Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
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(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
David A. Bell, Esq.
Laird H. Simons III, Esq.
Mark C. Stevens, Esq.
Fenwick & West LLP
Silicon Valley Center
801 California Street Mountain View, CA94041
(650) 988-8500
Robert V.
Gunderson, Jr., Esq.
Craig M. Schmitz, Esq.
Brooks Stough, Esq.
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive Menlo Park, CA94025
(650) 321-2400
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o _
_
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o _
_
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o _
_
CALCULATION OF
REGISTRATION FEE
Proposed
Maximum
Amount of
Title of Each
Class of Securities to be Registered
Aggregate
Offering Price(1)
Registration
Fee
Common Stock, par value
$0.0001 per share
$92,000,000
$9,844
(1)
Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(o) under the
Securities Act of 1933.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
This is an initial public offering of shares of common stock of
Glu Mobile Inc. All of the shares of common stock are being sold
by Glu Mobile Inc.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . Application has been made for
listing on The NASDAQ Global Market under the symbol
“GLUU.”
See “Risk Factors” on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
Per
Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to Glu
Mobile
$
$
To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from Glu Mobile at the initial public offering price less the
underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2007.
stranded
award-winning games
world series of poker
super k.o. boxing
global broad distribution portfolio
diner dash
deer hunter 2
technology independent expertise
pgr mobile
centipede
get glu’d to mobile
glu.com
World Series of PokerR, WSOP and related designs are trademarks of Harrah#fs License Company,
LLC. Used PlayFirst logo are trademarks of PlayFirst, Inc. c 2005 PlayFirst, Inc. PGR and Project
Gotham Corporation. All rights reserved. The trademarks, copyrights and design rights in and
associated with AtariR CentipedeR c 2004 Atari, Inc. Super KO Boxing, Stranded and all related
characters and elements
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all the
information you should consider before buying our common stock.
You should read the entire prospectus carefully, including the
section entitled “Risk Factors” and our consolidated
financial statements and related notes included elsewhere in
this prospectus, before making an investment in our common
stock. Unless otherwise indicated, the terms “Glu
Mobile,”“Glu,”“we,”“us”
and “our” refer to Glu Mobile Inc., a Delaware
corporation, together with its consolidated subsidiaries.
Glu Mobile
Inc.
Glu Mobile is a leading global publisher of mobile games. We
have developed and published a portfolio of more than 100 casual
and traditional games to appeal to a broad cross section of the
over one billion subscribers served by our more than 150
wireless carriers and other distributors. We create games and
related applications based on third-party licensed brands and
other intellectual property, as well as on our own original
brands and intellectual property. Our games based on licensed
intellectual property include Deer Hunter, Diner
Dash, Monopoly, Sonic the Hedgehog, World
Series of Poker and Zuma. Our original games based on
our own intellectual property include Alpha Wing,
Ancient Empires, Blackjack Hustler, Stranded and
Super K.O. Boxing. We were one of the top three mobile
game publishers in terms of mobile game market share in North
America during the third quarter of 2006 as measured by NPD
Group, Inc., a market research firm, in its September 2006
“Mobile Game Track Highlight Report,” and in terms of
unit sales volume in North America and Europe among titles
tracked by m:metrics, another market research firm.
Our business leverages the marketing resources and distribution
infrastructure of wireless carriers and the brands and other
intellectual property of third-party content owners, allowing us
to focus our efforts on developing and publishing high-quality
mobile games. For the first nine months of 2006, our largest
wireless carrier customers in each region by revenues were
Verizon Wireless, Sprint Nextel, Cingular Wireless and
T-Mobile USA
in North America; Vodafone, Hutchinson 3G, Orange and
Telefónica Móviles in Europe; TelCel and Vivo in Latin
America; and Vodafone, Hutchinson 3G Australia and Telecom New
Zealand in Asia Pacific. Branded content owners, such as Atari,
Celador (from which we license the rights to Who Wants To Be
A Millionaire? in some European and Asian countries), Fox,
PlayFirst, PopCap Games, Sega Europe and Turner Broadcasting,
provide us with well-known consumer brands and other
intellectual property on which we have based mobile games.
Industry
Overview
Juniper Research, a market research firm, in its June 2006
“Mobile Games: Subscription & Download,
2006-2011”
report, estimates that the worldwide market for mobile games
will grow from $3.1 billion in 2006 to $10.5 billion
in 2009, a compound annual growth rate of 50.2%. We believe that
the rapid growth of the mobile game market has been driven by
continued advances in wireless communications technology,
proliferation of multimedia-enabled mobile handsets, increasing
availability of high-quality mobile games and increasing
end-user awareness of, and demand for, mobile games.
The mobile game market differs substantially from the
traditional console game market. Mobile games typically have
significantly lower development and distribution costs and
longer life cycles than console games. Console game sales depend
upon the product cycles of the consoles themselves with large
generational shifts between versions of each of the major
console platforms every few years. In contrast, the mobile
platform is characterized by a gradual evolution of features and
capabilities in the many new handsets introduced each year by a
large number of manufacturers and carriers. Consumers typically
use their console games in the confines of their home, while
mobile games are available in all the settings where consumers
take their mobile phones. Furthermore, console games are usually
developed for a few console platforms at most, which means that
the development costs are mostly associated with the original
creation and development of the game. However, once developed,
mobile games, may need to be customized, or ported, to more than
1,000 different handset models, many
with different technological requirements. Therefore, the
ability to port mobile games quickly and cost effectively can be
a competitive differentiator among mobile game publishers and a
barrier to entry for other potential market entrants.
Our Competitive
Strengths
We believe we have a proven capability to develop high-quality
mobile games that engage end users. Our portfolio includes a
variety of genres and is designed to appeal to the diverse
interests of the broad wireless subscriber population. We
believe that we will continue to be attractive to wireless
carriers, content owners and end users because of the following
strengths:
Diverse Portfolio of Award-Winning High-Quality Mobile
Games. We have developed and published more
than 100 casual and traditional games across a number of genres,
including action, board game, card/casino, puzzle, sports,
strategy/role playing games, or RPG, and TV/movie. No single
game contributed more than 10% of our revenues in 2005 or in the
first nine months of 2006. Based on numerical ratings by
industry review websites, IGN Entertainment, Modojo and WGWorld,
we ranked first in terms of average game quality for mobile
games released in the first nine months of 2006. We have
received numerous industry awards for our games, including IGN
Entertainment’s 2005 Editor’s Choice award for best
wireless puzzle game for Zuma, The Academy of Interactive
Arts and Sciences’ 2006 Game of the Year award for
Ancient Empires II, and the 2005 award for Best
Mobile Sports Game from CNET’s Gamespot for Deer
Hunter.
Global Scale in Distribution, Sales and
Marketing. We currently have agreements with
more than 150 wireless carriers and other distributors, which
together serve more than one billion subscribers worldwide. Our
games regularly receive premium placement on these
carriers’ game menus, or decks, accessed through mobile
handset screens. Given the small size of these screens, there
are significant advantages to being placed in the initial list
of games that an end user sees on the deck, sometimes referred
to as premium deck placement, rather than being placed lower on
the list where an end user may need to scroll or search to find
a game.
Strong Relationships with Branded Content
Owners. We have built relationships with a
number of key branded content owners. The content providers that
accounted for the largest percentage of our revenues for the
first nine months of 2006 were Atari, Celador (from which we
license the rights to Who Wants To Be A Millionaire? in
some European and Asian countries), Fox, PlayFirst, PopCap
Games, Sega Europe and Turner Broadcasting. In addition to these
relationships, we have recently licensed brands or other
intellectual property from Harrah’s, Hasbro, Microsoft and
Sony. We believe that branded content owners increasingly
understand the complexities of developing their own internal
mobile entertainment capabilities, and therefore increasingly
wish to work with publishers with a history of successfully
developing and publishing high-quality games, as well as with
the carrier relationships and marketing resources to publish
their games on a worldwide basis.
Proprietary Porting and Data Mining
Capabilities. We have developed proprietary
technologies and processes designed to increase the
profitability of our games. These technologies and processes
include a standardized development process designed to
facilitate efficient porting, a tool library covering each
handset model and ongoing work flow analysis tools. As of
September 30, 2006, we had the capability to port
approximately 40,000 SKUs per month, with each SKU characterized
by title per language per handset per carrier. Our data mining
capabilities provide us with the ability to analyze the revenue
potential of each game and to improve profitability through
ongoing decision support for additional porting, pricing and
marketing programs. Together, our porting and data mining
capabilities help us in our efforts to increase the initial
sales of each game and support continuing premium deck placement.
Experienced Management Team. In
addition to their experience in mobile games, our management
team has significant experience in the video game publishing,
wireless communications, technology and media industries. We
believe that this broad expertise allows us in a timely manner
to design, develop and deliver games and other mobile
entertainment applications that are designed to
address the demands of our market. We believe our management
team’s expertise and continuity is a significant
competitive advantage in the evolving mobile entertainment
publishing market.
Our
Strategy
Our goal is to be the leading global publisher of mobile games
and other mobile entertainment applications. To achieve this
goal, we plan to:
Continue to Create Award-Winning Games through Ongoing
Investment in Our Studio and Technical Development
Capabilities. Our creative and technical
teams are recognized in the industry for creating high-quality,
award-winning mobile games. Our technical teams leverage
proprietary technologies and standardized automated processes
that are designed to enable rapid, timely, high-quality and
cost-effective development and porting of mobile games. We
believe that this combination provides us with a competitive
advantage over other industry participants that have
traditionally outsourced porting and development or used more
manual processes.
Leverage and Grow Our Portfolio of
Titles. We have developed a diverse portfolio
of more than 100 games, including perennial titles that we
believe can produce revenues for significantly longer than the
typical 18 to 24 month revenue lifecycle for mobile games.
In addition, successful games give us the potential to develop
and publish a series of sequel titles, sometimes referred to as
franchise titles. For both perennial and sequel titles, we
leverage existing development, porting and marketing investments
and broad end-user awareness in order to increase the revenue
lifecycle of an existing game or increase the chance of success
for new games. Games for the mobile platform also provide
potential opportunities for us to publish or license our
intellectual property for use on other platforms such as online,
console or personal computer games. We plan to continue
developing perennial and franchise titles, and believe that our
proprietary technology and development process capabilities
provide us an advantage over our competitors in the coordinated
launches frequently required of multi-platform games.
Expand and Strengthen Our
Distribution. We believe that wireless
carriers are increasing their focus on the leading mobile game
publishers in order to improve the consistency and quality of
the games that they offer on their handsets. We intend to take
steps to increase our market share with our existing carriers
and distributors and add additional relationships, particularly
in new geographies. In addition, we have increased and expect to
continue to increase our non-carrier distribution capabilities
through alternative channels such as Internet portals and
“off-deck” aggregators.
Build Upon Our Position as a Leading Global Publisher to
Strengthen Licensing Relationships. We
believe that, as a leading independent publisher of mobile
games, we will continue to benefit from branded content
owners’ increasing recognition of the challenges associated
with mobile entertainment publishing. As a result of those
challenges, some branded content owners are reducing their own
internal mobile development efforts. We believe that branded
content owners are also becoming more reluctant to contract with
smaller mobile game publishers that do not have a reputation for
quality development or that do not have the breadth of carrier
relationships and technological capabilities necessary to
publish a game on a worldwide basis. We intend to capitalize on
these trends and on our reputation with non-mobile content
owners as a leading mobile partner to strengthen our existing
licensing relationships and develop additional relationships.
Gain Scale through Select
Acquisitions. We have acquired and integrated
two mobile game companies — Macrospace and iFone. We
believe that there may be future opportunities to acquire
content developers and publishers in the mobile entertainment or
complementary industries and we intend, where appropriate, to
take advantage of these opportunities.
Our business is subject to numerous risks, which are highlighted
in the section entitled “Risk Factors” immediately
following this prospectus summary. These risks represent
challenges to the successful implementation of our strategy and
to the growth and future profitability of our business. Some of
these risks are:
•
we have incurred significant losses since inception, including a
net loss of $17.9 million in 2005 and a net loss of
$10.0 million in the first nine months of 2006, and as of
September 30, 2006, we had an accumulated deficit of
$43.7 million;
•
we have only a limited history of generating revenues, and the
future revenue potential of our business in the emerging mobile
game market is uncertain;
•
the market in which we operate is highly competitive, and many
of our established competitors have significantly greater
resources than we do;
•
many of our mobile games are based on or incorporate
intellectual property that we license from third parties, and
most of our revenues are derived from these games; we may not be
able to renew these licenses or obtain additional
licenses; and
•
we currently rely on wireless carriers, in particular, Verizon
Wireless, Sprint Nextel, Cingular Wireless and Vodafone, to
market and distribute our products and thus to generate our
revenues, and the loss of or a change in any of these carrier
relationships could materially harm our business, operating
results and financial condition.
Corporate History
and Information
We were incorporated in Nevada in May 2001 as Cyent Studios,
Inc. and changed our name to Sorrent, Inc. later that year. In
November 2001, we incorporated a wholly owned subsidiary in
California, and, in December 2001, we merged the Nevada
corporation into this California subsidiary to
form Sorrent, Inc., a California corporation. In May 2005,
we changed our name to Glu Mobile Inc. Prior to completion of
this offering, we intend to reincorporate in Delaware. In
December 2004, we acquired Macrospace Limited, or Macrospace,
and in March 2006 we acquired iFone Holdings Limited, or iFone,
each a company registered in England and Wales.
Our principal executive offices are located at 1800 Gateway
Drive, Second Floor, San Mateo, California94404 and our
telephone number is
(650) 571-1550.
Our website address is www.glu.com. The information on our
website is not incorporated by reference into this prospectus
and should not be considered to be a part of this prospectus.
Alpha Wing is our registered trademark in the United
States, and Glu, Glu Mobile, our corporate logo, our
‘g’ character logo, Ancient Empires, Blackjack
Hustler, Stranded and Super K.O. Boxing are our
trademarks. Other trademarks appearing in this prospectus are
the property of their respective holders.
Common stock to be outstanding after this offering
shares
Use of proceeds
We intend to use approximately $12.1 million of the net
proceeds of this offering to repay in full the principal and
accrued interest on our outstanding loan from Pinnacle Ventures.
We expect to use the remaining net proceeds of this offering for
general corporate purposes, including working capital and
potential capital expenditures and acquisitions. See “Use
of Proceeds.”
Proposed NASDAQ Global Market symbol
GLUU
The number of shares of common stock to be outstanding after
this offering is based on 63,169,489 shares of our common
stock outstanding as of September 30, 2006, and excludes:
•
8,158,311 shares issuable upon the exercise of stock
options outstanding as of September 30, 2006 with a
weighted average exercise price of $1.45 per share;
•
855,925 shares issuable upon the exercise of stock options
granted after September 30, 2006 with a weighted average
exercise price of $3.51 per share;
•
687,223 shares issuable upon the exercise of warrants
outstanding as of September 30, 2006 with a weighted
average exercise price of $1.74 per share; and
•
shares
to be reserved for issuance under our 2006 Equity Incentive Plan
and our 2006 Employee Stock Purchase Plan, each of which will
become effective on the first day that our common stock is
publicly traded and contains provisions that will automatically
increase its share reserve each year, as more fully described in
“Management — Employee Benefit Plans.”
Except as otherwise indicated, all information in this
prospectus assumes:
•
the automatic conversion of all outstanding shares of our
convertible preferred stock into 47,040,945 shares of our
common stock upon the completion of this offering;
•
our reincorporation in Delaware prior to completion of this
offering;
•
the filing of our amended and restated certificate of
incorporation in Delaware immediately following the completion
of this offering; and
•
no exercise by the underwriters of their option to purchase up
to an
additional shares
of our common stock in this offering.
The following tables present summary consolidated financial data
for our business. You should read this information together with
“Selected Consolidated Financial Data,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, each included elsewhere
in this prospectus.
We derived the statements of operations data for the years ended
December 31, 2003, 2004 and 2005 and the nine months ended
September 30, 2006 and the balance sheet data as of
September 30, 2006 from our audited consolidated financial
statements included elsewhere in this prospectus. We derived the
statements of operations data for the nine months ended
September 30, 2005 from our unaudited consolidated
financial statements included elsewhere in this prospectus. We
have prepared the unaudited consolidated financial statements on
the same basis as the audited consolidated financial statements
and have included, in our opinion, all adjustments, consisting
only of normal recurring adjustments, that we consider necessary
to state fairly the results of operations for the nine months
ended September 30, 2005. Our historical results are not
necessarily indicative of the results we expect in the future,
and our results for the nine months ended September 30,2006 should not be considered indicative of results we expect
for the full fiscal year.
The pro forma per share data give effect to the conversion of
all our outstanding convertible preferred stock into common
stock upon the completion of this offering and adjustments to
eliminate accretion to preferred stock and the charges
associated with the cumulative effect change and subsequent
remeasurement to fair value of our preferred stock warrants. For
further information concerning the calculation of pro forma per
share information, please refer to note 2 of our notes to
consolidated financial statements.
on a pro forma basis to reflect (i) the automatic
conversion of all outstanding shares of our preferred stock into
47,040,945 shares of our common stock and (ii) the
reclassification of our preferred stock warrant liability to
additional paid-in capital upon the conversion of warrants to
purchase shares of our convertible preferred stock into warrants
to purchase shares of our common stock upon the completion of
this offering; and
•
on a pro forma as adjusted basis to reflect (i) the sale by
us of the shares of common
stock offered by this prospectus at an assumed initial public
offering price of $ per
share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses, and (ii) the
use of approximately $12.1 million of the net proceeds of
this offering to repay in full the principal and accrued
interest on our loan from Pinnacle Ventures.
Each $1.00 increase or decrease in
the assumed initial public offering price of
$ per share would increase or
decrease, respectively, our cash, cash equivalents and
short-term investments, working capital, total assets and total
stockholders’ equity (deficit) by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions.
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus before purchasing
our common stock. If any of the following risks occurs, our
business, financial condition or results of operations could be
seriously harmed. In that case, the trading price of our common
stock could decline, and you might lose some or all of your
investment.
Risks Related to
Our Business
We have a history
of net losses, may incur substantial net losses in the future
and may not achieve profitability.
We have incurred significant losses since inception, including a
net loss of $8.3 million in 2004, a net loss of
$17.9 million in 2005 and a net loss of $10.0 million
in the first nine months of 2006. As of September 30, 2006,
we had an accumulated deficit of $43.7 million. We expect
to continue to increase expenses as we implement initiatives
designed to continue to grow our business, including, among
other things, the development and marketing of new games, plans
for further international expansion, expansion of our
infrastructure, acquisition of content, and general and
administrative expenses associated with being a public company.
If our revenues do not increase to offset these expected
increases in operating expenses, we will continue to incur
significant losses and will not become profitable. Our revenue
growth in recent periods should not be considered indicative of
our future performance. In fact, in future periods, our revenues
could decline. Accordingly, we may not be able to achieve
profitability in the future.
We have a limited
operating history in an emerging market, which may make it
difficult to evaluate our business.
We were incorporated in May 2001 and began selling mobile games
in July 2002. Accordingly, we have only a limited history of
generating revenues, and the future revenue potential of our
business in this emerging market is uncertain. As a result of
our short operating history, we have limited financial data that
can be used to evaluate our business. Any evaluation of our
business and our prospects must be considered in light of our
limited operating history and the risks and uncertainties
encountered by companies in our stage of development. As an
early stage company in the emerging mobile entertainment
industry, we face increased risks, uncertainties, expenses and
difficulties. To address these risks and uncertainties, we must
do the following:
•
maintain our current, and develop new, wireless carrier
relationships;
•
maintain and expand our current, and develop new, relationships
with third-party branded content owners;
•
retain or improve our current revenue-sharing arrangements with
carriers and third-party branded content owners;
•
maintain and enhance our own brands;
•
continue to develop new high-quality mobile games that achieve
significant market acceptance;
•
continue to port existing mobile games to new mobile handsets;
•
continue to develop and upgrade our technology;
•
continue to enhance our information processing systems;
•
increase the number of end users of our games;
•
maintain and grow our non-carrier, or “off-deck,”
distribution, including through our website and third-party
direct-to-consumer
distributors;
expand our development capacity in countries with lower costs;
•
execute our business and marketing strategies successfully;
•
respond to competitive developments; and
•
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these objectives,
which could cause our business to suffer. In addition,
accomplishing many of these efforts might be very expensive,
which could adversely impact our operating results and financial
condition.
Our financial
results could vary significantly from quarter to quarter and are
difficult to predict.
Our revenues and operating results could vary significantly from
quarter to quarter because of a variety of factors, many of
which are outside of our control. As a result, comparing our
operating results on a
period-to-period
basis may not be meaningful. In addition, we may not be able to
predict our future revenues or results of operations. We base
our current and future expense levels on our internal operating
plans and sales forecasts, and our operating costs are to a
large extent fixed. As a result, we may not be able to reduce
our costs sufficiently to compensate for an unexpected shortfall
in revenues, and even a small shortfall in revenues could
disproportionately and adversely affect financial results for
that quarter. Individual games and carrier relationships
represent meaningful portions of our revenues and net loss in
any quarter. We may incur significant or unanticipated expenses
when licenses are renewed. In addition, any payments due to us
from carriers for revenues that are recognized on a cash basis
may be delayed because of changes or issues with those
carriers’ processes.
In addition to other risk factors discussed in this section,
factors that may contribute to the variability of our quarterly
results include:
•
the number of new mobile games released by us and our
competitors;
•
the timing of release of new games by us and our competitors,
particularly those that may represent a significant portion of
revenues in a period;
•
the popularity of new games and games released in prior periods;
•
changes in prominence of deck placement for our leading games
and those of our competitors;
•
the expiration of existing content licenses for particular games;
•
the timing of charges related to impairments of goodwill,
intangible assets, prepaid royalties and guarantees;
•
changes in pricing policies by us, our competitors or our
carriers and other distributors;
•
changes in the mix of original and licensed games, which have
varying gross margins;
•
the timing of successful mobile handset launches;
•
the seasonality of our industry;
•
fluctuations in the size and rate of growth of overall consumer
demand for mobile games and related content;
•
strategic decisions by us or our competitors, such as
acquisitions, divestitures, spin-offs, joint ventures, strategic
investments or changes in business strategy;
accounting rules governing recognition of revenue;
•
the timing of compensation expense associated with equity
compensation grants; and
•
decisions by us to incur additional expenses, such as increases
in marketing or research and development.
As a result of these and other factors, our operating results
may not meet the expectations of investors or public market
analysts who choose to follow our company. Failure to meet
market expectations would likely result in decreases in the
trading price of our common stock.
The markets in
which we operate are highly competitive, and many of our
competitors have significantly greater resources than we
do.
The development, distribution and sale of mobile games is a
highly competitive business. For end users, we compete primarily
on the basis of brand, game quality and price. For wireless
carriers, we compete for deck placement based on these factors,
as well as historical performance and perception of sales
potential and relationships with licensors of brands and other
intellectual property. For content and brand licensors, we
compete based on royalty and other economic terms, perceptions
of development quality, porting abilities, speed of execution,
distribution breadth and relationships with carriers. We also
compete for experienced and talented employees.
Our primary competitors include Digital Chocolate, Electronic
Arts (EA Mobile), Gameloft, Hands-On Mobile, I-play, Namco and
THQ. In the future, likely competitors include major media
companies, traditional video game publishers, content
aggregators, mobile software providers and independent mobile
game publishers. Carriers may also decide to develop, internally
or through a managed third-party developer, and distribute their
own mobile games. If carriers enter the mobile game market as
publishers, they might refuse to distribute some or all of our
games or might deny us access to all or part of their networks.
Some of our competitors’ and our potential
competitors’ advantages over us, either globally or in
particular geographic markets, include the following:
•
significantly greater revenues and financial resources;
•
stronger brand and consumer recognition;
•
the capacity to leverage their marketing expenditures across a
broader portfolio of mobile and non-mobile products;
•
pre-existing relationships with brand owners or carriers;
•
greater resources to make acquisitions;
•
lower labor and development costs; and
•
broader distribution.
If we are unable to compete effectively or we are not as
successful as our competitors in our target markets, our sales
could decline, our margins could decline and we could lose
market share, any of which would materially harm our business,
operating results and financial condition.
Failure to renew
our existing brand and content licenses on favorable terms or at
all and to obtain additional licenses could harm our
business.
Revenues derived from mobile games and other applications based
on or incorporating brands or other intellectual property
licensed from third parties accounted for 77.1% and 85.0% of our
revenues in 2005 and the first nine months of 2006,
respectively. During the first nine months of 2006, revenues
derived from our four largest licensors, Atari, Celador, Fox and
PopCap Games, together accounted for approximately 62.3% of our
revenues. Even if mobile games based on licensed content
or brands remain popular, any of our licensors could decide not
to renew our existing license or not to license additional
intellectual property and instead license to our competitors or
develop and publish its own mobile games or other applications,
competing with us in the marketplace. Many of these licensors
already develop games for other platforms, and may have
significant experience and development resources available to
them should they decide to compete with us rather than license
to us.
We have both exclusive and non-exclusive licenses and both
licenses that are global and licenses that are limited to
specific geographies, often with other mobile game publishers
having rights to geographies not covered by our licenses. Our
licenses generally have terms that range from two to five years,
with the primary exceptions being our six-year licenses covering
World Series of Poker and Deer Hunter 2 and our
seven-year license covering Kasparov Chess. Licenses for
intellectual property that terminate prior to 2008 and during
2008 represented 55.0% and 18.3%, respectively, of our revenues
in the first nine months of 2006. Some of the licenses that we
have inherited through acquisitions provide that the licensor
owns the intellectual property that we develop in the mobile
version of the game and that, when our license expires, the
licensor can transfer that intellectual property to a new
licensee. Increased competition for licenses may lead to larger
guarantees, advances and royalties that we must pay to our
licensors, which could significantly increase our cost of
revenues and cash usage. We may be unable to renew these
licenses or to renew them on terms favorable to us, and we may
be unable to secure alternatives in a timely manner. Failure to
maintain or renew our existing licenses or to obtain additional
licenses would impair our ability to introduce new mobile games
or continue to offer our current games, which would materially
harm our business, operating results and financial condition.
Some of our existing licenses impose, and licenses that we
obtain in the future might impose, development, distribution and
marketing obligations on us. If we breach our obligations, our
licensors might have the right to terminate the license or
change an exclusive license to a non-exclusive license, which
would harm our business, operating results and financial
condition.
Even if we are successful in gaining new licenses or extending
existing licenses, we may fail to anticipate the entertainment
preferences of our end users when making choices about which
brands or other content to license. If the entertainment
preferences of end users shift to content or brands owned or
developed by companies with which we do not have relationships,
we may be unable to establish and maintain successful
relationships with these newly popular developers and owners,
which would materially harm our business, operating results and
financial condition. In addition, some rights are licensed from
licensors that have or may develop financial difficulties, and
may enter into bankruptcy protection under U.S. federal law
or in other countries. If any of our licensors files for
bankruptcy, our licenses might be impaired or voided, which
could materially harm our business, operating results and
financial condition.
We currently rely
on wireless carriers, in particular Verizon Wireless, Sprint
Nextel, Cingular Wireless and Vodafone, to market and distribute
our games and thus to generate our revenues. The loss of or a
change in any of these significant carrier relationships could
materially harm our business.
Our future success is highly dependent upon maintaining
successful relationships with the wireless carriers with which
we currently work and establishing new carrier relationships in
geographies where we have not yet established a significant
presence. A significant portion of our revenues is derived from
a very limited number of carriers. For the first nine months of
2006, we derived approximately 20.9% of our revenues from
subscribers of Verizon Wireless, 12.0% of our revenues from
subscribers of Sprint Nextel, 11.4% of our revenues from
subscribers of Cingular Wireless and 10.7% of our revenues from
subscribers of Vodafone. During 2005, we derived approximately
24.3%, 11.5%, 11.9% and 6.2%, respectively, of our revenues from
subscribers of these carriers. In 2005 and the first nine months
of 2006, subscribers from carriers representing the next ten
largest sources of our revenues represented 25.6% and 26.4% of
our revenues, respectively, although some of the
carriers represented in this group varied from period to period.
We expect that we will continue to generate a significant
portion of our revenues through distribution relationships with
a very limited number of carriers for the foreseeable future.
Our failure to maintain our relationships with these carriers
would materially harm our business, operating results and
financial condition.
Our carrier agreements do not establish us as the exclusive
provider of mobile games with the carriers and typically have a
term of one or two years with automatic renewal provisions upon
expiration of the initial term, absent a contrary notice from
either party. In addition, the carriers often can terminate
these agreements early and, in some instances, at any time
without cause, which could give them the ability to renegotiate
economic terms. The agreements generally do not obligate the
carriers to market or distribute any of our games. In many of
these agreements, we warrant that our games do not contain
libelous or obscene content, do not contain material defects or
viruses, and do not violate third-party intellectual property
rights and we indemnify the carrier for any breach of a third
party’s intellectual property. In addition, our agreements
with a substantial minority of our carriers, including Verizon
Wireless, allow the carrier to set the retail price at a level
different from the price implied by our negotiated revenue
split, without a corresponding change to our wholesale price to
the carrier. If one of these carriers raises the retail price of
one of our games, unit demand for that game might decline,
reducing our revenues, without necessarily reducing, and perhaps
increasing, the total revenues that the carrier receives from
sales of that game. Many other factors outside our control could
impair our ability to generate revenues through a given carrier,
including the following:
•
the carrier’s preference for our competitors’ mobile
games rather than ours;
•
the carrier’s decision not to include or highlight our
games on the deck of its mobile handsets;
•
the carrier’s decision to discontinue the sale of our
mobile games or all mobile games like ours;
•
the carrier’s decision to offer games to its subscribers
without charge or at reduced prices;
•
the carrier’s decision to require market development funds
from publishers like us;
•
the carrier’s decision to restrict or alter subscription or
other terms for downloading our games;
•
a failure of the carrier’s merchandising, provisioning or
billing systems;
•
the carrier’s decision to offer its own competing mobile
games; and
•
consolidation among carriers.
If any of our carriers decides not to market or distribute our
games or decides to terminate, not renew or modify the terms of
its agreement with us or if there is consolidation among
carriers generally, we may be unable to replace the affected
agreement with acceptable alternatives, causing us to lose
access to that carrier’s subscribers, which could
materially harm our business, operating results and financial
condition.
End user tastes
are continually changing and are often unpredictable; if we fail
to develop and publish new mobile games that achieve market
acceptance, our sales would suffer.
Our business depends on developing and publishing mobile games
that wireless carriers will place on their decks and end users
will buy. We must continue to invest significant resources in
licensing efforts, research and development, marketing and
regional expansion to enhance our offering of games and
introduce new games, and we must make decisions about these
matters well in advance of product release in order to implement
them in a timely manner. Our success depends, in part, on
unpredictable and volatile factors beyond our control, including
end-user preferences, competing games and the availability of
other entertainment activities. If our games and related
applications are not responsive to the requirements of our
carriers or the entertainment preferences of end users, or they
are not brought to market in a timely and effective manner, our
business, operating results and financial condition would be
harmed. Even if our games are successfully introduced and
initially adopted, a subsequent shift in our carriers or the
entertainment preferences of end users could cause a decline in
our games’ popularity that could materially reduce our
revenues and harm our business, operating results and financial
condition.
Inferior deck
placement would likely adversely impact our revenues, operating
results and financial condition.
Wireless carriers provide a limited selection of games that are
accessible to their subscribers through a deck on their mobile
handsets. The inherent limitation on the number of games
available on the deck is a function of the limited screen size
of handsets and carriers’ perceptions of the depth of menus
and numbers of choices end users will generally utilize.
Carriers typically provide one or more top level menus
highlighting games that are recent top sellers, that the carrier
believes will become top sellers or that the carrier otherwise
chooses to feature, in addition to a link to a menu of
additional games sorted by genre. We believe that deck placement
on the top level or featured menu or toward the top of
genre-specific or other menus, rather than lower down or in
sub-menus,
is likely to result in games achieving a greater degree of
commercial success. If carriers choose to give our games less
favorable deck placement, our games may be less successful than
we anticipate and our business, operating results and financial
condition may be materially harmed.
We depend on a
limited number of mobile games for a significant portion of our
revenues.
In our industry, new games are frequently introduced, but a
relatively small number of games account for a significant
portion of industry sales. Similarly, a significant portion of
our revenues comes from a limited number of mobile games,
although the games in that group have shifted over time. For
example, in 2005 and in the first nine months of 2006, we
generated approximately 52.8% and 57.0% of our revenues,
respectively, from our top ten games, but no individual game
represented more than 10% of our revenues in either period. We
expect to release a relatively small number of new games each
year for the foreseeable future. If these games are not
successful, our revenues could be limited and our business and
operating results would suffer in both the year of release and
thereafter.
In addition, the limited number of games that we release in a
year may contribute to fluctuations in our operating results.
Therefore, our reported results at quarter and year end may be
affected based on the release dates of our products, which could
result in volatility in the price of our common stock. If our
competitors develop more successful games, offer them at lower
prices based on payment models, such as
pay-for-play
or subscription-based models, perceived as offering a better
value proposition, or if we do not continue to develop
consistently high-quality and well-received games, our business,
operating results and financial condition would be harmed.
If we are
unsuccessful in establishing and increasing awareness of our
brand and recognition of our mobile games or if we incur
excessive expenses promoting and maintaining our brand or our
games, our business could be harmed.
We believe that establishing and maintaining our brand is
critical to retaining and expanding our existing relationships
with carriers and content licensors, as well as developing new
relationships. Promotion of the Glu brand will depend on our
success in providing high-quality mobile games. Similarly,
recognition of our games by end users will depend on our ability
to develop engaging games of high quality with attractive
titles. However, our success will also depend, in part, on the
services and efforts of third parties, over which we have little
or no control. For instance, if our wireless carriers fail to
provide high levels of service, our end users’ ability to
access our games may be interrupted, which may adversely affect
our brand. If end users, branded content owners and carriers do
not perceive our existing games as high-quality or if we
introduce new games that are not favorably received by our end
users and carriers, then we may be unsuccessful in building
brand recognition and brand loyalty in the marketplace. In
addition, globalizing and extending our brand and recognition of
our games will be costly and will involve extensive management
time to execute successfully. Further, the markets in which we
operate are highly competitive and some of our competitors, such
as
Electronic Arts (EA Mobile), already have substantially
more brand name recognition and greater marketing resources than
we do. If we fail to increase brand awareness and consumer
recognition of our games, our potential revenues could be
limited, our costs could increase and our business, operating
results and financial condition could suffer.
Our business and
growth may suffer if we are unable to hire and retain key
personnel, who are in high demand.
We depend on the continued contributions of our senior
management and other key personnel, especially L. Gregory
Ballard and Albert A. “Rocky” Pimentel. The loss of
the services of any of our executive officers or other key
employees could harm our business. All of our
U.S. executive officers and key employees are at-will
employees, which means they may terminate their employment
relationship with us at any time. None of our
U.S. employees is bound by a contractual non-competition
agreement, which could make us vulnerable to recruitment efforts
by our competitors. Internationally, while some employees are
bound by non-competition agreements, we may experience
difficulty in enforcing these agreements with our employees and
contractors. We do not maintain a key-person life insurance
policy on any of our officers or other employees.
Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial,
finance, marketing and creative personnel. We face intense
competition for qualified individuals from numerous technology,
marketing and mobile entertainment companies. In addition,
competition for qualified personnel is particularly intense in
the San Francisco Bay Area, where our headquarters are
located. Further, our principal overseas operations are based in
London and Hong Kong, cities that, similar to our headquarters
region, have high costs of living and consequently high
compensation standards. Qualified individuals are in high
demand, and we may incur significant costs to attract them. We
may be unable to attract and retain suitably qualified
individuals who are capable of meeting our growing creative,
operational and managerial requirements, or may be required to
pay increased compensation in order to do so, and if we are
unable to attract and retain the qualified personnel we need to
succeed, our business would suffer.
Volatility or lack of performance in our stock price may also
affect our ability to attract and retain our key employees. Many
of our senior management personnel and other key employees have
become, or will soon become, vested in a substantial amount of
stock or stock options. Employees may be more likely to leave us
if the shares they own or the shares underlying their options
have significantly appreciated in value relative to the original
purchase price of the shares or the exercise prices of the
option, or if the exercise prices of the options that they hold
are significantly above the market price of our common stock. If
we are unable to retain our employees, our business, operating
results and financial condition would be harmed.
Growth may place
significant demands on our management and our
infrastructure.
We have experienced, and may continue to experience, growth in
our business through internal growth and acquisitions. This
growth has placed, and may continue to place, significant
demands on our management and our operational and financial
infrastructure. In particular, continued growth could strain our
ability to:
•
develop and improve our operational, financial and management
controls;
•
enhance our reporting systems and procedures;
•
recruit, train and retain highly skilled personnel;
•
maintain our quality standards; and
•
maintain branded content owner, wireless carrier and end-user
satisfaction.
Managing our growth will require significant expenditures and
allocation of valuable management resources. If we fail to
achieve the necessary level of efficiency in our organization as
it grows, our business, operating results and financial
condition would be harmed.
The acquisition
of other companies, businesses or technologies could result in
operating difficulties, dilution and other harmful
consequences.
We have made recent acquisitions and, although we have no
present understandings, commitments or agreements to do so, we
may pursue further acquisitions, any of which could be material
to our business, operating results and financial condition.
Future acquisitions could divert management’s time and
focus from operating our business. In addition, integrating an
acquired company, business or technology is risky and may result
in unforeseen operating difficulties and expenditures. We may
also use a portion of the net proceeds of this offering for the
acquisition of, or investment in, companies, technologies,
products or assets that complement our business. Future
acquisitions or dispositions could result in potentially
dilutive issuances of our equity securities, including our
common stock, the incurrence of debt, contingent liabilities or
amortization expenses, or in-process research and development
costs, any of which could harm our financial condition and
operating results. Future acquisitions may also require us to
obtain additional financing, which may not be available on
favorable terms or at all.
