating from each affected title's historical data using a fixed decay rate in light of the behavior of similar titles for which we had complete data.
As ofJanuary 1, 2019 , we began calculating DAU and MAU using the average of each month during the period rather than our historical practice of calculating these metrics based on the last month of the period. For example, DAU for the three months endedDecember 31, 2020 is calculated as an average of aggregate daily DAU for the months ofOctober 2020 ,November 2020 andDecember 2020 calculated for all active smartphone free-to-play titles during those months across the distribution platforms for which we calculate the metric. We adopted this new methodology because we believe that it provides a more accurate representation of overall DAU and MAU for the applicable period and more closely aligns with the methodology used by other companies in the gaming industry to calculate similar metrics. Three Months Ended, 2020 2019 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
Aggregate DAU (in thousands) 2,507 2,940 3,788 3,048 2,903 3,288 3,230 3,150 Aggregate MAU (in thousands) 11,234 14,031 20,194 17,774 15,599 18,675 19,065 19,118 Aggregate ARPDAU$ 0.61 $ 0.59 $ 0.39 $ 0.39 $ 0.42 $ 0.35 $ 0.33 $ 0.34 Aggregate ABPDAU$ 0.54 $ 0.54 $ 0.53 $ 0.38 $
0.41$ 0.40 $ 0.35 $ 0.33
The decrease in aggregate DAU and MAU for the three months ended
Our aggregate ABPDAU and ARPDAU increased for the three months endedDecember 31, 2020 as compared to the same period of the prior year, as we improved monetization on certain titles, particularly through increased content updates and use of social features in those games. Future increases in our aggregate DAU, MAU, ABPDAU and ARPDAU will depend on our ability to retain current players, attract new paying players, launch new games and expand into new markets and distribution platforms. We rely on a very small portion of our total users for nearly all of our revenue derived from in-app purchases. Since the launch of our first free-to-play titles in the fourth quarter of 2010, the percentage of unique paying users for our largest revenue-generating free-to-play games has typically been less than 5%, when measured as the number of unique paying users on a given day divided by the number of unique users on that day, though this percentage fluctuates, and it may be higher than 5% for certain of our games during specific, relatively short time periods, such as immediately following worldwide launch or the week following content updates, marketing campaigns or certain other events. Significant Transactions Follow-on Public Offering 56 Table of Contents
InJune 2020 , we completed a follow-on public offering of 17,250,000 shares of our common stock, which included an over-allotment option to purchase an additional 2,250,000 shares, at a public offering price of$9.25 per share. The aggregate gross proceeds from the offering, including the exercise of the over-allotment option, were approximately$159.6 million , and net proceeds received after underwriting fees and offering expenses totaled approximately$151.8 million . We do not have specific uses of the net proceeds from the offering but intend to use the net proceeds for working capital and other general corporate purposes, which may include potential acquisitions and strategic transactions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withUnited States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our estimates and judgments are reasonable under the circumstances existing at the time these estimates and judgments are made, actual results may differ from those estimates, which could affect our consolidated financial statements. Our significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Some of these accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements: ? revenue recognition;
? prepaid or guaranteed licensor royalties; and
? stock-based compensation.
Revenue Recognition
We generate revenue through in-application purchases ("in-app purchases") within
our games on smartphones and tablet devices, such as Apple's iPhone and iPad,
and mobile devices utilizing Google's Android operating system. Users can
download our free-to-play games through Digital Storefronts. We also have
relationships with certain advertising service providers for advertisements
within smartphone games and revenue from these advertising providers is
generated through impressions, clickthroughs, banner ads and offers.
In accordance with Accounting Standard Codification 606, Revenue from Contracts
with Customers, (Topic 606), revenue is recognized when a customer obtains
control of promised services. The amount of revenue recognized reflects the
consideration we expect to receive in exchange for these services. A contract
with a customer exists when (i) we enter into an enforceable contract with a
customer that defines each party's rights regarding the services to be
transferred and identifies the payment terms related to these services, (ii) the
contract has commercial substance and, (iii) we determine that collection of
substantially all consideration for services that are transferred is probable
based on the customer's intent and ability to pay the promised consideration. We
apply judgment in determining the customer's ability and intention to pay, which
is based on a variety of factors including the customer's historical payment
experience or, in the case of a new customer, published credit and financial
information pertaining to the customer.
