000001366246--12-312020Q1false147778000151584000P3YP5YP5YfalseP0Y0001366246us-gaap:CommonStockMember2020-01-012020-03-310001366246us-gaap:CommonStockMember2019-01-012019-03-310001366246us-gaap:RetainedEarningsMember2020-03-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2020-03-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001366246us-gaap:RetainedEarningsMember2019-12-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2019-12-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001366246us-gaap:RetainedEarningsMember2019-03-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2019-03-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310001366246us-gaap:RetainedEarningsMember2018-12-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2018-12-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001366246us-gaap:StockOptionMember2019-12-310001366246gluu:PerformanceStockOptionsMember2019-12-310001366246us-gaap:StockOptionMember2020-01-012020-03-310001366246us-gaap:StockOptionMember2020-03-310001366246gluu:PerformanceStockOptionsMember2020-03-310001366246gluu:EquityIncentivePlanTwoThousandSevenMember2019-04-012019-04-300001366246gluu:EmployeeStockPurchasePlanTwoThousandSevenMember2017-04-012017-04-300001366246us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001366246us-gaap:EmployeeStockOptionMember2019-01-012019-03-310001366246srt:MinimumMember2020-01-012020-03-310001366246us-gaap:RestrictedStockUnitsRSUMember2019-12-310001366246gluu:PerformanceStockUnitsMember2019-12-310001366246us-gaap:SellingAndMarketingExpenseMember2020-01-012020-03-310001366246us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-03-310001366246us-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-03-310001366246us-gaap:SellingAndMarketingExpenseMember2019-01-012019-03-310001366246us-gaap:ResearchAndDevelopmentExpenseMember2019-01-012019-03-310001366246us-gaap:GeneralAndAdministrativeExpenseMember2019-01-012019-03-310001366246gluu:PerformanceStockOptionsMember2020-01-012020-03-310001366246us-gaap:EMEAMember2020-01-012020-03-310001366246srt:AsiaPacificMember2020-01-012020-03-310001366246gluu:AmericasExcludingUsaMember2020-01-012020-03-310001366246country:US2020-01-012020-03-310001366246us-gaap:EMEAMember2019-01-012019-03-310001366246srt:AsiaPacificMember2019-01-012019-03-310001366246gluu:AmericasExcludingUsaMember2019-01-012019-03-310001366246country:US2019-01-012019-03-310001366246gluu:OtherMemberus-gaap:TransferredAtPointInTimeMember2020-01-012020-03-310001366246gluu:MicroTransactionsMemberus-gaap:TransferredOverTimeMember2020-01-012020-03-310001366246gluu:AdvertisementsAndOffersMemberus-gaap:TransferredAtPointInTimeMember2020-01-012020-03-310001366246gluu:OtherMemberus-gaap:TransferredAtPointInTimeMember2019-01-012019-03-310001366246gluu:MicroTransactionsMemberus-gaap:TransferredOverTimeMember2019-01-012019-03-310001366246gluu:AdvertisementsAndOffersMemberus-gaap:TransferredAtPointInTimeMember2019-01-012019-03-310001366246gluu:AllCountriesExcludingUnitedStatesOfAmericaMember2020-03-310001366246country:US2020-03-310001366246gluu:AllCountriesExcludingUnitedStatesOfAmericaMember2019-12-310001366246country:US2019-12-310001366246us-gaap:WarrantMember2019-01-012019-03-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001366246us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001366246gluu:CurrentAndLongTermLiabilitiesMembergluu:AgreementsWithVariousLicensorsMember2020-03-310001366246us-gaap:RetainedEarningsMember2020-01-012020-03-310001366246us-gaap:RetainedEarningsMember2019-01-012019-03-310001366246gluu:DigitalStorefrontsMemberus-gaap:IndemnificationGuaranteeMember2020-03-310001366246gluu:DigitalStorefrontsMemberus-gaap:IndemnificationGuaranteeMember2019-12-310001366246srt:MinimumMembergluu:TitlesContentAndTechnologyMember2020-01-012020-03-310001366246srt:MaximumMembergluu:TitlesContentAndTechnologyMember2020-01-012020-03-310001366246us-gaap:TrademarksMember2020-01-012020-03-310001366246gluu:CustomerContractAndRelatedRelationshipsMember2020-01-012020-03-310001366246us-gaap:TrademarksMember2020-03-310001366246gluu:TitlesContentAndTechnologyMember2020-03-310001366246gluu:CustomerContractAndRelatedRelationshipsMember2020-03-310001366246us-gaap:TrademarksMember2019-12-310001366246gluu:TitlesContentAndTechnologyMember2019-12-310001366246gluu:CustomerContractAndRelatedRelationshipsMember2019-12-310001366246srt:MaximumMembergluu:PerformanceStockOptionsMember2020-01-012020-03-310001366246us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-03-310001366246us-gaap:EmployeeStockOptionMember2020-03-310001366246us-gaap:CommonStockMember2020-03-310001366246us-gaap:CommonStockMember2019-12-310001366246us-gaap:CommonStockMember2019-03-310001366246us-gaap:CommonStockMember2018-12-310001366246gluu:EquityInducementPlanTwoThousandEighteenMember2018-04-3000013662462018-12-3100013662462019-03-310001366246us-gaap:FairValueInputsLevel1Member2020-03-310001366246us-gaap:FairValueInputsLevel1Member2019-12-310001366246us-gaap:WarrantMember2020-01-012020-03-310001366246us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-03-310001366246us-gaap:PerformanceSharesMember2020-01-012020-03-310001366246us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001366246gluu:EmployeeStockPurchasePlanMember2020-01-012020-03-310001366246us-gaap:PerformanceSharesMember2019-01-012019-03-310001366246us-gaap:EmployeeStockOptionMember2019-01-012019-03-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2020-01-012020-03-310001366246us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember2019-01-012019-03-310001366246gluu:PerformanceStockUnitsMember2020-01-012020-03-310001366246us-gaap:RestrictedStockUnitsRSUMember2020-03-310001366246gluu:PerformanceStockUnitsMember2020-03-310001366246us-gaap:FairValueInputsLevel3Member2020-03-310001366246us-gaap:FairValueInputsLevel3Member2019-12-310001366246srt:MaximumMember2020-01-012020-03-3100013662462019-01-012019-03-310001366246us-gaap:WarrantMember2020-03-310001366246us-gaap:WarrantMember2019-12-310001366246us-gaap:WarrantMember2019-01-012019-12-310001366246us-gaap:WarrantMember2020-01-012020-03-310001366246gluu:TapjoyMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-03-310001366246gluu:GoogleMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-03-310001366246gluu:AppleMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-03-310001366246gluu:GoogleMemberus-gaap:SalesMember2020-01-012020-03-310001366246gluu:AppleMemberus-gaap:SalesMember2020-01-012020-03-310001366246gluu:TapjoyMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2019-01-012019-12-310001366246gluu:GoogleMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2019-01-012019-12-310001366246gluu:AppleMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2019-01-012019-12-310001366246gluu:GoogleMemberus-gaap:SalesMember2019-01-012019-03-310001366246gluu:AppleMemberus-gaap:SalesMember2019-01-012019-03-3100013662462020-03-3100013662462019-12-3100013662462020-05-0100013662462020-01-012020-03-31xbrli:sharesiso4217:USDxbrli:pureiso4217:USDxbrli:sharesutr:sqftgluu:segment

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

Commission File Number 001-33368

Glu Mobile Inc.