International acquisitions involve risks related to integration
of operations across different cultures and languages, currency
risks and the particular economic, political and regulatory
risks associated with specific countries.
Some or all of these issues may result from our acquisitions of
Macrospace in December 2004 and iFone in March 2006, each of
which is based in the United Kingdom. If the anticipated
benefits of either of these or future acquisitions do not
materialize, we experience difficulties integrating iFone or
businesses acquired in the future, or other unanticipated
problems arise, our business, operating results and financial
condition may be harmed.
In addition, a significant portion of the purchase price of
companies we acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment
at least annually. In the future, if our acquisitions do not
yield expected returns, we may be required to take charges to
our earnings based on this impairment assessment process, which
could harm our operating results.
We face added
business, political, regulatory, operational, financial and
economic risks as a result of our international operations and
distribution, any of which could increase our costs and hinder
our growth.
International sales represented approximately 41.8% and 44.6% of
our revenues for 2005 and the first nine months of 2006,
respectively. In addition, as part of our international efforts,
we acquired U.K.-based Macrospace in December 2004, opened our
Hong Kong office in July 2005, expanded our presence in the
European market with our acquisition of iFone in March 2006 and
opened additional offices in Brazil, France and Germany in the
second half of 2006. We expect to open additional international
offices, and we expect international sales to continue to be an
important component of our revenues. Risks affecting our
international operations include:
•
challenges caused by distance, language and cultural differences;
•
multiple and conflicting laws and regulations, including
complications due to unexpected changes in these laws and
regulations;
•
the burdens of complying with a wide variety of foreign laws and
regulations;
•
higher costs associated with doing business internationally;
•
difficulties in staffing and managing international operations;
greater fluctuations in sales to end users and through carriers
in developing countries, including longer payment cycles and
greater difficulty collecting accounts receivable;
•
protectionist laws and business practices that favor local
businesses in some countries;
•
foreign tax consequences;
•
foreign exchange controls that might prevent us from
repatriating income earned in countries outside the United
States;
•
price controls;
•
the servicing of regions by many different carriers;
•
imposition of public sector controls;
•
political, economic and social instability;
•
restrictions on the export or import of technology;
•
trade and tariff restrictions;
•
variations in tariffs, quotas, taxes and other market
barriers; and
•
difficulties in enforcing intellectual property rights in
countries other than the United States.
In addition, developing user interfaces that are compatible with
other languages or cultures can be expensive. As a result, our
ongoing international expansion efforts may be more costly than
we expect. Further, expansion into developing countries subjects
us to the effects of regional instability, civil unrest and
hostilities, and could adversely affect us by disrupting
communications and making travel more difficult.
These risks could harm our international expansion efforts,
which, in turn, could materially and adversely affect our
business, operating results and financial condition.
If we fail to
deliver our games at the same time as new mobile handset models
are commercially introduced, our sales may suffer.
Our business is dependent, in part, on the commercial
introduction of new handset models with enhanced features,
including larger, higher resolution color screens, improved
audio quality, and greater processing power, memory, battery
life and storage. We do not control the timing of these handset
launches. Some new handsets are sold by carriers with one or
more games or other applications pre-loaded, and many end users
who download our games do so after they purchase their new
handsets to experience the new features of those handsets. Some
handset manufacturers give us access to their handsets prior to
commercial release. If one or more major handset manufacturers
were to cease to provide us access to new handset models prior
to commercial release, we might be unable to introduce
compatible versions of our games for those handsets in
coordination with their commercial release, and we might not be
able to make compatible versions for a substantial period
following their commercial release. If, because of game launch
delays, we miss the opportunity to sell games when new handsets
are shipped or our end users upgrade to a new handset, or if we
miss the key holiday selling period, either because the
introduction of a new handset is delayed or we do not deploy our
games in time for the holiday selling season, our business,
operating results and financial condition would likely suffer.
Wireless carriers
generally control the price charged for our mobile games and the
billing and collection for sales of our mobile games and could
make decisions detrimental to us.
Wireless carriers generally control the price charged for our
mobile games either by approving or establishing the price of
the games charged to their subscribers. Some of our carrier
agreements also restrict our ability to change prices. In cases
where carrier approval is required, approvals may not be
granted in a timely manner or at all. A failure or delay in
obtaining these approvals, the prices established by the
carriers for our games, or changes in these prices could
adversely affect market acceptance of those games. Similarly,
for the significant minority of our carriers, including Verizon
Wireless, when we make changes to a pricing plan (the wholesale
price and the corresponding suggested retail price based on our
negotiated revenue-sharing arrangement), adjustments to the
actual retail price charged to end users may not be made in a
timely manner or at all (even though our wholesale price was
reduced). A failure or delay by these carriers in adjusting the
retail price for our games, could adversely affect sales volume
and our revenues for those games.
Carriers and other distributors also control billings and
collections for our games, either directly or through
third-party service providers. If our carriers or their
third-party service providers cause material inaccuracies when
providing billing and collection services to us, our revenues
may be less than anticipated or may be subject to refund at the
discretion of the carrier. This could harm our business,
operating results and financial condition.
We may be unable
to develop and introduce in a timely way new mobile games, and
our games may have defects, which could harm our
brand.
The planned timing and introduction of new original mobile games
and games based on licensed intellectual property are subject to
risks and uncertainties. Unexpected technical, operational,
deployment, distribution or other problems could delay or
prevent the introduction of new games, which could result in a
loss of, or delay in, revenues or damage to our reputation and
brand. If any of our games is introduced with defects, errors or
failures, we could experience decreased sales, loss of end
users, damage to our carrier relationships and damage to our
reputation and brand. Our attractiveness to branded content
licensors might also be reduced. In addition, new games may not
achieve sufficient market acceptance to offset the costs of
development, particularly when the introduction of a game is
substantially later than a planned
“day-and-date”
launch, which could materially harm our business, operating
results and financial condition.
If we fail to
maintain and enhance our capabilities for porting games to a
broad array of mobile handsets, our attractiveness to wireless
carriers and branded content owners will be impaired, and our
sales could suffer.
Once developed, a mobile game may be required to be ported to,
or converted into separate versions for, more than 1,000
different handset models, many with different technological
requirements. These include handsets with various combinations
of underlying technologies, user interfaces, keypad layouts,
screen resolutions, sound capabilities and other
carrier-specific customizations. If we fail to maintain or
enhance our porting capabilities, our sales could suffer,
branded content owners might choose not to grant us licenses and
carriers might choose to give our games less desirable deck
placement or not to give our games placement on their decks at
all.
Changes to our game design and development processes to address
new features or functions of handsets or networks might cause
inefficiencies in our porting process or might result in more
labor intensive porting processes. In addition, we anticipate
that in the future we will be required to port existing and new
games to a broader array of handsets. If we utilize more labor
intensive porting processes, our margins could be significantly
reduced and it might take us longer to port games to an
equivalent number of handsets. This, in turn, could harm our
business, operating results and financial condition.
If our
independent, third-party developers cease development of new
games for us and we are unable to find comparable replacements,
our competitive position may be adversely impacted.
We rely on independent third-party developers to develop some of
our games, which subjects us to the following risks:
•
key developers who worked for us in the past may choose to work
for or be acquired by our competitors;
•
developers currently under contract may try to renegotiate our
agreements with them on terms less favorable to us; and
•
our developers may be unable or unwilling to allocate sufficient
resources to complete our games in a timely or satisfactory
manner or at all.
If our developers terminate their relationships with us or
negotiate agreements with terms less favorable to us, we may
have to reduce the number of games that we intend to introduce,
delay the introduction of some game or increase our internal
development staff, which would be a time-consuming and
potentially costly process, and, as a result, our business,
operating results and financial condition could be harmed.
If one or more of
our games were found to contain hidden, objectionable content,
our business could suffer.
Historically, many video games have been designed to include
hidden content and gameplay features that are accessible through
the use of in-game cheat codes or other technological means that
are intended to enhance the gameplay experience. For example,
Super K.O. Boxing includes additional characters and game
modes that are available with a code (usually provided to a
player after accomplishing a certain level of achievement in the
game). Such features have been common in console and computer
games. However, in several recent cases, hidden content or
features have been found to be included in other
publishers’ products by an employee who was not authorized
to do so or by an outside developer without the knowledge of the
publisher. From time to time, some of this hidden content and
these hidden features have contained profanity, graphic violence
and sexually explicit or otherwise objectionable material. Our
design and porting process and the constraints on the file size
of our games reduce the possibility of hidden, objectionable
content from appearing in the games we publish. Nonetheless,
these processes and constraints may not prevent this content
from being included in our games. If a game we published were
found to contain hidden, objectionable content, the wireless
carriers and other distributors of our games could refuse to
sell it, consumers could refuse to buy it or demand a refund of
their money, and, if based on licensed content, the licensor
could demand that we incur significant expense to remove the
objectionable content from the game and all ported versions of
the game. This could have a materially negative impact on our
business, operating results and financial condition. In
addition, our reputation could be harmed, which could impact
sales of other games we sell and our attractiveness to content
licensors and carriers or other distributors of our games. If
any of these consequences were to occur, our business, operating
results and financial condition could be significantly harmed.
If we fail to
maintain an effective system of internal controls, we might not
be able to report our financial results accurately or prevent
fraud; in that case, our stockholders could lose confidence in
our financial reporting, which would harm our business and could
negatively impact the price of our stock.
Effective internal controls are necessary for us to provide
reliable financial reports and prevent fraud. In addition,
Section 404 of the Sarbanes-Oxley Act of 2002 will require
us to evaluate and report on our internal control over financial
reporting and have our independent registered public accounting
firm attest to our evaluation beginning with our Annual Report
on
Form 10-K
for the year ending December 31, 2008. We are in the
process of preparing and implementing an internal plan of
action for compliance with Section 404 and strengthening
and testing our system of internal controls to provide the basis
for our report. The process of implementing our internal
controls and complying with Section 404 will be expensive
and time consuming, and will require significant attention of
management. We cannot be certain that these measures will ensure
that we implement and maintain adequate controls over our
financial processes and reporting in the future. Even if we
conclude, and our independent registered public accounting firm
concurs, that our internal control over financial reporting
provides reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles, because of its inherent limitations,
internal control over financial reporting may not prevent or
detect fraud or misstatements. Failure to implement required new
or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. If we or our independent
registered public accounting firm discover a material weakness,
the disclosure of that fact, even if quickly remedied, could
reduce the market’s confidence in our financial statements
and harm our stock price. In addition, a delay in compliance
with Section 404 could subject us to a variety of
administrative sanctions, including ineligibility for short form
resale registration, SEC action, the suspension or delisting of
our common stock from The NASDAQ Global Market and the inability
of registered broker-dealers to make a market in our common
stock, which would further reduce our stock price and could harm
our business.
If we do not
adequately protect our intellectual property rights, our
competitive position may be adversely affected.
Our intellectual property is an essential element of our
business. We rely on a combination of copyright, trademark,
trade secret and other intellectual property laws and
restrictions on disclosure to protect our intellectual property
rights. To date, we have not sought patent protection.
Consequently, we will not be able to protect our technologies
from independent invention by third parties. Despite our efforts
to protect our intellectual property rights, unauthorized
parties may attempt to copy or otherwise to obtain and use our
technology and games. Monitoring unauthorized use of our games
is difficult and costly, and we cannot be certain that the steps
we have taken will prevent piracy and other unauthorized
distribution and use of our technology and games, particularly
internationally where the laws may not protect our intellectual
property rights as fully as in the United States. In the future,
we may have to resort to litigation to enforce our intellectual
property rights, which could result in substantial costs and
diversion of our management and resources.
In addition, although we require our third-party developers to
sign agreements not to disclose or improperly use our trade
secrets and acknowledging that all inventions, trade secrets,
works of authorship, developments and other processes generated
by them on our behalf are our property and to assign to us any
ownership they may have in those works, it may still be possible
for third parties to obtain and improperly use our intellectual
properties without our consent. This could harm our business,
operating results and financial condition.
Third parties may
sue us for intellectual property infringement, which, if
successful, may disrupt our business and could require us to pay
significant damage awards.
Third parties may sue us for intellectual property infringement
or initiate proceedings to invalidate our intellectual property,
either of which, if successful, could disrupt the conduct of our
business, cause us to pay significant damage awards or require
us to pay licensing fees. In the event of a successful claim
against us, we might be enjoined from using our or our licensed
intellectual property, we might incur significant licensing fees
and we might be forced to develop alternative technologies. Our
failure or inability to develop non-infringing technology or
games or to license the infringed or similar technology or games
on a timely basis could force us to withdraw games from the
market or prevent us from introducing new games. In addition,
even if we are able to license the infringed or similar
technology or games, license fees could be substantial and the
terms of these licenses could be burdensome, which might
adversely affect our operating results. We might also incur
substantial
expenses in defending against third-party infringement claims,
regardless of their merit. Successful infringement or licensing
claims against us might result in substantial monetary
liabilities and might materially disrupt the conduct of our
business.
Indemnity
provisions in various agreements potentially expose us to
substantial liability for intellectual property infringement,
damages caused by malicious software and other losses.
In the ordinary course of our business, most of our agreements
with carriers and other distributors include indemnification
provisions. In these provisions, we agree to indemnify them for
losses suffered or incurred in connection with our games,
including as a result of intellectual property infringement and
damages caused by viruses, worms and other malicious software.
The term of these indemnity provisions is generally perpetual
after execution of the corresponding license agreement, and the
maximum potential amount of future payments we could be required
to make under these indemnification provisions is generally
unlimited. Large future indemnity payments could harm our
business, operating results and financial condition.
As a result of
our business being concentrated with a limited number of
wireless carriers, we face a concentration of credit
risk.
As of December 31, 2005, our outstanding accounts
receivable balances with Verizon Wireless, Sprint Nextel,
Cingular Wireless and Vodafone were $1.7 million, $672,000,
$581,000 and $277,000, respectively. Similarly, as of
September 30, 2006, our outstanding accounts receivable
balances with those carriers were $2.5 million,
$1.2 million, $809,000 and $1.3 million,
respectively. Since a significant portion of our outstanding
accounts receivable are with Verizon Wireless, Sprint Nextel,
Cingular Wireless and Vodafone, we have a concentration of
credit risk. If any of these carriers is unable to fulfill its
payment obligations to us under our carrier agreements with
them, our revenues could decline significantly and our financial
condition might be harmed.
We may need to
raise additional capital to grow our business, and we may not be
able to raise capital on terms acceptable to us or at
all.
The operation of our business and our efforts to grow our
business further will require significant cash outlays and
commitments. If our cash, cash equivalents and short-term
investments balances and any cash generated from operations and
from this offering are not sufficient to meet our cash
requirements, we will need to seek additional capital,
potentially through debt or equity financings, to fund our
growth. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings, if available, may be on
terms that are dilutive or potentially dilutive to our
stockholders, and the prices at which new investors would be
willing to purchase our securities may be lower than the initial
public offering price. The holders of new securities may also
receive rights, preferences or privileges that are senior to
those of existing holders of our common stock. If new sources of
financing are required but are insufficient or unavailable, we
would be required to modify our growth and operating plans to
the extent of available funding, which would harm our ability to
grow our business.
We face risks
associated with currency exchange rate fluctuations.
Although we currently transact a majority of our business in
U.S. Dollars, we also transact substantial portions of our
business in pounds sterling and Euros as well as other
currencies. Conducting business in currencies other than
U.S. Dollars subjects us to fluctuations in currency
exchange rates that could have a negative impact on our reported
operating results. Fluctuations in the value of the
U.S. Dollar relative to other currencies impact our
revenues, cost of revenues and operating margins and result in
foreign currency translation gains and losses. To date, we have
not engaged in exchange rate hedging activities. Even were we to
implement hedging strategies to mitigate this risk, these
strategies might not eliminate our exposure to foreign exchange
rate fluctuations and would involve costs and risks of their
own, such as ongoing management time and expertise, external
costs to implement the strategies and potential accounting
implications.
Our operations in
countries with a history of corruption and transactions with
foreign governments, including government owned or controlled
wireless carriers, increase the risks associated with our
international activities.
As we operate and sell internationally, we are subject to the
U.S. Foreign Corrupt Practices Act, or the FCPA, and other
laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of obtaining or
retaining business. We have operations, deal with carriers and
make sales in countries known to experience corruption, and
further international expansion may involve more of these
countries. Our activities in these countries create the risk of
unauthorized payments or offers of payments by one of our
employees, consultants, sales agents or distributors that could
be in violation of various laws including the FCPA, even though
these parties are not always subject to our control. We have
attempted to implement safeguards to discourage these practices
by our employees, consultants, sales agents and distributors.
However, our existing safeguards and any future improvements may
prove to be less than effective, and our employees, consultants,
sales agents or distributors may engage in conduct for which we
might be held responsible. Violations of the FCPA may result in
severe criminal or civil sanctions, and we may be subject to
other liabilities, which could negatively affect our business,
operating results and financial condition.
Changes to
financial accounting standards and new exchange rules could make
it more expensive to issue stock options to employees, which
would increase compensation costs and might cause us to change
our business practices.
We prepare our financial statements to conform with accounting
principles generally accepted in the United States. These
accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the Securities
and Exchange Commission, or SEC, and various other bodies. A
change in those principles could have a significant effect on
our reported results and might affect our reporting of
transactions completed before a change is announced. For
example, we have used stock options as a fundamental component
of our employee compensation packages. We believe that stock
options directly motivate our employees to maximize long-term
stockholder value and, through the use of vesting, encourage
employees to remain in our employ. Several regulatory agencies
and entities have made regulatory changes that could make it
more difficult or expensive for us to grant stock options to
employees. For example, the FASB released Statement of Financial
Accounting Standards, or SFAS, No. 123R, Share-Based
Payment, that required us to record a charge to earnings for
employee stock option grants beginning in 2006. In addition,
regulations implemented by the NASDAQ Stock Market generally
require stockholder approval for all stock option plans, which
could make it more difficult for us to grant stock options to
employees. We may, as a result of these changes, incur increased
compensation costs, change our equity compensation strategy or
find it difficult to attract, retain and motivate employees, any
of which could materially and adversely affect our business,
operating results and financial condition.
Risks Relating to
Our Industry
Wireless
communications technology is changing rapidly, and we may not be
successful in working with these new technologies.
Wireless network and mobile handset technologies are undergoing
rapid innovation. New handsets with more advanced processors and
supporting advanced programming languages continue to be
introduced. In addition, networks that enable enhanced features,
such as multiplayer technology, are being developed and
deployed. We have no control over the demand for, or success of,
these products or technologies. The development of new,
technologically advanced games to match the advancements in
handset technology is a complex process requiring significant
research and development expense, as well as the accurate
anticipation of technological and market trends. If we fail to
anticipate and adapt to these and other technological changes,
the available channels for our games may be limited and our
market share and our operating results may suffer. Our future
success will
depend on our ability to adapt to rapidly changing technologies,
develop mobile games to accommodate evolving industry standards
and improve the performance and reliability of our games. In
addition, the widespread adoption of networking or
telecommunications technologies or other technological changes
could require substantial expenditures to modify or adapt our
games.
Technology changes in our industry require us to anticipate,
sometimes years in advance, which technologies we must implement
and take advantage of in order to make our games and other
mobile entertainment products competitive in the market.
Therefore, we usually start our product development with a range
of technical development goals that we hope to be able to
achieve. We may not be able to achieve these goals, or our
competition may be able to achieve them more quickly and
effectively than we can. In either case, our products may be
technologically inferior to those of our competitors, less
appealing to end users or both. If we cannot achieve our
technology goals within the original development schedule of our
products, then we may delay their release until these technology
goals can be achieved, which may delay or reduce our revenues,
increase our development expenses and harm our reputation.
Alternatively, we may increase the resources employed in
research and development in an attempt either to preserve our
product launch schedule or to keep up with our competition,
which would increase our development expenses. In either case,
our business, operating results and financial condition could be
materially harmed.
The complexity
and incompatibilities among mobile handsets may require us to
use additional resources for the development of our
games.
To reach large numbers of wireless subscribers, mobile
entertainment publishers like us must support numerous mobile
handsets and technologies. However, keeping pace with the rapid
innovation of handset technologies together with the continuous
introduction of new, and often incompatible, handset models by
wireless carriers requires us to make significant investments in
research and development, including personnel, technologies and
equipment. In the future, we may be required to make substantial
investments in our development if the number of different types
of handset models continues to proliferate. In addition, as more
advanced handsets are introduced enabling more complex, feature
rich games, we anticipate that our per-game development costs
will increase, which could increase the risks associated with
the failure of any one game and could materially harm our
operating results and financial condition.
If wireless
subscribers do not continue to use their mobile handsets to
access games and other applications, our business may be
adversely affected.
We operate in a developing industry. Our success depends on
growth in the number of wireless subscribers who use their
mobile handsets to access data services and, in particular,
entertainment applications of the type we develop and
distribute. New or different mobile entertainment applications,
such as streaming video or music applications, developed by our
current or future competitors may be preferred by subscribers to
our games. In addition, other mobile platforms such as the iPod
and dedicated portable gaming platforms such as the PlayStation
Portable and the Nintendo DS may become widespread, and end
users may choose to switch to these platforms. If the market for
our games does not continue to grow or we are unable to acquire
new end users, our business growth and future revenues could be
adversely affected. If end users switch their entertainment
spending away from the games and related applications that we
publish, or switch to portable gaming platforms or distribution
where we do not have comparative strengths, our business,
operating results and financial condition may suffer.
Our industry is
subject to risks generally associated with the entertainment
industry, any of which could significantly harm our operating
results.
Our business is subject to risks that are generally associated
with the entertainment industry, many of which are beyond our
control. These risks could negatively impact our operating
results and include: the popularity, price and timing of release
of games and mobile handsets on which they are
played; economic conditions that adversely affect discretionary
consumer spending; changes in consumer demographics; the
availability and popularity of other forms of entertainment; and
critical reviews and public tastes and preferences, which may
change rapidly and cannot necessarily be predicted.
A shift of
technology platform by wireless carriers and mobile handset
manufacturers could harm our business.
End users of games must have a mobile handset with multimedia
capabilities enabled by technologies capable of running
third-party games and related applications such as ours. Our
development resources are concentrated in the BREW and Java
platforms, and we have experience developing games for the
i-mode,
Mophun, Symbian and Windows Mobile Platforms. If one or more of
these technologies fall out of favor with handset manufacturers
and wireless carriers and there is a rapid shift to a technology
platform such as Adobe Flash Lite or a new technology where we
do not have development experience or resources, the development
period for our games may be lengthened, increasing our costs,
and the resulting games may be of lower quality, and may be
published later than anticipated. In such an event, our
reputation, business, operating results and financial condition
might suffer.
System or network
failures could reduce our sales, increase costs or result in a
loss of end users of our games.
Mobile game publishers rely on wireless carriers’ networks
to deliver games to end users and on their or other third
parties’ billing systems to track and account for the
downloading of their games. In certain circumstances, mobile
game publishers may also rely on their own servers to deliver
games on demand to end users through their carriers’
networks. In addition, certain subscription-based games such as
World Series of Poker and entertainment products such as
FOX Sports Mobile require access over the mobile Internet
to our servers in order to enable features such as multiplayer
modes, high score posting or access to information updates. Any
failure of, or technical problem with, carriers’, third
parties’ or our billing systems, delivery systems,
information systems or communications networks could result in
the inability of end users to download our games, prevent the
completion of billing for a game, or interfere with access to
some aspects of our games or other products. If any of these
systems fails or if there is an interruption in the supply of
power, an earthquake, fire, flood or other natural disaster, or
an act of war or terrorism, end users might be unable to access
our games. For example, from time to time, our carriers have
experienced failures with their billing and delivery systems and
communication networks, including gateway failures that reduced
the provisioning capacity of their branded
e-commerce
system. Any failure of, or technical problem with, the
carriers’, other third parties’ or our systems could
cause us to lose end users or revenues or incur substantial
repair costs and distract management from operating our
business. This, in turn, could harm our business, operating
results and financial condition.
The market for
mobile games is seasonal, and our results may vary significantly
from period to period.
Many new mobile handset models are released in the fourth
calendar quarter to coincide with the holiday shopping season.
Because many end users download our games soon after they
purchase new handsets, we may experience seasonal sales
increases based on the holiday selling period. However, due to
the time between handset purchases and game purchases, most of
this holiday impact occurs for us in our first quarter. In
addition, we seek to release many of our games in conjunction
with specific events, such as the release of a related movie. If
we miss these key selling periods for any reason, our sales will
suffer disproportionately. Likewise, if a key event to which our
game release schedule is tied were to be delayed or cancelled,
our sales would also suffer disproportionately. Further, for a
variety of reasons, including roaming charges for data downloads
that may make purchase of our games prohibitively expensive for
many end users while they are traveling,
we may experience seasonal sales decreases during the summer,
particularly in Europe. If the level of travel increases or
expands to other periods, our operating results and financial
condition may be harmed. Our ability to meet game development
schedules is affected by a number of factors, including the
creative processes involved, the coordination of large and
sometimes geographically dispersed development teams required by
the increasing complexity of our games, and the need to
fine-tune our games prior to their release. Any failure to meet
anticipated development or release schedules would likely result
in a delay of revenues or possibly a significant shortfall in
our revenues and cause our operating results to be materially
different than anticipated.
Our business
depends on the growth and maintenance of wireless communications
infrastructure.
Our success will depend on the continued growth and maintenance
of wireless communications infrastructure in the United States
and internationally. This includes deployment and maintenance of
reliable next-generation digital networks with the speed, data
capacity and security necessary to provide reliable wireless
communications services. Wireless communications infrastructure
may be unable to support the demands placed on it if the number
of subscribers continues to increase, or if existing or future
subscribers increase their bandwidth requirements. Wireless
communications have experienced a variety of outages and other
delays as a result of infrastructure and equipment failures, and
could face outages and delays in the future. These outages and
delays could reduce the level of wireless communications usage
as well as our ability to distribute our games successfully. In
addition, changes by a wireless carrier to network
infrastructure may interfere with downloads of our games and may
cause end users to lose functionality in our games that they
have already downloaded. This could harm our business, operating
results and financial condition.
Future mobile
handsets may significantly reduce or eliminate wireless
carriers’ control over delivery of our games and force us
to rely further on alternative sales channels, which, if not
successful, could require us to increase our sales and marketing
expenses significantly.
Substantially all our games are currently sold through
carriers’ branded
e-commerce
services. We have invested significant resources developing this
sales channel. However, a growing number of handset models
currently available allow wireless subscribers to browse the
Internet and, in some cases, download applications from sources
other than a carrier’s branded
e-commerce
service. In addition, the development of other application
delivery mechanisms such as premium-SMS may enable subscribers
to download applications without having to access a
carrier’s branded
e-commerce
service. Increased use by subscribers of open operating system
handsets or premium-SMS delivery systems will enable them to
bypass carriers’ branded
e-commerce
services and could reduce the market power of carriers. This
could force us to rely further on alternative sales channels
where we may not be successful selling our games, and could
require us to increase our sales and marketing expenses
significantly. As with our carriers, we believe that inferior
placement of our games and other mobile entertainment products
in the menus of off-deck distributors will result in lower
revenues than might otherwise be anticipated from these
alternative sales channels. We may be unable to develop and
promote our direct website distribution sufficiently to overcome
the limitations and disadvantages of off-deck distribution
channels. This could harm our business, operating results and
financial condition.
Actual or
perceived security vulnerabilities in mobile handsets or
wireless networks could adversely affect our revenues.
Maintaining the security of mobile handsets and wireless
networks is critical for our business. There are individuals and
groups who develop and deploy viruses, worms and other illicit
code or malicious software programs that may attack wireless
networks and handsets. Security experts have identified computer
“worm” programs, such as “Cabir” and
“Commwarrior.A,” and viruses, such as
“Lasco.A,” that target handsets running on the Symbian
operating system. Although these worms have
not been widely released and do not present an immediate risk to
our business, we believe future threats could lead some end
users to seek to return our games, reduce or delay future
purchases of our games or reduce or delay the use of their
handsets. Wireless carriers and handset manufacturers may also
increase their expenditures on protecting their wireless
networks and mobile phone products from attack, which could
delay adoption of new handset models. Any of these activities
could adversely affect our revenues and this could harm our
business, operating results and financial condition.
If a substantial
number of the end users that purchase our games by subscription
change mobile handsets or if wireless carriers switch to
subscription plans that require active monthly renewal by
subscribers, our sales could suffer.
Subscriptions represent a significant portion of our revenues.
As handset development continues, over time an increasing
percentage of end users who already own one or more of our
subscription games will likely upgrade from their existing
handsets. With some wireless carriers, it is not currently
feasible for these end users to transfer their existing
subscriptions from one handset to another. In addition, carriers
may switch their subscription billing systems to require end
users to actively renew, or opt-in, each month, rather than
current systems that passively renew requiring end users to take
some action to opt-out of their subscriptions. In either case,
unless we are able to re-sell subscriptions to these end users
or replace these end users with other end users, our sales would
suffer and this could harm our business, operating results and
financial condition.
Changes in
government regulation of the media and wireless communications
industries may adversely affect our business.
It is possible that a number of laws and regulations may be
adopted in the United States and elsewhere that could restrict
the media and wireless communications industries, including laws
and regulations regarding customer privacy, taxation, content
suitability, copyright, distribution and antitrust. Furthermore,
the growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws
that may impose additional burdens on companies such as ours
conducting business through wireless carriers. We anticipate
that regulation of our industry will increase and we will be
required to devote legal and other resources to address this
regulation. Changes in current laws or regulations or the
imposition of new laws and regulations in the United States or
elsewhere regarding the media and wireless communications
industries may lessen the growth of wireless communications
services and may materially reduce our ability to increase or
maintain sales of our games.
A number of studies have examined the health effects of mobile
phone use, and the results of some of the studies have been
interpreted as evidence that mobile phone use causes adverse
health effects. The establishment of a link between the use of
mobile phone services and health problems, or any media reports
suggesting such a link, could increase government regulation of,
and reduce demand for, mobile phones and, accordingly, the
demand for our games and related applications and this could
harm our business, operating results and financial condition.
Risks Related to
Ownership of Our Common Stock
There has been no
prior market for our common stock, our stock price may be
volatile or may decline regardless of our operating performance,
and you may not be able to resell your shares at or above the
initial public offering price.
There has been no public market for our common stock prior to
this offering. The initial public offering price for our common
stock will be determined through negotiations between the
underwriters and us. This initial public offering price may vary
from the market price of our common stock following this
offering. If you purchase shares of our common stock in this
offering, you may not be able to resell those shares at or above
the initial public offering price. An active or liquid market in
our
common stock may not develop upon completion of this offering
or, if it does develop, it may not be sustainable. The market
price of our common stock may fluctuate significantly in
response to numerous factors, many of which are beyond our
control, including:
•
price and volume fluctuations in the overall stock market;
•
changes in operating performance and stock market valuations of
other technology companies generally, or those in our industry
in particular;
•
actual or anticipated fluctuations in our operating results;
•
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
•
changes in financial estimates by any securities analysts who
follow our company, our failure to meet these estimates or
failure of those analysts to initiate or maintain coverage of
our stock;
•
ratings downgrades by any securities analysts who follow our
company;
•
announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
•
the public’s response to our press releases or other public
announcements, including our filings with the SEC;
•
market conditions or trends in our industry or the economy as a
whole;
•
the loss of key personnel;
•
lawsuits threatened or filed against us;
•
future sales of our common stock by our executive officers,
directors and significant stockholders; and
•
other events or factors, including those resulting from war,
incidents of terrorism or responses to these events.
In addition, the stock markets, and in particular The NASDAQ
Global Market on which our common stock will be listed, have
experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity
securities of many technology companies. Stock prices of many
technology companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those
companies. In the past, stockholders have instituted securities
class action litigation following periods of market volatility.
If we were to become involved in securities litigation, it could
have substantial costs and divert resources and the attention of
management from our business and adversely affect our business,
operating results and financial condition.
Maintaining and
improving our financial controls and the requirements of being a
public company may strain our resources, divert
management’s attention and affect our ability to attract
and retain qualified members for our board of
directors.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, or the
Exchange Act, the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and the rules and regulations of the NASDAQ
Stock Market. The requirements of these rules and regulations
will increase our legal, accounting and financial compliance
costs, will make some activities more difficult, time-consuming
and costly and may also place undue strain on our personnel,
systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. This can be difficult
to do. For example, we depend on the reports of wireless
carriers for information regarding the amount of sales
of our games and related applications and to determine the
amount of royalties we owe branded content licensors and the
amount of our revenues. These reports may not be timely, and in
the past they have contained, and in the future they may
contain, errors.
In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over
financial reporting, we will need to expend significant
resources and provide significant management oversight. We have
a substantial effort ahead of us to implement appropriate
processes, document the system of internal control over relevant
processes, assess their design, remediate any deficiencies
identified and test their operation. As a result,
management’s attention may be diverted from other business
concerns, which could harm our business, operating results and
financial condition. These efforts will also involve substantial
accounting-related costs. In addition, if we are unable to
continue to meet these requirements, we may not be able to
remain listed on The NASDAQ Global Market.
The Sarbanes-Oxley Act and the rules and regulations of the
NASDAQ Stock Market will make it more difficult and more
expensive for us to maintain directors’ and officers’
liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to maintain
coverage. If we are unable to maintain adequate directors’
and officers’ insurance, our ability to recruit and retain
qualified directors, especially those directors who may be
considered independent for purposes of the NASDAQ Stock Market
rules, and officers will be significantly curtailed.
Purchasers in
this offering will suffer immediate substantial
dilution.
If you purchase shares of our common stock in this offering, the
book value of your shares will immediately be less than the
price you paid. This effect is known as dilution. If previously
granted options or warrants are exercised, additional dilution
will occur. As of September 30, 2006, options to purchase
8,158,311 shares of our common stock at a weighted average
exercise price of approximately $1.45 per share were
outstanding. Subsequent to September 30, 2006, we granted
additional options to purchase an aggregate of
855,925 shares of our common stock at a weighted average
exercise price of $3.51 per share. In addition, as of the
date of this prospectus, warrants to purchase an aggregate of
687,223 shares of our common stock at a weighted average
exercise price of $1.74 were outstanding. Exercise of these
options and warrants will result in additional dilution to
purchasers of our common stock in this offering.
A significant
portion of our total outstanding shares may be sold into the
market in the near future. If there are substantial sales of
shares of our common stock, the price of our common stock could
decline.
The price of our common stock could decline if there are
substantial sales of our common stock or if there is a large
number of shares of our common stock available for sale. After
this offering, we will have
outstanding
shares of our common stock based on the number of shares
outstanding as of September 30, 2006. This includes the
shares that we are selling in this offering, which may be resold
in the public market immediately. The remaining
63,169,489 shares, or % of our
outstanding shares after this offering, are currently restricted
as a result of market standoff
and/or
lock-up
agreements but will be able to be sold in the near future as set
forth below.
Number of Shares
and
Date Available
for Sale
% of Total
Outstanding
into Public
Market
61,532,158 shares, or
%
180 days after the date of
this prospectus, sales of 48,582,262 of which will be subject to
volume and other limitations.
1,637,331 shares, or
%
More than 180 days after the
date of this prospectus, as restricted stock vests and shares
are released from escrow
After this offering, the holders of an aggregate of
47,571,918 shares of our common stock or subject to
warrants outstanding as of September 30, 2006 will have
rights, subject to some conditions, to require us to file
registration statements covering their shares or to include
their shares in registration statements that we may file for
ourselves or our stockholders. We also intend to register all
shares of our common stock that we have issued and may issue
under our employee equity incentive plans. Once we register
these shares, they will be able to be sold freely in the public
market upon issuance, subject to existing market standoff
and/or
lock-up
agreements.
The market price of the shares of our common stock could decline
as a result of sales of a substantial number of our shares in
the public market or the perception in the market that the
holders of a large number of shares intend to sell their shares.
Our directors,
executive officers and principal stockholders will continue to
have substantial control over us after this offering and could
delay or prevent a change in corporate control.
After this offering, our directors, executive officers and
holders of more than 5% of our common stock, together with their
affiliates, will beneficially own, in the aggregate,
approximately % of our outstanding
common stock. As a result, these stockholders, acting together,
would have the ability to significantly influence the outcome of
matters submitted to our stockholders for approval, including
the election of directors and any merger, consolidation or sale
of all or substantially all of our assets. In addition, these
stockholders, acting together, would have the ability to
significantly influence the management and affairs of our
company. Accordingly, this concentration of ownership might harm
the market price of our common stock by:
•
delaying, deferring or preventing a change in our control;
•
impeding a merger, consolidation, takeover or other business
combination involving us; or
•
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
We have broad
discretion in the use of the net proceeds from this offering and
may not use them effectively.
We cannot specify with any certainty the particular uses of the
net proceeds that we will receive from this offering other than
the use of $12.1 million to repay in full the principal and
accrued interest on our outstanding loan from Pinnacle Ventures.
Our management will have broad discretion in the application of
the net proceeds, including working capital, possible
acquisitions and other general corporate purposes. Our
stockholders may not agree with the manner in which our
management chooses to allocate and spend the net proceeds. The
failure by our management to apply these funds effectively could
harm our business and financial condition. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
If securities or
industry analysts do not publish research or publish inaccurate
or unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
cover us downgrade our stock or publish inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts cease coverage
of our company or fail to publish reports on us regularly,
demand for our stock could decrease, which might cause our stock
price and trading volume to decline.