In-App Purchases
Users can download our free-to-play games within the Digital Storefronts and pay
to acquire virtual currency, which can be redeemed in the game for virtual
goods, or virtual goods directly (together, defined as "virtual items") to
enhance their game-playing experience. We sell both consumable and durable
virtual items and receive reports from the Digital Storefronts, which breakdown
the various purchases made from our games over a given time period. We review
these reports and determine on a per-item basis whether the purchase was a
consumable virtual item or a durable virtual item. Consumable virtual items are
items that are consumed at a predetermined time or otherwise have limitations on
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repeated use. Durable virtual items are items, such as furniture, clothes, etc. that are accessible to the player over an extended period of time and that remain in the game for as long as the player continues to play.
The initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance. However, the separate election by the player to make an in-application purchase satisfies the criteria, thus creating a contract under ASC 606. We have identified the following performance obligations in these contracts:
Ongoing game related services such as hosting of game play, storage of
(1) customer content, when and if available content updates, maintaining the
virtual currency management engine, tracking gameplay statistics, matchmaking
as it relates to multiple player gameplay, etc.
(2) Obligation to the paying player to continue displaying and providing access
to the virtual items within the game.
Neither of these obligations are considered distinct since the actual mobile
game and the related ongoing services are both required to purchase and benefit
from the related virtual items. As such, our performance obligations represent a
single combined performance obligation which is to make the game and the ongoing
game related services available to the players. The transaction price, which is
the amount paid for the virtual items by the player, is allocated entirely to
the single combined performance obligation. We recognize revenue for durable
virtual items over the estimated average playing period of paying users on a per
title basis. Our revenue from consumable virtual items has been insignificant.
Based on our analysis, the estimated weighted average useful life of a paying
user ranges from four to eight months.
Advertisements and Offers
We have relationships with certain advertising service providers for
advertisements within our mobile games. Revenue from these advertising service
providers is generated through impressions, clickthroughs, offers and banner
ads. Offers are the type of advertisements where the players are rewarded with
virtual currency for completing specified actions, such as downloading another
application, watching a short video, subscribing to a service or completing a
survey. We have determined the advertising buyer to be our customer and
displaying the advertisements within the mobile games is identified as the
single performance obligation. Revenue from advertisements and offers are
recognized at the point-in-time the advertisements are displayed in the game or
the offer has been completed by the user as the customer simultaneously receives
and consumes the benefits provided from these services.
Other Estimates and Judgments
We compute our estimated average playing period of paying users at least twice each year. We have examined the playing patterns of paying users across a representative sample of our games across various genres.
We use the "survival analysis" model to estimate the average playing period for
paying users. This model provides for a singular approach to estimating the
average playing period of paying users on a title by title basis for our diverse
portfolio of games. It is a statistical model that analyzes time duration until
one or more events happens and is commonly used in various industries for
estimating lifespans. We believe this is an appropriate model to estimate the
average playing period of paying users for our titles as this model
statistically estimates the average playing period of each title by analyzing
the historical behavior patterns of paying users.
This model requires the stratification of user data into active and inactive
paying users on a per title basis. Active users are those who are active in the
game for the past 30 days as of the evaluation date. The remaining users are
considered inactive and deemed to have churned from the game. These users are
treated mathematically differently in the model than those who are still active.
A distribution curve is then fit to the user data to estimate the average
playing period of paying users on a per title basis.