(Exact name of the Registrant as Specified in its Charter)

Delaware

91-2143667

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

875 Howard Street, Suite 100

San Francisco, California 94103

(Address of Principal Executive Offices, including Zip Code)

(415) 800-6100

(Registrant’s Telephone number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

GLUU

Nasdaq Global Select Market

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

 

  

Accelerated Filer

 

Non-accelerated Filer

 

  

  

Smaller Reporting Company

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Shares of Glu Mobile Inc. common stock outstanding as of May 1, 2020: 151,592,271

Table of Contents

GLU MOBILE INC.

FORM 10-Q

Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

3

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and March 31, 2019

4

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three Months Ended March 31, 2020 and March 31, 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and March 31, 2019

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and March 31, 2019

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

ITEM 4. CONTROLS AND PROCEDURES

32

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

33

ITEM 1A. RISK FACTORS

33

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

58

ITEM 4. MINE SAFETY DISCLOSURES

58

ITEM 5. OTHER INFORMATION

58

ITEM 6. EXHIBITS

58

SIGNATURES

60

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)

    

March 31, 

December 31, 

 

   

2020

   

2019

 

ASSETS

 

Current assets:

Cash and cash equivalents

$

114,708

$

127,053

Accounts receivable, net

 

42,495

 

29,304

Prepaid royalties

15,517

15,347

Deferred royalties

5,068

5,067

Deferred platform commission fees

29,007

29,239

Prepaid expenses and other assets

 

8,822

 

8,629

Total current assets

 

215,617

 

214,639

Property and equipment, net

 

18,667

 

17,643

Operating lease right of use assets

34,497

35,170

Long-term prepaid royalties

26,502

26,879

Other long-term assets

 

2,570

 

2,733

Intangible assets, net

 

3,871

 

4,758

Goodwill

 

116,227

 

116,227

Total assets

$

417,951

$

418,049

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

22,709

$

17,535

Accrued compensation

 

9,431

 

11,260

Accrued royalties

 

11,724

 

20,802

Short-term operating lease liabilities

3,487

3,528

Deferred revenue

 

96,826

 

97,629

Total current liabilities

 

144,177

 

150,754

Long-term accrued royalties

26,502

26,842

Long-term operating lease liabilities

36,716

37,351

Other long-term liabilities

 

16

 

15

Total liabilities

 

207,411

 

214,962

Commitments and contingencies (Note 8)

Stockholders’ equity:

Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2020 and December 31, 2019; no shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

Common stock, $0.0001 par value; 250,000 shares authorized at March 31, 2020 and December 31, 2019; 151,584 and 147,778 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

15

 

15

Additional paid-in capital

 

650,470

 

634,721

Accumulated other comprehensive loss

 

(60)

 

(37)

Accumulated deficit

 

(439,885)

 

(431,612)

Total stockholders’ equity

 

210,540

 

203,087

Total liabilities and stockholders’ equity

$

417,951

$

418,049

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3

Table of Contents

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

Three Months Ended

March 31, 

   

2020

   

2019

   

Revenue

   

$

107,274

$

95,885

   

Cost of revenue:

Platform commissions, royalties and other

 

36,974

 

33,270

Amortization of intangible assets

 

888

 

1,252

Total cost of revenue

 

37,862

 

34,522

Gross profit

 

69,412

 

61,363

Operating expenses:

Research and development

 

29,531

 

26,546

Sales and marketing

 

42,743

 

28,105

General and administrative

 

6,667

 

6,635

Total operating expenses

 

78,941

 

61,286

Income/(loss) from operations

 

(9,529)

 

77

Interest and other income/(expense), net

 

(65)

 

764

Income/(loss) before income taxes

 

(9,594)

 

841

Income tax benefit/(provision)

 

1,321

 

(178)

Net income/(loss)

$

(8,273)

$

663

Net income/(loss) per common share - basic

$

(0.06)

$

0.00

Net income/(loss) per common share - diluted

$

(0.06)

$

0.00

Weighted average common shares outstanding:

Basic

149,629

144,445

Diluted

149,629

159,423

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4

Table of Contents

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

   

2020

   

2019

   

Net income/(loss)

$

(8,273)

$

663

Other comprehensive income/(loss):

Foreign currency translation adjustments

 

(23)

 

15

Other comprehensive income/(loss)

 

(23)

 

15

Comprehensive income/(loss)

$

(8,296)

$

678

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5

Table of Contents

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

2020

2019

Common stock and additional paid-in capital:

Beginning balance

$

634,736

$

617,795

Issuance of common stock upon exercise of stock options

9,526

1,313

Issuance of common stock under Employee Stock Purchase Plan

1,705

1,665

Taxes paid related to net share settlement of equity awards

(1,720)

(3,956)

Stock-based compensation expense

6,238

6,807

Ending balance

650,485

623,624

Accumulated deficit:

Beginning balance

(431,612)

(440,483)

Net income/(loss)

(8,273)

663

Ending balance

(439,885)

(439,820)

Accumulated other comprehensive income/(loss):

Beginning balance

(37)

1

Other comprehensive income/(loss)

(23)

15

Ending balance

(60)

16

Total stockholders' equity ending balance

$

210,540

$

183,820

Common stock shares outstanding:

Beginning balance

147,778

143,870

Common stock issued

3,806

1,306

Ending balance

151,584

145,176

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements

6

Table of Contents

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Three Months Ended March 31, 

   

2020

   

2019

Cash flows from operating activities:

Net income/(loss)

$

(8,273)

$

663

Adjustments to reconcile net income/(loss) to net cash used in operating activities:

Stock-based compensation

 

6,382

 

6,807

Depreciation

 

1,343

 

1,063

Non-cash lease expense

996

766

Amortization of intangible assets

 

888

 

1,252

Other non-cash adjustments

487

504

Changes in operating assets and liabilities:

Accounts receivable

 

(13,491)

 

(7,356)

Prepaid royalties

(6,310)

(370)

Deferred royalties

(1)

597

Deferred platform commission fees

232

1,109

Prepaid expenses and other assets

 

(128)

 

397

Accounts payable and other accrued liabilities

 

7,494

 