Some provisions
in our restated certificate of incorporation, restated bylaws,
Delaware law and the terms of some of our licensing and
distribution agreements may deter third parties from acquiring
us.
The terms of a number of our agreements with branded content
owners and wireless carriers effectively provide that, if we
undergo a change of control, the applicable content owner or
carrier will be entitled to terminate the relevant agreement. In
addition, we anticipate that our restated certificate of
incorporation and restated bylaws that will become effective
immediately following the completion of this offering will
contain provisions that may make the acquisition of our company
more difficult without the approval of our board of directors,
including the following:
•
our board of directors is classified into three classes of
directors with staggered three-year terms;
•
only our lead independent director, our chief executive officer,
our president or a majority of our board of directors is
authorized to call a special meeting of stockholders;
•
our stockholders may take action only at a meeting of
stockholders and not by written consent;
•
vacancies on our board of directors may be filled only by our
board of directors and not by stockholders;
•
our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established and shares of which may be issued without
stockholder approval; and
•
advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of stockholders.
These provisions and other provisions in our charter documents
could discourage, delay or prevent a transaction involving a
change in our control. Any delay or prevention of a change of
control transaction could cause stockholders to lose a
substantial premium over the then-current market price of their
shares. These provisions could also discourage proxy contests
and could make it more difficult for you and other stockholders
to elect directors of your choosing or to cause us to take other
corporate actions you desire.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which, subject to some exceptions,
prohibits “business combinations” between a Delaware
corporation and an “interested stockholder,” which is
generally defined as a stockholder who becomes a beneficial
owner of 15% or more of a Delaware corporation’s voting
stock, for a three-year period following the date that the
stockholder became an interested stockholder. Section 203
could have the effect of delaying, deferring or preventing a
change in control that our stockholders might consider to be in
their best interests.
In addition to historical information, this prospectus contains
forward-looking statements. We may, in some cases, use words,
such as “project,”“believe,”“anticipate,”“plan,”“expect,”“estimate,”“intend,”“continue,”“should,”“would,”“could,”“potentially,”“will” or “may,” or
other similar words and expressions that convey uncertainty
about future events or outcomes to identify these
forward-looking statements. Forward-looking statements in this
prospectus include statements about:
•
our expectations regarding our revenues, expenses and operations
and our ability to achieve and then sustain profitability;
•
our anticipated cash needs and our estimates regarding our
capital requirements;
•
our ability to expand our base of end users and relationships
with wireless carriers and branded content owners;
•
our ability to expand our product offerings and our ability to
develop games for other platforms;
•
our anticipated growth strategies and sources of new revenues;
•
anticipated trends and challenges in our business and the
markets in which we operate;
•
our ability to retain and hire necessary employees and staff our
operations appropriately;
•
the impact of seasonality on our business;
•
the amount of external development resources that we intend to
use;
•
our expectations regarding the royalty rates for intellectual
property that we license and publishing of original games;
•
our ability to estimate accurately for purposes of preparing our
consolidated financial statements;
•
our ability to find future acquisition opportunities on
favorable terms or at all;
•
our intention to license additional brands and other
intellectual property;
•
our planned capital expenditures;
•
our international expansion plans and our anticipated
international revenue growth;
•
our ability to stay abreast of modified or new laws applying to
our business; and
•
our spending of the net proceeds from this offering.
The outcome of the events described in these forward-looking
statements is subject to known and unknown risks, uncertainties
and other factors that could cause actual results to differ
materially from the results anticipated by these forward-looking
statements. These risks, uncertainties and factors include those
we discuss in this prospectus under the caption “Risk
Factors.” You should read these risk factors and the other
cautionary statements made in this prospectus as being
applicable to all related forward-looking statements wherever
they appear in this prospectus.
The forward-looking statements made in this prospectus relate
only to events as of the date on which the statements are made.
We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
This prospectus also contains statistical data that we obtained
from industry publications and reports. These industry
publications generally indicate that they have obtained their
information from sources believed to be reliable, but do not
guarantee the accuracy and completeness of their information.
Although we have not independently verified the data contained
in these industry publications and reports, based on our
industry experience we believe that the publications are
reliable and the conclusions contained in the publications and
reports are reasonable.
We estimate that we will receive net proceeds from the sale of
the shares
of common stock that we are selling in this offering of
approximately $ million,
based on an assumed initial public offering price of
$ per share, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses. Each $1.00 increase or decrease in the
assumed initial public offering price would increase or
decrease, as applicable, the net proceeds to us by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions. If the
underwriters’ option to purchase additional shares in this
offering is exercised in full, we estimate that our net proceeds
will be approximately
$ million.
The principal purposes of this offering are to obtain additional
capital, to create a public market for our common stock and to
facilitate our future access to the public equity markets. We
intend to use approximately $12.1 million of the net
proceeds of this offering to repay in full the principal and
accrued interest on our outstanding loan from Pinnacle Ventures,
based on amounts accrued as of December 19, 2006. The loan
has an interest rate of 11% and has a maturity date of June
2009. We used the net proceeds of this loan for working capital
and general corporate purposes. We expect to use the remaining
net proceeds of this offering for general corporate purposes,
including working capital and potential capital expenditures. We
do not have more specific plans for the net proceeds from this
offering. We may also use a portion of the net proceeds for the
acquisition of, or investment in, companies, technologies,
products or assets that complement our business. However, we
have no present understandings, commitments or agreements to
enter into any acquisitions or make any investments.
We have not yet determined our anticipated expenditures and
therefore cannot estimate the amounts to be used for each of the
purposes discussed above. The amounts and timing of any
expenditures will vary depending on the amount of cash generated
by our operations, competitive and technological developments
and the rate of growth, if any, of our business. Accordingly,
our management will have significant flexibility in applying the
net proceeds from this offering, and investors will be relying
on the judgment of our management regarding the application of
these net proceeds. Pending the uses described above, we intend
to invest the net proceeds from this offering in short-term,
interest-bearing, investment-grade securities. The goal with
respect to the investment of these net proceeds will be capital
preservation and liquidity so that these funds are readily
available to fund our operations.
We have never declared or paid any cash dividends on our capital
stock, and we do not currently intend to pay any cash dividends
on our common stock for the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Any future determination to pay
dividends on our common stock will be at the discretion of our
board of directors and will depend upon, among other factors,
our financial condition, operating results, current and
anticipated cash needs, plans for expansion and other factors
that our board of directors may deem relevant. Our existing loan
agreement with Pinnacle Ventures prohibits payment of dividends
prior to the effective date of the registration statement
covering this offering.
The following table sets forth our capitalization as of
September 30, 2006:
•
on an actual basis;
•
on a pro forma basis to reflect (i) the automatic
conversion of all outstanding shares of our preferred stock into
47,040,945 shares of our common stock, as if this had
occurred as of September 30, 2006, and (ii) the
reclassification of our preferred stock warrant liability to
additional paid-in capital upon the conversion of warrants to
purchase shares of our convertible preferred stock into warrants
to purchase shares of our common stock upon the completion of
this offering; and
•
on a pro forma as adjusted basis to reflect, in addition,
(i) the sale by us of
the shares
of common stock offered by us in this offering at an assumed
initial public offering price of
$ per share, after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses, (ii) the amendment and
restatement of our certificate of incorporation immediately
following the completion of this offering and (iii) the use
of approximately $12.1 million of the net proceeds of this
offering to repay in full the principal and accrued interest on
our loan from Pinnacle Ventures.
You should read this table together with our consolidated
financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
Mandatorily redeemable convertible
preferred stock (Series A –
D-1),
$0.0001 par value per share; 37,639,842 shares
authorized, 36,773,066 shares issued and outstanding,
actual; no shares authorized, issued or outstanding, pro forma
or pro forma as adjusted
57,246
—
—
Special junior redeemable preferred
stock, $0.0001 par value; 13,454,516 shares authorized,
10,267,879 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma or pro forma
as adjusted
19,098
—
—
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par
value per share; no shares authorized, issued or outstanding,
actual or pro forma; 5,000,000 shares authorized, no shares
issued or outstanding, pro forma as adjusted
—
—
—
Common stock, $0.0001 par
value per share; 100,000,000 shares authorized,
16,128,544 shares issued and outstanding, actual;
100,000,000 shares authorized, 63,169,489 shares
issued and outstanding, pro forma; 250,000,000 shares
authorized, shares
issued and outstanding, pro forma as adjusted
2
6
Additional paid-in capital
19,234
97,608
Deferred stock-based compensation
(562
)
(562
)
(562
)
Accumulated other comprehensive loss
229
229
229
Accumulated deficit
(43,666
)
(43,666
)
(43,666
)
Total stockholders’ equity
(deficit)
(24,763
)
53,615
Total capitalization
$
61,946
$
61,946
$
(1)
Each $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, respectively, the amount of
additional paid-in capital, total stockholders’ equity
(deficit) and total capitalization by approximately
$ million, assuming the
number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions.
In the table above, the number of shares outstanding as of
September 30, 2006 does not include:
•
8,158,311 shares issuable upon the exercise of stock
options outstanding as of September 30, 2006 with a
weighted average exercise price of approximately $1.45 per
share;
•
687,223 shares issuable upon the exercise of warrants
outstanding as of September 30, 2006 with a weighted
average exercise price of approximately $1.74 per
share; and
•
shares
to be reserved for issuance under our 2006 Equity Incentive Plan
and our 2006 Employee Stock Purchase Plan, each of which will
become effective on the first day that our common stock is
publicly traded and contains provisions that automatically
increase its share reserve each year, as more fully described in
“Management — Employee Benefit Plans.”
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the initial public offering price of our common stock and the
pro forma net tangible book value of our common stock after this
offering. As of September 30, 2006, our pro forma net
tangible book value was approximately $10.7 million, or
$0.17 per share, based upon 63,169,489 shares outstanding
as of this date. Pro forma net tangible book value per share
represents the amount of our total tangible assets less our
total liabilities, divided by the number of outstanding shares
of our common stock, after giving effect to the automatic
conversion of all outstanding shares of our preferred stock into
shares of our common stock and the reclassification of our
preferred stock warrant liability to additional paid-in capital
upon the conversion of warrants to purchase shares of our
convertible preferred stock into warrants to purchase shares of
our common stock upon the completion of this offering.
After giving effect to the sale by us of
the shares
of common stock offered by us in this offering at an assumed
initial public offering price of
$ per share, after deducting
the estimated underwriting discounts and commissions and the
estimated offering expenses, our pro forma as adjusted net
tangible book value as of September 30, 2006 would have
been approximately $ million,
or $ per share. This
represents an immediate increase in pro forma net tangible book
value of $ per share to
existing stockholders and an immediate dilution of
$ per share to new investors
purchasing shares at the initial public offering price. The
following table illustrates this per share dilution:
Increase in pro forma net tangible
book value per share attributable to new investors
Pro forma as adjusted net tangible
book value per share after this offering
Dilution in pro forma net tangible
book value per share to new investors
$
A $1.00 increase or decrease in the assumed initial public
offering price of $ would increase
or decrease our pro forma as adjusted net tangible book value
per share after this offering by
$ per share and the dilution
in pro forma as adjusted net tangible book value to new
investors by $ per share,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions.
If the underwriters exercise in full their option to purchase
additional shares of our common stock in this offering, the pro
forma net tangible book value per share after giving effect to
this offering would be $ per
share, and the dilution in pro forma net tangible book value per
share to investors in this offering would be
$ per share.
The following table summarizes on the pro forma as adjusted
basis described above, the difference between our existing
stockholders and the purchasers of shares of our common stock in
this offering with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and
the average price paid per share paid to us, based on an assumed
initial public offering price of
$ per share, before deducting
the estimated underwriting discounts and commissions:
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, respectively, total consideration
paid by new investors and total consideration paid by all
stockholders by approximately
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same.
The above discussion and tables assume no exercise of our stock
options or warrants outstanding as of September 30, 2006,
consisting of 8,158,311 shares of our common stock issuable
upon the exercise of stock options with a weighted average
exercise price of approximately $1.45 per share and
687,223 shares of our common stock issuable upon the
exercise of warrants with a weighted average exercise price of
approximately $1.74 per share. If all of these options and
warrants were exercised, then:
•
there will be an additional
$ per share of dilution to
new investors;
•
our existing stockholders, including the holders of these
options and warrants, would own % and our new
investors would own % of the total number of shares
of our common stock outstanding upon the completion of this
offering; and
•
our existing stockholders, including the holders of these
options and warrants, would have paid % of total
consideration, at an average price per share of
$ , and our new investors would
have paid % of total consideration.
You should read the selected consolidated financial data below
in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements, related notes and
other financial information included elsewhere in this
prospectus. The selected consolidated financial data in this
section are not intended to replace the financial statements and
are qualified in their entirety by the financial statements and
related notes included elsewhere in this prospectus.
The following table presents selected historical financial data.
We derived the statements of operations data for the years ended
December 31, 2003, 2004 and 2005 and the nine months ended
September 30, 2006 and the balance sheet data as of
December 31, 2004 and 2005 and September 30, 2006 from
our audited consolidated financial statements included elsewhere
in this prospectus. We derived the statements of operations data
for the period from May 16, 2001 (inception) through
December 31, 2001 and the year ended December 31, 2002
and the balance sheet data as of December 31, 2001, 2002
and 2003 from our audited consolidated financial statements that
do not appear in this prospectus. We derived the statement of
operations data for the nine months ended September 30,2005 from our unaudited consolidated financial statements
included elsewhere in this prospectus. We have prepared the
unaudited consolidated financial statements on the same basis as
the audited consolidated financial statements and have included,
in our opinion, all adjustments, consisting only of normal
recurring adjustments, that we consider necessary to state
fairly the results of operations for the nine months ended
September 30, 2005. Our historical results are not
necessarily indicative of the results we expect in the future,
and our results for the nine months ended September 30,2006 should not be considered indicative of results we expect
for the full fiscal year.
The pro forma per share data give effect to the conversion of
all our outstanding convertible preferred stock into common
stock upon the completion of this offering and adjustments to
eliminate accretion to preferred stock and the charges
associated with the cumulative effect change and subsequent
remeasurement to fair value of our preferred stock warrants. For
further information concerning the calculation of pro forma per
share information, please refer to note 2 of our notes to
consolidated financial statements.
You should read the following discussion and analysis in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may
differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors,
including those set forth under “Risk Factors” and
elsewhere in this prospectus.
Overview
Glu Mobile is a leading global publisher of mobile games. We
have developed and published a portfolio of more than 100 casual
and traditional games to appeal to a broad cross section of the
over one billion subscribers served by our more than 150
wireless carriers and other distributors. We create games and
related applications based on third-party licensed brands and
other intellectual property, as well as on our own original
brands and intellectual property. Our games based on licensed
intellectual property include Deer Hunter, Diner
Dash, Monopoly, Sonic the Hedgehog, World
Series of Poker and Zuma. Our original games based on
our own intellectual property include Alpha Wing,
Ancient Empires, Blackjack Hustler, Stranded
and Super K.O. Boxing.
We seek to attract end users by developing engaging content that
is designed specifically to take advantage of the portability
and networked nature of mobile handsets. We leverage the
marketing resources and distribution infrastructure of wireless
carriers and the brands and other intellectual property of
third-party content owners, which allows us to focus our efforts
on developing and publishing high-quality mobile games.
We believe the increase in quality and greater availability of
mobile games are increasing end-user awareness of and demand for
mobile games. At the same time, carriers and branded content
owners are focusing on a small group of publishers that have the
ability to produce high-quality mobile games consistently and
port them rapidly and cost effectively to a wide variety of
handsets. Additionally, branded content owners are seeking
publishers that have the ability to distribute games globally
through relationships with most or all of the major carriers. We
believe we have created the requisite development and porting
technology and have achieved the requisite scale to be in this
group. We also believe that leveraging our carrier and content
owner relationships will allow us to grow our revenues without
corresponding percentage growth in our infrastructure and
operating costs.
Our revenue growth rate will depend significantly on continued
growth in the mobile game market and our ability to continue to
attract new end users in that market. Our ability to attain
profitability will be affected by the extent to which we must
incur additional expenses to expand our sales, marketing,
development, and general and administrative capabilities to grow
our business. The largest component of our expenses is personnel
costs. Personnel costs consist of salaries, benefits and
incentive compensation, including bonuses and stock-based
compensation, for our employees. Our operating expenses will
continue to grow in absolute dollars, assuming our revenues
continue to grow. As a percentage of revenues, we expect these
expenses to decrease.
We were incorporated in May 2001 and introduced our first mobile
games to the market in July 2002. In December 2004 and in March
2006, we acquired Macrospace and iFone, respectively, each a
mobile game developer and publisher based in the United Kingdom.
In the third quarter of 2005, we opened a Hong Kong office; in
the third quarter of 2006, we opened an office in France; and,
in the fourth quarter of 2006, we opened additional offices in
Brazil and Germany.
Revenues
We generate the vast majority of our revenues from wireless
carriers that market and distribute our games. These carriers
generally charge a one-time purchase fee or a monthly
subscription fee on their subscribers’ phone bills when the
subscribers download our games to their mobile phones. The
carriers perform the billing and collection functions and
generally remit to us a contractual fee or a contractual
percentage of their collected fee for each game. We recognize as
revenues the percentage of the fees due to us from the carrier
(see “— Critical Accounting Policies and
Estimates — Revenue Recognition” below). End
users may also initiate the purchase of our games through
various Internet portal sites or through other delivery
mechanisms, with carriers generally continuing to be responsible
for billing, collecting and remitting to us a portion of their
fees. To date, eliminating the impact of our acquisitions, our
domestic revenues have grown more rapidly than our international
revenues, and this trend may continue.
Cost of
Revenues
Our cost of revenues consists primarily of royalties that we pay
to content owners from which we license brands and other
intellectual property and, to a limited extent, to certain
external developers. Our cost of revenues also includes noncash
expenses — amortization of certain acquired intangible
assets, and any impairment of those intangible assets, and any
impairment of prepaid royalties and guarantees. We record
advance royalty payments made to content licensors as prepaid
royalties on our balance sheet when payment is made to the
licensor. We recognize royalties in cost of revenues based upon
the revenues derived from the relevant game multiplied by the
applicable royalty rate. If our licensors earn royalties in
excess of their advance royalties, we also recognize these
excess royalties as cost of revenues in the period they are
earned by the licensor. If applicable, we will record an
impairment of prepaid royalties or accrue for future guaranteed
royalties that are in excess of anticipated demand or net
realizable value. At each balance sheet date, we perform a
detailed review of prepaid royalties and guarantees that
considers multiple factors, including demand forecast, game life
cycle status, game development plans and current and anticipated
sales levels.
We pay some of our external developers, especially in Europe,
royalties in addition to payments for game development costs. We
recognize these royalties as cost of revenues in the period the
developer earns the royalties based on the revenues from the
relevant game multiplied by the applicable royalty rate. We
expense the costs for development of our games prior to
technological feasibility as we incur them throughout the
development process, and we include these costs in research and
development expenses (see “— Critical Accounting
Policies and Estimates — Software Development
Costs”). To date, royalties paid to developers have not
been significant, but we expect them to increase in aggregate
amount based on our existing contracts with developers.
Absent further impairments of existing intangible assets, we
expect amortization of intangible assets included in cost of
revenues to be $552,000 in the fourth quarter of 2006,
$2.1 million in 2007, $883,000 in 2008, $526,000 in 2009,
$354,000 in 2010 and $84,000 in 2011. These amounts would likely
increase if we make future acquisitions.
Gross
Margin
Our gross margin is determined principally by the mix of games
that we license. Our games based on licensed intellectual
property require us to pay royalties to the licensor and the
royalty rates in our licenses vary significantly; our original
Glu-branded games, which are based on our own intellectual
property, require no royalty payments to licensors. There are
multiple internal and external factors that affect the mix of
revenues from licensed games and Glu-branded games, including
the overall number of licensed games and Glu-branded games
available for sale during a particular period, the extent of our
and our carriers’ marketing efforts for each game, and the
deck placement of each game on our carriers’ mobile
handsets. We believe the success of any individual game during a
particular period is affected by its quality and third-party
ratings, its marketing and media exposure, its consumer
recognizability, its overall acceptance by end users and the
availability of competitive games. If our product mix shifts
more to licensed games or games with higher royalty rates, our
gross margin would decline. Our gross margin is also adversely
affected by ongoing amortization of acquired intangible assets,
such as licensed content, games, trademarks and carrier
contracts, that are directly related to revenue generating
activities and by periodic charges for impairment of these
assets and of
prepaid royalties and guarantees. These charges can cause gross
margin variations, particularly from quarter to quarter.
Operating
Expenses
Our operating expenses primarily include research and
development expenses, sales and marketing expenses and general
and administrative expenses.
Research and Development. Our research and
development expenses consist primarily of salaries and benefits
of employees working on creating, developing, porting, quality
assurance, carrier certification and deployment of our games, on
technologies related to interoperating with our various wireless
carriers and on our internal platforms, payments to third
parties for developing and porting of our games, and allocated
facilities costs.
We devote substantial resources to the development, porting and
quality assurance of our games and expect this to continue in
the future. We believe that developing games internally through
our own development studios allows us to increase operating
margins, leverage the technology we have developed and better
control game delivery. During 2006, as a result of our
acquisition of iFone, we substantially increased our use of
external development resources, but we currently do not expect
further significant increases in expenses for external
development. Our games generally require six months to one year
to produce, based on the complexity and feature set of the game
developed, the number of carrier wireless platforms and mobile
handsets covered, and the experience of the internal or external
developer. We expect our research and development expenses will
increase in absolute terms as we continue to create new games
and technologies, but that these expenses will continue to
decline as a percentage of revenues.
Sales and Marketing. Our sales and marketing
expenses relate primarily to salaries, benefits and incentive
compensation for sales and marketing personnel, expenses for
advertising, trade shows, public relations and other promotional
and marketing activities, expenses for general business
development activities, travel and entertainment expenses and
allocated facilities costs. We expect sales and marketing
expenses to increase in absolute terms with the growth of our
business and as we further promote our games and the Glu brand.
Although we expect our variable marketing expenses to increase
at least as rapidly as our revenues, we expect that our sales
and marketing headcount will not increase as rapidly as revenues
and that therefore sales and marketing expenses will continue to
decrease as a percentage of revenues.
General and Administrative. Our general and
administrative expenses relate primarily to salaries and
benefits for general and administrative personnel, consulting
fees, legal, accounting and other professional fees, information
technology costs and allocated facilities costs. We expect that
general and administrative expenses will increase in absolute
terms as we hire additional personnel and incur costs related to
the anticipated growth of our business and our operation as a
public company. We also expect that these expenses will increase
because of the additional costs to comply with the
Sarbanes-Oxley Act and related regulation, our efforts to expand
our international operations and, in the near term, additional
accounting costs related to the public offering of our common
stock. However, we expect these expenses to continue to decrease
as a percentage of revenues.
Based on our current revenue and expense projections, we expect
that our various operating expense categories will decline as a
percentage of revenues. We could fail to increase our revenues
as anticipated, and we could decide to increase expenses in one
or more categories to respond to competitive pressures or for
other reasons. In these cases and others, it is possible that
one or more of our operating expense categories would not
decline as a percentage of revenues.
Amortization of Intangible Assets. We record
amortization of acquired intangible assets that are directly
related to revenue generating activities as part of our cost of
revenues and amortization of the remaining acquired intangible
assets, such as noncompetition agreements, as part of our
operating expenses. We record intangible assets on our balance
sheet based upon their fair value at the time
they are acquired. We determine the fair value of the intangible
assets using a discounted cash flows approach. We amortize the
amortizable intangible assets using the straight-line method
over their estimated useful lives of two to six years. Absent
impairments of existing intangible assets, we expect
amortization of existing intangible assets to be $140,000 in the
fourth quarter of 2006, $266,000 in 2007, $267,000 in 2008,
$267,000 in 2009 and $256,000 in 2010. These amounts would
likely increase if we make future acquisitions.
Restructuring Charge. In 2005, we undertook
restructuring activities to reduce our ongoing operating
expenses. This restructuring principally consisted of costs
associated with employee termination benefits. We recorded these
costs as an operating expense when we communicated the benefit
arrangement to the employee and no significant future services
were required of the employee in order to earn the termination
benefits other than a minimum retention period.
Acquired In-Process Research and
Development. We classify all development projects
acquired in business combinations as acquired in-process
research and development, or IPR&D, if the feasibility of
the acquired technology has not been established and no future
alternative uses exist. We expense the fair value of IPR&D
at the time it is acquired. We determine the fair value of the
IPR&D using a discounted cash flows approach. In estimating
the appropriate discount rate, we consider, among other things,
the risks to developing technology given changes in trends and
technology in our industry.
Interest and
Other Income, Net
Interest and other income, net, includes interest income,
interest expense, accretion of the fair value of warrants issued
to Pinnacle Ventures in conjunction with its loan to us, changes
in our preferred stock warrant liability and foreign currency
gains and losses. Following the completion of this offering when
our outstanding warrants to purchase redeemable convertible
preferred stock convert into warrants to purchase common stock,
we will no longer be required to record changes in our preferred
stock warrant liability under FSP
150-5 or
accretion in the fair value of the Pinnacle Ventures warrants.
Following this offering, we will have additional cash, cash
equivalents and short-term investments of approximately
$
resulting from the net proceeds of this offering. This will
likely cause a substantial increase in our interest income.
Accounting for
Income Taxes
We are subject to tax in the United States as well as other tax
jurisdictions or countries in which we conduct business.
Earnings from our
non-U.S.
activities are subject to local country income tax and may be
subject to current United States income tax depending on whether
these earnings are subject to U.S. income tax based upon
U.S. anti-deferral rules, such as Subpart F of the
Internal Revenue Code of 1986. In addition, some revenues
generated outside of the United States and the United Kingdom
may be subject to withholding taxes. In some cases, these
withholding taxes may be deductible on a current basis or may be
available as a credit to offset future income taxes depending on
a variety of factors.
We record a valuation allowance to reduce any deferred tax asset
to the amount that is more likely than not to be realized. We
consider historical levels of income, expectations and risks
associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for a valuation allowance. If we were to determine that we
would be able to realize deferred tax assets in the future in
excess of the net recorded amount, we would record an adjustment
to the deferred tax asset valuation allowance. Such an
adjustment would increase our income in the period the
determination is made. Historically, we have incurred operating
losses and have generated significant net operating loss
carryforwards.
As of December 31, 2005, the federal research and
development credit expired. Therefore, the 2006 tax calculations
only reflect the California research and development credit.
There is pending
legislation to reinstate the federal credit retroactively to
January 1, 2006. If the legislation is enacted, we will
recognize an additional credit in the fourth quarter of 2006.
Beginning on January 1, 2007, we will be accounting for
uncertainty in income taxes in accordance with FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. As of September 30, 2006, we have not
determined what the cumulative impact of adopting this change in
accounting method will be.
Cumulative
Effect of Change in Accounting Principle
On June 29, 2005, the FASB issued Staff Position
No. 150-5,
Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or FSP
150-5. FSP
150-5
affirms that warrants of this type are subject to the
requirements in SFAS No. 150, regardless of the
redemption price or the timing of the redemption feature.
Therefore, under SFAS No. 150, the outstanding
freestanding warrants to purchase our convertible preferred
stock are liabilities that must be recorded at fair value each
quarter, with the changes in estimated fair value in the quarter
recorded as other expense or income.
We adopted FSP
150-5 as of
July 1, 2005 and recorded an expense of $315,000 for the
cumulative effect of the change in accounting principle to
reflect the estimated fair value of these warrants as of that
date. We recorded income of $85,000 and expense of
$1.1 million in other income (expense), net, for the
remainder of 2005 and the first nine months of 2006,
respectively, to reflect further increases or decreases in the
estimated fair value of the warrants. The pro forma effect of
the adoption of FSP
150-5 on our
results of operations for 2004 and 2005, if applied
retroactively as if SFAS No. 150 had been adopted in
those years, was not material. We estimated the fair value of
these warrants at the respective balance sheet dates using the
Black-Scholes option valuation model. This model utilizes as
inputs the estimated fair value of the underlying convertible
preferred stock at the valuation measurement date, the remaining
contractual term of the warrant, risk-free interest rates,
expected dividends and expected volatility of the price of the
underlying convertible preferred stock.
Our Series A, B, C, D and D-1 mandatorily redeemable
convertible preferred stock has a mandatory redemption
provision. In each quarterly and annual period, we accrete the
amount that is necessary to adjust the recorded balance of this
preferred stock to an amount equal to its estimated redemption
value at its redemption date using the effective interest
method. The redemption value is the greater of the par value of
the preferred stock plus any dividends declared and unpaid or
its estimated fair value using the effective interest method.
Each share of the outstanding preferred stock will automatically
convert to common stock if this offering is completed, results
in proceeds of at least $50 million and has an offering
price in excess of $4.50 per share, and we will cease
accreting upon this conversion.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles, or
GAAP. These accounting principles require us to make certain
estimates and judgments that can affect the reported amounts of
assets and liabilities as of the dates of the consolidated
financial statements, the disclosure of contingencies as of the
dates of the consolidated financial statements, and the reported
amounts of revenues 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.
We believe the following to be critical accounting policies
because they are important to the portrayal of our financial
condition or results of operations and they require critical
management estimates and judgments about matters that are
uncertain:
•
revenue recognition;
•
advance or guaranteed licensor royalty payments;
•
long-lived assets;
•
goodwill;
•
software development costs;
•
stock-based compensation; and
•
income taxes.
Revenue
Recognition
We derive our revenues primarily by licensing software products
in the form of mobile games. License arrangements with our end
users can be on a perpetual or subscription basis. A perpetual
license gives an end user the right to use the licensed game on
the registered mobile handset on a perpetual basis. A
subscription license gives an end user the right to use the
licensed game on the registered handset for a limited period of
time, usually one month. We distribute our products through
primarily wireless carriers, which market our games to end
users. Carriers usually bill license fees for perpetual and
subscription licenses upon download of the game software by the
end user. Subsequent billings for subscription licenses are
generally billed monthly. We apply the provisions of Statement
of Position
97-2,
Software Revenue Recognition, as amended by Statement of
Position
98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all transactions.
We recognize revenues from our games when persuasive evidence of
an arrangement exists, the game has been delivered, the fee is
fixed or determinable, and the collection of the resulting
receivable is probable. For both perpetual and subscription
licenses, we consider a signed license agreement to be evidence
of an arrangement with a carrier and a “clickwrap”
agreement to be evidence of an arrangement with an end user. For
these licenses, we define delivery as the download of the game
by the end user.
We estimate revenues from carriers in the current period when
reasonable estimates of these amounts can be made. Several
carriers provide reliable interim preliminary reporting and
others report sales data within a reasonable time frame
following the end of each month, both of which allow us to make
reasonable estimates of revenues and therefore to recognize
revenues during the reporting period when the end user licenses
the game. Determination of the appropriate amount of revenue
recognized involves judgments and estimates that we believe are
reasonable, but it is possible that actual results may differ
from our estimates. When we receive the final carrier reports,
to the extent not received within a reasonable time frame
following the end of each month, we record any differences
between estimated revenues and actual revenues in the next
reporting period once we determine the actual amounts.
Historically, the license revenues on the final revenue report
have not differed materially from the final settlement from the
carrier. Revenues earned from certain carriers may not be
reasonably estimated. If we are unable to reasonably estimate
the amount of revenue to be recognized in the current period, we
recognize revenues upon the receipt of a carrier revenue report
and when our portion of a game’s licensed revenues is fixed
or determinable and collection is probable. In order to mitigate
the risk of a material misstatement, our management reviews the
revenues by carrier by game on a weekly basis to identify
unusual trends that could indicate a
misstatement. If we deem a carrier not to be creditworthy, we
defer all revenues from the arrangement with that carrier until
we receive payment and all other revenue recognition criteria
have been met.
In accordance with Emerging Issues Task Force, or EITF, Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, we recognize as revenues the amount the carrier
reports as payable to us upon the sale of our games, which is
net of any service or other fees earned and deducted by the
carrier. We have evaluated our carrier agreements and have
determined that we are not the principal when selling our games
through carriers. Key indicators that we evaluated in reaching
this determination included:
•
wireless subscribers directly contract with their carriers,
which have most of the service interaction and are generally
viewed as the primary obligor by the subscribers;
•
carriers generally have significant control over the types of
games that they offer to their subscribers;
•
carriers are directly responsible for billing and collecting
fees from their subscribers, including the resolution of billing
disputes;
•
carriers generally pay us a fixed percentage of the revenues or
a fixed fee for each game;
•
carriers generally must approve the price of our games in
advance of their sale to subscribers, and our more significant
carriers generally have the ability to set the ultimate price
charged to their subscribers; and
•
we have limited risks, including no inventory risk and limited
credit risk.
Advance or
Guaranteed Licensor Royalty Payments
Advance or guaranteed licensor royalty payments are fees that we
pay to branded content owners for use of their intellectual
property, including trademarks or copyrights, in the development
of our games. Advance royalties are paid in advance of any game
sales to end users. Guaranteed royalties represent the minimum
royalty payments to be paid pursuant to the terms of the license
agreement regardless of the ultimate volume of game sales to end
users.
We record advance royalty payments made to content licensors as
prepaid royalties on our balance sheet when payment is made to
the licensor. We recognize royalties in cost of revenues based
upon the revenues derived from the relevant game multiplied by
the applicable royalty rate. If our licensors earn royalties in
excess of their advance royalties, we also recognize these
excess royalties as cost of revenues in the period they are
earned by the licensor. If applicable, we will record a
write-down of prepaid royalties or accrue for future guaranteed
royalties that are in excess of anticipated demand or net
realizable value. At each balance sheet date, we perform a
detailed review of prepaid royalties and guarantees that
considers multiple factors, including demand forecast, game life
cycle status, game development plans and current and anticipated
sales levels.
Long-Lived
Assets
We evaluate our long-lived assets, including property and
equipment and intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Factors
considered important that could result in an impairment review
include significant underperformance relative to expected
historical or projected future operating results, significant
changes in the manner of use of the acquired assets, significant
negative industry or economic trends, and a significant decline
in our stock price for a sustained period of time. We recognize
impairment based on the difference between the fair value of the
asset and its carrying value. Fair value is generally measured
based on either quoted market prices, if applicable, or a
discounted cash flow analysis.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, we do not amortize goodwill or other
intangible assets with indefinite lives but rather test them for
impairment. SFAS No. 142 requires us to perform an
impairment review of our goodwill balance at least annually,
which we do as of September 30 each year, and also whenever
events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. In our impairment
review, we look at two of our reporting units — the
United States and EMEA — since none of our goodwill is
attributable to our third operating unit, the rest of the world.
We compare the fair value of each unit to its carrying value,
including goodwill. If the carrying value, including goodwill,
exceeds the fair value, we perform an allocation of the
unit’s fair value to its identifiable tangible and
nongoodwill intangible assets and liabilities. This allows us to
determine an implied fair value for the unit’s goodwill. We
then compare the implied fair value of the unit’s goodwill
with the carrying value of the unit’s goodwill. If the
carrying value of the unit’s goodwill is greater than its
implied fair value, we would recognize an impairment charge for
the difference. To date, no unit’s carrying value has
exceeded its fair value, and thus we have taken no goodwill
impairment charges.
Software
Development Costs
We apply the principles of SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed. SFAS No. 86 requires that
software development costs incurred in conjunction with product
development be charged to research and development expense until
technological feasibility is established. Thereafter, until the
product is released for sale, software development costs must be
capitalized and reported at the lower of unamortized cost or net
realizable value of the related product. We have adopted the
“tested working model” approach to establishing
technological feasibility for our games. Under this approach, we
do not consider a game in development to have passed the
technological feasibility milestone until we have produced a
model of the game that contains essentially all the
functionality and features of the final game and have tested the
model to ensure that it works as expected. To date, we have not
incurred significant costs between the establishment of
technological feasibility and the release of a game for sale;
thus, we have expensed all software development costs as
incurred. In the future, we will consider the following factors
in determining whether costs should be capitalized: the emerging
nature of the mobile game market; the gradual evolution of the
wireless carrier platforms and mobile handsets for which we
develop games; the lack of pre-orders or sales history for our
games; the uncertainty regarding a game’s
revenue-generating potential; our lack of control over the
carrier distribution channel resulting in uncertainty as to
when, if ever, a game will be available for sale; and our
historical practice of canceling games at any stage of the
development process.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for stock-based
employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB
No. 25, and related interpretations, and followed the
disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. Under APB No. 25,
compensation expense for an option was based on the difference,
if any, on the date of the grant between the fair value of a
company’s common stock and the exercise price of the
option. APB No. 25 required companies to record deferred
stock-based compensation on their balance sheets and amortize it
to expense over the vesting periods of the individual options.
We recorded deferred stock-based compensation of
$2.6 million and $1.1 million related to employee
stock options granted in 2004 and 2005, respectively. We
amortize deferred stock-based compensation using the multiple
option method as prescribed by FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans, or FIN 28, over the option
vesting period using an accelerated amortization schedule. We
expensed employee stock-based compensation of $0, $288,000,
$1.5 million and $1.0 million in 2003, 2004 and 2005
and the nine months ended September 30, 2005, respectively.
Effective January 1, 2006, we adopted the fair value
provisions of SFAS No. 123R, Share-Based
Payments, which supersedes our previous accounting under APB
No. 25. SFAS No. 123R requires the recognition of
compensation expense, using a fair-value based method, for costs
related to all share-based payments including stock options.