We have selected a threshold of 120 days from the commercial launch of a title
as the minimum number of days of data required for this model. This threshold
was deemed to be appropriate as we tested the model using lower thresholds which
resulted in inconsistencies in the estimate of the average playing period of
paying users. For new titles with less
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than 120 days of data that share similar attributes with an existing title and/or prequel titles, the average playing period is determined based on the average playing period of that existing title or prequel title, as applicable. For all other titles with less than 120 days of data, the average playing period is determined based on the average playing period of all other remaining existing titles. While we believe our estimates to be reasonable based on available game player information, we may revise such estimates in the future if a titles' user characteristics change. Any adjustments arising from changes in the estimates of the average playing period for paying users would be applied to the current quarter and prospectively on the basis that such changes are caused by new information that indicates a change in user behavior patterns compared to historical titles. Any changes in our estimates of the useful life of virtual items in a certain title may result in revenue being recognized on a basis different from prior periods' and may cause our operating results to fluctuate.
Principal Agent Considerations
We evaluated our Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if we are acting as the principal or as an agent when selling virtual items or advertisements within our games. We primarily use Digital Storefronts for distributing our smartphone games and for enabling players to purchase virtual items and advertising service providers to serve advertisements within our games. We evaluated the following factors to assess whether we control each specified good or service before that good or service is transferred to the customer:
? the party responsible for the fulfillment of the virtual items, game related
services, or serving of advertisements;
? the party having the discretion to set pricing with the end-users; and
? the party having inventory risk before the specified good or service have been
transferred to a customer.
Based on the evaluation of the above indicators, we determined that we have control of the services before they are transferred to the end-user. Thus, we are generally acting as a principal and are the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through our advertising service providers. Therefore, we recognize revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers. In situations where the price paid by the end-user of the advertising service provider is not known, we account for these transactions on a net basis.
Deferred Platform Commissions and Royalties
Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. We are also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and our plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in "Cost of revenue" in the period in which the related sales are recognized as revenue.
Prepaid or Guaranteed Licensor Royalties
Our royalty expenses consist of fees that we pay to content owners for the use of their brands, properties and other licensed content, including trademarks and copyrights, in the development of our games. Royalty-based obligations are either paid in advance and capitalized on the balance sheet as prepaid royalties or accrued as incurred and subsequently paid. These royalty-based obligations are expensed to cost of revenue at the greater of the revenue derived from the relevant game multiplied by the applicable contractual rate or an effective royalty rate based on expected net product sales.
Our contracts with certain licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of sales to end users, in accordance with ASC 440-10, Commitments, or ASC 440. When no
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significant performance remains with the licensor, we initially record each of
these guarantees as an asset and as a liability at the contractual amount. We
believe that the contractual amount represents the fair value of the liability.
When significant performance remains with the licensor, we record royalty
payments as an asset when actually paid and as a liability when incurred, rather
than upon execution of the contract. The classification of minimum royalty
payment obligations between long-term and short-term is determined based on the
expected timing of recoupment of earned royalties calculated on projected
revenue for the games that include content licensed from third parties.
Each quarter, we evaluate the realization of our prepaid and guaranteed
royalties as well as any unrecognized guarantees not yet paid to determine
amounts that we deem unlikely to be realized through product sales. We use
estimates of undiscounted revenue and net margins to evaluate the future
realization of prepaid royalties, license fees, and guarantees. This evaluation
is performed at the title level and considers multiple factors, such as, the
term of the agreement, forecasted demand, game life cycle status, game
development plans, level of social media activity, and current and anticipated
sales levels, as well as other qualitative factors such as the success of
similar games and similar genres on mobile devices published by us and our
competitors and/or other game platforms (e.g., consoles and personal computers)
utilizing the intellectual property. To the extent that this evaluation
indicates that the remaining prepaid and guaranteed royalty payments are not
recoverable, we record an impairment charge to cost of revenue in the period
that impairment is indicated.