7,252

Accrued compensation

 

(1,829)

 

(10,303)

Accrued royalties

 

(2,939)

 

(678)

Deferred revenue

 

(803)

 

(3,296)

Other long-term liabilities

 

1

 

(20)

Operating lease liabilities

(901)

(775)

Net cash used in operating activities

 

(16,852)

 

(2,388)

Cash flows from investing activities:

Purchase of property and equipment

 

(4,830)

 

(1,137)

Other investing activities

(100)

Net cash used in investing activities

 

(4,830)

 

(1,237)

Cash flows from financing activities:

Proceeds from exercise of stock options and purchases under the ESPP

11,231

2,978

Taxes paid related to net share settlement of equity awards

 

(1,720)

 

(3,956)

Net cash provided by/(used in) financing activities

 

9,511

 

(978)

Effect of exchange rate changes on cash

 

(174)

 

(36)

Net decrease in cash, cash equivalents and restricted cash

 

(12,345)

 

(4,639)

Cash, cash equivalents and restricted cash at beginning of period

127,053

97,944

Cash, cash equivalents and restricted cash at end of period

$

114,708

$

93,305

Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets

Cash and cash equivalents

$

114,708

$

93,195

Restricted cash

110

Total cash, cash equivalents, and restricted cash

$

114,708

$

93,305

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

7

Table of Contents

GLU MOBILE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in thousands, except per share data)

Note 1 — The Company, Basis of Presentation and Summary of Significant Accounting Policies

Glu Mobile Inc. (the “Company” or “Glu”) was incorporated in the state of Nevada in May 2001 and reincorporated in the state of Delaware in March 2007. The Company develops, publishes, and markets a portfolio of games designed for users of smartphones and tablet devices who download and make purchases within its games through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play Store and others (“Digital Storefronts”). The Company creates games based on its own original brands, as well as third-party licensed brands, properties and other content.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of March 31, 2020 and its condensed consolidated results of operations for the three months ended March 31, 2020 and 2019, respectively. These unaudited condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The condensed consolidated balance sheet presented as of December 31, 2019 has been derived from the audited consolidated financial statements as of that date, and the condensed consolidated balance sheet presented as of March 31, 2020 has been derived from the unaudited condensed consolidated financial statements as of that date. Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not materially affect revenue, operating income/(loss), net income/(loss), cash flows, total assets, total liabilities or stockholders’ equity.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates and assumptions reflected in the unaudited condensed consolidated financial statements include, but are not limited to, estimation of the average playing period of paying users associated with durable virtual items, the allowance for doubtful accounts, useful lives of property and equipment and intangible assets, valuation and realizability of deferred tax assets and uncertain tax positions, fair value of stock awards issued, fair value of warrants issued, accounting for business combinations, evaluating goodwill, long-lived assets for impairment, and realization of prepaid royalties and fair value of investments. Actual results may differ from these estimates due to risks and uncertainties, and these differences may be material, including uncertainty in the current economic environment due to the recent coronavirus (“COVID-19”) pandemic. Management will continue to actively monitor the impact of the COVID-19 pandemic on the Company’s assumptions and estimates.

8

Table of Contents

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable.

The Company derives its accounts receivable from revenue earned from customers located worldwide. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company bases its allowance for doubtful accounts on management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company writes off accounts receivable balances against the allowance when it determines that the amount will not be recovered.

The following table summarizes the revenue from customers in excess of 10% of the Company’s revenue:

Three Months Ended

March 31, 

   

2020

   

2019

 

Apple

57.6

%  

52.9

%

Google

31.9

%  

34.1

%

At March 31, 2020, Apple Inc. (“Apple”), Google Inc. (“Google”), and Tapjoy Inc. (“Tapjoy”) accounted for 63.1%, 21.6%, and 11.1%, respectively, of total accounts receivable. At December 31, 2019, Apple, Google, and Tapjoy accounted for 47.2%, 28.5%, and 17.8%, respectively, of total accounts receivable. No other customer or Digital Storefront represented more than 10% of the Company’s total accounts receivable as of these dates.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost and replaces the existing incurred loss impairment model with an expected loss methodology, which will result in earlier recognition of credit losses. The ASU requires a cumulative-effect adjustment to retained earnings transition approach and is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the amount of goodwill. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This guidance adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

9

Table of Contents

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

Note 2 — Net Income/(Loss) Per Share

The Company computes basic net income/(loss) per share by dividing its net income/(loss) for the period by the weighted average number of common shares outstanding during the period.

Diluted net income per share for the three months ended March 31, 2019 is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period, including potentially dilutive common stock instruments. Diluted net loss per share for the three months ended March 31, 2020 has been computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents as their effect would have been antidilutive.

Three Months Ended

March 31, 

2020

   

2019

   

Net income/(loss)

$

(8,273)

$

663

Shares used to compute net income/(loss) per share:

Weighted average shares used to compute basic net income/(loss) per share

149,629

144,445

Dilutive potential common shares

14,978

Weighted average shares used to compute diluted net income/(loss) per share

 

149,629

 

159,423

Basic net income/(loss) per share

$

(0.06)

$

0.00

Diluted net income/(loss) per share

$

(0.06)

$

0.00

10

Table of Contents

The following equity awards outstanding at the end of each period presented have been excluded from the computation of diluted net income/(loss) per share of common stock for the periods presented because including them would have had an anti-dilutive effect: 

Three Months Ended

March 31, 

2020

2019

    

Warrants to purchase common stock

1,125

Options to purchase common stock

13,641

277

Restricted stock units ("RSUs")

6,338

Performance stock options ("PSOs")

3,244

3,244

Performance stock units ("PSUs")

2,958

Employee stock purchase plan ("ESPP")

428

Total

24,776

6,479

 

Note 3 — Revenue from Contracts with Customers

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2020 and March 31, 2019:

Three Months Ended

March 31, 

2020

2019

In-App Purchases (over-time revenue recognition)

$

95,939

$

83,544

Advertisements and offers (point-in-time revenue recognition)

11,329

 

12,330

Other (point-in-time revenue recognition)

6

11

Total revenue

$

107,274

$

95,885

The Company operates in a single reportable segment. In the table above, revenue is disaggregated by type of revenue stream, indicating whether it is recognized over-time or at a point-in-time.

Contract Balances

The following table provides information about receivables and contract liabilities from contracts with customers:

March 31, 2020

December 31, 2019

Receivables, which are included in accounts receivable, net

$

42,495

$

29,304

Contract liabilities, which are included in deferred revenue

 

96,826

 

97,629

The Company receives payments from customers based on billing terms established in the Company’s contracts. Contract assets relate to the Company’s right to consideration for its completed performance under the contract before the customer pays consideration or before payment is due. At March 31, 2020 and December 31, 2019, there were no contract assets recorded in the Company’s condensed consolidated balance sheets. Accounts receivable are recorded when the right to consideration becomes unconditional.