SFAS No. 123R requires companies to estimate the fair
value of share-based payment awards on the grant date using an
option-pricing model. We adopted SFAS No. 123R using
the prospective transition method, which required us to apply
SFAS No. 123R to option grants after the required
effective date. For options granted prior to the January 1,2006 effective date that remained unvested on that date, we
continue to recognize compensation expense under the intrinsic
value method of APB No. 25. In addition, we are continuing
to amortize those awards granted prior to January 1, 2006
utilizing an accelerated amortization schedule, while we will
expense all options granted or modified on and after
January 1, 2006 on a straight-line basis. To value awards
granted on or after January 1, 2006, we used the
Black-Scholes option pricing model. We determined the
assumptions used in this pricing model at the grant date. We
based expected volatility on the historical volatility of a peer
group of publicly traded entities. We determined the expected
term of our options based upon historical exercises,
post-vesting cancellations and the options’ contractual
term. We based the risk-free rate for the expected term of the
option on the U.S. Treasury Constant Maturity rate as of
the grant date. We determined the forfeiture rate based upon our
historical experience with option cancellations adjusted for
unusual or infrequent events.
In 2004, 2005 and the nine months ended September 30, 2006,
we issued options to employees with exercise prices that we
determined with hindsight to be below the fair market values of
our common stock at the grant dates. We retrospectively
estimated the fair value of our common stock based upon a number
of factors, including our operating and financial performance,
progress and milestones attained in our business, past sales of
convertible preferred stock, the results of retrospective
valuations performed by a third-party valuation firm, and the
expected valuation that we would obtain in an initial public
offering. These retrospective valuations utilized the
probability-weighted expected return and the option pricing
valuation methodologies. We reviewed these factors and the
events that happened between each valuation date and determined
that the combination of these factors and events reflect a true
measurement of the fair value of our common stock over an
extended period of time and believe that the fair value of our
common stock is appropriately reflected in the table below.
The following table summarizes by grant date the number of
shares subject to options granted between April 26, 2004
and September 30, 2006 and the per share exercise price,
deemed fair value and resulting intrinsic value.
In June 2006, we repriced stock options that we had granted to
15 employees in the first quarter of 2005. We changed no
terms of the original option grants, other than the exercise
price and the term, which we extended from the fifth anniversary
to the tenth anniversary of the grant date. This repricing
related to vested options to purchase 86,879 shares of our
common stock and unvested options to purchase
729,396 shares of our common stock having weighted average
original exercise prices of $0.78 and $0.76 per share,
respectively. We repriced these options at a new exercise price
of $1.30 per share. We accounted for the repricing as a
modification under SFAS No. 123R and thus recorded the
new incremental fair value related to vested awards as
compensation expense on the date of modification. In accordance
with SFAS No. 123R, we will record the incremental
fair value related to the unvested awards, together with
unamortized stock-based compensation expense associated with the
unvested awards as determined under APB No. 25, over the
remaining requisite service period of the option holders. In
connection with the repricing, we recorded stock-based
compensation expense of $59,000 in the nine months ended
September 30, 2006. Total incremental compensation cost
resulting from the modification was $150,000. In connection with
this repricing, we followed the provisions of
SFAS No. 123R and eliminated from our balance sheet
the remaining deferred stock-based compensation related to the
modified stock options. Future stock compensation charges for
the modified options will be recorded in accordance with
SFAS No. 123R.
As a result of adopting SFAS No. 123R, our net loss in
the nine months ended September 30, 2006 was higher by
$244,000, net of tax effect, than if we had continued to account
for stock-based compensation under APB No. 25. Basic and
diluted net loss per share for the nine months ended
September 30, 2006 would have been $0.02 lower than if we
had not adopted SFAS No. 123R. At September 30,2006, we had $4.0 million of total unrecognized
compensation expense under SFAS No. 123R, net of
estimated forfeitures, that will be recognized over a weighted
average period
of 1.77 years. At September 30, 2006, the aggregate
intrinsic value of outstanding options and exercisable options
was $16.8 million and $5.4 million, respectively.
We account for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, EITF
Issue
No. 96-18
and FIN 28. In 2003, 2004, 2005 and the nine months ended
September 30, 2006, we granted stock options to
non-employees to purchase 49,000, 344,000, 3,500 and
2,000 shares of our common stock, respectively. At
December 31, 2003, 2004 and 2005 and September 30,2006, we had outstanding non-employee stock options to purchase
59,000, 338,000, 34,000 and 2,000 shares of our common
stock, respectively, with weighted average exercise prices of
$0.06, $0.10, $0.06 and $1.30 per share, respectively. At
September 30, 2006, the outstanding non-employee options
had an exercise price of $1.30, a remaining contractual term of
9.80 years and no intrinsic value. In 2005, we cancelled
certain options issued to consultants in prior years. As these
options were not vested at the time of the cancellation, we
reversed $227,000 of expense recognized in previous years.
Stock-based compensation expense related to options granted to
non-employees was $32,000, $253,000, ($210,000) and $4,000 in
2003, 2004, 2005 and the nine months ended September 30,2006.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. As
part of the process of preparing our consolidated financial
statements, we are required to estimate our income tax benefit
(provision) in each of the jurisdictions in which we operate.
This process involves estimating our current income tax benefit
(provision) together with assessing temporary differences
resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet using the enacted tax rates in effect
for the year in which we expect the differences to reverse.
We record a valuation allowance to reduce our deferred tax
assets to an amount that more likely than not will be realized.
As of December 31, 2004 and 2005 and September 30, 2006, our
valuation allowance on our net deferred tax assets was
$6.3 million, $11.4 million and $14.3 million,
respectively. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize our deferred
tax assets in the future in excess of our net recorded amount,
we would need to make an adjustment to the allowance for the
deferred tax asset, which would increase income in the period
that determination was made.
We have not provided federal income taxes on the unremitted
earnings of foreign subsidiaries because these earnings are
intended to be reinvested permanently.
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.
Our revenues increased $13.0 million, or 69%, from
$18.9 million in the nine months ended September 30,2005 to $31.9 million in the nine months ended
September 30, 2006. The increase resulted from sales of
games that we have released since September 30, 2005,
including Ice Age 2, Diner Dash and Driver
Vegas, and sales of games acquired from iFone. Revenues from
iFone games from March 29, 2006, when we acquired it, to
September 30, 2006 totaled approximately $4.8 million,
primarily in Europe and the United States. By utilizing our
carrier relationships and our marketing and development
resources, we were able to increase worldwide distribution and
handset porting of iFone games and thus to increase
significantly the revenues derived from the licenses that we
acquired from iFone. Revenues from our top ten games increased
from $10.1 million in the nine months ended
September 30, 2005 to $18.2 million in the nine months
ended September 30, 2006. International revenues, defined
as revenues generated from carriers whose principal operations
are located outside the United States, increased
$6.2 million from $8.0 million in the nine months
ended September 30, 2005 to $14.2 million in the nine
months ended September 30, 2006. A majority of this
increase resulted from the acquisition of iFone in 2006. The
following wireless carriers accounted for 10% or more of our
revenues in the nine months ended September 30, 2005 or
2006.
Our cost of revenues increased $3.2 million, or 41%, from
$8.0 million in the nine months ended September 30,2005 to $11.2 million in the nine months ended
September 30, 2006. The increase resulted from an increase
in royalties, which was offset by a decrease in amortization of
acquired intangible assets and a decrease in impairment of
prepaid royalties and guarantees. Royalties increased
$4.5 million principally because of higher revenues with
associated royalties, including those acquired from iFone.
Revenues attributable to games based upon branded intellectual
property increased as a percentage of revenues from 74.8% in the
nine months ended September 30, 2005 to 85.0% in the nine
months ended September 30, 2006. The average royalty rate
that we paid on games based on licensed intellectual property
decreased from 37% in the nine months ended September 30,2005 to 36% in the nine months ended September 30, 2006.
Amortization of intangible assets decreased by $1.0 million
as completion of amortization in 2006 for certain intangible
assets acquired from Macrospace was only partially offset by the
commencement of amortization of intangible assets acquired in
2006 from iFone.
Gross
Margin
Our gross margin increased from 57.8% in the nine months ended
September 30, 2005 to 64.9% in the nine months ended
September 30, 2006 because of the decreased amortization of
intangible assets and the decreased impairment of prepaid
royalties in the nine months ended September 30, 2006
partially offset by the increase in royalties. Without the
effect of amortization of acquired intangible assets, our gross
margin would have been essentially level at 69% in both periods.
Our research and development expenses increased $571,000, or 5%,
from $10.8 million in the nine months ended
September 30, 2005 to $11.3 million in the nine months
ended September 30, 2006. The increase in research and
development costs was primarily due to increases in allocated
facilities costs of $625,000 and salaries and benefits of
$182,000, offset by lower outside services costs of $98,000.
A restructuring that we effected in the fourth quarter of 2005
resulted in the elimination of 17 research and development
employees, but by September 30, 2006 our research and
development staff had increased by seven employees from a year
earlier and salaries and benefits had increased as a result.
Outside services, including fees for third-party development,
porting, localization and testing declined from 10.0% of total
research and development expenses in the nine months ended
September 30, 2005 to 8.7% in the nine months ended
September 30, 2006 because of an increase in internal
resources used to design, develop, port and test new games.
Research and development expenses included $154,000 of
stock-based compensation expense in the nine months ended
September 30, 2005 and $100,000 in the nine months ended
September 30, 2006. As a percentage of revenues, research
and development expenses declined from 57.1% in the nine months
ended September 30, 2005 to 35.6% in the nine months ended
September 30, 2006.
Our sales and marketing expenses increased $2.0 million, or
31%, from $6.4 million in the nine months ended
September 30, 2005 to $8.3 million in the nine months
ended September 30, 2006. Most of the increase was
attributable to a $1.4 million increase in salaries and
benefits, as we increased our sales and marketing headcount from
11 to 37 in the nine months ended September 30, 2005 and
from 32 to 44 in the nine months ended September 30, 2006,
and most of the remaining increase was attributable to increased
allocated facilities costs. We increased staffing to expand our
marketing efforts for our games and the Glu brand, to increase
sales efforts to our new and existing wireless carriers and to
expand our sales and marketing operations into the Asia-Pacific
region. Aside from the increase in headcount in our sales and
marketing functions, the increase in salaries and benefits cost
was due to an increase in variable compensation of $369,000,
primarily an increase in commissions paid to our sales employees
as a result of higher revenue attainment, and $292,000 in
compensation for transitional employees from iFone who were
terminated throughout the second and third quarters of 2006. As
a percentage of revenues, sales and marketing expenses declined
from 33.7% in the nine months ended September 30, 2005 to
26.1% in the nine months ended September 30, 2006 as we
completed most of our necessary sales and marketing hiring by
the end of 2005 and thereafter significantly reduced the rate at
which we added personnel. Also, our sales and marketing
activities generated more revenues across a greater number of
carriers and mobile handsets. Sales and marketing expenses
included $107,000 of stock-based compensation expense in the
nine months ended September 30, 2005 and $131,000 in the
nine months ended September 30, 2006.
Our general and administrative expenses increased
$2.0 million, or 36%, from $5.6 million in the nine
months ended September 30, 2005 to $7.7 million in the
nine months ended September 30, 2006. The increase in
general and administrative expenses was primarily the result of
a $1.5 million increase in salaries and benefits and a
$975,000 increase in consulting and professional fees. We
increased our general and administrative headcount from 13 to 40
in the nine months ended September 30, 2005 and from 37 to
42 in the nine months ended September 30, 2006. Aside from
the increase in headcount in our general and administrative
functions, the increase in salaries and benefits costs was due
to $216,000 in compensation for transitional employees from
iFone, most of whom were terminated during the second and third
quarters of 2006. As a percentage of revenues, general and
administrative expenses declined from 29.9% in the nine months
ended September 30, 2005 to 24.1% in the nine months ended
September 30, 2006 as a result of the overall growth of our
revenues, which resulted in economies of scale in our general
and administrative expenses. General and administrative expenses
included $733,000 of stock-based compensation expense in the
nine months ended September 30, 2005 and $735,000 in the
nine months ended September 30, 2006.
Other Operating
Expenses
Our amortization of intangible assets, such as trademarks,
copyrights and non-competition agreements, acquired from
Macrospace and iFone was relatively constant at $463,000 in the
nine months ended September 30, 2005 and $476,000 in the
nine months ended September 30, 2006.
Our acquired in-process research and development increased from
$0 in the nine months ended September 30, 2005 to
$1.5 million in the nine months ended September 30,2006. The acquired in-process research and development charge,
or IPR&D, recorded in 2006 is related to the development of
new games. We determined the value of acquired IPR&D using
the discounted cash flow approach. We calculated the present
value of expected future cash flows attributable to the
in-process technology using a 21% discount rate. This rate
took into account the percentage of completion of the
development effort of approximately 20% and the risks associated
with our developing technology given changes in trends and
technology in the industry. As of September 30, 2005,
acquired IPR&D projects were approximately 90% completed.
Management expects that the remaining projects will be completed
by the end of 2006.
Other
Expenses
Interest and other income (expense), net, decreased from income
of $351,000 in the nine months ended September 30, 2005 to
expense of $904,000 in the nine months ended September 30,2006. This decrease was primarily due to a $1.1 million
expense resulting from an increase in the fair value of warrants
issued to Pinnacle Ventures in conjunction with our loan from
them in May 2006 and $550,000 of interest expense on that loan
in the nine months ended September 30, 2006. The warrants
are subject to revaluation at the balance sheet date and any
changes in fair value will be recorded as a component of other
income (expense). The increase in the value of the warrant was
due to an increase in the value of the underlying preferred
stock during the nine months ended September 30, 2006.
These expenses were partially offset by $295,000 of foreign
currency exchange gains and by increased interest income of
$169,000 in the nine months ended September 30, 2006.
Income tax benefit (provision) decreased from a benefit of
$943,000 in the nine months ended September 30, 2005 to a
provision of $437,000 in the nine months ended
September 30, 2006 as a result of changes in the valuation
allowance.
Our revenues increased $18.6 million, or 265%, from
$7.0 million in 2004 to $25.7 million in 2005. The
increase resulted from sales of games acquired from Macrospace
in December 2004, sales of games that we released in 2005,
including Deer Hunter, Zuma and FOX Sports
Mobile, and an increase in sales from games introduced prior
to 2005. Revenues from Macrospace games, primarily from Europe,
increased from $65,000 in 2004 to $10.6 million in 2005.
Revenues from our top 10 games increased from $5.6 million
in 2004 to $13.5 million in 2005, of which
$2.3 million resulted from the acquisition of Macrospace.
Our international revenues increased $10.3 million from
$416,000 in 2004 to $10.7 million in 2005. Most of this
increase in international revenues was due to the acquisition of
Macrospace. The following wireless carriers accounted for 10% or
more of our revenues in 2004 or 2005.
Our cost of revenues increased $11.1 million, or 647%, from
$1.7 million in 2004 to $12.8 million in 2005. The
increase resulted from an increase in royalty payments, an
increase in amortization of intangible assets due to the
acquisition of Macrospace, an increase in impairment of prepaid
royalties and guarantees, and impairment of intangible assets
acquired from Macrospace in 2005. Royalties increased
$5.9 million primarily because of higher revenues with
associated royalties and higher average royalty rates for
licensed intellectual property, primarily as a result of the
Macrospace acquisition. Although revenues attributable to games
based upon branded intellectual property decreased as a
percentage of revenues from 81.9% in 2004 to 77.1% in 2005,
revenues attributable to games based upon branded intellectual
property increased by 244% from 2004 to 2005. The average
royalty rate that we paid on games based on licensed
intellectual property increased from 24% in 2004 to 37% in 2005
primarily as a result of the acquisition of Macrospace.
Gross
Margin
Our gross margin decreased from 75.6% in 2004 to 50.0% in 2005.
This decrease was primarily due to increased amortization of
intangible assets, higher royalty rates paid on games acquired
from Macrospace, an increase in impairment of prepaid royalties
and guarantees, and impairment of intangible assets in 2005.
Without the effect of amortization and impairment of acquired
intangible assets, our gross margin would have decreased by
12 percentage points from 77.4% to 65.3% instead of
26 percentage points.
Our research and development expenses increased
$8.1 million, or 125%, from $6.5 million in 2004 to
$14.6 million in 2005. The increase primarily resulted from
a $6.6 million increase in salaries and benefits due to
increases in personnel in the United States and the United
Kingdom, a $600,000 increase in allocated facilities costs and a
$97,000 increase in expenses for outside services. The increase
in these costs and expenses was primarily due to the acquisition
of Macrospace in December 2004. We increased our research and
development staff from 65 at December 31, 2004 to 122 at
December 31, 2005. Despite the absolute increase in
expenses for outside services, these expenses declined as a
percentage of research and development expenses from 19.9% in
2004 to 9.7% in 2005
because of an increase in internal resources used to design,
develop, port and test new games. As a percentage of revenues,
our research and development expenses decreased from 92.2% in
2004 to 56.8% in 2005, primarily as a result of growth in
revenues. Research and development expenses included $28,000 of
stock-based compensation expense in 2004 and $158,000 in 2005.
Our sales and marketing expenses increased $4.8 million, or
131%, from $3.7 million in 2004 to $8.5 million in
2005. The increase resulted from a $2.6 million increase in
salaries and benefits, a $1.7 million increase in spending
on advertising, public relations and corporate branding and a
$466,000 increase in travel and entertainment costs. We
increased our sales and marketing staff from 11 at
December 31, 2004 to 32 at December 31, 2005. We
increased sales and marketing spending to expand the marketing
efforts for our games, to rebrand the company as Glu Mobile in
June 2005 following the acquisition of Macrospace, to expand
marketing of the Glu brand in the United States and to increase
marketing efforts in various European markets after the
acquisition of Macrospace in December 2004. As a percentage of
revenues, sales and marketing expenses declined from 52.6% in
2004 to 33.2% in 2005 as our sales and marketing activities
generated more revenues across a greater number of carriers and
mobile handsets. Sales and marketing expenses included $59,000
of stock-based compensation expense in 2004 and $132,000 in 2005.
Our general and administrative expenses increased
$4.9 million, or 143%, from $3.5 million in 2004 to
$8.4 million in 2005. The increase was due primarily to an
increase of $2.3 million in salaries and benefits resulting
from an increase in headcount with the completion of the
acquisition of Macrospace in December 2004, an increase of
$1.7 million in consulting and professional services costs
and an increase of $533,000 in stock-based compensation. We
increased our general and administrative staff from 13 at
December 31, 2004 to 37 at December 31, 2005. As a
percentage of revenues, general and administrative expenses
declined from 49.4% in 2004 to 32.9% in 2005 due to the overall
growth of our revenues, which allowed economies of scale in our
general and administrative expenses. General and administrative
expenses included $454,000 of stock-based compensation expense
in 2004 and $987,000 in 2005.
Other Operating
Expenses
Our amortization of intangible assets increased from $26,000 in
2004 to $616,000 in 2005. This increase was due to the
intangible assets acquired from Macrospace in December 2004.
We had no restructuring charge in 2004; our 2005 restructuring
charge was $450,000. In December 2005, we undertook
restructuring activities in order to reduce operating expenses.
We
eliminated 27 positions, of which 17 were in research and
development, 4 were in sales and marketing and 6 were in general
and administrative. Of the total restructuring charge recorded,
$225,000 was recorded in the United States and $225,000 was
recorded in Europe. These restructuring costs were paid in full
by March 31, 2006.
Other
Expenses
Our interest and other income (expense), net was an expense of
$69,000 in 2004 and income of $541,000 in 2005. The increase was
primarily a result of a $488,000 increase in interest income due
to higher average cash and cash equivalent balances in 2005.
Our income tax benefit increased from $101,000 in 2004 to
$1.6 million in 2005. The increase in the income tax
benefit was primarily due to the net operating loss of
Macrospace in 2005.
Our revenues increased 292% from $1.8 million in 2003 to
$7.0 million in 2004. The increase primarily resulted from
sales of games that we released in 2004 such as Driv3r,
FOX Sports Football and Yao Ming Basketball. In
2003, we had no international revenues compared to $416,000 of
international revenues in 2004.
Cost of revenues increased $1.5 million, or 565%, from
$258,000 in 2003 to $1.7 million in 2004. Royalties
increased from $258,000 in 2003 to $1.4 million in 2004 due
to higher revenues and higher average royalty rates for licensed
properties.
Gross
Margin
Our gross margin as a percentage of revenues decreased from
85.6% in 2003 to 75.6% in 2004. The decrease in our gross profit
as a percentage of revenues resulted from higher royalty rates
paid to licensors on new games released in 2004, and impairment
of prepaid royalties and guarantees and amortization of
intangible assets recorded in 2004.
Research and development expenses increased 93% from
$3.4 million in 2003 to $6.5 million in 2004. The
increase primarily resulted from an increase in salaries and
benefits and outside services related to porting, localization
and certification costs as we increased our development efforts
on new games. Outside services represented approximately 20% of
total research and development expenses in 2003 and 2004, or
$677,000 in 2003 and $1.3 million in 2004. Research and
development expenses included stock-based compensation expense
of $0 in 2003 and $28,000 in 2004.
Sales and marketing expenses increased 430% from $697,000 in
2003 to $3.7 million in 2004. The increase was due to
increased salaries and benefits costs and spending on product
marketing and corporate branding. As a percentage of revenues,
sales and marketing expenses increased from 38.9% in 2003 to
52.6% in 2004 due to our investment in marketing and in sales
and marketing personnel. Sales and marketing expenses included
stock-based compensation expense of $0 in 2003 and $59,000 in
2004.
General and administrative expenses increased 158% from
$1.3 million in 2003 to $3.5 million in 2004. The
increase primarily resulted from increased salaries and benefits
and professional fees. As a
percentage of revenues, general and administrative expenses
declined from 75.0% in 2003 to 49.4% in 2004 due to the overall
growth of our revenues, which resulted in economies of scale in
our general and administrative costs. General and administrative
expenses included stock-based compensation expense of $32,000 in
2003 and $454,000 in 2004.
Quarterly
Results of Operations
The following table sets forth unaudited quarterly consolidated
statements of operations data for 2005 and the first three
quarters of 2006. We derived this information from unaudited
consolidated financial statements, which we prepared on the same
basis as our audited consolidated financial statements contained
in this prospectus. In our opinion, these unaudited statements
include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair statement of
that information when read in conjunction with the consolidated
financial statements and related notes included elsewhere in
this prospectus. The operating results for any quarter should
not be considered indicative of results for any future period.
For the Three
Months Ended
2005
2006
March 31
June 30
September 30
December 31
March 31
June 30(1)
September 30(1)
(In
thousands)
Revenues
$
4,762
$
6,984
$
7,125
$
6,780
$
8,073
$
11,443
$
12,347
Cost of revenues:
Royalties
1,158
1,897
2,178
2,023
2,564
3,499
3,687
Impairment of prepaid royalties and
guarantees
72
453
—
1,120
34
164
26
Amortization of intangible assets
759
759
684
621
118
553
553
Impairment of intangible assets
—
—
—
1,103
—
—
—
Total cost of revenues
1,989
3,109
2,862
4,867
2,716
4,216
4,266
Gross profit
2,773
3,874
4,263
1,913
5,357
7,227
8,081
Operating expenses:
Research and development
3,648
3,374
3,754
3,781
3,189
3,884
4,273
Sales and marketing
1,936
2,307
2,116
2,156
2,202
3,126
2,989
General and administrative
1,436
1,950
2,254
2,794
1,852
2,655
3,177
Amortization of intangible assets
154
154
154
154
154
154
168
Restructuring charge
—
—
—
450
—
—
—
Acquired in-process research and
development
—
—
—
—
1,500
—
—
Total operating expenses
7,174
7,785
8,278
9,335
8,897
9,819
10,607
Loss from operations
(4,401
)
(3,910
)
(4,015
)
(7,422
)
(3,540
)
(2,592
)
(2,526
)
Interest and other income
(expense), net
(87
)
100
338
190
152
50
(1,106
)
Loss before income taxes and
cumulative effect of change in accounting principle
(4,488
)
(3,810
)
(3,677
)
(7,232
)
(3,388
)
(2,542
)
(3,632
)
Income tax benefit (provision)
354
274
316
677
(106
)
(139
)
(192
)
Net loss before cumulative effect
of change in accounting principle
(4,134
)
(3,536
)
(3,361
)
(6,555
)
(3,494
)
(2,681
)
(3,824
)
Cumulative effect of change in
accounting principle
—
—
(315
)
—
—
—
—
Net loss
$
(4,134
)
$
(3,536
)
$
(3,676
)
$
(6,555
)
$
(3,494
)
$
(2,681
)
$
(3,824
)
(1)
We acquired iFone on March 29,2006, and our results of operations include the results of
operations of iFone after that date.
The following table sets forth our historical results, for the
periods indicated, as a percentage of our revenues.
For the Three
Months Ended
2005
2006
March 31
June 30
September 30
December 31
March 31
June 30
September 30
Revenues
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Cost of revenues:
Royalties
24.3
27.2
30.6
29.8
31.8
30.6
29.9
Impairment of prepaid royalties and
guarantees
1.5
6.5
—
16.5
0.4
1.4
0.2
Amortization of intangible assets
16.0
10.8
9.6
9.2
1.5
4.8
4.5
Impairment of intangible assets
—
—
—
16.3
—
—
—
Total cost of revenues
41.8
44.5
40.2
71.8
33.6
36.8
34.6
Gross profit
58.2
55.5
59.8
28.2
66.4
63.2
65.4
Operating expenses:
Research and development
76.6
48.3
52.7
55.8
39.5
33.9
34.6
Sales and marketing
40.6
33.0
29.7
31.8
27.3
27.3
24.2
General and administrative
30.2
27.9
31.6
41.2
22.9
23.2
25.7
Amortization of intangible assets
3.2
2.2
2.2
2.3
2.0
1.3
1.4
Restructuring charge
—
—
—
6.6
—
—
—
Acquired in-process research and
development
—
—
—
—
18.6
—
—
Total operating expenses
150.6
111.5
116.2
137.7
110.3
85.8
85.9
Loss from operations
(92.4
)
(56.0
)
(56.4
)
(109.5
)
(43.9
)
(22.6
)
(20.5
)
Interest and other
income/(expense), net
(1.8
)
1.4
4.7
2.8
1.9
0.4
(9.0
)
Loss before income taxes and
cumulative effect of change in accounting principle
(94.2
)
(54.6
)
(51.7
)
(106.7
)
(42.0
)
(22.2
)
(29.5
)
Income tax benefit (provision)
7.4
3.9
4.4
10.0
(1.3
)
(1.2
)
(1.6
)
Net loss before cumulative effect
of change in accounting principle
(86.8
)
(50.6
)
(47.3
)
(96.7
)
(43.3
)
(23.4
)
(31.1
)
Cumulative effect of change in
accounting principle
—
—
(4.4
)
—
—
—
—
Net loss
(86.8
)%
(50.6
)%
(51.7
)%
(96.7
)%
(43.3
)%
(23.4
)%
(31.1
)%
Our revenues generally increased in conjunction with the
introduction of new games, the expansion of our wireless carrier
distribution channel and the porting of our games to additional
mobile handsets. Revenues in the second and third quarters of
2006 were favorably impacted by revenues generated from
increased porting and distribution of games acquired from iFone
in late March. Revenues from iFone games in the second and third
quarters of 2006 were $1.7 million and $3.1 million,
respectively.
Many new mobile handset models are released in the fourth
calendar quarter to coincide with the holiday shopping season.
Because many end users download our games soon after they
purchase new handsets, we may experience seasonal sales
increases based on this key holiday selling period. However, due
to the time between handset purchases and game purchases, most
of this holiday impact occurs for us in our first quarter. For a
variety of reasons, we may experience seasonal sales decreases
during the summer, particularly in Europe, which is
predominantly reflected in our third quarter. In addition to
these possible seasonal patterns, we seek to release many of our
games in conjunction with specific events, such as the release
of a movie or console game. Initial spikes in revenues as a
result of successful new releases may create further aberrations
in our revenue patterns.
Our cost of revenues increased over the above periods as a
result of increased royalty payments to licensors and developers
caused by increased revenues. However, our cost of revenues did
not
increase sequentially in all quarters because of periodic
impairment charges and, in the first quarter of 2006, a
significant reduction in amortization of intangible assets
because a substantial part of the intangible assets acquired
from Macrospace became fully amortized in December 2005.
Amortization of intangible assets increased in the second
quarter of 2006 following the acquisition of iFone.
Our quarterly research and development expenses were relatively
constant in 2005 as we were able to use our technology to
create, develop and port a larger number of games without any
significant change in staffing. The decrease in research and
development expenses from the fourth quarter of 2005 to the
first quarter of 2006 was due to a reduction in employee costs
resulting from a restructuring initiated in December 2005. A
total of 17 research and development employees were terminated
as part of this restructuring effort. The increase in research
and development expenses from the first quarter of 2006 to the
second quarter of 2006 was primarily due to additional research
and development activities with the completion of the iFone
acquisition. The increase in research and development expenses
from the second quarter of 2006 to the third quarter of 2006 was
due to an increase in research and development personnel because
of the number of games acquired from iFone.
Our sales and marketing expenses were relatively constant in
2005 and the first quarter of 2006, with the exception of the
second quarter of 2005 when we increased marketing expenses in
connection with our corporate name change and rebranding
efforts. The increase in sales and marketing expenses from the
first quarter of 2006 to the second quarter of 2006 was due to
additional sales and marketing activities with the completion of
the iFone acquisition.
Our general and administrative expenses generally increased each
quarter as a result of increased salaries and benefits and
consulting fees to support the growth in our business. The
decrease in general and administrative expenses from the fourth
quarter of 2005 to the first quarter of 2006 was due to a
reduction in employee costs (resulting from the restructuring
initiated in December 2005), lower professional services fees
and lower allocated facilities costs. A total of six general and
administrative employees were terminated as part of this
restructuring effort. The increase in general and administrative
expenses from the first quarter of 2005 to the second quarter of
2006 was due to additional general and administrative activities
and personnel with the completion of the iFone acquisition.
Our acquired in-process research and development expense in the
first quarter of 2006 related to certain in-process projects
assumed in the 2006 acquisition of iFone.
We adopted FSP
150-5 in
July 2005 and thus, in the third quarter of 2005, accounted for
the cumulative effect of this change in accounting principle.
Thereafter, in each quarter, we recorded the increase in fair
value in our outstanding warrants to purchase preferred stock as
part of interest and other income (expense), net.
Cash flows (used in) provided by
investing activities
(124
)
(10,007
)
(16,706
)
2,292
Cash flows provided by financing
activities
5,408
20,184
26,692
11,208
Since our inception, we have incurred recurring losses and
negative annual cash flows from operating activities and we had
an accumulated deficit of $43.7 million as of
September 30, 2006. Our primary sources of liquidity have
historically been private placements of shares of our preferred
stock with aggregate proceeds of $57.4 million and
borrowings under our credit facilities with aggregate proceeds
of $12.0 million. In the future, we anticipate that our
primary sources of liquidity will come from cash generated from
the proceeds of this offering and our operating activities.
Operating
Activities
We used $10.6 million of net cash in operating activities
in the nine months ended September 30, 2006. This use of
cash was primarily the result of a net loss of
$10.0 million (partially offset by non-cash expenses,
including $1.7 million of amortization of intangible
assets, a $1.5 million acquired in-process research and
development charge and $1.1 million of depreciation and
amortization), and a $7.1 million increase in net operating
assets. This increase in net operating assets was primarily due
to a $2.9 million decrease in accounts payable, a
$2.2 million decrease in other accrued liabilities and a
$2.0 million increase in accounts receivable.
We used $10.3 million of net cash in operating activities
in 2005. This use of cash was primarily the result of a net loss
of $17.9 million, partially offset by non-cash expenses
including $3.4 million of amortization of intangible
assets, $1.6 million of impairment of prepaid royalties and
guarantees, $1.3 million of stock-based compensation
expense and $1.1 million of impairment of intangible assets.
We used $9.2 million of net cash in operating activities in
2004. This use of cash was primarily the result of a net loss of
$8.3 million, an increase in prepaid royalties of
$1.9 million and an increase in accounts receivable of
$1.4 million, partially offset by an increase in account
payable of $1.6 million.
We used $4.2 million of net cash in operating activities in
2003. This use of cash was primarily the result of a net loss of
$3.8 million and an increase in accounts receivable of
$812,000.
Investing
Activities
Our primary investing activities have consisted of purchases and
sales of short-term investments, purchases of property and
equipment, and, in 2004 and 2006, the acquisitions of Macrospace
and iFone, respectively.
We generated $2.3 million as net cash from investing
activities in the nine months ended September 30, 2006.
This net cash resulted from net sales of short-term investments
of $10.3 million, partially offset by the acquisition of
iFone for cash and stock, net of cash acquired, of
$7.4 million and purchases of property and equipment of
$612,000.
We used $16.7 million of net cash in investing activities
in 2005, $13.7 million of which represented net purchases
of short-term investments and the remaining $3.0 million of
which represented purchases of property and equipment, such as
our enterprise resource planning, or ERP, system and our revenue
data warehouse.
We used $10.0 million of net cash in investment activities
in 2004, $5.5 million of which represented purchases of
short-term investments and $4.3 million of which
represented the acquisition of Macrospace for cash and stock,
net of cash acquired.
Financing
Activities
We generated $11.2 million of net cash from financing
activities in the nine months ended September 30, 2006,
substantially all of which came from the proceeds of a loan from
Pinnacle Ventures, described below.
We generated $26.7 million of net cash from financing
activities in 2005, substantially all of which came from the
issuance and sale of our preferred stock. We used
$1.1 million to repay debt issued in connection with the
Macrospace acquisition.
We generated $20.2 million of net cash from financing
activities in 2004, substantially all of which came from the
issuance and sale of our preferred stock.
We generated $5.4 million of net cash from financing
activities in 2003, $4.5 million of which came from the
issuance and sale of our preferred stock and $1.0 million
of which came from the issuance and sale of convertible
promissory notes, which were later converted into our preferred
stock.
Sufficiency of
Current Cash, Cash Equivalents and Short-Term
Investments
Our cash, cash equivalents and short-term investments were
$21.6 million as of December 31, 2005 and
$14.4 million as of September 30, 2006. We believe
that our cash, cash equivalents and short-term investments and
any cash flow from operations will be sufficient to meet our
anticipated cash needs, including for working capital purposes,
capital expenditures and various contractual obligations, for at
least the next 12 months. We may, however, require
additional cash resources due to changed business conditions or
other future developments, including any investments or
acquisitions we may decide to pursue. If these sources are
insufficient to satisfy our cash requirements, we may seek to
sell debt securities or additional equity securities or to
obtain a credit facility. The sale of convertible debt
securities or additional equity securities could result in
additional dilution to our stockholders. The incurrence of
indebtedness would result in debt service obligations and could
result in operating and financial covenants that would restrict
our operations. In addition, there can be no assurance that any
additional financing will be available on acceptable terms, if
at all. We anticipate that, from time to time, we may evaluate
acquisitions of complementary businesses, technologies or
assets. However, there are no current understandings,
commitments or agreements with respect to any acquisitions.
Contractual
Obligations
The following is a summary of our contractual obligations as of
September 30, 2006:
The amounts in the table include interest payments on the loan.
In May 2006, we borrowed $12.0 million from Pinnacle
Ventures. This loan has an interest rate of 11% and is
collateralized by all of our assets. We are obligated to pay
only interest in 2006. Thereafter, we are obligated to pay 30
equal monthly payments of principal and accrued interest. If we
elect to make any advance payments, they would be subject to a
premium equal to 3% of the principal amount repaid unless the
payments were made in connection with an issuance of shares of
stock that would be publicly traded on a national market or
exchange, in connection with a change in our control or more
than 18 months after the funding of the loan. We intend to
repay the entire outstanding principal amount of the loan and
all accrued interest from the net proceeds of this offering.
(2)
We have entered into license and development arrangements with
various owners of brands and other intellectual property so that
we can create and publish games for mobile handsets based on
that intellectual property. Pursuant to some of these
agreements, we are required to pay guaranteed royalties over the
term of the contracts regardless of actual game sales.
Off-Balance Sheet
Arrangements
We do not have any relationships with unconsolidated entities or
financial partners, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings
or debt, and we have not entered into any synthetic leases. We
are, therefore, not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Recent Accounting
Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
establishes a framework for measuring the fair value of assets
and liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under
various existing accounting standards that permit, or in some
cases require, estimates of fair market value.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those
fiscal years. Earlier adoption is encouraged, provided that the
reporting entity has not yet issued financial statements for
that fiscal year, including any financial statements for an
interim period within that fiscal year. We are currently in the
process of evaluating the impact of SFAS No. 157 on
our consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes. This Interpretation prescribes a comprehensive model
for how a company should recognize, measure, present and
disclose in its financials statements uncertain tax positions
that it has taken or expects to take on a tax return, including
a decision whether to file or not to file a return in a
particular jurisdiction. Under the Interpretation, the financial
statements must reflect expected future tax consequences of
these positions presuming the taxing authorities’ full
knowledge of the position and all relevant facts. The
Interpretation also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the
unrecognized tax benefits. This Interpretation is effective for
fiscal years beginning after December 15, 2006. We will
adopt this provision in the first quarter of 2007 and are
currently evaluating the impact of this provision on our
consolidated financial position, results of operations or cash
flows.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, or
SAB No. 108, which provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. We will be required to adopt the provisions of
SAB No. 108 in our fiscal
year 2006. We do not believe the adoption of
SAB No. 108 will have a material impact on our
consolidated financial position, results of operations or cash
flows.
Quantitative and
Qualitative Disclosures about Market Risk
Interest Rate
and Credit Risk
We have exposure to interest rate risk that relates primarily to
our investment portfolio. All of our current investments are
classified as cash equivalents or short-term investments and
carried at cost, which approximates market value. We do not
currently use or plan to use derivative financial instruments in
our investment portfolio. The risk associated with fluctuating
interest rates is limited to our investment portfolio, and we do
not believe that a 10% change in interest rates would have a
significant impact on our interest income, operating results or
liquidity.