Stock-Based Compensation
We apply the fair value provisions of ASC 718, Compensation - Stock Compensation
("ASC 718"). ASC 718 requires the recognition of compensation expense, using a
fair-value based method, for costs related to all stock-based payments including
stock options, restricted stock units ("RSUs"), performance-based stock units
("PSUs"), and performance-based stock options ("PSOs"). The number of PSUs and
PSOs earned and eligible to vest will be determined based on achievement of
specified financial performance measures. ASC 718 requires companies to estimate
the fair value of stock-option awards on the grant date using an option pricing
model. The fair value of stock options and PSOs and stock purchase rights
granted pursuant to our equity incentive plans and 2007 Employee Stock Purchase
Plan ("ESPP"), respectively, is determined using the Black-Scholes valuation
model. The determination of fair value is affected by the stock price, as well
as assumptions regarding subjective variables such as expected employee exercise
behavior and expected stock price volatility over the expected term of the
award. Generally, these assumptions are based on historical information and
judgment is required to determine if historical trends may be indicators of
future outcomes.
Effective January 1, 2017 we no longer estimate forfeitures but account for them
as and when they occur. Changes to the assumptions used in the Black-Scholes
option valuation calculation, as well as future equity granted or assumed
through acquisitions could significantly impact the compensation expense we
recognize. The cost of RSUs and PSUs is determined using the fair value of the
common stock based on the quoted closing price of our common stock on the date
of grant. Compensation cost for stock options and RSUs is amortized ratably over
the requisite service period. For performance-based awards that have multiple
vesting dates, the compensation cost is recognized ratably over the requisite
service period for each tranche, whereby each vesting tranche is treated as a
separate award for determining the requisite service period. The compensation
cost for performance-based awards may be adjusted over the vesting period based
on interim estimates of performance against the pre-set financial performance
measures.
Results of Operations
The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.
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Comparison of the Years Ended
Revenue
Year Ended December 31,
2020 2019 % Change
Revenue by Type (dollars in thousands)
In-App Purchases $ 481,279 $ 360,598 33.5%
Advertisements and Offers 59,046 50,728 16.4%
Other 197 55 253.8%
Total revenue $ 540,522 $ 411,381 31.4%
Our revenue increased$129.1 million , or 31.4%, from$411.4 million for the year endedDecember 31, 2019 to$540.5 million for the year endedDecember 31, 2020 , which was primarily related to a$120.7 million increase in our revenue from micro-transactions (in-app purchases) and an$8.3 million increase in our revenue from advertisements and offers. The increase was primarily related to an increase in revenue from our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, our catalog gameKim Kardashian :Hollywood , as well as the worldwide launch of new titles Diner DASH Adventures in the second quarter of 2019 and Disney Sorcerer's Arena in the first quarter of 2020. Revenue from our three growth games increased by$61.7 million during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Revenue from the new titles launched in 2020 and 2019 increased by$57.6 million during the year endedDecember 31, 2020 compared to the year ended 2019. Revenue from our catalog titles increased by a net of approximately$9.8 million during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , mainly due to increased revenue fromKim Kardashian :Hollywood that was partially offset by declining revenue from our other catalog titles. The increase in revenue from advertisements and offers was primarily due to more efficient advertisement monetization capabilities. In 2020, Design Home, the Tap Sports Baseball franchise and Covet Fashion were our top three revenue-generating games and comprised 38.5%, 17.8% and 14.7%, respectively, of our revenue for the period. In 2019, Design Home, the Tap Sports Baseball franchise and Covet Fashion were our top three revenue-generating games and comprised 42.2%, 21.0% and 15.2%, respectively, of our revenue for the period. No other game generated more than 10% of revenue during either period. International revenue (defined as revenue generated from distributors and advertising service providers whose principal operations are located outsidethe United States or, in the case of the Digital Storefronts, the revenue generated from end-user purchases made outside ofthe United States ) increased by$24.6 million , from$91.0 million in the year endedDecember 31, 2019 to$115.6 million in the year endedDecember 31, 2020 . This was primarily related to an$11.6 million increase in our EMEA revenue, a$6.8 million increase in our revenue fromAmericas , excludingthe United States , and a$6.2 million increase in our APAC revenue. These increases were primarily related to increased revenue from our growth games. Cost of Revenue Year Ended December 31, 2020 2019 % Change (dollars in thousands) Cost of revenue:
Platform commissions, royalties and other$ 188,295 $ 141,112
33.4%
Amortization of intangible assets 3,258 4,387
(25.7)% Total cost of revenue$ 191,553 $ 145,499 31.7% Revenue$ 540,522 $ 411,381 Gross margin 64.6 % 64.6 %
Our cost of revenue increased$46.1 million , or 31.7%, from$145.5 million in the year endedDecember 31, 2019 to$191.6 million in the year endedDecember 31, 2020 . This increase was primarily due to an increase of$36.0 million in platform commissions due to a higher volume of revenue transactions through the Digital Storefronts, a$10.7 million net increase in royalties we paid to licensors due to growth in revenue from royalty burdened titles, and a$477,000 increase in hosting costs. These increases were partially offset by a$1.1 million decrease in amortization of intangible assets. We expect our cost of revenue to increase in 2021 primarily due to higher royalty payments and hosting fees. 61 Table of Contents
Research and Development Expenses
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Research and development expenses
22.1 % 23.1 %
Our research and development expenses increased $24.6 million , or 25.9%, from
$95.1 million in the year ended December 31, 2019 to $119.7 million in the year
ended December 31, 2020 . This was primarily attributable to a net increase in
payroll related costs of $15.2 million mainly due to an increase in headcount,
payroll taxes, severance and certain employee benefit costs, a $9.6 million
increase in stock-based compensation expense mainly related to lower expense
recorded in the year ended December 31, 2019 due to the decrease in vesting
probability of certain performance-based equity awards combined with additional
expense recorded from the acceleration of performance-based awards in December
2020 , a $2.0 million increase in professional and outside service fees, and a
$250,000 increase in allocated charges for equipment, facilities and
depreciation. These increases were partially offset by a $1.4 million increase
in research and development tax credit benefit received during 2020, and a $1.1
million decrease in business travel and entertainment expenses due to shelter in
place orders resulting from the COVID-19 pandemic. As a percentage of revenue,
research and development expenses decreased from 23.1% in the year ended
December 31, 2019 to 22.1% in the year ended December 31, 2020 . We expect our
research and development expenditures to increase in absolute dollars in 2021
primarily due to an increase in headcount.
Sales and Marketing Expenses
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
Sales and marketing expenses $ 177,245 $ 140,298 26.3%
Percentage of revenue 32.8 % 34.1 %
Our sales and marketing expenses increased $36.9 million , or 26.3%, from $140.3
million in the year ended December 31, 2019 to $177.2 million in the year ended
December 31, 2020 . This was primarily attributable to an increase of $28.3
million in user acquisition and other marketing expenditures primarily related
to a significant investment in user acquisition for Disney Sorcerer's Arena
following the global launch in March 2020 , as well as increased marketing
expenditures for Design Home, the Tap Sports Baseball franchise, and Kim
Kardashian : Hollywood , as we sought to capitalize on the lower CPI environment
that existed in April and May 2020 , a $4.6 million increase in net payroll
related costs mainly due to the increase in headcount and certain employee
benefit costs, a $2.2 million increase in stock-based compensation expense
mainly related to lower expense recorded in the year ended December 31, 2019 due
to the decrease in vesting probability of certain performance-based equity
awards combined with additional expense recorded from the acceleration of
performance-based awards during December 2020 , a $1.3 million increase in
professional and outside service fees, and a $673,000 increase related to
software and equipment purchases. These increases were partially offset by a
$353,000 decrease in business travel and entertainment expenses due to shelter
in place orders resulting from the COVID-19 pandemic. As a percentage of
revenue, sales and marketing expenses decreased from 34.1% in the year ended
December 31, 2019 to 32.8% in the year ended December 31, 2020 . We expect our
sales and marketing expenses to increase in absolute dollars in 2021 primarily
due to higher user acquisition expenditures related to the expected launch of
new titles such as Table & Taste, Tap Sports Fishing, Deer Hunter World ,
Crowdstar Moments and the next iteration of Tap Sports Baseball during 2021.