Deferred revenue relates to payments received in advance of performance under the contract.  Deferred revenue is recognized as revenue as the Company performs under the contract. The Company had $97,629 in deferred revenue as of December 31, 2019, of which $71,767 was recognized as revenue in the three months ended March 31, 2020. The Company had $85,736 in deferred revenue as of December 31, 2018, of which $62,698 was recognized as revenue in the three months ended March 31, 2019.

11

Table of Contents

Note 4 — Fair Value Measurements

Fair Value Measurements

The Company accounts for fair value in accordance with Accounting Standard Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a three-tier hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets as of March 31, 2020 are presented below at fair value and were classified within the fair value hierarchy as follows:

    

Level 1

    

Level 2

    

Level 3

    

March 31, 2020

 

Financial Assets

Cash and cash equivalents

$

114,708

$

$

$

114,708

Other investments

1,565

1,565

Total financial assets

$

114,708

$

$

1,565

$

116,273

The Company’s financial assets as of December 31, 2019 are presented below at fair value and were classified within the fair value hierarchy as follows:

    

Level 1

    

Level 2

    

Level 3

    

December 31, 2019

Financial Assets

Cash and cash equivalents

$

127,053

$

$

$

127,053

Other investments

1,565

1,565

Total financial assets

$

127,053

$

$

1,565

$

128,618

The Company’s cash and cash equivalents, which were held in operating bank and money market 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. The carrying value of accounts receivable and payables approximates fair value due to the short time to expected payment or receipt of cash. The carrying value of other investments approximates fair value, and there are no unrealized gains or losses, as there have been no events or changes in circumstances that would have had a significant effect on the fair value of these investments at March 31, 2020 and December 31, 2019.

Note 5 — Balance Sheet Components

Accounts Receivable, net

    

March 31, 

    

December 31, 

    

   

2020

   

2019

   

Accounts receivable

$

42,495

$

29,304

Less: Allowance for doubtful accounts

 

 

Accounts receivable, net

$

42,495

$

29,304

12

Table of Contents

Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates, but net of platform commissions paid to the Digital Storefronts. The Company had no bad debts during the three months ended March 31, 2020 and 2019.

Note 6 — Goodwill and Intangible Assets

Intangible Assets

The Company’s intangible assets were acquired primarily in various acquisitions as well as in connection with the purchase of certain trademarks, brand assets and licensed content. The carrying amounts and accumulated amortization expense of the acquired intangible assets at March 31, 2020 and December 31, 2019 were as follows:

March 31, 2020

December 31, 2019

 

    

Estimated

    

Gross

    

Accumulated

    

Net

    

Gross

    

Accumulated

    

Net

 

Useful

Carrying

Amortization

Carrying

Carrying

Amortization

Carrying

 

Life

Value

Expense

Value

Value

Expense

Value

 

Intangible assets amortized to cost of revenue:

Titles, content and technology

 

3 - 5 yrs

$

21,117

$

(17,246)

$

3,871

$

21,117

$

(16,359)

$

4,758

Customer contracts and related relationships

 

5 yrs

 

700

(700)

 

700

(700)

Trademarks

 

7 yrs

 

5,000

(5,000)

 

5,000

(5,000)

$

26,817

$

(22,946)

$

3,871

$

26,817

$

(22,059)

$

4,758

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated useful lives, which approximate the pattern in which the economic benefits of the intangible assets are realized. The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenue.

During the three months ended March 31, 2020 and 2019, the Company recorded amortization expense in cost of revenue for $888 and $1,252, respectively.

As of March 31, 2020, total expected future amortization related to intangible assets was as follows:

    

Amortization

to Be Included in

Cost of

Year Ending December 31,

   

Revenue

2020 (remaining 9 months)

$

2,371

2021

 

1,500

Total intangible assets

$

3,871

Goodwill

The Company had $116,227 in goodwill as of March 31, 2020 and December 31, 2019, respectively. There were no indicators of impairment as of March 31, 2020.

Note 7 – Leases

The Company currently leases real estate space under non-cancelable operating lease agreements for its corporate headquarters in San Francisco, California and its operations in Toronto, Canada, Hyderabad, India, Foster City, California, Burlingame, California and Orlando, Florida. These operating leases have remaining lease terms ranging from 2 months to 7.67 years, some of which include the option to extend the lease, with the longest extension option being 6 years.

The Company does not include any of its renewal options when calculating its lease liability as the Company is not reasonably certain whether it will exercise these renewal options at this time. The weighted-average remaining non-cancelable lease term for the Company’s operating leases was 7.32 years for the three months ended March 31, 2020.

13

Table of Contents

The weighted-average discount rate was 6.7% for the three months ended March 31, 2020. Rent expense for the three months ended March 31, 2020 and 2019 was $1,171 and $1,351, respectively.

During the three months ended March 31, 2020, the Company signed a new operating lease for approximately 2,600 square feet of office space in Orlando, Florida and extended the lease term of its Burlingame office. As a result, the Company recorded an increase of the lease liability and ROU asset by an aggregate of $334 on their respective execution dates.

The future minimum lease payments to be paid under noncancelable leases in effect at March 31, 2020, are as follows:

Operating

Year Ending December 31,

   

Leases

2020 (remaining 9 months)

 

3,024

2021

 

7,093

2022

7,009

2023

6,980

2024 and thereafter

27,666

Total lease payments

$

51,772

Less: imputed interest

(11,569)

Total

$

40,203

Supplemental information related to the Company’s leases for the three months ended March 31, 2020 is as follows:

Three Months Ended

   

March 31, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflow from operating leases

$

1,635

Three Months Ended

   

March 31, 2020

Right of use assets obtained in exchange for new lease obligations:

Operating leases

$

334

Note 8 — Commitments and Contingencies

Minimum Guaranteed Royalties and Developer Commitments

The Company has entered into license and publishing agreements with various celebrities, athletes, sports and entertainment organizations, and other well-known brands and properties to develop and publish games for mobile devices. Pursuant to some of these agreements, the Company is required to make minimum guaranteed royalty payments regardless of revenue generated by the applicable game, which may not be dependent on any deliverables. The significant majority of these minimum guaranteed royalty payments are recoupable against future royalty obligations that would otherwise become payable, or in certain circumstances, where not recoupable, are capitalized and amortized over the lesser of (1) the estimated life of the title incorporating licensed content or (2) the term of the license agreement.