As of December 31, 2004 and 2005 and September 30,2006, our cash and cash equivalents were maintained by financial
institutions in the United States, the United Kingdom and Hong
Kong, and our current deposits are likely in excess of insured
limits. We believe that the financial institutions that hold our
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
Our accounts receivable primarily relate to revenues earned from
domestic and international wireless carriers. We perform ongoing
credit evaluations of our carriers’ financial condition but
generally require no collateral from them. At December 31,2004, Verizon Wireless and Sprint Nextel accounted for 30% and
22%, respectively, of our total accounts receivable. At
December 31, 2005, Verizon Wireless accounted for 23% of
our total accounts receivable. At September 30, 2006,
Verizon Wireless, Vodafone and Sprint Nextel accounted for 21%,
11% and 10% of our total accounts receivable, respectively.
Foreign
Currency Risk
The functional currencies of our United States and United
Kingdom operations are the United States Dollar, or USD, and the
pound sterling respectively. A significant portion of our
business is conducted in currencies other than the USD or the
pound sterling. Our revenues are usually denominated in the
functional currency of the carrier. Operating expenses are
usually in the local currency of the operating unit, which
mitigates a portion of the exposure related to currency
fluctuations. Intercompany transactions between our domestic and
foreign operations are denominated in either the USD or the
pound sterling. At month-end, foreign currency-denominated
accounts receivable and intercompany balances are marked to
market and unrealized gains and losses are included in interest
and other income (expense), net.
Our foreign exchange gains and losses have been generated
primarily from fluctuations in the pound sterling versus the USD
and in the Euro versus the pound sterling. It is uncertain
whether these currency trends will continue. In the future, we
may experience foreign exchange losses on our accounts
receivable and intercompany receivables and payables. Foreign
exchange losses could have a material adverse effect on our
business, operating results and financial condition.
Inflation
We do not believe that inflation has had a material effect on
our business, financial condition or results of operations. If
our costs were to become subject to significant inflationary
pressures, we might not be able to offset these higher costs
fully through price increases. Our inability or failure to do so
could harm our business, operating results and financial
condition.
Glu Mobile is a leading global publisher of mobile games. We
have developed and published a portfolio of more than 100 casual
and traditional games to appeal to a broad cross section of the
over one billion subscribers served by our more than 150
wireless carriers and other distributors. We create games and
related applications based on third-party licensed brands and
other intellectual property, as well as on our own original
brands and intellectual property. Our games based on licensed
intellectual property include Deer Hunter, Diner
Dash, Monopoly, Sonic the Hedgehog, World
Series of Poker and Zuma. Our original games based on
our own intellectual property include Alpha Wing,
Ancient Empires, Blackjack Hustler, Stranded
and Super K.O. Boxing. We were one of the top three
mobile game publishers in terms of mobile game market share in
North America during the third quarter of 2006 as measured by
NPD Group, Inc., a market research firm, in its September 2006
“Mobile Game Track Highlight Report,” and in terms of
unit sales volume in North America and Europe among titles
tracked by m:metrics, another market research firm.
Juniper Research, a market research firm, in its June 2006
“Mobile Games: Subscription & Download,
2006-2011”
report, estimates that the worldwide market for mobile games
will grow from $3.1 billion in 2006 to $10.5 billion
in 2009, a compound annual growth rate of 50.2%. We believe that
the rapid growth of the mobile game market has been driven by
continued advances in wireless communications technology,
proliferation of multimedia-enabled mobile handsets, increasing
availability of high-quality mobile games and increasing
end-user awareness of, and demand for, mobile games.
We seek to attract end users by developing engaging content that
is designed specifically to take advantage of the portability
and networked nature of mobile handsets. We leverage the
marketing resources and distribution infrastructure of wireless
carriers and the brands and other intellectual property of
third-party content owners, allowing us to focus our efforts on
developing and publishing high-quality mobile games. We believe
that the quality of our games, the breadth of our distribution
and licensing relationships, and the advantages we gain through
our technology will enable us to gain share in this growing
market.
By using carriers’ distribution infrastructures, we afford
end users of our games the convenience of paying through their
mobile phone bill, while eliminating for us the traditional
publishing costs associated with packaging, shipping, stocking,
inventory management and return processing. For the first nine
months of 2006, our largest wireless carrier customers in each
region by revenues were Verizon Wireless, Sprint Nextel,
Cingular Wireless and
T-Mobile USA
in North America; Vodafone, Hutchinson 3G, Orange and
Telefónica Móviles in Europe; TelCel and Vivo in Latin
America; and Vodafone, Hutchinson 3G Australia and Telecom New
Zealand in Asia Pacific. Carriers market and distribute our
games, retaining a portion of the gross fee paid by their
subscribers for purchasing or accessing our games and paying to
us the remainder. Thus, the carriers have the opportunity to
increase their average revenue per subscriber.
By licensing intellectual property from third-party content
owners, we provide end users brands and content with which they
are familiar, while eliminating for us the need to develop all
of our games from our own intellectual property. Our branded
content owners, such as Atari, Celador (from which we license
the rights to Who Wants To Be A Millionaire? in some
European and Asian countries), Fox, PlayFirst, PopCap Games,
Sega Europe and Turner Broadcasting, provide us with well-known
consumer brands and other intellectual property on which we have
based mobile games. When we use licensed content in the
development of our games, we share with the content owner a
portion of the amount paid to us by carriers, thereby allowing
it to derive incremental revenue from its content. We also
provide a solution for content owners to the development and
distribution challenges associated with creating and
distributing their own mobile games.
We believe that our carriers and content owners value our global
reach, the consistently high quality of our game portfolio, the
creativity of our development studios, and our mobile-specific
development expertise, including our ability to port games to
more than 1,000 different handset models with various
combinations of underlying technologies, user interfaces, keypad
layouts, screen resolutions, sound capabilities and other
carrier-specific customizations.
Industry
Background
The growth of the mobile entertainment market is being shaped by
an intersection of trends in the wireless communications and
entertainment industries since wireless carriers provide the
primary marketing and distribution channel for mobile game and
branded content owners provide the licensing relationships that
facilitate creating a large and diverse portfolio of
recognizable games. Juniper Research, in its June 2006
“Mobile Games: Subscription & Download,
2006-2011”
report, estimates that the percentage of wireless subscribers
who download mobile games in our two largest markets, North
America and Europe, will increase from 5.5% in 2006 to 14.6% in
2009 and from 5.6% in 2006 to 14.0% in 2009, respectively.
The mobile game market differs substantially from the
traditional console game market. Mobile games typically have
significantly lower development and distribution costs and
longer life cycles than console games. Console game sales depend
upon the product cycles of the consoles themselves, with large
generational shifts between versions of each of the major
console platforms every few years. In contrast, the mobile
platform is characterized by a gradual evolution of features and
capabilities in the many new handsets introduced each year by a
large number of manufacturers and carriers. Consumers typically
use their console games in the confines of their home, while
mobile games are available in all the settings where consumers
take their mobile handsets. Furthermore, console games are
usually developed for a few console platforms at most, which
means that the development costs are mostly associated with the
original creation and development of the game. However, once
developed, mobile games may need to be ported to more than 1,000
different handset models, many with different technological
requirements. Therefore, the ability to port mobile games
quickly and cost effectively can be a competitive differentiator
among mobile game publishers and a barrier to entry for other
potential market entrants.
The networked nature of mobile games allows publishers the
opportunity to improve the profitability of a game through
decisions on porting, pricing, localization and marketing. Some
games, especially those tied to films, television shows or
console games with specific launch “day-and-date”
requirements, ideally are launched simultaneously on a global
basis with a large number of carriers. Other games are launched
in stages by regions or by carriers. These games require initial
launch on fewer handsets than games with global
“day-and-date” launch requirements. Games released in
stages offer the opportunity to improve profitability by
adjusting porting and marketing support costs based upon the
initial success of the game.
We believe that the following trends will continue to shape the
growing market for mobile entertainment:
Increasing Quality and Broadening Appeal of Mobile
Games. We believe that improving quality and
greater availability of mobile games are contributing to
increased end-user awareness of and demand for mobile
entertainment. Wireless carriers and mobile game publishers now
offer games across a diverse range of genres in an effort to
appeal to a broad cross section of end users with mobile phones.
For example, casual games, such as Diner Dash, are easy
to learn and play and therefore well-suited to the mass market
demographics of wireless subscribers. Carriers and mobile game
publishers also have begun to focus on games where the brand,
such as Monopoly, or the name, such as Super K.O.
Boxing, clearly communicates the nature of the game within
the handset’s game menu and therefore increases the
likelihood of purchase or subscription. In addition, mobile
entertainment publishers are introducing games, such as Deer
Hunter, that are tailored to specific
regional, age and gender demographics. We believe that these
factors will contribute to rapid growth in the percentage of
subscribers who download games.
Increasing Complexity of Developing and Publishing Mobile
Games. Mobile game publishers have emerged to
address the requirements specific to mobile games, such as
creating games to operate within the resource constraints of
handsets, negotiating the requisite distribution agreements, and
developing the technical expertise required to port and
customize a game to more than 1,000 handset models and, with
regional and language requirements, to create thousands of
versions of that game. Some companies in related industries,
such as carriers, traditional game publishers and other branded
content owners, have established internal mobile game
development or publishing capabilities. We believe that these
companies are becoming increasingly aware of the complexities of
developing mobile games and, as a result, are increasingly
partnering with a small group of leading publishers that can
manage the complexities specific to mobile games and related
applications.
Increasing Importance of Scale in Licensing and Wireless
Carrier Partnerships. Carriers increasingly
are seeking mobile game publishers with large and diverse
portfolios of high-quality games based on well-known brands that
are likely to appeal to a large number of the carriers’
subscribers. Branded content owners prefer global distribution
in order to match the breadth of distribution of their brands in
other entertainment media. Thus, they increasingly are seeking
mobile game publishers with a global network of carrier
relationships and a history of successfully launching
high-quality games with premium deck placement on a number of
mobile handsets. As a result, scale in content and carrier
relationships is mutually reinforcing and has resulted in
increasing differentiation between mobile game publishers that
have achieved sufficient scale in licensing and carrier
relationships and those that have not. We believe that only a
small group of leading mobile entertainment publishers has
established the licensing relationships necessary to create
large and diverse portfolios of well-known games and the carrier
relationships necessary to facilitate global distribution.
Continuing Advances in the Multimedia Capabilities of
Mobile Handsets. Mobile games capitalize on
the ongoing and accelerating improvement of multimedia
capabilities in handsets. The increasing screen resolutions,
audio and graphics capabilities, processing power, battery life,
memory and storage capabilities, and the increasing
affordability of these handsets, are enabling the delivery of a
higher quality visual and audio entertainment experience to a
broader group of end users.
Accelerating Deployment of Advanced Wireless
Networks. Advances in wireless networks are
increasingly enabling convenient and rapid downloads of large
files such as mobile games. In addition, these advanced networks
have improved merchandising capabilities as well as flexible
provisioning and billing capabilities for data applications,
such as pay per play, providing the infrastructure necessary for
the purchase and download of mobile games. We believe that
incremental revenue from data-centric usages, such as accessing
the Internet and downloading mobile games, helps wireless
carriers recoup their multi-billion dollar investments in
next-generation infrastructure. Juniper Research, in its June
2006 “Mobile Games: Subscription & Download,
2006-2011”
report, estimates that the number of wireless subscribers on
2.5G and 3G networks, which facilitate the latest and highest
quality mobile games, will grow from 970 million
subscribers in 2006 to 1.8 billion subscribers in 2010.
Our Competitive
Strengths
We believe we have a proven capability to develop high-quality
mobile games that engage end users. Our portfolio of more than
100 games includes a variety of genres and is designed to appeal
to the diverse interests of the broad wireless subscriber
population. As the mobile entertainment market continues to
develop, we believe that wireless carriers and branded content
owners will increasingly recognize the benefits of partnering
with independent mobile entertainment publishers that have
achieved the scale necessary to develop and publish a consistent
portfolio of high-quality games and
to distribute them globally. We believe that we will continue to
be attractive to carriers, content owners and end users because
of the following strengths:
Diverse Portfolio of Award-Winning High-Quality Mobile
Games. We have developed and published more
than 100 casual and traditional games across a number of genres,
including action, board games, card/casino, puzzle, sports,
strategy/RPG and TV/movie. No single game contributed more than
10% of our revenues in 2005 or the first nine months of 2006. We
develop most of our games, including both original games and
those based on licensed brands and intellectual property, at our
studios in San Mateo, California and London, England. We
believe that internal development of our games is a key factor
in their consistently high quality. Our games are widely
recognized for innovation and quality by industry reviewers.
Based on numerical ratings by industry review websites, IGN
Entertainment, Modojo and WGWorld, we ranked first in terms of
average game quality for mobile games released in the first nine
months of 2006. We have received numerous industry awards for
our games, including IGN Entertainment’s 2005 Editor’s
Choice award for best wireless puzzle game for Zuma, The
Academy of Interactive Arts and Sciences’ 2006 Game of the
Year award for Ancient Empires II, and the 2005
award for Best Mobile Sports Game by CNET’s Gamespot for
Deer Hunter. Industry awards such as these increase our
overall brand recognition and help us to gain premium deck
placement with the wireless carriers, thereby increasing the
likelihood that end users will purchase and play our games.
Global Scale in Distribution, Sales and
Marketing. We currently have agreements with
more than 150 wireless carriers and other distributors, which
together serve more than one billion subscribers worldwide. Our
games regularly receive premium placement on these
carriers’ game decks accessed through handset screens.
Given the small size of these screens, there are significant
advantages to being placed in the initial list of games that an
end user sees on the deck, rather than being placed lower on the
list where an end user may need to scroll or search to find a
game. In addition, we have developed closely integrated
technical and strategic relationships with many carriers. These
relationships typically are available to only a small number of
leading publishers and may result in access to carriers’
new handset models for porting and preloading games prior to
commercial handset release, self-certification of games with
carriers (rather than going through the carriers’ more
time-consuming processes for certifying compliance with their
network requirements), co-marketing and promotions for new game
releases, and end-user market research.
Strong Relationships with Branded Content
Owners. We have built relationships with a
number of key branded content owners. The content providers that
accounted for the largest percentages of our revenues in the
first nine months of 2006 were Atari, Celador (from which we
license the rights to Who Wants To Be A Millionaire? in
some European and Asian countries), Fox, PlayFirst, PopCap
Games, Sega Europe and Turner Broadcasting. In addition to these
relationships, we have recently licensed brands or other
intellectual property from Harrah’s, Hasbro, Microsoft and
Sony. We believe that branded content owners increasingly
understand the complexities of developing their own internal
mobile entertainment capabilities. In choosing mobile game
publishing partners, we believe that branded content owners wish
to work with publishers with a history of successfully
developing and publishing high-quality games, the carrier
relationships necessary to distribute their games on a worldwide
basis, the ability to do global marketing on a localized basis,
and independence from a parent that may compete with the content
owner in other markets. A number of carriers have reduced the
number of mobile game publishers to which they provide access to
their networks, and many branded content owners have similarly
narrowed the number of mobile game publishers with which they
contract. We believe these trends have mutually reinforced each
other to the benefit of leading publishers such as Glu.
Proprietary Porting and Data Mining
Capabilities. We have developed proprietary
technologies and processes designed to increase the
profitability of our games through rapid and cost-effective
porting to a broad range of handsets across a number of
carriers. Our porting capabilities leverage technology and
proprietary standardized processes, such as a development
process designed to facilitate efficient porting, a tool library
that helps automate some of the repetitive development tasks
to support new handsets, and ongoing work flow analysis tools to
support continuous improvement of our porting and deployment
capabilities. Porting and localization results in each game
having many stock keeping units, or SKUs, characterized by
title, language, handset and carrier. As of September 30,2006, we had the capability to port games to approximately
40,000 SKUs per month. Our data mining capabilities provide us
with the ability to analyze the revenue potential of each game
and to improve profitability by adjusting porting and marketing
support costs based upon the initial success of the game.
Together, our porting and data mining capabilities help us in
our efforts to increase initial and subsequent sales of each
game and to support continuing premium deck placement.
Experienced Management Team. In
addition to their experience in mobile games, our management
team has significant experience in the video game publishing,
wireless communications, technology and media industries. We
believe that this broad expertise allows us in a timely manner
to design, develop and deliver games and other mobile
entertainment applications that are designed to address the
demands of our market. We believe our management team’s
expertise and continuity is a significant competitive advantage
in the evolving mobile entertainment publishing market.
Our
Strategy
Our goal is to be the leading global publisher of mobile games
and other mobile entertainment applications. To achieve this
goal, we plan to:
Continue to Create Award-Winning Games through Ongoing
Investment in Our Studio and Technical Development
Capabilities. Our creative and technical
teams are recognized in the industry for creating high-quality,
award-winning mobile games. Our technical teams leverage
proprietary technologies and standardized automated processes
that are designed to enable rapid, timely, high-quality and
cost-effective development and porting of mobile games. We
believe that this combination provides us with a competitive
advantage over other industry participants that have
traditionally outsourced porting and development or used more
manual processes. As a result, we have a record of developing
successful mobile games based on licensed brands, as well as our
own original brands such as Super K.O. Boxing. Original
games result in higher margins, since we do not have to pay
royalties to a content licensor. The industry-leading quality of
our games, as recognized by industry reviewers is important to
our success, and we intend to continue investing in our
studio’s game development capabilities.
Leverage and Grow Our Portfolio of
Games. We have developed a diverse portfolio
of more than 100 games, including perennial titles that we
believe can produce revenues for significantly longer than the
typical 18 to 24 month revenue lifecycle for mobile games.
In addition, successful games give us the potential to develop
and publish a series of sequel titles, sometimes referred to as
franchise titles. For both perennial and sequel titles, we
leverage existing development, porting and marketing investments
and broad end-user awareness in order to increase the revenue
lifecycle of an existing game or increase the chance of success
for new games. Games for the mobile platform also provide
potential opportunities for us to publish or license our
intellectual property for use on other platforms such as online,
console or personal computer games. For example, casual games
are well suited for both online and mobile platforms, and we may
develop or license online versions of some of our casual games.
We plan to continue developing perennial and franchise titles,
and we believe that our proprietary technology and development
process capabilities provide us an advantage over our
competitors in the coordinated launches frequently required of
multi-platform games.
Expand and Strengthen Our
Distribution. We believe that wireless
carriers are increasing their focus on the leading mobile game
publishers in order to improve the consistency and quality of
the games that they offer on their handsets. However, among
carriers in the United States, the top seven publishers
currently account for only approximately 60% of mobile game
revenues, according to the September 2006 “Mobile Game
Track Highlight Report” of NPD Group, Inc., a market
research firm. We intend to take steps to increase our market
share with our existing carriers and distributors. For example,
we plan to leverage increased user awareness of Glu as a brand
that stands for high-
quality mobile entertainment through the use of Glu-branded game
menus on mobile handset decks. We also plan to seek additional
carrier relationships in geographic areas where we do not yet
have a significant presence. In addition, we have increased and
expect to continue to increase our non-carrier distribution
capabilities through alternative channels such as Internet
portals and “off-deck” aggregators.
Build Upon Our Position as a Leading Global Publisher to
Strengthen Licensing Relationships. We
believe that, as a leading independent publisher of mobile
games, we will continue to benefit from branded content
owners’ increasing recognition of the challenges associated
with mobile entertainment publishing. As a result of these
challenges, some branded content owners are reducing their own
internal mobile development efforts. We believe that branded
content owners are also becoming more reluctant to contract with
smaller mobile game publishers that do not have a reputation for
quality development or that do not have the breadth of carrier
relationships and technological capabilities necessary to
publish a game on a worldwide basis. We intend to capitalize on
these trends and on our reputation with non-mobile content
owners as a leading mobile partner to strengthen our existing
licensing relationships and develop additional relationships.
Gain Scale through Select
Acquisitions. We have acquired and integrated
two mobile game companies — Macrospace and iFone. We
believe that there may be future opportunities to acquire
content developers and publishers in the mobile entertainment or
complementary industries and we intend, where appropriate, to
take advantage of these opportunities.
Our
Products
We design our portfolio of games to appeal to the diverse
interests of the broad wireless subscriber population. We
believe that the quality of our games, as recognized by numerous
industry awards, is key to their repeated success. We focus on
developing a diverse portfolio of games across a number of
genres designed to increase adoption and repeat purchase rates
by subscribers. We also develop and publish ringtones and
wallpaper in coordination with a small number of our games, such
as Ice Age 2. Revenues from applications other than
games have not been material to date.
End users typically purchase our games from their wireless
carrier and are billed on their monthly phone bill. In the
United States, one-time fees for unlimited use generally range
between approximately $5.00 and $8.00, and prices for
subscriptions generally range between approximately $2.50 and
$3.50 per month, typically varying by game and carrier. In
Europe, our subscription prices have a similar range, while
one-time fees for unlimited use range both higher and lower,
depending on the country. Prices in the Asia-Pacific region are
generally lower than in the United States and Europe. Carriers
normally share with us 50% to 70% of their subscribers’
payments for our games, which we record as revenues. In the case
of games based on licensed brands, we, in turn, share with the
content licensor a portion of our revenues, with the specific
terms varying based on factors such as the strength of the
licensed brand.
Our portfolio of games includes original games based on our own
intellectual property and games based on brands and other
intellectual property licensed from branded content owners.
These latter games are inspired by non-mobile brands and
intellectual property, including movies, board games,
Internet-based casual games and console games. In the first nine
months of 2006, Glu-branded original games accounted for 15.0%
of our revenues. Games based on licensed content from Atari,
Fox, PopCap Games and Celador accounted for 23.6%, 17.3%, 11.6%
and 9.8%, respectively, of our revenues for this period, with
the balance coming from games and other applications based on
content from other branded content owners.
Our games typically generate revenues for 18 to 24 months
after release. As a result, we generate a significant portion of
our revenues from our current collection of games that have been
in release for more than 12 months, which we sometimes
refer to as our catalog.
The following table summarizes a selection of our games by genre:
Year
Target
Title
Branded Content
Owner
Introduced
Market
Action
Aqua Teen Hunger Force
Turner Broadcasting
2005*
Global
Driv3r and Driver
Vegas
Atari
2003/2005
Global
Inuyasha
Viz Media
2005
Regional
Sonic the Hedgehog
Part 1
Sega Europe
2006*
*
Regional
Board Game
Battleship
Hasbro
2006*
*
Global
Clue
Hasbro
2006*
*
Global
Game of Life
Hasbro
2006*
*
Global
Monopoly
Hasbro
2006*
*
Global
Card/Casino
5 Card Draw Poker
Glu
2004
Global
Blackjack Hustler
Glu
2005
Global
Hoyle Solitaire Pro
Encore Software
2006
Global
World Series of Poker Texas Hold
’em
Harrah’s
2006
Global
Puzzle
Astropop
PopCap Games
2005
Global
Diner Dash
PlayFirst
2006
Global
Insaniquarium Deluxe
PopCap Games
2006
Global
Zuma
PopCap Games
2005
Global
Sports
Deer Hunter and Deer Hunter
2
Atari
2004/2006
Global
FOX Sports Mobile
Fox
2003
Regional
Shark Hunt
Glu
2003
Global
Super K.O. Boxing
Glu
2006
Global
Strategy/RPG
Ancient Empires I and
II
Glu
2005*
Global
Baldur’s Gate
Hasbro
2004
Global
Kasparov Chess
Gary Kasparov
2006
Global
Stranded
Glu
2006
Global
TV/Movie
Ice Age 2
Fox
2006
Global
Mr. &
Mrs. Smith
Fox
2005
Global
Robots
Fox
2005
Global
Who Wants to Be a
Millionaire?
Celador
2005*
Regional
*
Title acquired from Macrospace in
December 2004 with first revenue for us in 2005.
**
Title acquired from iFone in March
2006 with first revenue for us in 2006.
Some of our newest games include the following:
Centipede. This game is based on the
Atari classic game and created for the mobile environment. This
game has players encounter tenacious centipedes, bouncing
spiders, mushroom-laying fleas and transforming scorpions as
with the popular original arcade game. Players choose from six
different themes, from recognizable Retro based on Atari’s
classic, to other new themes such as Robo, Water, Fire, Flower
and Contempo. The “Power Up” mode is designed to give
players new weapons such as missiles, bombs and lasers, and
precise, responsive controls.
Deer Hunter Mobile. Based on
Atari’s Deer Hunter franchise, Glu’s
award-winning Deer Hunter and its sequel, Deer Hunter
2 Mobile, are designed to give end users the most realistic
hunting game
available on mobile phones. Players take aim at multiple deer
species with a range of weapons in detailed environments. The
game allows players to utilize a GPS system to track deer and
choose their hunting location, attract deer with scents and
calls, use binoculars to spot the biggest bucks, tag them for
easy tracking, and use the “Steady Aim System” for
pinpoint accuracy. Players can hit the kill zone for one shot
take-downs and view an instant replay of the action. With
multiple modes of play, players can take either a quick hunt or
climb the hunters’ ranks in career mode.
Monopoly. Through our license with
Hasbro, we publish for mobile handsets this top-selling board
game in two versions: classic Monopoly and the all-new
Monopoly Here & Now. Up to four players can
play, choosing from eight tokens. Through buying, renting and
selling the 22 pieces of real estate on the board, players
compete to build their real estate empires, bankrupt their
opponents and stay out of jail in order to become the wealthiest
player.
Project Gotham Racing Mobile. Through
our relationship with Microsoft, we introduced 2- and
3-dimensional
mobile games based on Project Gotham Racing, the leading
action-oriented racing franchise on the Xbox 360 video game and
entertainment system. Microsoft markets Project Gotham Racing
as the ultimate test of racing where style is of the
essence. End users race seven types of vehicles including Aston
Martin, Lamborghini and Mercedes, with the game designed to
emulate each vehicle’s unique physics and engine
specifications, including top speed and horsepower, in order to
give an authentic driving experience. Players race through
locations including Paris, Cairo and Shanghai and progress
through a combination of fast lap performances, earning
“Kudos” points for driving with skill, style and
daring.
Super K.O. Boxing. This title is an
arcade-style boxing game for mobile handsets. Super K.O.
Boxing features arcade style boxing with animations,
cartoon-style graphics and
larger-than-life
characters. This Glu original game is designed to allow players
to punch their way through three circuits against outrageous
contenders with names such as Major Pain, 15 Cent and Sake Bomb
and learn each fighter’s weaknesses and fighting style,
while dodging and blocking to avoid going down for the count.
This game has been widely acclaimed, winning IGN’s
Editor’s Choice Award and WGWorld.com’s Editor’s
Award.
Changes in end-user tastes and advances in technology combined
with limitations on our ability to introduce additional versions
of games under many of our license agreements, even those with
durations longer than the typical shelf life of our games, mean
that we are frequently evaluating ideas for new potential games
and will need to obtain new licenses or develop new original
games on an ongoing basis. We may be unable to obtain new
licenses or to obtain them on terms favorable to us. Failure to
maintain or renew our existing licenses or to obtain additional
licenses could impair our ability to introduce new mobile games
or continue our current games, which could materially harm our
business, operating results and financial condition. Even if we
are successful in gaining new licenses or extending existing
licenses, we may fail to anticipate the entertainment
preferences of our end users when making choices about which
brands, titles or other content to license. If the entertainment
preferences of end users shift to content or brands owned or
developed by companies with which we do not have relationships,
we may be unable to establish and maintain successful
relationships with these developers and owners, which would
materially harm our business, operating results and financial
condition.
Sales, Marketing
and Distribution
We market and sell our games primarily through wireless
carriers. Because of our internal development, porting and
operations capabilities, we believe that we have a competitive
advantage over our competitors in the ability to execute
simultaneous and coordinated
“day-and-date”
launches. These typically include games associated with other
content platforms such as films, television and console games.
We also coordinate our marketing efforts with carriers and
mobile handset manufacturers in the launch of new games with new
handsets.
Our sales and marketing organization focuses on increasing
end-user awareness, adoption and repeat purchase rates through a
variety of programs. We co-market our games with our partners,
including carriers, branded content owners and
direct-to-consumer companies. For example, when we create an
idea for a game, we discuss the game with carriers early in the
development process to gain an understanding of the
attractiveness of the game to them, to obtain their other
feedback regarding the game, and to develop plans for
co-marketing and a potential launch strategy. We also coordinate
our marketing efforts with those of branded content owners,
especially where our games will be launched concurrently with
their film, television show or other entertainment product.
These programs leverage the sales and marketing resources of our
carriers and content licensors to amplify our own sales and
marketing efforts. In addition, we work with our carriers to
develop merchandising initiatives that stimulate trial and
purchase such as pre-loading of games on handsets, often with
free trials, Glu-branded game menus that offer games for trial
or sale, and
pay-per-play
or other alternative billing arrangements.
We believe that placement of games on the top level or featured
handset menu or toward the top of the genre-specific or other
menus, rather than lower down or in
sub-menus,
is likely to result in games achieving a greater degree of
commercial success. We believe that a number of factors may
influence the deck placement of a game including:
•
the perceived attractiveness of the title or brand;
•
past success of this title or other titles previously introduced
by a publisher;
•
the number of handsets for which a version of the game is
available;
•
the relationship with the applicable carrier;
•
the carrier’s economic incentives with respect to the
particular game, such as revenue split percentage; and
•
the level of marketing support, including marketing development
funds.
If carriers choose to give our games less favorable deck
placement, our games may be less successful than we anticipate
and our business, operating results and financial condition may
be materially harmed.
We currently have agreements with more than 150 carriers and
other distributors that in the aggregate reach more than one
billion subscribers. End users download our mobile games and
related applications to their mobile handsets, and typically
their carrier bills them a one-time fee or monthly subscription
fee, depending on the end user’s desired payment
arrangement and the carrier’s offering. Our carrier
distribution agreements establish the portion of revenues that
will be retained by the carrier for distributing our games and
other applications. Our carrier agreements do not establish us
as the exclusive provider of mobile games with the carriers and
typically have a term of one or two years with automatic renewal
provisions upon expiration of the initial term, absent a
contrary notice from either party. In addition, the carriers can
terminate these agreements early and, in some instances, without
cause. The agreements generally do not obligate the carriers to
market or distribute any of our games. In many of these
agreements, we warrant that our games do not contain libelous or
obscene content, do not contain material defects or viruses, and
do not violate third-party intellectual property rights and we
indemnify the carrier for any breach of a third party’s
intellectual property.
In the first nine months of 2006, Verizon Wireless, Sprint
Nextel, Cingular Wireless and Vodafone accounted for 20.9%,
12.0%, 11.4% and 10.7%, respectively, of our revenues. In 2005,
those carriers accounted for 24.3%, 11.5%, 11.9% and 6.2%,
respectively, of our revenues. Listed below are our ten largest
carriers by revenues (on an operating unit basis rather than a
globally or regionally
consolidated basis) in the nine months ended September 30,2006 for each of our four major geographical markets:
North
America
Europe
Verizon Wireless
Hutchinson 3G UK
Sprint Nextel
O2 UK
Cingular Wireless
Vodafone Germany
T-Mobile USA
Vodafone Spain
ALLTEL
Orange UK
Boost Mobile
Hutchinson 3G Italy
US Cellular
Vodafone UK
Bell Mobility
Vodafone France (SFR)
Rogers
Telefónica Móviles
Virgin
O2 Germany
Asia
Pacific
Latin
America
Hutchinson 3G Australia
TelCel
Vodafone Australia
Vivo - Telesp Celular SA
Telecom New Zealand
IUSACELL
Vodafone New Zealand
Telecomunicaciones Movilnet
Telstra
Verizon Wireless Puerto Rico
China Mobile
Centennial Puerto Rico
SKT
Telesp Celular SA
Optus Administration Pty Limited
nTelos
Smart
CODETEL
KTF
UNEFON
Although we intend to continue the primary distribution of our
games through carriers, we also sell and market our games
through our own website and various Internet portals. Currently,
revenues from these alternative distribution channels are
immaterial. However, we believe that they increase the exposure
of our games and brand to end users and that they may become
significant channels in the future. As with our carrier
distribution, we believe that inferior placement of our games in
the menus of off-deck distributors will result in lower revenues
than might otherwise be anticipated from these alternative sales
channels.
Studios
We have two internal studios that create and develop games and
other entertainment products tailored to mobile handsets. These
studios, based in San Mateo, California, and London,
England, have the ability to design and build products from
original intellectual property, based on games originated in
other media such as online and game consoles, or based on other
licensed brands and intellectual property.
Where we license intellectual property from films or other
brands or content not based on games from other media, our game
development process involves a significant amount of creativity.
Even licensed console or Internet games require more than a
simple port to the mobile environment; rather, our developers
must create games that are inspired by the game play of the
original. In each of these cases, our creative and technical
studio expertise is necessary to design games that appeal to end
users and work well on handsets with their inherent limitations
such as small screen sizes and control buttons.
In addition, our studios develop games with worldwide appeal
such as Ice Age 2 as well as games that are
regionally and culturally relevant like Deer Hunter. We
anticipate expanding our
creative and development team to include studios in Asia and
Latin America for localization and development of culturally
attuned games.
Product
Development and Technology
We have developed proprietary technologies and product
development processes that are designed to enable us rapidly and
cost effectively to develop and publish games that are
consistently rated as high quality by industry publications such
as IGN.com and WGWorld.com, and that meet the needs of our
wireless carriers. These technologies and processes include:
Development Platforms. Our development
platforms are designed to enable us to create high-quality games
that overcome the significant constraints of mobile handsets
while taking advantage of the inherent capabilities of networked
handsets. In addition, we have developed an infrastructure that
allows us to outsource the development of some games while
retaining the consistency of our development processes. This
provides us with a cost effective alternative for selected games.
Porting Tools and Processes. Unlike the
PC or console markets that have a relatively small number of
platforms, the heterogeneity of handsets creates substantial
complexity when publishing a game broadly. We have designed our
overall game development processes and tools to account for the
complexity of porting a game to over 1,000 handsets and over
10,000 SKUs. Furthermore, we have developed proprietary
software, tools and libraries that we believe provide us with an
advantage over our competitors by allowing us to port our games
to handsets quickly and at a significantly lower cost.
Broad Development Capabilities. We have
created development capabilities intended to exploit the full
range of the handset as an entertainment platform, including
single player games, client server applications such as FOX
Sports Mobile, turn-based two player games such as
Kasparov Chess, and real-time multi-player games such as
World Series of Poker.
Application Hosting, Provisioning and Billing
Capabilities. We have developed an
application hosting and provisioning system that integrates with
both carrier and third-party billing systems and allows for a
range of billing options designed to maximize the attractiveness
of games to end users with different payment preferences. For
example, we support
pay-per-play
and micro-billing, as well as the more traditional one-time and
subscription billing models. We believe that this system allows
us to deepen our relationships with our carriers and provides a
marketing opportunity by allowing for control of our own
merchandising.
Merchandising and Marketing
Platform. We have developed technologies to
enable innovative sales and marketing programs. For example, we
have developed innovative technologies that address the
historical challenges of marketing to end users within the
limits of the deck. Play free technologies allow us to push
games to an end user’s handset after he or she registers at
our website or at an Internet portal. We also create and host
WAP channels that enable Glu-branded storefronts, or menus, on a
carrier’s
e-commerce
system.
Thin Client-Server Platform. We have
invested in the technology infrastructure to develop and deploy
highly tailored non-browser based client-server applications.
This technology has allowed us to deploy entertainment products
like FOX Sports Mobile, which give consumers real-time
access to sports news and other information. This technology
could serve as a foundation for non-game entertainment products
we may deploy in the future.
Strategic
Relationships
The following are brief summaries of our major wireless carrier
and branded content owner relationships:
Verizon Wireless. We are party to a
BREW Application License Agreement with Cellco Partnership
(d.b.a. Verizon Wireless) dated February 12, 2002 and a
BREW Developer Agreement
with Qualcomm Inc. dated November 2, 2001, as amended,
under which we provide our games to Qualcomm, and Qualcomm in
turn distributes our games on the Verizon Wireless network
utilizing Qualcomm’s BREW technology. Under these
agreements, we set the wholesale price for each game, and for
each game sold, we retain a specified percentage of the
wholesale price. Verizon Wireless maintains control to set the
retail price. These agreements are terminable by either party
without cause with 30 days’ notice. We have similar
arrangements with other carriers that utilize Qualcomm’s
BREW technology.
Cingular Wireless and Vodafone. We are
party to a Wireless Information Service Licensing Agreement with
Cingular Wireless dated October 15, 2004 and our
wholly-owned subsidiary, Glu Mobile Limited, is a party to a
Master Reseller Agreement with Vodafone Global Content Services
Limited dated July 7, 2003, under which these carriers
function as resellers of our games and remit to us a specified
percentage of all revenues derived from the sale of our games to
their subscribers. In each case, the carrier maintains the right
to set the retail price. Cingular Wireless and Vodafone may
terminate their respective agreements with us for any reason
with 90 and 30 days’ notice, respectively. Under our
Cingular Wireless agreement, we have a joint marketing
commitment which guarantees that each quarter a specified number
of our games will be jointly marketed and will receive premium
deck placement.
Celador. Our wholly-owned subsidiary,
Glu Mobile Limited, is party to a Wireless Games Agreement with
Celador International Limited, dated December 8, 2004, as
amended, under which Celador grants to us the exclusive license
to create mobile games based on the Celador title Who
Wants To Be A Millionaire? on specified wireless platforms
in specified territories, primarily in Europe, but also in the
Asia-Pacific region. The agreement also grants us the right to
create mobile game versions of Who Wants To Be A Millionaire?
where all the questions and answers included adhere to a
particular category or genre. We pay Celador a royalty of a
specified percentage of our net distributable revenues from
revenues arising from sales of the games, although this
percentage varies for sales through specified entities in
specified territories.