General and Administrative Expenses
Year Ended December 31,
2020 2019 % Change
(dollars in thousands)
General and administrative expenses $ 31,491 $ 23,216 35.6%
Percentage of revenue 5.8 % 5.6 %
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Our general and administrative expenses increased $8.3 million , or 35.6%, from
$23.2 million in the year ended December 31, 2019 to $31.5 million in the year
ended December 31, 2020 . This was primarily attributable to a $2.7 million
increase in stock-based compensation expense mainly related to lower expense
recorded in the year ended December 31, 2019 due to the decrease in vesting
probability of certain performance-based equity awards combined with additional
expense from the acceleration of performance-based awards during December 2020 ,
a $2.6 million increase in professional fees and consulting expenses, a $1.7
million increase in payroll related costs mainly due to an increase in headcount
and certain employee benefit costs, a $1.1 million increase in allocated charges
for equipment, facilities and depreciation, and a $449,000 increase in tax
related expenses. These increases were partially offset by a decrease of
$364,000 in business travel and entertainment expenses due to shelter in place
orders resulting from the COVID-19 pandemic. As a percentage of revenue, general
and administrative expenses increased from 5.6% in the year ended December 31,
2019 to 5.8% in the year ended December 31, 2020 . We expect our general and
administrative expenses to decrease slightly in absolute dollars in 2021 as
compared to 2020 primarily due to a decrease in headcount.
Interest and Other Income, Net
Interest and other income decreased$1.0 million from$2.1 million in the year endedDecember 31, 2019 to$1.1 million in the year endedDecember 31, 2020 . This was primarily attributable to a decrease of$1.5 million in interest income due to decline in interest rates, partially offset by$478,000 in foreign translation gains. Income Tax Provision Our income tax expense increased from$471,000 in the year endedDecember 31, 2019 to$1.1 million in the year endedDecember 31, 2020 . The income tax expense in 2020 was mainly attributable to changes in pre-tax income inthe United States and certain foreign entities reduced by a benefit as a result of releasing the tax reserves in relation to closing a foreign subsidiary in 2019. The provision for income taxes differs from the amount computed by applying the statutoryU.S. federal rate principally due to the effect of our non-U.S. operations, non-deductible stock-based compensation expense, and change in foreign withholding taxes. Our effective income tax rates for future periods will depend on a variety of factors, including changes in the deferred tax valuation allowance, as well as changes in our business such as intercompany transactions, any acquisitions, any changes in our international structure, any changes in the geographic location of our business functions or assets, changes in the geographic mix of our income, any changes in or termination of our agreements with tax authorities, changes in applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.
Liquidity and Capital Resources
Year Ended December 31,
2020 2019
(In thousands)
Consolidated Statement of Cash Flows Data:
Cash flows provided by operating activities $ 76,052 $ 35,181
Cash flows used in investing activities $ (7,064) Since our inception, we have generally incurred recurring losses and negative annual cash flows from operating activities. However, we recorded net income of$20.4 million and$8.9 million in the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$411.2 million . 63 Table of Contents Operating Activities In 2020, net cash provided by operating activities was$76.1 million . Our net income of$20.4 million was our primary source of cash, which included the following non-cash adjustments:$31.8 million in stock based compensation,$5.4 million in depreciation expense,$4.1 million in non-cash lease expense,$3.3 million in amortization of intangible assets, and other miscellaneous items totaling$212,000 . Net cash provided by operating activities also increased primarily due to an increase in deferred revenue of$20.0 million mainly attributable to an increase in revenue from titles with longer useful lives, a$10.0 million increase in accrued compensation due to higher variable compensation expense, and a$1.0 million increase in non-current liabilities. The increase in net cash provided by operating activities was partially offset by a$6.0 million increase in deferred platform commission fees attributable to higher bookings, a$4.9 million increase in accounts receivable mainly due to increased bookings and the timing of payments from our customers, a$3.1 million increase in prepaid and other assets, a$1.9 million net decrease in lease liability, and a$4.6 million increase in prepaid and deferred royalties due to prepayments to licensors and increase in revenue generated from royalty burdened titles. In 2019, net cash generated from operating activities was$35.2 million , which was primarily due to an increase in deferred revenue of$11.9 million mainly attributable to an increase in revenue from titles with longer useful lives, net income of$8.9 million , an increase in accounts payable and accrued liabilities of$3.1 million mainly due to the timing of payments to our vendors, and other assets and adjustments for non-cash items including stock based compensation expense of$17.4 million , amortization and impairment of intangible assets of$4.4 million , depreciation of$4.2 million and non-cash lease expense of$3.3 million . These changes were partially offset by a$6.6 million decrease in accrued compensation due to lower variable compensation expense, a$3.4 million increase in deferred platform commission fees attributable to higher bookings, a decrease of$3.0 million in lease liability, a$2.0 million increase in accounts receivable due to the timing of payments from our customers, and a$2.0 million increase in other prepaid expenses. Investing Activities
Our primary investing activities have consisted of acquisition/divestiture of mobile gaming companies and purchases of property and equipment and leasehold improvements for our offices.