14

Table of Contents

At March 31, 2020, future unpaid minimum guaranteed royalty commitments were as follows:

Future

Minimum

Guarantee

Year Ending December 31,

    

Commitments

2020 (remaining 9 months)

$

3,270

2021

 

10,815

2022

6,855

2023

6,690

2024

6,150

$

33,780

The amounts represented in the table above reflect the Company’s minimum cash obligations for the respective calendar years, but do not necessarily represent the periods in which they will be expensed in the Company’s unaudited condensed consolidated financial statements. Additionally, subsequent to March 31, 2020, the Company entered into other agreements with commitments totaling approximately $9,000 through fiscal year 2020.

Licensor commitments include $33,780 of commitments due to licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets because payment is not contingent upon performance by the licensor. The classification of commitments between long-term and short-term is determined based on the timing of expected recoupment of earned royalties calculated on projected revenue for the licensed intellectual property games.

Indemnification Arrangements

The Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime for certain events or occurrences while the officer or director is or was serving at the Company’s request in that capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid.

In the ordinary course of its business, the Company includes standard indemnification provisions in most of its commercial agreements with Digital Storefronts and licensors. Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered or incurred in connection with its games, including as a result of intellectual property infringement, viruses, worms and other malicious software, and legal or regulatory violations. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments the Company could be required to make under these provisions is often unlimited. To date, the Company has not incurred costs to defend lawsuits or settle indemnified claims of these types and, accordingly, has recorded no liabilities for these provisions as of March 31, 2020 and December 31, 2019.

Contingencies

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company’s estimate of losses is developed in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. After taking all of the above factors into account, the Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed reasonably probable and the amount can be reasonably estimated. The Company further determines whether an estimated loss from a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible. Such disclosure will include an estimate of the additional loss or range of loss or will state that an estimate cannot be made.

The Company does not believe it is party to any currently pending litigation, the outcome of which is reasonably possible to have a material adverse effect on its operations, financial position or liquidity. However, the ultimate

15

Table of Contents

outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors.

Note 9 — Stockholders’ Equity

Warrants to Purchase Common Stock

Warrants outstanding at March 31, 2020 were as follows:

 

Number

Weighted

of Shares

Average

Outstanding

Exercise

Average

Under

Price per

Contractual

Warrant

   

Share

   

Term (Years)

   

Warrants outstanding, December 31, 2019

1,600

$

4.61

5.44

Exercised

(475)

$

4.99

5.00

Warrants outstanding, March 31, 2020

1,125

$

4.46

5.44

No expenses with respect to these warrants were recognized during the three months ended March 31, 2020 and 2019.

Note 10 — Stock Incentive Plans

2007 Equity Incentive Plan

In April 2019, the Company’s Board of Directors approved, and in June 2019, the Company’s stockholders approved, the fifth Amended and Restated 2007 Equity Incentive Plan (the “Fifth Amended 2007 Plan”). The Fifth Amended 2007 Plan included an increase of 4,600 shares in the aggregate number of shares of common stock authorized for issuance under the plan.

Performance-based equity awards

The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) has awarded PSOs and/or PSUs to the Company’s executives and certain other employees. These performance-based awards are subject to the achievement of specified annual performance goals. They become eligible to vest only if the applicable performance goals are achieved and will vest only if the grantee remains employed with the Company through each applicable vesting date. The number of shares that may vest depend on the extent to which the Company achieves the specified annual performance goals. The fair value of these awards is estimated on the date of grant. The PSOs have a contractual term of 10 years. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized, and any previously recognized expense is reversed. The expected cost is based on the awards that are probable to vest and is recognized over the service period.

2007 Employee Stock Purchase Plan

In April 2017, the Company’s Board of Directors approved, and in June 2017, the Company’s stockholders approved, the Amended and Restated 2007 Employee Stock Purchase Plan (the “Amended 2007 Purchase Plan”). The Amended 2007 Purchase Plan included an increase of 4,000 shares in the aggregate number of shares of common stock authorized for issuance under the plan and removal of the expiration date of the plan.

2018 Equity Inducement Plan

In April 2018, the Compensation Committee of the Company’s Board of Directors adopted the 2018 Equity Inducement Plan (the “2018 Plan”). The 2018 Plan replaced the Company’s 2008 Equity Inducement Plan that expired by its terms in March 2018, and is intended to augment the shares available for issuance under the Fourth Amended 2007

16

Table of Contents

Plan. The Company did not seek stockholder approval for the 2018 Plan. As such, awards under the Inducement Plan will be granted in accordance with Nasdaq Listing Rule 5635(c)(4) and only to persons not previously considered an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such individuals entering into employment with the Company. The Company initially reserved 400 shares of common stock for issuance under the 2018 Plan.

RSU Activity

A summary of the Company’s RSU activity for the three months ended March 31, 2020 is as follows:

    

    

    

Weighted

Weighted

Number of

Average

Average Remaining

Aggregate

Units

Grant Date

Contractual

Intrinsic

   

Outstanding

   

Fair Value

Term (Years)

Value

Awarded and unvested, December 31, 2019

 

3,951

$

5.66

Granted

 

2,696

$

6.18

Vested

 

(284)

$

3.70

Forfeited

 

(25)

$

6.26

Awarded and unvested, March 31, 2020

 

6,338

$

5.97

1.79

$

39,867

PSU Activity

A summary of the Company’s PSU activity for the three months ended March 31, 2020 is as follows:

    

    

    

Weighted

Weighted

Number of

Average

Average Remaining

Aggregate

Units

Grant Date

Contractual

Intrinsic

   

Outstanding

   

Fair Value

Term (Years)

Value

Awarded and unvested, December 31, 2019

5,417

$

6.06

Vested

(276)

$

3.61

Forfeited

(1,065)

$

6.21

Awarded and unvested, March 31, 2020

4,076

$

6.18

1.41

$

25,638

PSUs expected to vest at March 31, 2020

1,271

$

6.10

0.88

$

7,994

PSO Activity

A summary of the Company’s PSO activity for the three months ended March 31, 2020 is as follows:

    

    

    

Weighted

Weighted

Number of

Average

Average Remaining

Aggregate

Shares

Exercise

Contractual

Intrinsic

   

Outstanding

   

Price

Term (Years)

Value

Balance as of December 31, 2019

6,583

$

4.54

Canceled

(1,376)

$

6.18

Exercised

(504)

$

3.63

Balance as of March 31, 2020

4,703

$

4.15

7.76

$

10,162

PSOs expected to vest at March 31, 2020

-

$

-

-

$

-

PSOs exercisable at March 31, 2020

3,244

$

3.59

7.55

$

8,747

17

Table of Contents

Stock Option Activity

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2020:

Options Outstanding

 

    

    

Weighted

    

Weighted

    

 

Number

Average

Average Remaining

Aggregate

 

of

Exercise

Contractual

Intrinsic

 

Shares

Price

Term (Years)

Value

 

Balances at December 31, 2019

    

16,288

    

$

3.56

    

Options canceled

 

(218)

$

5.68

Options exercised

 

(2,429)

$

3.17

Balances at March 31, 2020

 

13,641

$

3.60

 

7.16

$

37,821

Options exercisable at March 31, 2020

 

8,438

$

3.23

 

6.80

$

26,054

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock on The Nasdaq Global Select Market of $6.29 per share as of March 31, 2020 (the last trading day in the quarter). Cash proceeds, net of taxes, from option exercises were $9,526 during the three months ended March 31, 2020. Cash proceeds, net of taxes, from option exercises were $1,313 during the three months ended March 31, 2019.