Fox. We are party to a Wireless Content
License Agreement with Fox Mobile Entertainment Inc., a division
of Fox Entertainment Group, Inc., dated December 16, 2004,
as amended, under which Fox grants to us the exclusive worldwide
license to create mobile games and applications based on such
Fox titles as Ice Age 2 and Kingdom of Heaven
on certain wireless platforms, and we grant to Fox a
non-exclusive license to sell these mobile games and
applications to Vodafone Group Services Limited and
T-Mobile,
for distribution to end users outside of the United States. For
the sale of our mobile games and applications based on the Fox
titles, we pay Fox a royalty of a specified percentage of our
receipts, which percentage varies based on the volume of our
sales and whether the film was a major release or a targeted
release. This agreement also provided for specified advances and
guaranties for some titles.
PopCap Games. We are party to a
Publishing and Distribution Agreement with PopCap Games, Inc.
and PopCap Games International, Ltd., dated October 1,2004, as amended, under which PopCap Games grants to us the
exclusive worldwide license to create mobile games based on
PopCap Games’ titles on specified wireless platforms. We
pay PopCap Games a royalty on sales of the mobile games equal to
the greater of a specified percentage of our revenues from these
sales or a specified fixed amount per unit sold, with the
percentages and amounts varying for one-time download sales and
subscription sales. PopCap Games may terminate the agreement
with regard to any game that we publish and distribute under
this agreement if we do not meet specified quarterly royalty
targets for that game.
Competition
Our primary competitors include Digital Chocolate, Electronic
Arts (EA Mobile), Gameloft, Hands-On Mobile, I-play, Namco and
THQ. In the future, likely competitors include major media
companies, traditional video game publishers, content
aggregators, mobile software providers and
independent mobile game publishers. Wireless carriers may also
decide to develop, internally or through a managed third-party
developer, and distribute their own mobile games. If carriers
enter the mobile game market as publishers, they might refuse to
distribute some or all of our games or might deny us access to
all or part of their networks.
The development, distribution and sale of mobile games is a
highly competitive business. For end users, we compete primarily
on the basis of brand, game quality and price. For wireless
carriers, we compete for deck placement based on these factors,
as well as historical performance and perception of sales
potential and relationships with licensors of brands and other
intellectual property. For licensors, we compete based on
royalty and other economic terms, perceptions of development
quality, porting abilities, speed of execution, distribution
breadth and relationships with carriers. We also compete for
experienced and talented employees.
Some of our competitors’ and our potential
competitors’ advantages over us, either globally or in
particular geographic markets, include the following:
•
significantly greater revenues and financial resources;
•
stronger brand and consumer recognition;
•
the capacity to leverage their marketing expenditures across a
broader portfolio of mobile and non-mobile products;
•
pre-existing relationships with brand owners or carriers;
•
greater resources to make acquisitions;
•
lower labor and development costs; and
•
broader distribution.
Further, our capital resources limit the number of games that we
can develop and market, and any inability to predict
successfully the appropriate level of marketing investment in
each game could result in lower earnings than we anticipate.
Electronic Arts (EA Mobile) and Gameloft are expending
significant amounts to promote the introduction of a large
number of games in Europe in the fourth calendar quarter of
2006. The success of these marketing efforts and the volume of
games involved may result in less desirable placement, or no
placement, on the decks of some carriers for the new games that
we plan to introduce, and, irrespective of deck placement, may
result in greater sales of their games to end users and,
consequently, lower sales of our games.
Intellectual
Property
Our intellectual property is an essential element of our
business. We use a combination of trademark, copyright, trade
secret and other intellectual property laws, confidentiality
agreements and license agreements to protect our intellectual
property. Our employees and independent contractors are required
to sign agreements acknowledging that all inventions, trade
secrets, works of authorship, developments and other processes
generated by them on our behalf are our property, and assigning
to us any ownership that they may claim in those works. Despite
our precautions, it may be possible for third parties to obtain
and use without consent intellectual property that we own or
license. Unauthorized use of our intellectual property by third
parties, and the expenses incurred in protecting our
intellectual property rights, may adversely affect our business.
We are the owner of six trademarks registered with the
U.S. Patent and Trademark office, including Alpha
Wing, and have six trademark applications pending with the
U.S. Patent and Trademark Office, including Glu, our
‘g’ character logo, Ancient Empires and
Super K.O. Boxing. We also own one or more registered
trademarks in Australia, Chile, the European Union, Mexico, New
Zealand and the United Kingdom, including the names Alpha
Wing, Ancient Empires and our ‘g’
character logo, and have a number of trademark applications
pending in more than 20 other jurisdictions for the same and
other trademarks. Registration of both U.S. and foreign
trademarks are renewable every ten years.
In addition, many of our games and other applications are based
on or incorporate intellectual property that we license from
third parties. We have both exclusive and non-exclusive licenses
to use these properties for terms that generally range from two
to five years. Our licensed brands include, among others,
Deer Hunter, Diner Dash, Monopoly, Sonic the Hedgehog, Who
Wants To Be A Millionaire? and Zuma. Our licensors
include a number of well-established video game publishers and
major media companies, including Atari, Celador, Fox,
Harrah’s, Hasbro, Microsoft, PlayFirst, PopCap Games, Sega
Europe, Sony and Turner Broadcasting. In the first nine months
of 2006, revenues derived from our games and other applications
based on the brands and other intellectual property of our four
largest licensors, Atari, Fox, PopCap Games and Celador,
represented 23.6%, 17.3% 11.6% and 9.8% of our revenues in the
first nine months of 2006.
From time to time, we may encounter disputes over rights and
obligations concerning intellectual property. Although we
believe that our product offerings do not infringe the
intellectual property rights of any third party, we cannot be
certain that we will prevail in any intellectual property
dispute. If we do not prevail in these disputes, we may lose
some or all of our intellectual property protection, be enjoined
from further sales of our games or other applications determined
to infringe the rights of others,
and/or be
forced to pay substantial royalties to a third party, any of
which would have a material adverse effect on our business,
financial condition and results of operations.
Employees
As of September 30, 2006, we had 226 employees, including
140 in research and product development. Of these employees, 123
were in the United States, 96 were in Europe and 7 were in Hong
Kong. None of our employees is represented by a labor union or
is covered by a collective bargaining agreement. We have never
experienced any employment-related work stoppages and consider
relations with our employees to be good.
Facilities
We lease approximately 37,048 square feet in
San Mateo, California for our corporate headquarters,
including our operations, studio and research and development
facilities, pursuant to a lease agreement that expires in March
2008. We have an option to extend the lease for three years and
a right of first refusal to lease additional space in our
building. In addition, we intend to enter into a lease for
approximately 10,600 square feet in London, England for our
principal European offices with an expected expiration date of
October 2012. We anticipate having an option to extend the
London lease for five years and a right of first refusal to
lease additional space in that building. We also lease
properties in Brazil, France, Germany and Hong Kong. We believe
our space is adequate for our current needs and that suitable
additional or substitute space will be available to accommodate
the foreseeable expansion of our operations.
Legal
Proceedings
From time to time, we may be subject to legal proceedings and
claims in the ordinary course of business. We are not currently
a party to any material legal proceedings, and to our knowledge
none is threatened.
The following table provides information regarding our executive
officers and directors as of December 15, 2006:
Name
Age
Position(s)
Executive Officers:
L. Gregory Ballard
53
President, Chief Executive Officer
and Director
Albert A. “Rocky”
Pimentel
51
Executive Vice President and Chief
Financial Officer
Jill S. Braff
37
Senior Vice President of Worldwide
Marketing and
General Manager of the Americas
Alessandro Galvagni
36
Senior Vice President of Product
Development and
Chief Technology Officer
Kristian Segerstråle
29
Managing Director, EMEA
Other Directors:
Daniel L. Skaff
46
Lead Independent Director
Ann Mather(1)
46
Director
Richard A. Moran(2)
56
Director
Hany M. Nada(1)
37
Director
A. Brooke Seawell(1)(3)
58
Director
Sharon L. Wienbar(2)(3)
44
Director
Key Employees:
Kevin S. Chou
34
Vice President and General Counsel
Denis M. Guyennot
43
Chief Executive Officer, EMEA
Eric R. Ludwig
37
Vice President, Finance
(1)
Member of our Audit Committee.
(2)
Member of our Compensation Committee.
(3)
Member of our Nominating and Governance Committee.
L. Gregory Ballard has served as our President,
Chief Executive Officer and director since September 2003. Prior
to joining us, Mr. Ballard consulted for Virgin USA, Inc.
from April 2003 to September 2003. Prior to then, he served as
Chief Executive Officer at SONICblue Incorporated, a
manufacturer of ReplayTV digital video recorders and Rio digital
music players, from August 2002 to April 2003, and as Executive
Vice President of Marketing and Product Management at SONICblue
from April 2002 to August 2002. Between July 2001 and April
2002, Mr. Ballard worked as a consultant. Mr. Ballard
served as Chief Executive Officer of MyFamily.com, Inc., a
subscription-based Internet service, from January 2000 to July
2001. Previously, he served as Chief Executive Officer or in
another senior executive capacity with 3dfx Interactive, Inc.,
an advanced graphics chip manufacturer, Warner Custom Music
Corp., a division of Time Warner, Inc., Capcom Entertainment,
Inc., a developer and publisher of video games, and Digital
Pictures, Inc., a video game developer and publisher.
Mr. Ballard holds a B.A. degree in political science from
the University of Redlands and a J.D. from Harvard Law School.
Albert A. “Rocky” Pimentel has served as our
Executive Vice President and Chief Financial Officer since
October 2004. Prior to joining us, Mr. Pimentel served as
Executive Vice President and Chief Financial Officer of Zone
Labs, Inc., an end-point security software company, from
September 2003 until it was acquired in April 2004 by Checkpoint
Software, Inc. From January 2001 to June 2003, he served as a
Partner of Redpoint Ventures, a venture capital firm focused on
investments in information technology. Prior to then, he served
as Chief Financial Officer for WebTV Networks, Inc., a provider
of set-top Internet access devices and services acquired by
Microsoft Corporation, and LSI
Logic Corporation, a semiconductor and storage systems developer
listed on the New York Stock Exchange. Mr. Pimentel holds a
B.S. in commerce from Santa Clara University and is a
Certified Public Accountant.
Jill S. Braff has served as our Senior Vice President of
Worldwide Marketing since May 2005 and also as our General
Manager of the Americas since August 2005. She also previously
served as our Vice President of Marketing from December 2003 to
May 2004, and as a marketing consultant from November 2003 to
December 2003. From 2001 until November 2003, Ms. Braff
worked as an independent marketing consultant and functioned as
interim Vice President of Marketing at Sega of America, Inc., an
interactive entertainment company, from June 2003 to August
2003, as Creative Director at Konami of America, an electronic
entertainment company, from January 2003 to June 2003, and as a
wireless games consultant at Sprint PCS from January 2002 to
April 2002. Ms. Braff has also held senior marketing
positions at Photopoint Corporation, MyFamily.com, Inc. and The
Learning Company. Ms. Braff holds a B.A. in English from
Colgate University.
Alessandro Galvagni has served as our Chief Technology
Officer since September 2002 and also as our Senior Vice
President of Product Development since January 2006. Prior to
joining us, Mr. Galvagni served as an architect (pervasive
division) at BEA Systems, Inc. during 2001. Previously,
Mr. Galvagni served as project leader at Pumatech
International, a mobile software technology company, from 1999
to 2001. Prior to then, Mr. Galvagni served in senior
engineering roles with Proxinet, Inc., a mobile software
technology company, and at NASA Ames Research Center.
Mr. Galvagni holds a B.S. in computer engineering from
California State University at San Jose and an M.S. in
computer engineering from Santa Clara University.
Kristian Segerstråle has served as our Managing
Director, EMEA, since December 2005, and served as our Vice
President, Production, EMEA from December 2004 to December 2005.
In August 2001, Mr. Segerstråle co-founded Macrospace,
a mobile games developer and publisher, where he served as
Director and Head of Products and Services until we acquired
Macrospace in December 2004. Mr Segerstråle holds a B.A.
Hons (M.A. Cantab) in economics from Cambridge University and an
M.Sc. from London School of Economics.
Daniel L. Skaff has served on our board of directors
since December 2001 and has served as our lead independent
director since June 2005. Mr. Skaff is the founder of
Sienna Ventures, a venture capital firm, and has served as its
Managing Partner since its inception in June 2000. He also
co-founded
Pon North America Inc., a distribution company, and served as
its Chairman from May 1998 to May 2001. Mr. Skaff also is a
founding investor and lead director of Protocol Communications
Inc., a call center and integrated marketing services business,
where he served as a director from June 1998 to December 1999.
He is currently on the investment committee of the Marin
Community Foundation, a large charitable organization, and is a
founding advisory board member of Northstar Capital LLC, a
subordinated debt fund based in Minneapolis. Mr. Skaff also
serves on the boards of directors of EBT Mobile China, Plc,
Epana Networks, Inc., and Viaquo Corp. Mr. Skaff holds an
A.B. in economics with honors from Harvard University and an
M.B.A. from the Wharton School, University of Pennsylvania,
where he was a Wharton Fellow.
Ann Mather has served on our board of directors since
September 2005. From September 1999 to May 2004, Ms. Mather
was Executive Vice President and Chief Financial Officer for
Pixar Animation Studios Inc. From 1992 to July 1999 she held
various executive positions at The Walt Disney Company,
including Senior Vice President of Finance and Administration
for its Buena Vista International Theatrical Division. Prior to
then, she served in various roles with Alico, a division of AIG,
Inc., Polo Ralph Lauren Europe’s retail operations,
Paramount Pictures Corporation and KPMG in London.
Ms. Mather also serves on the boards of directors of Google
Inc., where she is chair of its audit committee, Central
European Media Enterprises Ltd., where she is on its audit and
compensation committees, Ariat International, Inc and
Zappos.com, Inc. She also served as a director of Shopping.com
from May 2004 until it was acquired by Ebay in 2005, where she
was chair of its audit committee and a member of its corporate
governance and nominating committee. Ms. Mather holds
an M.A. from Cambridge University in England and is qualified as
a Chartered Accountant in England and Wales.
Richard A. Moran has served on our board of directors
since May 2002. He served as Chairman of the Board of Directors
of Portal Software, Inc. from February 2003 until Portal was
sold to Oracle Corporation in July 2006. Also, since January
2002, he has served as Chief Executive Officer of Moran Manor
and Vineyards LLC. From April 1996 to May 2002, Mr. Moran
served as Partner at Accenture Inc. (formerly Anderson
Consulting LLP), focusing on media and entertainment. He also
serves on the boards of directors of Sutura, Inc. and the
National Association of Corporate Directors, Northern California
Chapter. Mr. Moran is the author of several books on
business and management. Mr. Moran holds a B.A. in English
from Rutgers College, an M.A. in personnel administration from
Indiana University and a Ph.D. in organizational behavior/higher
education from Miami University (Ohio).
Hany M. Nada has served on our board of directors since
April 2005. Mr. Nada co-founded Granite Global Ventures in
2000 and has served as a Managing Director since its inception.
He has also served as Managing Director and Senior Research
Analyst at Piper Jaffray & Co., specializing in
Internet software and e-infrastructure. Mr. Nada also
serves on the boards of directors of OneWave
Technologies, Inc., Accruent, Inc., Vocera
Communications, Inc., WildTangent, Inc., and Endeca
Technologies, Inc. Mr. Nada holds a B.S. in economics
and a B.A. in political science from the University of Minnesota.
A. Brooke Seawell has served on our board of
directors since June 2006. Since January 2005, Mr. Seawell
has served as a Venture Partner at New Enterprise Associates,
focusing on software and semiconductor investments. From
February 2000 to December 2004, he served as a Partner at
Technology Crossover Ventures. Prior to joining TCV,
Mr. Seawell worked in senior executive positions with
NetDynamics, Inc., an application server software company, and
Synopsys Inc., an electronic design automation software company.
Mr. Seawell also serves on the boards of directors of
NVIDIA Corporation, Informatica Corporation, CoWare, Inc., iRise
Corporation and SiTime Corporation. Mr. Seawell holds a
B.A. in economics from Stanford University and an M.B.A. from
the Stanford Graduate School of Business.
Sharon L. Wienbar has served on our board of directors
since June 2004. Since 2001, Ms. Wienbar has served first
as a Director and later as a Managing Director at BA Venture
Partners, focusing on software investments, including media and
Internet companies. From 1999 to 2000, she served as Vice
President, Marketing at Amplitude Software Corp., a provider of
Internet resource scheduling solutions, and then at Critical
Path, Inc., a software-as-a-service company that acquired
Amplitude. Prior to then, she worked in product marketing at
Adobe Systems and practiced strategy consulting at
Bain & Company. Ms. Wienbar also serves on the
boards of directors of Bellamax, Inc., Biz360, Inc., FaceTime
Communications, Inc., Reply! Inc. and WYBS, Inc. (doing business
as MerchantCircle). Ms. Wienbar holds a A.B. in engineering
from Harvard University, a M.A. in engineering from Harvard
University and an M.B.A. from the Stanford Graduate School of
Business.
Kevin S. Chou has served as our Vice President and
General Counsel since July 2006. Prior to joining us,
Mr. Chou served as Senior Counsel at Knight-Ridder, Inc., a
newspaper publishing and Internet company, from August 2005 to
July 2006. From September 2002 to August 2005, he served as
Associate General Counsel at The Thomas Kinkade Company, an art
publishing company. Mr. Chou served as General Counsel of
Dialpad Communications, Inc., an Internet telephony company,
from October 2000 to March 2002. Previously, Mr. Chou
worked at Fenwick & West LLP, a law firm serving
technology and life sciences clients. Mr. Chou holds a B.S.
in economics from the University of California at Berkeley and a
J.D. from Yale Law School.
Denis M. Guyennot has served as the Chief Executive
Officer, EMEA since March 2006. Prior to joining us,
Mr. Guyennot served as Executive Vice President of the
wireless division of Infogrames Entertainment S.A., a video game
company, from October 2004 to March 2006, President and Chief
Operating Officer of Atari, Inc., a video game company, from
April 2000 to September 2004, and
President of Distribution for Infogrames Entertainment Europe,
from January 1999 to January 2000. From July 1998 to January
1999, Mr. Guyennot served as President of Infogrames
Europe’s Southern Region. Mr. Guyennot has been a
director of Atari, Inc. since January 2000 and is also currently
a director of Boonty Inc. Mr. Guyennot attended the
University of Lyon.
Eric R. Ludwig has served as our Vice President, Finance
since April 2005, and served as our Director of Finance from
January 2005 to April 2005. Prior to joining us, from January
1996 to January 2005, Mr. Ludwig held various positions at
Instill Corporation, an on-demand supply chain software company,
most recently as Chief Financial Officer, Vice President,
Finance and Corporate Secretary. Prior to Instill,
Mr. Ludwig was Corporate Controller at Camstar Systems,
Inc., an enterprise manufacturing execution and quality systems
software company, from May 1994 to January 1996. He also worked
at Price Waterhouse L.L.P. from May 1989 to May 1994.
Mr. Ludwig holds a B.S. in commerce from Santa Clara
University and is a Certified Public Accountant.
Board of
Directors Composition
Under our restated bylaws that will become effective immediately
following the completion of this offering, our board of
directors may set the authorized number of directors. While our
board of directors currently consists of ten authorized members,
our board of directors intends to reduce the number of
authorized directors to seven prior to completion of this
offering. Each director currently serves until our next annual
meeting or until his or her successor is duly elected and
qualified. Upon the completion of this offering, our common
stock will be listed on The NASDAQ Global Market. The rules of
The NASDAQ Stock Market require that a majority of the members
of our board of directors be independent within specified
periods following the completion of this offering. We believe
that six of our directors are independent as determined under
the rules of The NASDAQ Stock Market: Messrs. Skaff, Moran,
Nada and Seawell, and Mses. Mather and Wienbar. In June 2005,
our board of directors designated Daniel L. Skaff as our lead
independent director.
Pursuant to a voting agreement entered into in March 29,2006, Messrs. Barry J. Schiffman, Skaff, Seawell, Nada,
Andrew T. Heller and David C. Ward, and Ms. Wienbar were
designated to serve as members of our board of directors.
Pursuant to the voting agreement, Messrs. Seawell and Skaff
were selected as the representatives of our Series A
Preferred Stock, Mr. Schiffman was selected as the
representative of our Series B Preferred Stock,
Ms. Wienbar was selected as the representative of our
Series C Preferred Stock, Messrs. Nada and Heller were
selected as the representatives of our Series D and
Series D-1
Preferred Stock, Mr. Ward was selected as the
representative of our Special Junior Preferred Stock and
Messrs. Ballard and Moran and Ms. Mather were selected
by all of the holders of our preferred and common stock. As of
the date of this prospectus, Messrs. Nada, Skaff and
Seawell and Ms. Wienbar continue to serve on our board of
directors and will continue to serve as directors until their
resignation or until their successors are duly elected by the
holders of our common stock, despite the fact that the voting
agreement will terminate upon the completion of this offering.
Immediately following the completion of this offering, we will
file our restated certificate of incorporation. We anticipate
that the restated certificate of incorporation will divide our
board of directors into three classes, with staggered three-year
terms:
•
Class I directors, whose initial term will expire at the
annual meeting of stockholders to be held in 2008;
•
Class II directors, whose initial term will expire at the
annual meeting of stockholders to be held in 2009; and
•
Class III directors, whose initial term will expire at the
annual meeting of stockholders to be held in 2010.
At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms have
expired will be elected to serve from the time of election and
qualification until the
third annual meeting following election. Upon the completion of
this offering, the Class I directors will consist of
Messrs. Moran and Nada and Ms. Wienbar; the
Class II directors will consist Ms. Mather and
Mr. Skaff; and the Class III directors will consist of
Messrs. Ballard and Seawell. As a result, only one class of
directors will be elected at each annual meeting of our
stockholders, with the other classes continuing for the
remainder of their respective three-year terms.
In addition, we intend to restate our bylaws upon the completion
of this offering to provide that only our board of directors may
fill vacancies on our board of directors until the next annual
meeting of stockholders. Any additional directorships resulting
from an increase in the number of directors will be distributed
among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors.
This classification of our board of directors and the provisions
described above may have the effect of delaying or preventing
changes in our control or management. See “Description of
Capital Stock — Anti-Takeover Provisions —
Restated Certificate of Incorporation and Restated Bylaw
Provisions.”
Committees of Our
Board of Directors
Our board of directors has established an audit committee, a
compensation committee and a nominating and governance
committee. The composition and responsibilities of each
committee are described below. Members serve on these committees
until their resignations or until otherwise determined by our
board of directors.
Audit
Committee
Our audit committee is comprised of Ms. Mather, who is the
chair of the audit committee, and Messrs. Nada and Seawell.
The composition of our audit committee meets the requirements
for independence under the current NASDAQ Stock Market and SEC
rules and regulations, including their transitional rules. Each
member of our audit committee is financially literate. In
addition, our audit committee includes a financial expert within
the meaning of Item 401(h) of
Regulation S-K
promulgated under the Securities Act of 1933, or the Securities
Act. All audit services to be provided to us and all permissible
non-audit services, other than de minimis non-audit services, to
be provided to us by our independent registered public
accounting firm will be approved in advance by our audit
committee. Our audit committee recommended, and our board of
directors has adopted, an amended and restated charter for our
audit committee, which will be posted on our website. Our audit
committee, among other things:
•
selects a firm to serve as independent registered public
accounting firm to audit our financial statements;
•
helps to ensure the independence of the independent registered
public accounting firm;
•
discusses the scope and results of the audit with the
independent registered public accounting firm, and reviews, with
management and that firm, our interim and year-end operating
results;
•
develops procedures for employees to submit anonymously concerns
about questionable accounting or audit matters;
•
considers the adequacy of our internal accounting controls and
audit procedures; and
•
approves or, as permitted, pre-approves all audit and non-audit
services to be performed by the independent registered public
accounting firm.
Compensation
Committee
Our compensation committee is comprised of Mr. Moran, who
is the chair of the compensation committee, and
Ms. Wienbar. The composition of our compensation committee
meets the
requirements for independence under the current NASDAQ Stock
Market and SEC rules and regulations. The purpose of our
compensation committee is to discharge the responsibilities of
our board of directors relating to compensation of our executive
officers. Our compensation committee recommended, and our board
of directors has adopted, an amended and restated charter for
our compensation committee. Our compensation committee, among
other things:
•
reviews and determines the compensation of our executive
officers;
•
administers our stock and equity incentive plans;
•
reviews and makes recommendations to our board of directors with
respect to incentive compensation and equity plans; and
•
establishes and reviews general policies relating to
compensation and benefits of our employees.
Nominating and
Governance Committee
We currently have a nominating and governance committee
comprised of Ms. Wienbar, who is the chair of the
nominating and governance committee, and Mr. Seawell. Upon
completion of this offering, our board of directors will have a
nominating and governance committee consisting of two directors.
The composition of our nominating and governance committee will
meet the requirements for independence under the current NASDAQ
Stock Market and SEC rules and regulations. Our nominating and
governance committee recommended, and our board of directors has
adopted, an amended and restated charter for our nominating and
governance committee. Our nominating and governance committee,
among other things:
•
identifies, evaluates and recommends nominees to our board of
directors and committees of our board of directors;
•
conducts searches for appropriate directors;
•
evaluates the performance of our board of directors;
•
considers and makes recommendations to our board of directors
regarding the composition of our board of directors and its
committees;
•
reviews related party transactions and proposed waivers of the
code of conduct;
•
reviews developments in corporate governance practices;
•
evaluates the adequacy of our corporate governance practices and
reporting; and
•
makes recommendations to our board of directors concerning
corporate governance matters.
Compensation
Committee Interlocks and Insider Participation
Since January 1, 2005, the following directors and former
directors have at one time been members of our compensation
committee: Ms. Wienbar, Mr. Moran, Stewart J. O.
Alsop II (resigned from our board of directors effective
June 6, 2006) and Jon D. Callaghan (resigned from our
board of directors effective February 2, 2006). None of
them has at any time been one of our officers or employees. None
of our executive officers serves or in the past has served as a
member of our board of directors or compensation committee of
any entity that has one or more of its executive officers
serving on our board of directors or our compensation committee.
In September 2004, Mr. Ballard and his spouse agreed to
purchase a home in Redwood City, California from Mr. Alsop,
who was then a member of our board of directors and compensation
committee, and his spouse. The Alsops had recently listed the
house on the local multiple listing service, but
Mr. Ballard learned directly from Mr. Alsop that it
was for sale. Through a real estate agent, Mr. Ballard and
his spouse initially offered to purchase the home at the listed
asking price of $3.0 million. Mr. Alsop and his spouse
counter-offered to sell the house for $3.1 million, and
Mr. Ballard
and his spouse agreed. In connection with the arrangement of the
mortgage, the home was appraised at $3.1 million. The sale
was completed in December 2004. The other members of our
compensation committee were aware of the transaction at the time
of discussing Mr. Ballard’s compensation.
Director
Compensation
The following table provides information for 2006 regarding all
plan and non-plan compensation awarded to, earned by or paid to
each person who served as a director for some portion or all of
2006. Other than as set forth in the table and described more
fully below, in 2006, we did not pay any fees to, reimburse any
expenses of, make any equity or non-equity awards to or pay any
other compensation to our non-employee directors. All
compensation that we paid to Mr. Ballard, our only employee
director, is set forth in the tables summarizing executive
officer compensation below.
2006
Names
Option
Awards(1)
Amy N. Francetic(2)
—
Ann Mather(3)
$
6,930
Richard A. Moran(4)
36,621
(1)
The amounts in this column represent the aggregate grant date
fair value, computed in accordance with SFAS No. 123R,
of all options granted to the named director in 2006. See
note 12 of the notes to our consolidated financial
statements for a discussion of all assumptions made in
determining the grant date fair values.
(2)
We initially granted Ms. Francetic an option to purchase
10,000 shares of our common stock, with an exercise price
of $0.06 per share, in August 2002 for serving on our
advisory board; this option vested over two years and
became fully vested in August 2004. We appointed
Ms. Francetic to our board of directors in June 2004 and,
at that time, we granted her an option to purchase
75,000 shares of our common stock with an exercise price of
$0.25 per share. The option vested over four years with a
schedule similar to that described in footnote (3), but,
when Ms. Francetic resigned from our board of directors in
March 2006, we accelerated the vesting of all her options that
remained unvested at that time. Ms. Francetic exercised
both options in full on June 2006. In 2006, we reimbursed an
aggregate of $1,627 of Ms. Francetic’s travel expenses
in connection with attendance at the meetings of our board of
directors in late 2005 and early 2006.
(3)
In September 2005, we granted Ms. Mather an option to
purchase 150,000 shares of our common stock. We also
granted Ms. Mather an option to purchase 75,000 shares
of our common stock in February 2006. Each of these options:
(i) vests as to 1/4 of the shares of common stock
underlying it on the first anniversary of its grant date and as
to 1/48 of the shares of common stock underlying it monthly
thereafter; (ii) is immediately exercisable;
(iii) contains change of control provisions such that all
unvested shares vest immediately upon the closing of a change of
control transaction, as defined in the 2001 Stock Option Plan;
and (iv) has an exercise price of $1.19. Both of these
options remained outstanding at December 19, 2006. The
grant to Ms. Mather from September 2005 originally had an
exercise price of $1.60 per share; in March 2006, in order
to maintain the retentive and incentive value of
Ms. Mather’s stock options and to align her stock
option exercise price with that of Mr. Moran, our other director
not affiliated with a principal stockholder, our board of
directors elected to reprice Ms. Mather’s September
2005 option at $1.19 per share, which is not less than the
$1.09 fair market value of our common stock based upon a
valuation report as of December 31, 2005, and $1.19 based
upon a valuation report as of March 31, 2006, both from an
independent valuation firm. For a discussion of the valuation of
our common stock, please see “— Executive
Compensation — Compensation Discussion and
Analysis — Equity Compensation” below. The
aggregate incremental fair value, computed in accordance with
SFAS No. 123R, of this option as of the date that it
was repriced was $6,930. See note 12 of the notes to our
consolidated financial statements for a discussion of all
assumptions made in determining the grant date fair values.
In June 2002, we granted Mr. Moran two options, each to
purchase 50,000 shares of our common stock. We granted one
option for his work as a consultant and the other for joining
our board of directors. Each of these options vested as to 1/4
of the shares of common stock underlying it on the first
anniversary of its grant date and as to 1/48 of the shares of
common stock underlying it monthly thereafter, and had an
exercise price of $0.06 per share. In May 2003, we granted
Mr. Moran an option to purchase 80,000 shares of our
common stock, with an exercise price of $0.06 per share,
that vests over a four-year period; our board of directors
determined that the May 2003 grant should vest concurrently with
the options granted in June 2002. In each case, the exercise
price was equal to the fair market value of our common stock as
determined by our board of directors on the grant date.
Mr. Moran exercised these three options and purchased
180,000 shares of our common stock in December 2004. In February
2006, we granted Mr. Moran an additional option to purchase
45,000 shares of our common stock. This option
(i) vests as to 1/4 of the shares of common stock
underlying it on the first anniversary of its grant date and as
to 1/48 of the shares of common stock underlying it each month
thereafter; (ii) is immediately exercisable;
(iii) contains a change of control provision such that all
unvested shares vest immediately upon the closing of a change of
control transaction, as defined in the 2001 Stock Option Plan;
and (iv) has an exercise price of $1.19, which is not less
than the $1.09 fair market value of our common stock based
upon a valuation report as of December 31, 2005, and $1.19
based upon a valuation report as of March 31, 2006, both
from an independent valuation firm. For a discussion of the
valuation of our common stock, please see
“— Executive
Compensation — Compensation Discussion and
Analysis — Equity Compensation” below.
Following the completion of this offering, we intend to
compensate our non-employee directors with a combination of cash
and equity. Each non-employee director will receive an annual
base compensation of $20,000, provided that, until our first
annual meeting of stockholders following the completion of this
offering, directors who are affiliated with one of our principal
stockholders will not be eligible for this annual base
compensation. Our lead independent director, the chairperson of
our audit committee and the chairperson of our compensation
committee will receive additional annual compensation of
$15,000, and the chairperson of our nominating and governance
committee will receive additional annual cash compensation of
$5,000. Each director will receive additional annual cash
compensation of $5,000 for service on each of the committees
described above other than as chairperson. All this cash
compensation will be paid in quarterly installments upon
continuing service. Further, upon completion of this offering,
each non-employee director, other than Ms. Mather and
Mr. Moran who have previously received an initial equity
compensation award and consequently will receive smaller awards,
will receive an initial equity award of, at that director’s
discretion, either an option to purchase 100,000 shares of
our common stock or a grant of 33,000 shares of restricted
stock, which in either case will vest as to
162/3%
of the shares after six months and thereafter will vest pro rata
monthly for the next 30 months. Ms. Mather and
Mr. Moran will have a choice of either an option to
purchase 33,000 shares or a grant of 11,000 shares of
restricted stock, which vest as to 50% of the shares after six
months and thereafter will vest pro rata monthly for the next
six months. Each year at about the time of our annual meeting of
stockholders, each non-employee director will receive an
additional equity award of, at that director’s discretion,
either a grant of a number of shares of restricted stock with a
then fair market value equal to $50,000 or an option to purchase
three times as many shares of our common stock, in either case
vesting pro rata monthly over one year. We intend to provide
equity compensation to new non-employee directors in initial and
annual amounts with similar dollar values.
Executive
Compensation
Compensation
Discussion and Analysis
This section discusses the principles underlying our executive
compensation policies and decisions and the most important
factors relevant to an analysis of these policies and decisions.
It provides qualitative information regarding the manner and
context in which compensation is awarded
to and earned by our executive officers and places in
perspective the data presented in the tables and narrative that
follow.
Our compensation program for executive officers is designed to
attract, as needed, individuals with the skills necessary for us
to achieve our business plan, to motivate those individuals, to
reward those individuals fairly over time, and to retain those
individuals who continue to perform at or above the levels that
we expect. It is also designed to reinforce a sense of
ownership, urgency and overall entrepreneurial spirit and to
link rewards to measurable corporate and individual performance.
Our executive officers’ compensation currently has three
primary components — base compensation or salary,
quarterly (and, in the case of Mr. Ballard, our Chief
Executive Officer, also annual) cash bonuses under a
performance-based, non-equity incentive plan, and stock option
awards granted pursuant to our 2001 Stock Option Plan, which is
described below under “— Employee Benefit
Plans.” In addition, we provide our executive officers a
variety of benefits that are available generally to all salaried
employees in the geographical location where they are based. We
fix executive officer base compensation at a level we believe
enables us to hire and retain individuals in a competitive
environment and to reward satisfactory individual performance
and a satisfactory level of contribution to our overall business
goals. We also take into account the base compensation that is
payable by companies that we believe to be our competitors and
by other private and public companies with which we believe we
generally compete for executives. To this end, with the help of
a consultant, we access a number of executive compensation
surveys and other databases and review them when making crucial
executive officer hiring decisions and annually when we review
executive compensation. We designed our executive bonus plan to
focus our management on achieving key corporate financial
objectives, to motivate certain desired individual behaviors and
to reward substantial achievement of these company financial
objectives and individual goals. We utilize cash bonuses to
reward performance achievements with a time horizon of one year
or less and we utilize salary as the base amount necessary to
match our competitors for executive talent. We utilize stock
options to reward long-term performance, with excellent
corporate performance and extended officer tenure producing
potentially significant value for the officer.
We view these components of compensation as related but
distinct. Although our compensation committee does review total
compensation, we do not believe that significant compensation
derived from one component of compensation should negate or
reduce compensation from other components. We determine the
appropriate level for each compensation component based in part,
but not exclusively, on competitive benchmarking consistent with
our recruiting and retention goals, our view of internal equity
and consistency, and other considerations we deem relevant, such
as rewarding extraordinary performance. We believe that, as is
common in the technology sector, stock option awards are the
primary compensation-related motivator in attracting and
retaining employees and that salary and bonus levels are
secondary considerations to most employees. Except as described
below, our compensation committee has not adopted any formal or
informal policies or guidelines for allocating compensation
between long-term and currently paid out compensation, between
cash and non-cash compensation, or among different forms of
non-cash compensation. However, our compensation
committee’s philosophy is to make a greater percentage of
an employee’s compensation performance-based as he or she
becomes more senior and to keep cash compensation to the minimum
competitive level while providing the opportunity to be well
rewarded through equity if the company performs well over time.
Our compensation committee’s current intent is to perform
at least annually a strategic review of our executive
officers’ compensation to determine whether they provide
adequate incentives and motivation to our executive officers and
whether they adequately compensate our executive officers
relative to comparable officers in other companies with which we
compete for executives. These companies may or may not be public
companies or even in all cases technology companies. Our
compensation committee’s most recent review occurred in
September 2006. Compensation committee meetings typically have
included, for all or a portion of each meeting, not only the
committee members but also our lead independent director, our
chief executive officer, our chief financial officer and our
general counsel. For compensation decisions, including decisions
regarding the grant of equity compensation, relating to
executive officers other than our chief executive officer, our
compensation committee typically considers recommendations from
the chief executive officer.
We account for equity compensation paid to our employees under
the rules of SFAS No. 123R, which requires us to estimate
and record an expense over the service period of the award.
Accounting rules also require us to record cash compensation as
an expense at the time the obligation is accrued. Unless and
until we achieve sustained profitability, the availability to us
of a tax deduction for compensation expense will not be material
to our financial position. We structure cash bonus compensation
so that it is taxable to our executives at the time it becomes
available to them. We currently intend that all cash
compensation paid will be tax deductible for us. However, with
respect to equity compensation awards, while any gain recognized
by employees from nonqualified options should be deductible, to
the extent that an option constitutes an incentive stock option
gain recognized by the optionee will not be deductible if there
is no disqualifying disposition by the optionee. In addition, if
we grant restricted stock or restricted stock unit awards that
are not subject to performance vesting, they may not be fully
deductible by us at the time the award is otherwise taxable to
the employee.