In 2020, we used
In 2019, we used
Financing Activities
In 2020, net cash provided by financing activities was
In 2019, net cash used from financing activities was$443,000 which was primarily due to$8.4 million of taxes paid related to net share settlement of RSUs. These cash outflows were partially offset by$8.0 million in proceeds received from option exercises and purchases under our employee stock purchase plan.
Sufficiency of Current Cash and Cash Equivalents
Our cash and cash equivalents were$364.4 million as ofDecember 31, 2020 . Cash and cash equivalents held outside of theU.S. in various foreign subsidiaries were$3.3 million as ofDecember 31, 2020 , most of which were held by our Canadian and Indian subsidiaries. Under current tax laws and regulations, if cash and cash equivalents held outside theU.S. are distributed to theU.S. in the form of dividends or otherwise, we may be subject to additionalU.S. income taxes and foreign withholding taxes. We have not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, because their earnings are intended to be reinvested indefinitely. However, if any such balances were to be 64 Table of Contents
repatriated, additional
We expect to fund our operations, grow our business and satisfy our contractual obligations during the next 12 months primarily through our cash and cash equivalents and cash generated by our operations. We believe our cash and cash equivalents and cash generated by our operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this report; however, our cash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, revenue that is lower than we currently anticipate, greater than expected operating expenses, particularly with respect to our research and development and sales and marketing initiatives, use of cash to pay minimum guaranteed royalties, use of cash to fund our foreign operations and the impact of foreign currency rate changes, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries or any investments or acquisitions that we may decide to pursue. We expect to continue to use cash to fund minimum guaranteed royalty payments during 2021 as milestone payments become due on games we publish and/or develop that incorporate licensed property, as well as to fund the purchase price of any acquisitions. If the games we develop based on such licensing arrangements fail to perform in accordance with our expectations, we may not fully recoup these minimum guaranteed royalty payments. If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital. However, we may be unable to do so on terms that are favorable to us or at all. Contractual Obligations The following table is a summary of our contractual obligations as ofDecember 31, 2020 : Payments Due by
Period from
Total Less than 1-3 years 3-5 years More than
1 year 5 years
(In thousands)Operating lease obligations$ 48,802 $ 7,129 $ 14,006 $ 14,562 $ 13,105 Guaranteed royalties (1) 28,807 9,060 19,747 - - Total contractual obligations$ 77,609 $ 16,189 $
33,753
We have entered into license and publishing agreements with various
celebrities and other owners of brands, properties and other content to (1) develop and publish games and other software applications for mobile devices.
These agreements typically require us to make non-refundable, but recoupable
payments of minimum guaranteed royalties or license fees as up-front payments
or over the term of the agreement.
Off-Balance Sheet Arrangements
At
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to fully offset these higher costs through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.
Recent Accounting Pronouncements
For further information on recent accounting pronouncements, see Note 1 in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report
on
Form 10-K.
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