Stock-Based Compensation

The cost of RSUs and PSUs are determined using the fair value of the Company’s common stock based on the quoted closing price of the Company’s common stock on the date of grant. RSUs typically vest and are settled over approximately a four-year period with 25% of the shares vesting on or around the one-year anniversary of the grant date and the remaining shares vesting quarterly thereafter. Compensation cost for stock options, RSUs and performance-based awards with a single vesting date is amortized ratably over the requisite service period. For performance-based awards that have multiple vesting dates, the compensation cost is recognized ratably over the requisite service period for each tranche, whereby each vesting tranche is treated as a separate award for determining the requisite service period. The compensation cost for performance-based awards may be adjusted over the vesting period based on interim estimates of performance against the pre-set financial performance measures.

Under Accounting Standard Codification 718, Compensation-Stock Compensation (“ASC 718”), the Company estimated the fair value of each option award on the grant date using the Black-Scholes option valuation model and the weighted average assumptions noted in the following tables:

Stock Options

Three Months Ended

March 31, 

 

   

2020

   

2019

 

Dividend yield

 

 

%

 

%

Risk-free interest rate

 

 

%

 

2.46

%

Expected volatility

 

 

%

 

56.4

%

Expected term (years)

 

 

 

4.00

The expected term of stock options gave consideration to early exercises, post-vesting cancellations and the options’ contractual term ranging from 6 to 10 years. The Company based its expected volatility on its own historical volatility. The Company did not grant any PSOs during the three months ended March 31, 2020 and 2019. The Company did not grant any stock options for the three months ended March 31, 2020. The weighted-average fair value of stock options granted during the three months ended March 31, 2019 was $4.13 per share.

18

Table of Contents

The following table summarizes the consolidated stock-based compensation expense by line items in the condensed consolidated statement of operations:

Three Months Ended

March 31, 

2020

   

2019

Research and development (1)

$

3,962

$

3,946

Sales and marketing

 

875

 

826

General and administrative

 

1,545

 

2,035

Total stock-based compensation expense

$

6,382

$

6,807

(1) For the three months ended March 31, 2020, stock-based compensation expense recorded in research and development includes $144 from PSUs classified as liabilities.

The following table summarizes total compensation expense related to unvested awards not yet recognized as of March 31, 2020:

Unrecognized Compensation

Expense for Unvested

Awards

Stock options

$

9,056

RSUs

34,187

PSUs (1)

6,964

Total unrecognized compensation expense

$

50,207

(1) The unrecognized compensation expense for PSUs classified as equity and vesting in fiscal years 2022 and 2023, except for PSUs classified as liabilities, is excluded in the table above as the Company does not have a reasonable basis upon which to estimate the vesting probability of such awards in those future periods.

The unrecognized compensation expense related to stock options and RSUs will be recognized over a weighted average period of 1.59 years and 3.33 years, respectively. The unrecognized compensation expense related to PSUs, except for PSUs classified as equity and vesting in fiscal years 2022 and 2023, will be recognized over a weighted average period of 0.93 years.

Note 11 – Income Taxes

The Company recorded an income tax benefit of $1,321 for the three months ended March 31, 2020 and an income tax expense of $178 for the three months ended March 31, 2019. The change in income tax provision was primarily due to changes in pretax income (loss) in the United States and certain foreign entities and changes in tax rates. The income tax rates vary from the Federal and State statutory rates due to the valuation allowances on the Company’s net operating losses, foreign tax rate differences and withholding taxes. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter.

The Company accounts for uncertain tax positions in accordance with Accounting Standards Codification 740, Income Taxes (“ASC 740”).  As of March 31, 2020, and December 31, 2019, the total amount of unrecognized tax benefits was $15,734 and $15,084, respectively. These unrecognized tax benefits are currently included in the Company’s deferred tax assets, which are subject to full valuation allowance. As such, these unrecognized tax benefits, if recognized, would not have an impact on the Company’s effective tax rate.

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, Canada, and India. The Company’s federal tax returns are open by statute for tax years 1998 and forward and California tax returns are open by statute for tax years 2003 and forward and could be subject to examination by the tax authorities. The Company’s income tax returns in its international locations are open by statute for tax years 2011 and forward.

 

The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely outside the U.S. 

19

Table of Contents

Note 12 — Segment Information and Operations by Geographic Area

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its Chief Executive Officer as the CODM. The Company operates in a single operating segment. The financial information reviewed by the CODM is included within one operating segment for purposes of allocating resources and evaluating financial performance.

The following tables set forth revenue and long-lived assets based on geography:

Revenue

Revenue by geography is primarily based on the geographic location of the Company’s payers. International revenue is revenue generated from distributors and advertising service providers whose principal operations are located outside the United States or, in the case of the Digital Storefronts, the revenue generated from end-user purchases made outside of the United States.

Three Months Ended

March 31, 

2020

   

2019

United States of America

$

84,008

$

72,868

Americas, excluding the United States

 

6,620

 

6,218

EMEA

 

11,858

 

11,528

APAC

 

4,788

 

5,271

Total revenue

$

107,274

$

95,885

Long-Lived Assets

The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Property and equipment, net of accumulated depreciation and amortization, summarized by geographic location was as follows:

    

March 31, 

    

December 31, 

    

   

2020

   

2019

   

United States of America

$

17,784

$

16,738

Rest of the World

 

883

 

905

Total

$

18,667

$

17,643

  

20

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) the unaudited condensed consolidated financial statements and related notes contained elsewhere in this report and (2) the audited consolidated financial statements and related notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020. The information in this discussion and elsewhere in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties, including risks and uncertainty around the impact of the COVID-19 outbreak. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “may,” “will,” “believe,” “anticipate,” “plan,”, “expect,” “intend,” “could,” “estimate,” “continue” and similar expressions or variations identify forward-looking statements.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed elsewhere in this report, particularly in the section titled “Risk Factors” set forth in Part II, Item 1A of this report. All forward-looking statements in this report are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances, except as required by law.

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.

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 the three months ended March 31, 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 unaudited condensed consolidated financial statements and accompanying notes.  