Benchmarking of
Base Compensation and Equity Holdings
At its September 2006 meeting, our compensation committee
decided to set executive officers’ salaries at a level that
was at or near the 60th percentile of salaries of
executives with similar roles at comparable pre-public and small
public companies and to set their aggregate share and option
holdings at a level that was at or near the 75th percentile
of executives in similar positions. Our compensation committee
believes that the 60th percentile for base salaries is the
minimum cash compensation level that would allow us to attract
and retain talented officers. However, because our compensation
committee fixed salaries near the median of comparable
officers’ salaries, it chose to make equity grants at or
near the level of the 75th percentile. Our compensation
committee realizes that using a benchmark may not always be
appropriate but believes that it is the best alternative at this
point in the life cycle of our company. In instances where an
executive officer is uniquely key to our success, our
compensation committee may provide compensation in excess of
these percentiles. Our compensation committee’s judgments
with regard to market levels of base compensation and aggregate
equity holdings were based on a report obtained from an
independent outside consulting firm specializing in executive
compensation, which was engaged by our compensation committee to
assist in the adjustment of the compensation to our executives;
the report compared our executive compensation with the
executive compensation at a number of recently public companies
and a number of similarly situated private companies, analyzing
various factors including employee headcount and revenues. The
compensation committee’s choice of the foregoing
percentiles to apply to the data in the report reflected
consideration of our stockholders’ interests in paying what
was necessary, but not significantly more than necessary, to
achieve our corporate goals, while conserving cash and equity as
much as practicable. We believe that, given the industry in
which we operate and the corporate culture that we have created,
base compensation and options at these percentage levels are
generally sufficient to retain our existing executive officers
and to hire new executive officers when and as required. At the
September and October 2006 meetings, based on these benchmarks,
our compensation committee recommended and our board of
directors subsequently approved salary increases and additional
option grants to our executive officers. The new annual salary
levels fixed in September 2006 for our executive officers are
reflected in the footnotes to the “Summary Compensation
Table — 2006” below and the numbers of shares
subject to the September and October 2006 option grants to these
officers are reflected in the “Grants of Plan-Based
Awards” table below.
Equity
Compensation
In February 2005, our compensation committee hired an
independent valuation firm to determine the fair market value of
our common stock as of December 15, 2004, and it has sought
periodic
valuation updates as of March 31, 2005, April 30,2005, June 30, 2005, September 30, 2005,
December 31, 2005, March 31, 2006, June 30, 2006,
and September 7, 2006. All equity awards to our employees,
including executive officers, and to our directors have been
granted and reflected in our consolidated financial statements,
based upon the applicable accounting guidance, at fair market
value on the grant date in accordance with the valuation
determined by our independent, outside valuation firm. We do not
have any program, plan or obligation that requires us to grant
equity compensation on specified dates and, because we have not
been a public company, we have not made equity grants in
connection with the release or withholding of material
non-public information. It is possible that we will establish
programs or policies of this sort in the future, but we do not
expect to do so prior to this offering. Authority to make equity
grants to executive officers rests with our compensation
committee, although, as noted above, our compensation committee
does consider the recommendations of our chief executive
officer. Prior to the original February 2005 engagement of an
independent valuation firm, our board of directors determined
the value of our common stock based on internal reports and
other relevant factors.
The value of the shares subject to the September 2006 option
grants to executive officers are reflected in the “Summary
Compensation Table — 2006” table below and
further information about these grants is reflected in the
“2006 Grants of Plan-Based Awards” table below.
Prior to this offering, our board of directors intends to adopt
a new equity plan described under “— Employee
Benefit Plans” below. The 2006 Equity Incentive Plan will
replace our existing 2001 Stock Option Plan immediately
following this offering and, as described below, will afford our
compensation committee much greater flexibility in making a wide
variety of equity awards. Participation in the 2006 Employee
Stock Purchase Plan that we intend to adopt prior to this
offering will also be available to all executive officers
following this offering on the same basis as our other employees.
Cash Bonuses
Under Our Non-Equity Incentive Plan
Our current executive bonus plan was adopted by our compensation
committee in February 2004 to reward all vice presidents and
more senior executive officers. It contemplates the payment of a
maximum annual bonus equal to an officer’s current annual
salary times a percentage fixed in the officer’s employment
offer letter or subsequently by our chief executive officer or,
in the case of our chief executive officer’s percentage,
our compensation committee. The percentages are currently 50%
for Mr. Ballard, 30% for Mr. Pimentel, 25% for
Ms. Braff and Mr. Galvagni and 10% to 25% for our
other officers. We pay bonuses quarterly with the maximum
potential bonus in a given quarter, except for
Mr. Ballard’s, equal to one-quarter of the maximum
annual bonus. We determined to pay bonuses quarterly because our
compensation committee believed a short-term orientation was
appropriate given the uncertainty and unpredictability of
operations in a small company. Mr. Ballard’s maximum
potential bonus in a given quarter is equal to 20% of his
maximum annual bonus, with the final 20% being paid after our
year-end based on his annual performance. The compensation
committee wanted Mr. Ballard’s bonus to be largely
aligned with those of the other executive officers but to
include a strategic component that went beyond the short-term
quarterly financial metrics. We define operational EBITDA, for
bonus purposes, to mean the estimated revenues that we will
ultimately recognize from end-user game downloads during the
quarter less the royalties associated with those revenues and
less our normal recurring cash operating expenses. Thus, we do
not subtract amortization or impairment of intangible assets,
impairment of prepaid royalties or guarantees, stock-based
compensation, depreciation, restructuring charges or any other
expenses that we consider nonrecurring. The compensation
committee felt that the largest portion of each bonus should be
based on our executive officers’ success as a team and thus
based on corporate financial goals, but that there should be
some ability to reward individual contributions. Each of the
three components of the bonus is independent of the other two
components, and we will pay the applicable percentage of the
bonus if an objective is attained, regardless of whether any or
all of the other objectives are attained. The compensation
committee chose revenues and operational EBITDA because it
believed that, as a “growth company,” we should reward
revenue growth, but only if that revenue growth is achieved cost
effectively. Likewise, it believed a “profitable
company” with little or no growth was not acceptable. Thus,
the compensation committee considered the chosen metrics to be
the best indicators of financial success and stockholder value
creation. The individual performance objectives are determined
by the executive officer to whom the potential bonus recipient
reports or, in the case of our chief executive officer, by our
lead independent director and one or more members of our
compensation committee, after taking input from the other
members of our board of directors. The basis for
Mr. Ballard’s bonus might include such objectives as
developing our executive team, successfully integrating
acquisitions, ensuring the creation of a sufficient number of
games, developing improved content strategy or developing
strategic opportunities.
Third quarter 2006 bonuses were below the maximum levels because
we did not achieve our operational EBITDA targets. We believe
that there is a reasonable likelihood that we will achieve our
targets in the fourth quarter of 2006 and pay the maximum
bonuses possible based on revenues and operational EBITDA. Our
bonus plan does not formally provide for the exercise of
discretion, but our compensation committee did exercise
discretion in the third quarter of 2006 in the following ways:
(1) to reduce to zero a bonus for a departed executive
officer; (2) to prorate the bonus of a former executive
officer who is no longer devoting full-time efforts to the
company; and (3) to provide small bonuses to two executive
officers whose region of geographical responsibility achieved
110% of its target but who suffered because company-wide goals
were not met due to other regions’ less robust performance.
In addition, our executive team determined not to accept bonuses
in the first quarter of 2006 in order to improve our
consolidated financial statements and achieve profitability more
rapidly. Further details about our executive bonus plan are
provided below in the footnotes to the “2006 Grants of
Plan-Based Awards” table, which shows the
“threshold” and “maximum” bonus amounts that
could have been earned by each named executive officer in 2006.
Since we have only recently started to pay bonuses, our
compensation committee has not considered whether it would
attempt to recover bonuses paid based on our financial
performance where our quarterly revenues or operational EBITDA
is restated in a downward direction sufficient to reduce the
amount of bonus that should have been paid under our plan
formulas.
Severance and
Change of Control Payments
From February 2002 to March 2006, our board of directors
included, as a default provision, an acceleration to the option
vesting schedule in options for director-level employees, vice
presidents and more senior executive officers if the optionee
was terminated for any reason other than for cause, disability
or death within six months following a change in our control.
For director-level employees, this acceleration related to up to
25% of the shares subject to non-vested options on the date of
termination, and, for vice presidents and more senior executive
officers, this acceleration related to up to 50% of the shares
subject to non-vested options on the date of termination. Our
board of directors was authorized to deviate from this
percentage in individual cases. The default acceleration
provision was used for executive officers in three instances:
(a) an option grant to Ms. Braff in April 2005 for
75,000 shares, (b) an option grant to Ms. Braff
in December 2005 for 30,000 shares, and (c) an option
grant to Mr. Galvagni in April 2005 for
130,000 shares. The majority of the options granted to our
executives during this period call for an acceleration of 50% of
their non-vested options upon involuntary termination of their
employment within 90 days of a change of control event.
In March 2006, our board of directors eliminated this default
provision. After that date, option grants may only contain a
change of control acceleration provision if specifically
authorized by our board of directors or our compensation
committee. Those individuals who were executive officers in
March 2006 retained the acceleration of vesting provisions that
were included in their options granted prior to March 2006.
As noted above, in September 2006 and October 2006,
Messrs. Ballard, Galvagni, Segerstråle and Pimentel
and Ms. Braff were granted options. With the exceptions of
Messrs. Ballard and Pimentel, the grants included
provisions such that 50% of the non-vested shares will vest in
the event
the optionee is terminated for any reason other than cause,
disability or death within 90 days of a change of control
event.
In May 2006, following recommendation and approval from our
compensation committee, our board of directors determined to
enter into severance agreements with Messrs. Ballard and
Pimentel that contain change of control provisions. These
agreements are identical and described below under
“— Severance and Change of Control
Agreements.” These agreements, by their terms, pertained to
all options granted to Messrs. Ballard and Pimentel prior
to March 2006. Options subsequently granted to
Messrs. Ballard and Pimentel have incorporated the terms of
these severance agreements.
In December 2006, following recommendation and approval
from our compensation committee, our board of directors
determined to amend the change of control acceleration
provisions for Messrs. Ballard, Pimentel and Galvagni and
Ms. Braff. With respect to Mr. Galvagni and
Ms. Braff, following this amendment, should the executive
terminate his or her employment for good reason, as defined
below, or be terminated, other than for cause or disability,
within 12 months after a change in control transaction,
that executive would continue for six months to receive his or
her then-current base salary and benefits (other than any
prospective bonus) he or she might have been eligible to
receive, would receive a bonus prorated for the portion of the
relevant period actually served and would become vested as to an
additional 50% of his or her options or shares of common stock
subject to our right of repurchase outstanding as of December
2006. With respect to Messrs. Ballard and Pimentel, we replaced
the definition of “good reason” in each
executive’s severance agreement described below with the
definition of “good reason” provided in
“— Executive Compensation — Severance
and Change of Control Agreements” below. In addition, for
Messrs. Ballard and Pimentel the severance payment of
salary and benefits other than bonus would continue for
12 months, rather than six months as previously provided,
in the event that the executive terminates his employment for
good reason or is terminated for other than cause or disability.
Our board of directors determined to provide these change of
control arrangements in order to mitigate some of the risk that
exists for executives working in a small, dynamic startup
company, an environment where there is a meaningful likelihood
that we may be acquired. These arrangements are intended to
attract and retain qualified executives that have alternatives
that may appear to them to be less risky absent these
arrangements, and mitigate a potential disincentive to
consideration and execution of such an acquisition, particularly
where the services of these executive officers may not be
required by the acquirer. For quantification of these severance
and change of control benefits, please see the discussion under
“— Executive Compensation — Severance
and Change of Control Agreements” below.
Absent a change of control event, upon termination, no executive
officer is entitled to either equity vesting acceleration or
cash severance payments.
Other
Benefits
Executive officers are eligible to participate in all of our
employee benefit plans, such as medical, dental, vision, group
life, disability, and accidental death and dismemberment
insurance and our 401(k) plan, in each case on the same basis as
other employees. There were no special benefits or perquisites
provided to any executive officer in 2006.
Our officers and employees in Europe and Hong Kong generally
have somewhat different employee benefit plans than those we
offer domestically, typically based on the requirements of their
respective countries of domicile.
The following table provides information regarding all plan and
non-plan compensation awarded to, earned by or paid to each of
our executive officers serving as such at the end of 2006 for
all services rendered in all capacities to us during 2006, based
on the information available to us as of December 19, 2006.
We refer to these five executive officers as our named executive
officers.
Summary
Compensation Table — 2006
Non-Equity
Name
and
Option
Incentive
Plan
Principal
Position
Salary(1)
Bonus(2)
Awards(3)
Compensation(4)
Total(5)
L. Gregory Ballard
$
281,250
—
$997,601
$
37,125
$
1,315,976
Chief Executive Officer
Albert A. “Rocky”
Pimentel
223,750
—
619,108
23,865
866,723
Chief Financial Officer
Jill S. Braff
217,500
—
506,543
36,925
760,968
Senior Vice President of Worldwide
Marketing
Alessandro Galvagni
198,750
—
506,543
33,613
738,906
Senior Vice President of Product
Development
Kristian Segerstråle
220,019
—
450,200
14,466
684,685
Managing Director, EMEA
(1)
The amounts in this column include any salary contributed by the
named executive officer to our 401(k) plan.
Mr. Segerstråle’s annual salary is £120,000;
the figure of $220,019 is obtained using an exchange ratio of
£1 to $1.83349, the average exchange rate in 2006 through
December 4, 2006. In September 2006, our compensation
committee set annual base compensation for these executive
officers, effective October 1, 2006, as follows:
Mr. Ballard — $300,000;
Mr. Pimentel — $250,000;
Ms. Braff — $240,000; and
Mr. Galvagni — $240,000.
Mr. Segerstråle’s salary was not increased.
(2)
Bonus amounts paid in 2006 were made under our executive bonus
plan and are included in the “Non-Equity Incentive Plan
Compensation” column.
(3)
The amounts in this column represent the aggregate grant date
fair value, computed in accordance with SFAS No. 123R,
of all options granted to the named executive officer in 2006,
less in the case of modified or replacement options the fair
value of the option modified or replaced. Our compensation cost
for these option grants is similarly based on the grant date
fair market value but is recognized over the period, typically
four years, in which the executive officer must provide services
in order to earn the award. The July 20, 2006 option grant
to Mr. Ballard shown in the “2006 Grants of Plan-Based
Awards” table is valued above at zero; it did not create
any incremental fair value on the replacement date since it had
a higher exercise price than the option that it replaced. Please
see footnote (4) to the “2006 Grant of Plan-Based
Awards” table for a discussion of this grant to
Mr. Ballard. Please see note 12 of the notes to our
consolidated financial statements for a discussion of all
assumptions made in determining the grant date fair values of
the options we granted in 2006.
(4)
The amounts in this column represent total performance-based
bonuses earned for services rendered during 2006. These bonuses
were earned in the first three quarters of 2006 and were based
entirely on our financial performance and the executive
officer’s performance against his or her specified
individual objectives. The bonus earned for the last quarter of
2006 will be paid in 2007.
The figure for Mr. Segerstråle’s bonus was
obtained using an exchange ratio of £1 to $1.83349, the
average exchange rate in 2006 through December 4, 2006.
(5)
The dollar value in this column for each named executive officer
represents the sum of all compensation reflected in the
preceding columns.
The following table provides information with regard to
potential cash bonuses paid or payable in 2006 under our
performance-based, non-equity incentive plan, and with regard to
each stock option granted to each named executive officer during
2006, based on the information available to us as of
December 19, 2006. There were no equity incentive plan
awards in 2006.
2006 Grants of
Plan-Based Awards
Number of
Shares
Exercise
Estimated Future
Payouts Under Non-Equity
Underlying
Price of
Grant
Incentive Plan
Awards(1)
Option
Option
Name
Date
Threshold
Maximum
Awards(2)
Awards(3)
L. Gregory Ballard
7/20/06
$
45,000
$
140,625
550,000
(4)
$
1.30
9/7/06
400,000
3.51
Albert A. “Rocky”
Pimentel
9/7/06
21,480
67,125
275,000
3.51
Jill S. Braff
9/7/06
17,400
54,375
225,000
3.51
Alessandro Galvagni
9/7/06
15,900
49,688
225,000
3.51
Kristian Segerstråle
10/31/06
14,092
44,038
200,000
3.51
(1)
Under our current executive bonus plan, 40% of each quarterly
bonus is based on our performance relative to our revenue plan
and 40% is based on our performance relative to our operational
EBITDA plan, in each case with 40% of the maximum amount for
that portion of the bonus being paid if we achieve at least 90%
of our plan, 70% if we achieve at least 95% of our plan and 100%
if we meet or exceed our plan. The final 20% of each quarterly
bonus is based on the percentage of individual objectives that
the chief executive officer determines the executive officer
met. These objectives typically include qualitative and
quantitative elements such as demonstrated leadership and
achieving spending within plan for the officer’s area of
functional responsibility, as well as tactical and strategic
objectives to be achieved within the officer’s functional
area. Beginning with the first quarter of 2007, the percentages
for revenue plan performance, operational EBITDA performance and
individual objectives will be 37.5%, 37.5% and 25%,
respectively. In the table above, the “Threshold”
column represents the smallest total bonus that would have been
paid in 2006 to each named executive officer if, in each quarter
of 2006, we had achieved the minimum revenues and operational
EBITDA amounts required for the payment of any bonus but the
executive officer did not meet any of his or her individual
objectives. Payment of the applicable portion of each bonus is
contingent on (a) our having achieved either (i) at
least 90% of our revenue plan or (ii) at least 90% of our
operational EBITDA plan or (b) the executive officer’s
achieving one or more of his individual performance goals.
Failure to meet any of these conditions in any quarter would
result in an executive officer’s receiving no bonus. The
“Maximum” column represents the largest total bonus
that could be paid to each named executive officer if all
corporate financial and individual objectives are met in each
quarter of 2006. The actual bonus amount earned by each named
executive officer in 2006 is shown in the “Summary
Compensation Table — 2006” above.
(2)
All option awards were made under our 2001 Stock Option Plan,
which is described below under “— Employee
Benefit Plans” below. Each award is divided into two
options, with one option covering shares designated as an
incentive stock option and the other option covering the
remaining shares designated as a nonqualified stock option.
Other than the grant to Mr. Ballard in July 2006,
which is described in footnote (4) below, the options vest
as to 1/4 of the shares of common stock underlying the options
on the first anniversary of the grant date and as to 1/48 of the
underlying shares monthly thereafter. These options contain
provisions that call for accelerated vesting upon certain events
following a change of control event, as discussed above in
“— Executive Compensation —
Compensation Discussion and Analysis — Severance and
Change of Control Payments” and below in
“— Executive
Compensation — Severance and Change of Control
Agreements.”
(3)
Represents the fair market value of a share of our common stock,
as determined by our board of directors, on the option’s
grant date. Please see “— Executive
Compensation — Compensation Discussion and
Analysis — Equity Compensation” above for a
discussion of how we have valued our common stock.
(4)
This option was granted to replace an option of like size and
similar terms, but with an exercise price of $0.75, which was
granted in February 2005. In April 2006, we learned that the
March 2005 option was granted with an exercise price of less
than fair market value at the grant date; our board of directors
and Mr. Ballard agreed to cancel the March 2005 option and
replace it with a grant of like size and terms, but with an
exercise price $1.30, which a valuation report from our
independent valuation firm determined was not less than the then
fair market value of a share of our common stock. The
replacement grant retained all of the terms of the original
grant other than the exercise price and a new expiration date of
July 20, 2016.
The following table provides information regarding each
unexercised stock option held by each of our named executive
officers as of December 31, 2006, based on the information
available to us as of December 19, 2006.
Except as otherwise described in these footnotes, each option
vests as to 1/4 of the shares of common stock underlying it on
the first anniversary of the grant date and as to 1/48 of the
shares
of common stock underlying it each month thereafter. In December
2004, our board of directors amended the stock options granted
to employees at the level of vice president and above such that
their previously granted stock options would be immediately
exercisable, and determined that, unless otherwise approved by
our board of directors or our compensation committee, future
option grants to these employees would also be immediately
exercisable. Any options exercised prior to their vesting date
would be subject to our right of repurchase as specified in the
2001 Stock Option Plan.
(2)
Represents the fair market value of a share of our common stock,
as determined by our board of directors, on the option’s
grant date. Please see “— Executive
Compensation — Compensation Discussion and
Analysis — Equity Compensation” above for a
discussion of how we have valued our common stock.
(3)
In May 2006, upon recommendation and approval from our
compensation committee, we entered into the severance agreement
described below under “— Executive Compensation
— Severance and Change of Control Agreements,”
including a change of control provision, with Mr. Ballard.
This agreement covered all stock option grants made to
Mr. Ballard prior to March 2006, but the terms of this
agreement were incorporated into a replacement grant to
Mr. Ballard in July 2006 and into the grant to
Mr. Ballard in September 2006.
(4)
Vests monthly as to 1/48 of the shares of common stock
underlying the option.
(5)
This stock option grant was immediately exercisable. Vests as to
1/2 of the shares of common stock underlying the option on the
second anniversary of the grant date and as to 1/48 of the
shares of common stock underlying the option monthly thereafter.
Any unvested shares vest upon the completion of this offering.
(6)
In May 2006, upon recommendation and approval from our
compensation committee, we entered into the severance agreement
described below under “— Executive Compensation
— Severance and Change of Control Agreements,”
including a change of control provision, with Mr. Pimentel.
This agreement covered all stock option grants made to
Mr. Pimentel prior to March 2006, but the terms of this
agreement were incorporated into the grant to Mr. Pimentel
in September 2006.
(7)
Option was fully vested on grant date.
The following table shows the number of shares acquired pursuant
to the exercise of options by each named executive officer
during 2006 and the aggregate dollar amount realized by the
named executive officer upon exercise of the option, based on
the information available to us as of December 19, 2006.
2006 Option
Exercises
Number of
Shares
Acquired
Value Realized
Name
on
Exercise
on
Exercise(1)
L. Gregory Ballard
533,333
Albert A. “Rocky”
Pimentel
—
—
Jill S. Braff
—
—
Alessandro Galvagni
—
—
Kristian Segerstråle
—
—
(1)
The aggregate dollar amount realized upon the exercise of an
option represents the difference between the aggregate market
price of the shares of our common stock underlying that option
on the date of exercise, which we have assumed to be the
midpoint of the price range set forth on the cover page of this
prospectus, and the aggregate exercise price of the option.
In May 2006, we entered into severance agreements with
Messrs. Ballard and Pimentel, which were amended in
December 2006 as described above under
“— Executive Compensation —
Compensation Discussion and Analysis — Severance and
Change of Control Payments.” Each agreement provides that,
should the executive terminate his employment for “good
reason” or be terminated, other than for “cause”
or disability, within 12 months after a “change in
control transaction,” he would continue for 12 months
to receive his then-current base salary and benefits (other than
any prospective bonus) he might have been eligible to receive.
Each such executive will also be eligible to receive a partial
bonus prorated for the portion of the relevant period served by
the executive prior to the termination. Additionally, all of his
unvested options or shares of common stock subject to our
lapsing right of repurchase outstanding would become fully
vested.
Ms. Braff and Mr. Galvagni
In December 2006, our board of directors approved revised
severance arrangements with Ms. Braff and
Mr. Galvagni, under which, should the executive terminate
his or her employment for “good reason” or be
terminated, other than for “cause” or disability,
within 12 months after a “change in control
transaction,” the executive would continue for six months
to receive his or her then-current base salary and benefits
(other than any bonus) the executive might have been eligible to
receive. Each such executive will also be eligible to receive a
partial bonus prorated for the portion of the relevant period
served by the executive prior to the termination. Additionally,
each of these executives outstanding unvested options or
outstanding shares of common stock subject to our lapsing right
of repurchase outstanding would become vested as to an
additional 50% of the shares originally subject to that option
or lapsing repurchase right.
The following definitions are utilized in the severance
arrangements with each of Messrs. Ballard, Galvagni and
Pimentel and Ms. Braff:
A “change in control transaction” is defined to mean
the closing of (i) a merger or consolidation in one
transaction or a series of related transactions, in which our
stockholders before the merger or consolidation own less than
50% of the outstanding voting equity securities of the surviving
corporation after the transaction or series of related
transactions, (ii) a sale or other transfer of all or
substantially all of our assets as a going concern, in one
transaction or a series of related transactions, followed by the
distribution to our stockholders of any proceeds remaining after
payment of creditors or (iii) a transfer of more than 50%
of our outstanding voting equity securities by our stockholders
to one or more related persons or entities other than our
company in one transaction or a series of related transactions.
“Good reason” is defined to mean (i) without his
or her express written consent, a significant reduction in his
or her duties, position or responsibilities, or his or her
removal from these duties, position and responsibilities, unless
he or she is provided with a position of substantially equal or
greater organizational level, duties, authority and
compensation; provided, however, that a change of title, in and
of itself, or a reduction of duties, position or
responsibilities solely by virtue of our being acquired and made
part of a larger entity will not constitute “good
reason,” (ii) a greater than 15% reduction in his or
her then-current annual base compensation that is not applicable
to our other executive officers, or (iii) without his or
her express written consent, a relocation to a facility or a
location more than 30 miles from his or her then-current
location of employment.
“Cause” is defined to mean (i) the
executive’s committing an act of gross negligence, gross
misconduct or dishonesty, or other willful act, including
misappropriation, embezzlement or fraud, that materially
adversely affects us or any of our customers, suppliers or
partners, (ii) his personal dishonesty, willful misconduct
in the performance of services for us, or breach of fiduciary
duty involving personal profit, (iii) his being convicted
of, or pleading no contest to, any felony or misdemeanor
involving fraud, breach of trust or misappropriation or any
other act that our board of
directors reasonably believes in good faith has materially
adversely affected, or upon disclosure will materially adversely
affect, us, including our public reputation, (iv) any
material breach of any agreement with us by him that remains
uncured for 30 days after written notice by us to him,
unless that breach is incapable of cure, or any other material
unauthorized use or disclosure of our confidential information
or trade secrets involving personal benefit or (v) his
failure to follow the lawful directions of our board of
directors or, if he is not the chief executive officer, the
lawful directions of the chief executive officer, in the scope
of his employment unless he reasonably believes in good faith
that these directions are not lawful and notifies our board of
directors or chief executive officer, as the case may be, of the
reasons for his belief.
The following table describes the potential payments for each
named executive officer upon involuntary termination or
termination for good reason within 12 months following a
change in our control:
Equity
Benefits and
Name
Salary
Acceleration(2)
Perquisites(3)
L. Gregory Ballard
$
300,000
$
5,345,442
$
8,622
Albert A. “Rocky”
Pimentel
250,000
2,712,156
8,622
Jill S. Braff
120,000
900,901
4,311
Alessandro Galvagni
120,000
663,246
1,705
Kristian Segerstråle
—
—
—
(1)
Reflects 12 months of continued salary in the cases of
Messrs. Ballard and Pimentel and six months of
continued salary in the cases of the other named executive
officers.
(2)
Calculated based on the change in control taking place as of
December 31, 2006 and based on the fair market value of
shares as of that date. Reflects 100% acceleration of vesting of
equity awards in the cases of Messrs. Ballard and Pimentel,
and reflects 50% acceleration of vesting of equity awards in the
cases of the other named executive officers, in each case as of
that date.
(3)
Reflects 12 months of continued health (medical, dental and
vision) and life insurance benefits in the cases of
Messrs. Ballard and Pimentel and six months of
continued health (medical, dental and vision) and life insurance
benefits in the cases of the other named executive officers.
Employment
Agreements and Offer Letters
We are party to the following agreements contained in employment
offer letters with our named executive officers.
L. Gregory
Ballard
On September 23, 2003, Mr. Ballard executed our
written offer of employment as our Chief Executive Officer and
President. The written offer of employment specifies that
Mr. Ballard’s employment with us is “at
will.” Mr. Ballard’s current base compensation is
$300,000. He is currently eligible to receive a bonus of up to
50% of his base compensation. The provision of
Mr. Ballard’s offer letter regarding termination upon
a “change in control” event has been superseded by the
Severance Agreement described above in
“— Severance and Change of Control
Agreements.”
Albert A.
“Rocky” Pimentel
On September 28, 2004, Mr. Pimentel executed our
written offer of employment as our Executive Vice President and
Chief Financial Officer. The written offer of employment
specifies that Mr. Pimentel’s employment with us is
“at will.” Mr. Pimentel’s current base
compensation is $250,000. He is currently eligible to receive a
bonus of up to 30% of his base compensation. The provision of
Mr. Pimentel’s offer letter regarding termination upon
a “change of control” event has been superseded by the
Severance Agreement described above in
“— Severance and Change of Control
Agreements.”
On September 23, 2002, Mr. Galvagni executed our
written offer of employment as our Chief Technical Officer
commencing on September 30, 2002. He is currently Senior
Vice President of Product Development and Chief Technology
Officer. The written offer of employment does not specify a
specific term for Mr. Galvagni’s employment; rather,
Mr. Galvagni’s employment with us is “at
will.” Mr. Galvagni’s current base compensation
is $240,000. He is currently eligible to receive a bonus of up
to 25% of his base compensation.
Jill S.
Braff
On December 23, 2003, Ms. Braff executed our written
offer of employment as our Vice President, Marketing commencing
on December 29, 2003. She is currently Senior Vice
President of Worldwide Marketing and General Manager of the
Americas. This offer letter was subsequently amended on
July 23, 2004. The written offer of employment does not
specify a specific term for Ms. Braff’s employment;
rather, Ms. Braff’s employment with us is “at
will.” Ms. Braff’s current base compensation is
$240,000. She is currently eligible to receive a bonus of up to
25% of her base compensation.
Kristian
Segerstråle
In December 2004, Mr. Segerstråle executed our
written offer of employment as our Vice President of Production
for our United Kingdom subsidiary. He is currently the Managing
Director of our United Kingdom subsidiary. The written offer of
employment does not specify a specific term for
Mr. Segerstråle’s employment. Rather,
Mr. Segerstråle’s employment with us is “at
will” and thus may be terminated any time for any or no
reason, provided that either party terminating the agreement
must give at least the greater of four weeks’ notice or the
statutory minimum under United Kingdom regulations. The
agreement can be terminated immediately upon the occurrence of
certain situations, including, but not limited to,
Mr. Segerstråle’s committing an act of gross
misconduct or the material breach this agreement.
Mr. Segerstråle’s current base compensation is
£120,000, approximately $220,019 using an exchange ratio of
£1 to $1.83349, the average exchange rate in 2006 through
December 4, 2006. He is currently eligible to receive a
bonus of up to 20% of his base compensation.
Employee Benefit
Plans
2001 Second
Amended and Restated Stock Option Plan
Our board of directors adopted, and our stockholders approved,
our 2001 Stock Option Plan in December 2001. The 2001 Stock
Option Plan has been amended from time to time, and we refer to
it in this prospectus as the 2001 Stock Option Plan. The 2001
Stock Option Plan provides for the grant of both incentive stock
options, which qualify for favorable tax treatment to their
recipients under Section 422 of the Internal Revenue Code
of 1986, as amended, or the Code, and nonqualified stock
options. Incentive stock options may be granted only to our
employees and those of our subsidiaries. Nonqualified stock
options may be granted to our employees, directors, consultants,
independent contractors and advisors and those of our
subsidiaries. The exercise price of incentive stock options must
be at least equal to the fair market value of our common stock
on the date of grant. The exercise price of incentive stock
options granted to 10% stockholders must be at least equal to
110% of the fair market value of our common stock on the grant
date. The maximum permitted term of options granted under our
2001 Stock Option Plan is ten years. In the event of a change in
control, the 2001 Stock Plan provides that options held by
current employees, directors and consultants that are not
assumed may, at the discretion of our board of directors, vest
in full prior to that change in control and that all unexercised
options expire on the consummation of the change in control.
As of September 30, 2006, we had reserved
13,494,922 shares of our common stock for issuance under
our 2001 Stock Option Plan. As of September 30, 2006,
options to purchase 3,223,267 of these shares had been
exercised, options to purchase 8,158,311 of these shares
remained outstanding and 2,113,344 of these shares remained
available for future grant. The options outstanding as of
September 30, 2006 had a weighted average exercise price of
$1.45. Our 2006 Equity Incentive Plan will be effective upon the
date of this prospectus. The 2001 Stock Option Plan will
terminate on that date, and thereafter we will not grant any
additional options under the 2001 Stock Option Plan. However,
any outstanding options granted under the 2001 Stock Option Plan
will remain outstanding, subject to the terms of our 2001 Stock
Option Plan and stock option agreements, until the options are
exercised or until they terminate or expire by their terms.
Options granted under the 2001 Stock Option Plan have terms
similar to those described below with respect to options granted
under our 2006 Equity Incentive Plan, except
that .
2006 Equity
Incentive Plan
We anticipate that we will adopt a 2006 Equity Incentive Plan
that will become effective on the date of this prospectus and
will serve as the successor to our 2001 Stock Option Plan. We
anticipate that we will
reserve shares
of our common stock to be issued under our 2006 Equity Incentive
Plan. In addition, we anticipate that shares not issued or
subject to outstanding grants under our 2001 Stock Option Plan
on the date of this prospectus, and any shares issued under the
2001 Stock Option Plan that are forfeited or repurchased by us
or that are issuable upon exercise of options that expire or
become unexercisable for any reason without having been
exercised in full, will be available for grant and issuance
under our 2006 Equity Incentive Plan. We anticipate that the
number of shares available for grant and issuance under the 2006
Equity Incentive Plan will be increased on January 1 of
each of 2008 through 2010 by an amount equal
to % of our shares outstanding on
the immediately preceding December 31, up to an aggregate
maximum
of ,
unless our board of directors, in its discretion, determines to
make a smaller increase. In addition, the following shares will
again be available for grant and issuance under our 2006 Equity
Incentive Plan:
•
shares subject to an option granted under our 2006 Equity
Incentive Plan that cease to be subject to the option for any
reason other than exercise of the option;
•
shares subject to an award granted under our 2006 Equity
Incentive Plan that are subsequently forfeited or repurchased by
us at the original issue price; or
•
shares subject to an award granted under our 2006 Equity
Incentive Plan that otherwise terminates without shares being
issued.
We anticipate that our 2006 Equity Incentive Plan will terminate
ten years from the date our board of directors approves the
plan, unless it is terminated earlier by our board of directors.
Our 2006 Equity Incentive Plan authorizes the award of stock
options, restricted stock awards, stock appreciation rights,
restricted stock units and stock bonuses. No person will be
eligible to receive more than 1,000,000 shares in any
calendar year under our 2006 Equity Incentive Plan other than a
new employee of ours or a new employee of any parent or
subsidiary of ours, who will be eligible to receive no more than
2,000,000 shares under the plan in the calendar year in
which the employee commences employment.
Our 2006 Equity Incentive Plan will be administered by our
compensation committee, all of the members of which are
non-employee directors under applicable federal securities laws
and outside directors as defined under applicable federal tax
laws. Our compensation committee will have the authority to
construe and interpret our 2006 Equity Incentive Plan, grant
awards and make all other determinations necessary or advisable
for the administration of the plan.
We anticipate that our 2006 Equity Incentive Plan will provide
for the grant of incentive stock options that qualify under
Section 422 of the Code only to our employees and those of
any parent or subsidiary of ours. All awards other than
incentive stock options may be granted to our employees,
directors, consultants, independent contractors and advisors or
those of any parent or subsidiary of ours, provided the
consultants, independent contractors and advisors render
services not in connection with the offer and sale of securities
in a capital-raising transaction. The exercise price of stock
options must be at least equal to the fair market value of our
common stock on the grant date. The exercise price of incentive
stock options granted to 10% stockholders must be at least equal
to 110% of that value.
Our compensation committee may provide for options to be
exercised only as they vest or to be immediately exercisable
with any shares issued on exercise being subject to our right of
repurchase that lapses as the shares vest. In general, options
will vest over a four-year period. The maximum term of options
granted under our 2006 Equity Incentive Plan is ten years.
A restricted stock award is an offer by us to sell shares of our
common stock subject to restrictions. The price, if any, of a
restricted stock award will be determined by our compensation
committee. Unless otherwise determined by our compensation
committee at the time of award, vesting will cease on the date
the participant no longer provides services to us and unvested
shares will be forfeited to us.
Stock appreciation rights provide for a payment, or payments, in
cash or shares of our common stock, to the holder based upon the
difference between the fair market value of our common stock on
the date of exercise and the stated exercise price up to a
maximum amount of cash or number of shares. Stock appreciation
rights may vest based on time or achievement of performance
conditions.
Restricted stock units represent the right to receive shares of
our common stock at a specified date in the future, subject to
forfeiture of that right because of termination of employment or
failure to achieve certain performance conditions. If a
restricted stock unit has not been forfeited, then on the date
specified in the restricted stock unit agreement, we will
deliver to the holder of the restricted stock unit whole shares
of our common stock, which may be subject to additional
restrictions, cash or a combination of our common stock and cash.
Stock bonuses would be granted as additional compensation for
service and/or performance and therefore not be issued in
exchange for cash.