Impact of the COVID-19 Pandemic

The extent of the impact of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”), on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our employees, and the effect on the global economy, all of which are uncertain and cannot be predicted. Although we were able to successfully launch two new games, MLB Tap Sports Baseball 2020 and Disney Sorcerer’s Arena, in March 2020 and have been publishing updates and running live operations for our games while our global workforce has been working from home, we believe that if our employees are required to work from home for many

21

Table of Contents

months, it could ultimately negatively impact game development. We have also recently seen a reduction in CPIs (costs per install) and an increase in the daily active users in many of our games, but believe that this effect may be temporary and that the trend of increasing CPIs and declining daily and monthly active users may persist over the longer term. In addition, we may 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-Q, 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 will 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 the three months ended March 31, 2020 was $107.3 million, an 11.9% increase compared to the three months ended March 31, 2019, in which we reported revenue of $95.9 million. The increase was primarily related to an increase in revenue from Design Home, Covet Fashion and the Tap Sports Baseball franchise, the worldwide launches of Diner DASH Adventures and WWE Universe in the second quarter of 2019, and the worldwide launch of Disney Sorcerer’s Arena in the first quarter of 2020. These increases were partially offset by declining revenue on a year-over-year basis from catalog titles such as Kim Kardashian: Hollywood, Cooking Dash, Restaurant Dash with Gordon Ramsay, Deer Hunter 2018 (originally launched as Deer Hunter 2016), Diner Dash and Racing Rivals.

 

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 62.8% and 60.6% of our total revenue for the three months ended March 31, 2020 and 2019, respectively. We generated the majority of this iOS-related revenue through the Apple App Store, which represented 57.6% and 52.9% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on the Apple App Store. In addition, we generated approximately 37.2% and 39.3% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, from the Android platform. We generated the majority of our Android-related revenue through the Google Play Store, which represented 31.9% and 34.1% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our Android-related revenue from other platforms that distribute apps that run the Android operating system (e.g., the Amazon App Store) and through offers and advertisements in games distributed through the Google Play Store and other Android platforms.

 

We currently publish titles primarily in four genres: lifestyle, casual, mid-core, and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game. Across genres, we view our titles as either growth games or catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements.

We established our leadership position in the lifestyle genre through our acquisition of Crowdstar Inc. (“Crowdstar”) in November 2016 and its successful Covet Fashion title, and extended our leadership with our global release of Design Home in November 2016. We introduced key updates for Design Home in 2019 and the first three months of 2020, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, and meta game functionality, and are planning further key updates for this title, including the introduction of e-commerce functionality. The casual genre includes our Kim Kardashian: Hollywood title; we recently extended the term of our license agreement with Ms. Kardashian West for an additional 3.5 years through the end of 2023. The casual genre also includes our Cooking Dash and Diner DASH franchises, and our leadership position in this genre was bolstered by our worldwide launch of Diner DASH Adventures in June 2019. The mid-core genre includes our Disney Sorcerer’s Arena title that launched worldwide in March of 2020. Our leadership in the sports and outdoors category remains strong with our Tap Sports Baseball and Deer Hunter franchises. In March 2020, we furthered our leadership in this genre with the launch of MLB Tap Sports Baseball 2020 in more than 100 countries (prior versions of the Tap Sports Baseball franchise were only available in the United States, Canada, United Kingdom, Germany and

22

Table of Contents

Australia). MLB Tap Sports Baseball 2020 includes licensed content from Major League Baseball, or MLB, together with current and former MLB players pursuant to our continuing agreements with the Major League Baseball Players Association, and Major League Baseball Players Alumni Association, contains new features and content, including authentic major league stadiums, a skill-based home run mode and a new cover athlete.  We expect to add to our portfolio of sports and outdoor titles through the worldwide release of the next iteration of our Deer Hunter franchise in the second half of 2020.

We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on the Apple and Google storefronts when they were commercially released, which we believe is the result of us being a good partner of Apple and Google.   

 

We work closely with our celebrity and brand licensors to engage their social media audiences and build games that will resonate with their unique fan bases.  For example, our Kim Kardashian: Hollywood title utilizes transmedia storytelling, leveraging Ms. Kardashian West’s built-in social media fan base to drive installs and awareness of the game, and then attempting to surprise and delight those fans with real-world events and other game content based on her life.  Our goal is for the game content to become entwined with Ms. Kardashian West’s persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2020 which features all MLB clubs and uniforms, current and former MLB players and real MLB stadiums, or with our Disney Sorcerer’s Arena title, which includes characters from the Disney and Pixar universes. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity’s fan base.   

 

For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. We have also made significant investments in our proprietary analytics and revenue technology infrastructure.  With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players.  We aim to connect our analytics and revenue technology infrastructure to multiple elements of our business – from marketing to merchandising – in order to improve player retention and monetization.

   

We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features and through enhancing our live operations. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space, particularly as brands continue to migrate budgets from web to mobile.  Continuing to drive installs and awareness of our games through licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games.  Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners.  We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization. 

Across the globe, our industry is evidencing that hit titles generally remain higher in the top grossing charts for longer.  We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business position us to take advantage of these trends, as evidenced by the continued strength and year-over-year growth of Design Home, Covet Fashion and the Tap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer

23

Table of Contents

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 loss in the three months ended March 31, 2020 was $8.3 million versus net income of $663,000 in the three months ended March 31, 2019. This change was primarily due to an increase in sales and marketing expenses of $14.6 million, an increase in cost of revenue of $3.3 million, and an increase in research and development expenses of $3.0 million, partially offset by an increase in revenue of $11.4 million and a change from tax expense to a tax benefit of $1.3 million. See “—Results of Operations—Comparison of the Three Months Ended March 31, 2020 and 2019” below for further details.

Our ability to achieve, 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 increased our sales and marketing expenditures during the first three months of 2020 compared to the first three months of 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. Our increased sales and marketing expenses may impair our ability to achieve and sustain profitability if this spending does not result in increased revenues. 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. In the remainder of 2020, we expect that our operating costs will increase as we invest in user acquisition for our games and continue to hire creative and project management talent in all of our offices worldwide.

Cash and cash equivalents at March 31, 2020 totaled $114.7 million, a decrease of $12.3 million from the $127.1 million balance at December 31, 2019. This decrease was primarily related to $16.9 million of cash used in operating activities, $4.8 million of cash used in investing activities, partially offset by $9.5 million of cash provided by financing activities.

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 three metrics that we use most frequently are Daily Active Users (DAU), Monthly Active Users (MAU), and Average Revenue Per Daily Active User (ARPDAU). Our methodology for calculating DAU, MAU, 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.

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.

24

Table of Contents

We calculate DAU, MAU and ARPDAU for only our primary distribution platforms, Apple’s App Store, the Google Play Store and Amazon’s Appstore, as well as from Facebook for certain titles; we are not able to calculate these metrics across all of our distribution channels. In addition, the platforms that we include for purposes of this calculation have changed over time, and we expect that they will continue to change as our business evolves, but we do not expect that we will adjust prior metrics to take any such additions or deletions of distribution platforms into account. We believe that calculating these metrics for only our primary distribution platforms at a given period is generally representative of the metrics for all of our distribution platforms. Moreover, we rely on the data analytics software that we incorporate into our games to calculate and report the DAU, MAU 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 13), preventing us from collecting complete data. For these titles, we estimate DAU and MAU by extrapolating from each affected title’s historical data using a fixed decay rate in light of the behavior of similar titles for which we had complete data.

As of January 1, 2019, we began calculating DAU and MAU using the average of each month during the period rather than our historical practice of calculating these metrics based on the last month of the period. For example, DAU for the three months ended March 31, 2020 is calculated as an average of aggregate daily DAU for the months of January 2020, February 2020 and March 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

March 31,

2020

2019

Aggregate DAU

3,048

3,150

Aggregate MAU

17,774

19,118

Aggregate ARPDAU

$

0.39

$

0.34

The decrease in aggregate DAU and MAU for the three months ended March 31, 2020 as compared to the same period of the prior year was primarily related to fewer downloads across our portfolio of catalog games partially offset by an increase in aggregate DAU and MAU attributable to our new title launches in 2019, primarily Diner DASH Adventures, an earlier launch date of our MLB Tap Sports Baseball franchise in the first quarter of 2020, compared with the prior year, as well as higher downloads of our growth games.

Our aggregate ARPDAU increased for the three months ended March 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 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.

Critical Accounting Policies and Estimates

A summary of our critical accounting policies is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. Information with respect to changes in our critical accounting policies can be

25

Table of Contents

found in Note 1 of the Notes to the unaudited condensed consolidated financial statements in this report, which information is incorporated herein by reference.

Recent Accounting Pronouncements

Information with respect to recent accounting pronouncements may be found in Note 1 of the Notes to the unaudited condensed consolidated financial statements in this report, which information is incorporated herein by reference.

Results of Operations

The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.

Comparison of the Three Months Ended March 31, 2020 and 2019

Revenue

Three Months Ended March 31, 

2020

    

2019

% Change

Revenue by Type

(dollars in thousands)

In-App Purchases

$

95,939

$

83,544

14.8%

Advertisements and Offers

11,329

12,330

(8.1%)

Other

6

11

(45.5%)

Total revenue

$

107,274

$

95,885

11.9%

Our revenue increased $11.4 million, or 11.9%, from $95.9 million for the three months ended March 31, 2019 to $107.3 million for the three months ended March 31, 2020, which was primarily comprised of a $12.4 million increase in our revenue from micro-transactions (in-app purchases), partially offset by a decrease of $1.0 million in our revenue from advertisements and offers. The increase in revenue from micro-transactions was primarily related to our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, as well as the worldwide launch of new titles Diner DASH Adventures and WWE Universe in the second quarter of 2019 and Disney Sorcerer’s Arena in the first quarter of 2020. Revenue from our growth games increased by $8.8 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Revenue from the new titles launched in 2019 and 2020 was $9.3 million during the three months ended March 31, 2020. These increases were partially offset by a $6.7 million aggregate decline in revenue from catalog titles such as Kim Kardashian: Hollywood, Cooking Dash, Restaurant Dash with Gordon Ramsay, Diner Dash, Racing Rivals, and Deer Hunter 2018. The decrease in revenue from advertisements and offers was primarily due to the removal of pay-per-engagement offer wall advertisement units from Apple in 2019.

During the three months ended March 31, 2020, Design Home, the Tap Sports Baseball franchise, and Covet Fashion, were our top three revenue-generating games and comprised 43.0%, 18.8% and 15.8%, respectively, of our revenue for the period. During the three months ended March 31, 2019, Design Home, the Tap Sports Baseball franchise, and Covet Fashion, were our top three revenue-generating games and represented 44.9%, 17.2% and 15.6% of our revenue for the period, respectively. No other game generated more than 10% of revenue during the quarters ended March 31, 2020 and 2019.

International revenue (generated from distributors and advertising service providers whose principal operations are located outside the United States or, in the case of the digital storefronts, the revenue generated from end-user purchases made outside of the United States) increased by $249,000 from $23.0 million in the three months ended March 31, 2019 to $23.3 million in the three months ended March 31, 2020.

26

Table of Contents

Cost of Revenue

Three Months Ended March 31, 

2020

2019

% Change

Cost of revenue:

(dollars in thousands)

Platform commissions, royalties and other

$

36,974

$

33,270

11.1%

Amortization of intangible assets

888

1,252

(29.1%)

Total cost of revenue

$

37,862

$

34,522

9.7%

Revenue

$

107,274

$

95,885

11.9%

Gross margin

64.7

%

64.0

%

Our cost of revenue increased $3.3 million, or 9.7%, from $34.5 million in the three months ended March 31, 2019 to $37.9 million in the three months ended March 31, 2020. This was primarily due to an increase of $3.6 million in platform commission fees resulting from a higher volume of revenue transactions through the digital storefronts and a $349,000 increase in hosting costs. This increase was partially offset by a $418,000 decrease in impairment of prepaid royalties and minimum guarantees, and a $364,000 decrease in amortization of intangible assets.

The royalties we paid to licensors increased by $195,000, or 3.2%, from $6.1 million in the three months ended March 31, 2019 to $6.3 million in the three months ended March 31, 2020. The increase was due to a growth in revenue from royalty burdened titles. However, the rate of increase of our royalty payments was lower than the 11.9% increase in our revenue, which increased from $95.9 million in the three months ended March 31, 2019 to $107.3 million in the three months ended March 31, 2020. This was due to a larger percentage of our revenue being attributable to titles that are not royalty burdened, such as Design HomeCovet Fashion and Diner DASH Adventures.

Research and Development Expenses

Three Months Ended March 31, 

2020

    

2019

 

% Change

(dollars in thousands)

Research and development expenses

$

29,531

$

26,546

11.2%

Percentage of revenue

27.5

%  

27.7

%

Our research and development expenses increased $3.0 million, or 11.2%, from $26.5 million in the three months ended March 31, 2019 to $29.5 million in the three months ended March 31, 2020. This was primarily attributable to a net increase in payroll related costs of $2.5 million mainly due to the increase in headcount, payroll taxes and certain employee benefit costs and a $398,000 increase in allocated charges for equipment, facilities and depreciation. As a percentage of revenue, research and development expenses decreased slightly from 27.7% in the three months ended March 31, 2019 to 27.5% in the three months ended March 31, 2020. We expect our research and development expenditures to increase slightly in absolute dollars in the remainder of 2020, primarily due to expected increases in headcount.

Sales and Marketing Expenses

Three Months Ended March 31, 

2020

    

2019

% Change

(dollars in thousands)

Sales and marketing expenses

$

42,743

$

28,105