Awards granted under our 2006 Equity Incentive Plan may not be
transferred in any manner other than by will or by the laws of
descent and distribution or as determined by our compensation
committee. Unless otherwise restricted by our compensation
committee, awards that are nonqualified stock options may be
exercised during the lifetime of the optionee only by the
optionee, the optionee’s guardian or legal representative,
or a family member of the optionee who has acquired the option
by a permitted transfer. Awards that are incentive stock options
may be exercised during the lifetime of the optionee only by the
optionee or the optionee’s guardian or legal
representative. Options granted under our 2006 Equity Incentive
Plan generally may be exercised for a period of three months
after the termination of the optionee’s service to us or
any parent or subsidiary of ours. Options will generally
terminate immediately upon termination of employment for cause.
If we are dissolved or liquidated or have a change in control
transaction, outstanding awards, including any vesting
provisions, may be assumed or substituted by the successor
company. Outstanding awards that are not assumed or substituted
will expire upon the dissolution, liquidation or closing of a
change in control transaction. In the discretion of our
compensation committee, the vesting of these awards may be
accelerated upon the occurrence of these types of transactions.
2006 Employee
Stock Purchase Plan
We anticipate that we will adopt a 2006 Employee Stock Purchase
Plan that is designed to enable eligible employees to purchase
shares of our common stock periodically at a discount. Purchases
are accomplished through participation in discrete offering
periods. Our 2006 Employee Stock Purchase Plan will be intended
to qualify as an employee stock purchase plan under
Section 423 of the Code. We anticipate that we will seek
approval of our 2006 Employee Stock Purchase Plan from our board
of directors and our stockholders to be effective upon
completion of this offering.
We anticipate that we will initially
reserve shares
of our common stock for issuance under our 2006 Employee Stock
Purchase Plan. We anticipate that the number of shares reserved
for issuance under our 2006 Employee Stock Purchase Plan will
increase automatically on the first day of each January,
starting with January 1, 2008, by the number of shares
equal to % of our total outstanding shares as of the
immediately preceding December 31st (rounded to the nearest
whole share); provided, however, that, for the increase on
January 1, 2008, this addition will equal the product of 1%
of our total outstanding shares as of December 31, 2007,
multiplied by a fraction, the numerator of which is the number
of days between the effective date of this registration
statement and December 31, 2007 and the denominator of
which is 365 (rounded to the nearest whole share). Our board of
directors or compensation committee may reduce the amount of the
increase in any particular year. No more
than shares
of our common stock may be issued under our 2006 Employee Stock
Purchase Plan, and no other shares may be added to this plan
without the approval of our stockholders.
Our compensation committee will administer our 2006 Employee
Stock Purchase Plan. Our employees generally are eligible to
participate in our 2006 Employee Stock Purchase Plan if they are
employed by us, or a subsidiary of ours that we designate, for
more
than hours
per week and more than months in a
calendar year. Employees who are %
stockholders, or would become %
stockholders as a result of their participation in our 2006
Employee Stock Purchase Plan, are ineligible to participate in
our 2006 Employee Stock Purchase Plan. We may impose additional
restrictions on eligibility as well. Under our 2006 Employee
Stock Purchase Plan, eligible employees may acquire shares of
our common stock by accumulating funds through payroll
deductions. Our eligible employees may select a rate of payroll
deduction between 1% and % of their
cash compensation. We also have the right to amend or terminate
our 2006 Employee Stock Purchase Plan, except that, subject to
certain exceptions, no such action may adversely affect any
outstanding rights to purchase stock under the plan. Our 2006
Employee Stock Purchase Plan will terminate on the tenth
anniversary of the first offering date, unless it is terminated
earlier by our board of directors.
When an offering period commences, our employees who meet the
eligibility requirements for participation in that offering
period are automatically granted a non-transferable option to
purchase shares in that offering period. Each offering period
may run for no more
than
months and consist of no more than three purchase periods. An
employee’s participation automatically ends upon
termination of employment for any reason.
Except for the first offering period, each offering period will
be
for months — commencing
each August 15th and February 15th on and after
August 15, 2007 — and will consist of two
six-month purchase periods — August 15th to
February 14th and February 15th to August 14th.
The first offering period will begin upon the effective date of
this offering and will end
on 2008.
The first purchase period in this first offering period will run
until August 14, 2007 and the second purchase period in
this first offering period will run from August 15, 2007 to
February 14, 2008.
No participant will have the right to purchase our shares at a
rate which, when aggregated with purchase rights under all our
employee stock purchase plans that are also outstanding in the
same calendar year(s), have a fair market value of more than
$ , determined as of the first day
of the applicable offering period, for each calendar year in
which that right is outstanding. The purchase price for shares
of our common stock purchased under our 2006 Employee Stock
Purchase Plan will be 85% of the lesser of the fair market value
of our common stock on (i) the first trading day of the
applicable offering period and (ii) the last trading day of
each purchase period in the applicable offering period.
In the event of a change in control transaction, our 2006
Employee Stock Purchase Plan and any offering periods that
commenced prior to the closing of the proposed transaction may
terminate on the closing of the proposed transaction and the
final purchase of shares will occur on that date, but our
compensation committee may instead terminate any such offering
period at a different date.
We sponsor a retirement plan intended to qualify for favorable
tax treatment under Section 401(k) of the Code. Employees
who have attained at least 21 years of age are generally
eligible to participate in the plan on their first pay period.
Participants may make pre-tax contributions to the plan from
their eligible earnings up to the statutorily prescribed annual
limit on pre-tax contributions under the Code. Participants who
are 50 years of age or older may contribute additional
amounts based on the statutory limits for
catch-up
contributions. Pre-tax contributions by participants to the plan
and the income earned on those contributions are generally not
taxable to participants until withdrawn. Participant
contributions are held in trust as required by law. No minimum
benefit is provided under the plan. For each employee that
completes 1,000 hours of service during the year, we may
elect to match a percentage of his or her contributions. The
plan has a profit-sharing element whereby we can make a
contribution in an amount to be determined annually by our board
of directors. An employee’s interest in his or her
deferrals is 100% vested when contributed, and any employer
matching or profit-sharing contributions will vest equally each
year over four years.
Limitation of
Liability and Indemnification of Directors and
Officers
Our restated certificate of incorporation contains provisions
that limit the liability of our directors for monetary damages
to the fullest extent permitted by Delaware law. Consequently,
our directors will not be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary
duties as directors, except liability for the following:
•
any breach of their duty of loyalty to our company or our
stockholders;
•
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
•
any transaction from which they derived an improper personal
benefit.
Our restated bylaws provide that we shall indemnify, to the
fullest extent permitted by law, any person who is or was a
party or is threatened to be made a party to any action, suit or
proceeding, by reason of the fact that he or she is or was one
of our directors or officers or is or was serving at our request
as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. Our restated bylaws
provide that we may indemnify, to the fullest extent permitted
by law, any person who is or was a party or is threatened to be
made a party to any action, suit or proceeding, by reason of the
fact that he or she is or was one of our employees or agents or
is or was serving at our request as an employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise. Our restated bylaws also provide that we must
advance expenses incurred by or on behalf of a director or
officer in advance of the final disposition of any action or
proceeding, subject to very limited exceptions.
We have obtained insurance policies under which, subject to the
limitations of the policies, coverage is provided to our
directors and officers against loss arising from claims made by
reason of breach of fiduciary duty or other wrongful acts as a
director or officer, including claims relating to public
securities matters, and to us with respect to payments that may
be made by us to these officers and directors pursuant to our
indemnification obligations or otherwise as a matter of law.
Prior to completion of this offering, we intend to enter into
indemnity agreements with each of our directors and executive
officers that may be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law.
These indemnity agreements may require us, among other things,
to indemnify our directors and executive officers against
liabilities that may arise by reason of their status or service.
These indemnity agreements may also require us to advance all
expenses incurred by the directors and executive officers in
investigating or defending any such
action, suit or proceeding. We believe that these agreements are
necessary to attract and retain qualified individuals to serve
as directors and executive officers.
At present, we are not aware of any pending litigation or
proceeding involving any person who is or was one of our
directors, officers, employees or other agents or is or was
serving at our request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or
other enterprise, for which indemnification is sought, and we
are not aware of any threatened litigation that may result in
claims for indemnification.
The underwriting agreement provides for indemnification by the
underwriters of us and our officers, directors and employees for
certain liabilities arising under the Securities Act or
otherwise.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling our company pursuant to the foregoing
provisions, we have been informed that, in the opinion of the
SEC, that indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
In addition to the compensation arrangements, including
employment, termination of employment and
change-in-control
and indemnification arrangements, discussed, when required,
above under “Management,” and the registration rights
described below under “Description of Capital
Stock — Registration Rights,” the following is a
description of each transaction since January 1, 2003 and
each currently proposed transaction in which:
•
we have been or are to be a participant;
•
the amount involved exceeds $120,000; and
•
any of our directors, executive officers or holders of more than
5% of our capital stock, or any immediate family member of or
person sharing the household with any of these individuals, had
or will have a direct or indirect material interest.
Promissory Note
and Preferred Stock Financings
In March 2003, we issued convertible promissory notes in
the aggregate principal amount of $1.0 million and warrants
to purchase an aggregate of 212,036 shares of Series B
Preferred Stock with an exercise price of $0.64. The notes,
together with accrued interest, were converted into an aggregate
of 1,573,029 shares of our Series B Preferred Stock in
April 2003.
In April 2003 and June 2003, we sold an aggregate of
8,593,750 shares of our Series B Preferred Stock at a
purchase price of $0.64 per share for an aggregate purchase
price of approximately $5.5 million, which includes the
amount raised pursuant to the issuance of the convertible
promissory notes described above. In June 2004 and
August 2004, we sold an aggregate of 12,046,016 shares
of our Series C Preferred Stock at a purchase price of
$1.6603 per share for an aggregate purchase price of
approximately $20.0 million. In April 2005 and
July 2005, we sold an aggregate of 6,701,510 shares of
our Series D Preferred Stock at a purchase price of
$3.01 per share for an aggregate purchase price of
approximately $20.2 million. In July 2005, we sold an
aggregate of 2,491,694 shares of our
Series D-1
Preferred Stock at a purchase price of $3.01 per share for
an aggregate purchase price of approximately $7.5 million.
Each share of our preferred stock will automatically convert
into one share of our common stock upon the completion of this
offering. The purchasers of these shares of preferred stock are
entitled to specified registration rights. See “Description
of Capital Stock — Registration Rights.” The
following table summarizes our securities, reflected on an
as-converted to common stock basis, purchased by our executive
officers, directors and holders of more than 5% of our
outstanding common stock since January 1, 2003 in
connection with the transactions described above in this
section. The terms of these purchases were the same as those
made available to unaffiliated purchasers.
Warrants to
Shares of
Purchase
Shares of
Shares of
Shares of
Convertible
Series B
Series B
Series C
Series D
Series D-1
Promissory
Preferred
Preferred
Preferred
Preferred
Preferred
Name
Notes
Stock
Stock
Stock
Stock
Stock
BAVP, L.P.(1)
—
—
—
5,992,893
923,852
—
Amy N. Francetic(2)
—
—
—
—
8,000
—
Entities associated with Globespan
Capital Partners(3)
—
3,496,000
—
1,384,681
752,392
—
Entities associated with Granite
Global Ventures II L.P.(4)
—
—
—
—
2,491,694
—
Moran Family 2003 Revocable Trust(5)
—
—
—
—
8,000
—
Entities affiliated with New
Enterprise Associates (6)
Ms. Wienbar, one of our
directors, is a member of BA Venture Partners VI, LLC, the
general partner of BAVP, L.P. The voting and disposition of our
shares held by BAVP, L.P. are determined by the four managing
members of BA Venture Partners VI, LLC, the ultimate
general partner of BAVP, L.P. BAVP, L.P. is affiliated with Banc
of America Securities, LLC, a co-managing underwriter in this
offering. Sharon Wienbar, one of our directors, is one of the
members of BA Venture Partners VI, LLC.
(2)
Ms. Francetic is a former
director.
(3)
Mr. Schiffman, who served as
one of our directors from February 2006 until December 2006, is
(i) a managing member of JAV Management Associates III,
L.L.C., which is the general partner of JAFCO America Technology
Fund III, L.P., JAFCO America Technology Cayman
Fund III, L.P., JAFCO USIT Fund III L.P. and JAFCO
America Technology Affiliates Fund III, L.P., (ii) a
member of Globespan Management Associates IV, LLC, which is
(a) the general partner of Globespan Management
Associates IV, L.P., which is the general partner of
Globespan Capital Partners IV, L.P., JAFCO Globespan
USIT IV, L.P. and GCP IV Affiliates Fund, L.P. and the
managing limited partner of Globespan Capital Partners IV
GmbH & Co. KG, and (b) the general partner of
Globespan Management Associates (Cayman) IV, L.P., which is
the general partner of Globespan Capital Partners
(Cayman) IV, L.P., and (iii) a managing director of
Globespan Management Associates IV GmbH, which is the
general partner of Globespan Capital Partners IV
GmbH & Co. KG. Barry Schiffman is also a limited
partner of each of Globespan Management Associates IV, L.P.
and Globespan Management Associates (Cayman) IV, L.P. Jon
Callaghan, who served as one of our directors from
April 2003 until February 2006, (i) a
non-managing member of JAV Management Associates III,
L.L.C., which is the general partner of JAFCO America Technology
Fund III, L.P., JAFCO America Technology Cayman
Fund III, L.P., JAFCO USIT Fund III L.P. and JAFCO
America Technology Affiliates Fund III, L.P., (ii) a
limited partner of Globespan Management Associates IV,
L.P., which is the general partner of Globespan Capital
Partners IV, L.P., JAFCO Globespan USIT IV, L.P. and
GCP IV Affiliates Fund, L.P. and the managing limited
partner of Globespan Capital Partners IV GmbH &
Co. KG, and (iii) a limited partner of Globespan Management
Associates (Cayman) IV, L.P., was which is the general
partner of Globespan Capital Partners (Cayman) IV, L.P., at
the time of the purchase of these securities.
(4)
Mr. Nada, who served as one of
our directors from April 2005 until December 2006, is
a Managing Director of Granite Global Ventures II L.L.C.,
the general partner of Granite Global Ventures II L.P. and
GGV II Entrepreneurs Fund L.P.
(5)
Mr. Moran, one of our
directors, is a trustee of the Moran Family 2003 Revocable Trust.
(6)
Mr. Seawell, one of our
directors, is a Venture Partner of NEA Development Corp., an
entity that provides administrative services to New Enterprise
Associates 10 L.P. and NEA Ventures 2001, L.P.
Mr. Alsop, who served as one of our director from December
2001 until June 2006, was a General Partner of NEA
Partners 10, Limited Partnership, the general partner of
New Enterprise Associates 10 L.P. at the time of the
transactions.
(7)
Mr. Skaff, one of our
directors, is the Managing Member of Sienna Associates III,
L.L.C., the general partner of Sienna Limited Partnership III,
L.P.
(8)
Mr. Heller, who served as one
of our directors from July 2005 to December 2006, is
the President of Domestic Distribution of Turner Broadcasting
Systems, Inc., an affiliate of TWI Glu Mobile Holdings Inc. For
a description of our commercial relationships with other
entities affiliated with TWI Glu Mobile Holdings Inc., please
see “Transactions with Entities Affiliated with Time Warner
Inc.” below.
Acquisition of
Macrospace
In December 2004, we acquired Macrospace Limited, a company
registered in England and Wales, in exchange for approximately
$3.6 million in cash, approximately $1.1 million in
promissory notes and 8,199,233 shares of our common stock.
In connection with that transaction, Kristian Segerstråle,
who
became one of our executive officers following the acquisition
of Macrospace, received 1,209,989 shares of our common
stock, $331,721 of cash and $221,147 of promissory notes.
Common Stock
Transaction
In April 2005, we sold an aggregate of 249,169 shares of
our common stock at a purchase price of $1.00 per share for
an aggregate purchase price of $249,169 to entities affiliated
with Granite Global Ventures. Mr. Nada, who has served as
one of our directors since April 2005, is a Managing Director of
Granite Global Ventures II L.L.C., the general partner of
Granite Global Ventures II L.P. and GGV II
Entrepreneurs Fund L.P.
Acquisition of
iFone
In March 2006, we acquired all of the capital stock of iFone
Holdings Limited, a company registered in England and Wales, in
exchange for approximately $5.0 million in cash and
10,267,879 shares of our Special Junior Preferred Stock.
David C. Ward, an officer and member of the board of directors
of iFone prior to the acquisition and one of our directors
following the acquisition, received 3,956,851 shares of our
Special Junior Preferred Stock and $1,348,767 in cash.
Mr. Ward resigned from our board of directors in December
2006.
Transactions with
Entities Affiliated with Time Warner Inc.
In March 2004, Macrospace entered into a Services Agreement with
Turner Broadcasting System Europe Limited, The Cartoon Network
LP, Turner Broadcasting System Asia Pacific, Inc. and Turner
Broadcasting System Latin America, Inc. These parties along with
Turner Entertainment Networks Asia, Inc. amended the Services
Agreement in May 2005 and April 2006. Mr. Heller, who
served as one of our directors from July 2005 until December
2006, is the President of Domestic Distribution of Turner
Broadcasting Systems, Inc., an affiliate of the foregoing
entities. We believe that these transactions were entered into
on terms consistent with the terms offered to unrelated
third-party licensing partners.
Transaction with
Banc of America Securities LLC
Banc of America Securities LLC is a co-managing underwriter of
this offering. Ms. Wienbar, one of our directors, is a
member of the general partner of BAVP, L.P., which owns
more than 5% of our capital stock, and an employee of Bank of
America, National Association, each of which is an affiliate of
Banc of America Securities LLC.
Review, Approval
or Ratification of Transactions with Related Parties
Our policy and the charters of our nominating and governance
committee and our audit committee adopted by our board of
directors on December 13, 2006 require that any transaction
with a related party that must be reported under applicable
rules of the SEC, other than compensation-related matters, must
be reviewed and approved or ratified by our nominating and
governance committee, unless the related party is, or is
associated with, a member of that committee, in which event the
transaction must be reviewed and approved by our audit
committee. These committees have not adopted policies or
procedures for review of, or standards for approval of, these
transactions.
The following table presents information regarding the
beneficial ownership of our common stock as of December 15,2006, and as adjusted to reflect our sale of common stock in
this offering, by:
•
each stockholder known by us to be the beneficial owner of more
than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC and thus represents voting or investment power with
respect to our securities. Unless otherwise indicated below, to
our knowledge, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where
applicable. Shares of our common stock subject to options or
warrants that are currently exercisable or exercisable within
60 days of December 15, 2006 are deemed to be
outstanding and to be beneficially owned by the person holding
the options or warrants for the purpose of computing the
percentage ownership of that person but are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person.
Percentage ownership of our common stock before this offering is
based on 63,392,183 shares of our common stock outstanding
as of December 15, 2006, which includes
47,040,945 shares of common stock resulting from the
automatic conversion of all outstanding shares of our preferred
stock upon the completion of this offering, as if this
conversion had occurred as of December 15, 2006. Percentage
ownership of our common stock after this offering also assumes
our sale of
the shares
in this offering. Unless otherwise indicated, the address of
each of the individuals and entities named below is c/o Glu
Mobile Inc., 1800 Gateway Drive, Second Floor, San Mateo,
California94404.
Number of
Shares
Percentage of
Outstanding
Beneficially
Shares
Beneficially Owned
Name
of Beneficial Owner
Owned
Before
Offering
After
Offering
5% Stockholders:
New Enterprise Associates and
affiliated entities(1)
14,456,388
22.8
%
%
BAVP, L.P.(2)
7,202,459
11.4
Globespan Capital Partners and
affiliated entities(3)
5,633,073
8.9
Sienna Limited
Partnership III, L.P.(4)
4,709,217
7.4
David C. Ward
4,073,802
6.4
Scott S. Orr(5)
3,679,610
5.8
Directors and Executive
Officers:
L. Gregory Ballard(6)
2,650,000
4.1
Albert A. “Rocky”
Pimentel(7)
822,882
1.3
Jill S. Braff(8)
342,937
*
*
Alessandro Galvagni(9)
430,000
*
*
Kristian Segerstråle
1,209,989
1.9
Ann Mather(10)
225,000
*
*
Richard A. Moran(11)
233,000
*
*
Hany M. Nada(12)
2,859,234
4.5
A. Brooke Seawell(13)
60,000
*
*
Daniel L. Skaff(4)
4,709,217
7.4
Sharon L. Wienbar(14)
—
—
—
All 11 directors and executive
officers as a group(15)
Represents beneficial ownership of less than 1% of our
outstanding shares of our common stock.
(1)
Represents 14,225,232 shares held by New Enterprise
Associates 10 L.P., 73,052 shares held by NEA Ventures
2001, L.P. and 158,104 shares subject to immediately
exercisable warrants held by New Enterprise Associates 10 L.P.
NEA Partners 10, L.P., which has eight individual general
partners, is the general partner of New Enterprise Associates 10
L.P. Pamela J. Clark is the general partner of NEA Ventures
2001, L.P. See footnote (12) regarding the relationship
between this securityholder and Mr. Seawell. The address of
New Enterprise Associates is 2490 Sand Hill Road, Menlo Park,
California94025.
(2)
BAVP, L.P. is affiliated with Banc of America Securities LLC, a
co-managing underwriter of this offering. The voting and
disposition of our shares held by BAVP, L.P. are determined by
the four managing members of BA Venture Partners VI,
LLC, the ultimate general partner of BAVP, L.P. See
footnote (13) regarding the relationship between this
securityholder and Ms. Wienbar. The address of BAVP, L.P.
is 950 Tower Lane, Suite 700, Foster City, California94404.
(3)
Represents 1,601,156 shares held by JAFCO America
Technology Fund III, L.P., 1,461,031 shares held by
JAFCO America Technology Cayman Fund III, L.P.,
1,436,041 shares held by Globespan Capital Partners IV,
L.P., 706,658 shares held by JAFCO USIT Fund III L.P.,
174,309 shares held by JAFCO America Technology Affiliates
Fund III, L.P., 98,729 shares held by Globespan
Capital Partners (Cayman) IV, L.P., 88,925 shares held by
JAFCO Globespan USIT IV, L.P., 39,127 shares held by
Globespan Capital Partners IV GmbH & Co. KG and
27,097 shares held by GCP IV Affiliates Fund, L.P. The
address of Globespan Capital Partners is 300 Hamilton Avenue,
Top Floor, Palo Alto, California94301.
(4)
Includes 52,702 shares subject to immediately exercisable
warrants. Mr. Skaff is the Managing Member of Sienna
Associates III, L.L.C., the general partner of Sienna
Limited Partnership III, L.P. Mr. Skaff disclaims
beneficial ownership of these shares except to the extent of his
individual pecuniary interest in this entity. The address of
Sienna Limited Partnership III, L.P. and Mr. Skaff is
2330 Marinship Way, Suite 130, Sausalito, California94965.
Includes 1,516,667 shares subject to options that are
exercisable within 60 days of December 15, 2006, of
which 975,000 shares, if these options were exercised in
full, would be subject to vesting and a right of repurchase in
our favor upon Mr. Ballard’s cessation of service
prior to vesting, and 80,000 shares held by
Mr. Ballard’s minor children.
(7)
Includes 137,758 shares subject to options that are
exercisable within 60 days of December 15, 2006 and
299,741 shares subject to our right of repurchase, which
right lapses as to 14,273 shares each succeeding month over
the next 21 months.
(8)
Represents 342,937 shares subject to options that are
exercisable within 60 days of December 15, 2006, of
which 85,418 shares, if these options were exercised in
full, would be subject to vesting and a right of repurchase in
our favor upon Ms. Braff’s cessation of service prior
to vesting.
(9)
Includes 330,000 shares subject to options that are
exercisable within 60 days of December 15, 2006, of
which 82,501 shares, if these options were exercised in
full, would be subject to vesting and a right of repurchase in
our favor upon Mr. Galvagni’s cessation of service
prior to vesting.
(10)
Represents 225,000 shares subject to options that are
exercisable within 60 days of December 15, 2006, of
which 137,500 shares, if these options were exercised in
full, would be subject to vesting and a right of repurchase in
our favor upon Ms. Mather’s cessation of service prior
to vesting.
Includes 45,000 shares subject to options that are
exercisable within 60 days of December 15, 2006, all
of which, if these options were exercised in full, would be
subject to vesting and a right of repurchase in our favor upon
Mr. Moran’s cessation of service prior to vesting, and
8,000 shares held by the Moran Family 2003 Revocable Trust.
(12)
Represents 2,803,479 shares held by Granite Global
Ventures II L.P. and 55,755 shares held by GGV II
Entrepreneurs Fund L.P. Mr. Nada is a managing
director of the general partner of the foregoing entities, which
has seven individual managing directors, and shares voting and
investment power with respect to the shares held by these
entities with the other managing directors of the general
partners. Mr. Nada disclaims beneficial ownership of these
shares except to the extent of his individual pecuniary
interests in these entities.
(13)
Excludes 14,225,232 shares held by New Enterprise
Associates 10 L.P., 73,052 shares held by NEA Ventures
2001, L.P. and 158,104 shares subject to immediately
exercisable warrants held by New Enterprise Associates 10 L.P.
Mr. Seawell is a Venture Partner of NEA Development Corp.,
an entity that provides administrative services to the foregoing
entities. Mr. Seawell does not have voting or dispositive
power with respect to any of the shares held by New Enterprise
Associates 10, L.P or NEA Ventures 2001, L.P., and
disclaims beneficial ownership of any securities held by them,
except to the extent of his respective proportionate pecuniary
interests therein.
(14)
Excludes 7,202,459 shares held by BAVP, L.P. The voting and
disposition of our shares held by BAVP, L.P. are determined by
the four individual managing members of BA Venture
Partners VI, LLC, the ultimate general partner of BAVP,
L.P. BAVP, L.P. is affiliated with Banc of America Securities,
LLC, a co-managing underwriter in this offering. Sharon Wienbar,
one of our directors, is one of the members of BA Venture
Partners VI, LLC but does not share voting or dispositive
power for shares of our common stock.
(15)
Includes 299,741 shares subject to our right of repurchase,
which right lapses as to 14,273 shares each succeeding
month over the next 21 months and 2,597,362 shares
subject to options that are exercisable with 60 days of
December 15, 2006, of which 1,325,419 shares, if these
options were exercised in full, would be subject to vesting and
right of repurchase in our favor upon the executive
officer’s cessation of service prior to vesting. Excludes
the shares indicated to be excluded in footnotes (13) and
(14).
Upon the completion of this offering, our authorized capital
stock will consist of 250,000,000 shares of common stock,
$0.0001 par value per share, and 5,000,000 shares of
undesignated preferred stock, $0.0001 par value per share.
The following description summarizes the most important terms of
our capital stock. Because it is only a summary, it does not
contain all the information that may be important to you. For a
complete description, you should refer to our restated
certificate of incorporation and restated bylaws, which are
included as exhibits to the registration statement of which this
prospectus forms a part, and to the provisions of applicable
Delaware law.
Common
Stock
As of September 30, 2006, there were 63,169,489 shares
of our common stock outstanding, held by 145 stockholders of
record, and no shares of our preferred stock outstanding,
assuming the conversion of all outstanding shares of our
preferred stock into shares of our common stock, which will
occur immediately upon the completion of this offering. After
this offering, there will
be
shares of our common stock outstanding,
or shares
if the underwriters exercise in full their option to purchase
additional shares of our common stock in this offering.
Dividend Rights. Subject to preferences
that may apply to shares of our preferred stock outstanding at
the time, the holders of outstanding shares of our common stock
are entitled to receive dividends out of funds legally available
at the times and in the amounts that our board of directors may
determine.
Voting Rights. Each holder of our
common stock is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided
for in our restated certificate of incorporation, which means
that the holders of a majority of our shares of common stock
voted can elect all of the directors then standing for election.
No Preemptive or Similar Rights. Our
common stock is not entitled to preemptive rights and is not
subject to conversion or redemption.
Right to Receive Liquidation
Distributions. Upon our liquidation,
dissolution or
winding-up,
the assets legally available for distribution to our
stockholders would be distributable ratably among the holders of
our common stock and any participating preferred stock
outstanding at that time after payment of liquidation
preferences, if any, on any outstanding shares of our preferred
stock and payment of other claims of creditors.
Fully Paid and Nonassessable. All of
our outstanding shares of common stock are, and the shares of
our common stock to be issued in this offering will be, fully
paid and non-assessable.
Preferred
Stock
Following this offering, our board of directors will be
authorized, subject to limitations prescribed by Delaware law,
to issue preferred stock in one or more series, to establish
from time to time the number of shares to be included in each
series, to fix the designation, powers, preferences and rights
of the shares of each series and any of its qualifications,
limitations or restrictions, in each case without further action
by our stockholders. Our board of directors can also increase or
decrease the number of shares of any series of our preferred
stock, but not below the number of shares of that series then
outstanding, unless approved by the affirmative vote of the
holders of a majority of our capital stock entitled to vote, or
such other vote as may be required by the certificate of
designation establishing the series. Our board of directors may
authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power
or other rights of the holders of our common stock. The issuance
of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or
preventing a change in our control and might adversely affect
the market price
of our common stock and the voting and other rights of the
holders of our common stock. We have no current plan to issue
any shares of our preferred stock.
Warrants
As of September 30, 2006, we had outstanding warrants to
purchase 212,036 shares of our Series B Preferred
Stock with an exercise price of $0.64 and an expiration date of
March 7, 2008, a warrant to purchase 156,250 shares of
Series B Preferred Stock with an exercise price of $0.64
and an expiration date of the earlier of the date we undergo a
merger or consolidation meeting certain conditions or
March 31, 2011 and warrants to purchase 318,937 shares
of our Series D Preferred Stock with an exercise price of
$3.01 and an expiration date of May 2, 2013. Following the
completion of this offering, any of the warrants that remain
outstanding will become exercisable for a like number of shares
of our common stock.
Registration
Rights
Pursuant to the terms of our amended and restated
investors’ rights agreement, immediately following this
offering, the holders of approximately 47,571,918 shares of
our common stock outstanding as of September 30, 2006 or
subject to warrants outstanding as of September 30, 2006
will be entitled to rights with respect to the registration of
these shares under the Securities Act, as described below.
Demand Registration Rights. At any time
beginning six months after the completion of this offering, the
holders of at least 30% of the shares having registration rights
can request that we file a registration statement covering
registrable securities with an anticipated aggregate offering
price of at least $7.5 million. We will only be required to
file two registration statements upon exercise of these demand
registration rights. We may postpone the filing of a
registration statement for up to 120 days once in a
12-month
period if we determine that the filing would be seriously
detrimental to us and our stockholders.
Piggyback Registration Rights. If we
register any of our securities for public sale, holders of
shares having registration rights, as well as the holder of a
warrant to purchase an additional 156,250 shares of our
common stock, will have the right to include their shares in the
registration statement. However, this right does not apply to a
registration relating to any of our employee benefit plans, a
registration relating to a corporate reorganization or
acquisition or a registration in which the only equity security
being registered is common stock issuable upon conversion of
convertible debt securities that are also being registered. The
managing underwriter of any underwritten offering will have the
right, in its sole discretion, to limit, because of marketing
reasons, the number of shares registered by these holders, in
which case the number of shares to be registered will be
apportioned pro rata among these holders, according to the total
amount of securities entitled to be included by each holder, or
in a manner mutually agreed upon by the holders. However, the
number of shares to be registered by these holders cannot be
reduced below 25% of the total shares covered by the
registration statement unless no other stockholder’s shares
are included in the registration statement.
Form S-3
Registration Rights. The holders of at least
10% of the shares with registration rights can request that we
register their shares on
Form S-3
if we are eligible to file a registration statement on
Form S-3
and if the aggregate price to the public of the shares offered
is at least $1.0 million. The stockholders may only require
us to file three registration statements on
Form S-3
in a
12-month
period. We may postpone the filing of a registration statement
on
Form S-3
for up to 120 days once in a
12-month
period if we determine that the filing would be seriously
detrimental to us and our stockholders.
Expenses of Registration Rights. We
will pay all expenses, other than underwriting discounts,
commissions and stock transfer taxes, incurred in connection
with the registrations described above, except for the expenses
incurred pursuant to the third registration following the
exercise of the
Form S-3
registration rights described above in a
12-month
period.
Expiration of Registration Rights. The
registration rights described above will expire, with respect to
any particular holder of these rights on the earlier of the
fourth anniversary of the completion of this offering or when
that holder owns registrable securities constituting 1% or less
of our outstanding voting stock and can sell all of its
registrable securities in any three-month period under
Rule 144 promulgated under of the Securities Act. In
addition, the registration rights described above will expire
with respect to all holders on the date of a bona fide
acquisition of our company.
Anti-Takeover
Provisions
The provisions of Delaware law, our restated certificate of
incorporation and our restated bylaws may have the effect of
delaying, deferring or discouraging another person from
acquiring control of our company.
Delaware Law. We are governed by the
provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public
Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A
“business combination” includes mergers, asset sales
or other transactions resulting in a financial benefit to the
stockholder. An “interested stockholder” is a person
who, together with affiliates and associates, owns, or within
three years did own, 15% or more of the corporation’s
outstanding voting stock. These provisions may have the effect
of delaying, deferring or preventing a change in our control.
Restated Certificate of Incorporation and Restated Bylaw
Provisions. We anticipate that our restated
certificate of incorporation and our restated bylaws will
include a number of provisions that may have the effect of
deterring hostile takeovers or delaying or preventing changes in
control of our management team, including the following:
•
Board of Directors Vacancies. We anticipate
that our restated certificate of incorporation and restated
bylaws will authorize only our board of directors to fill vacant
directorships. In addition, the number of directors constituting
our board of directors may be set only by resolution adopted by
a majority vote of our entire board of directors. These
provisions prevent a stockholder from increasing the size of our
board of directors and gaining control of our board of directors
by filling the resulting vacancies with its own nominees.
•
Classified Board. We anticipate that our
restated certificate of incorporation and restated bylaws will
provide that our board is classified into three classes of
directors. The existence of a classified board could delay a
successful tender offeror from obtaining majority control of our
board of directors, and the prospect of that delay might deter a
potential offeror.
•
Stockholder Action; Special Meeting of
Stockholders. We anticipate that our restated
certificate of incorporation will provide that our stockholders
may not take action by written consent, but may only take action
at annual or special meetings of our stockholders. Stockholders
will not be permitted to cumulate their votes for the election
of directors. We anticipate that our restated bylaws will
further provide that special meetings of our stockholders may be
called only by a majority of our board of directors, our lead
independent director, our chief executive officer or our
president.
•
Advance Notice Requirements for Stockholder Proposals and
Director Nominations. We anticipate that our
restated bylaws will provide advance notice procedures for
stockholders seeking to bring business before our annual meeting
of stockholders, or to nominate candidates for election as
directors at our annual meeting of stockholders. We anticipate
that our restated bylaws also will specify certain requirements
regarding the form and content of a stockholder’s notice.
These provisions may preclude our stockholders from bringing
matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
Issuance of Undesignated Preferred Stock. We
anticipate that, after the filing of our restated certificate of
incorporation, our board of directors will have the authority,
without further action by the stockholders, to issue up to
5,000,000 shares of undesignated preferred stock with
rights and preferences, including voting rights, designated from
time to time by our board of directors. The existence of
authorized but unissued shares of preferred stock enables our
board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise.
NASDAQ Global
Market Listing
We have applied for listing of our common stock on The NASDAQ
Global Market under the symbol “GLUU.”
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock
is .
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
market sales of shares of our common stock or the availability
of shares of our common stock for sale will have on the market
price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock,
including shares issued upon exercise of outstanding options or
warrants, in the public market after this offering could
adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through the sale of
our equity securities.
Upon the completion of this offering, based on the number of
shares outstanding as of September 30, 2006, we will
have shares
of our common stock outstanding. Of these outstanding shares,
all of
the
shares sold in this offering will be freely tradable, except
that any shares held by our affiliates, as that term is defined
in Rule 144 promulgated under the Securities Act, may only
be sold in compliance with the limitations described below.
The remaining outstanding shares of our common stock will be
deemed restricted securities as defined under Rule 144.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 promulgated under the
Securities Act, which rules are summarized below. In addition,
all of our stockholders have entered into market standoff
agreements with us or
lock-up
agreements with the underwriters under which they agreed,
subject to specific exceptions, not to sell any of their stock
for at least 180 days following the date of this
prospectus. Subject to the provisions of Rule 144 or
Rule 701, based on an assumed offering date of
March 30, 2007, shares will be available for sale in the
public market as follows:
•
Beginning 180 days after the date of this prospectus,
61,532,158 additional shares will become eligible for sale in
the public market, of which 12,620,129 shares will be
freely tradable under Rule 144(k), 329,767 shares will
be freely tradeable under Rule 701, 42,796,075 shares
will be held by affiliates and subject to the volume and other
restrictions of Rule 144, as described below, and the
remaining 5,786,187 shares will be held by non-affiliates
and subject to the volume and other restrictions of
Rule 144; and
•
The remaining 1,637,331 shares will become eligible for
sale from time to time thereafter.
Lock-Up
Agreements
All of our directors and officers and all of our security
holders are subject to
lock-up
agreements or market standoff provisions that prohibit them from
offering for sale, selling, contracting to sell, granting any
option for the sale of, transferring or otherwise disposing of
any shares of our common stock, options or warrants to acquire
shares of our common stock or any security or instrument related
to our common stock, options or warrants for a period of at
least 180 days following the date of this prospectus
without the prior written consent of Goldman, Sachs &
Co.
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person, or group of persons whose shares are required to be
aggregated, who has beneficially owned shares for at least one
year, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock or the average weekly
trading volume in our common stock during the four calendar
weeks preceding the date on which notice of the sale is filed.
In addition, a person who is not deemed to have been an
affiliate at any time during the three months preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell those shares
under Rule 144(k) without regard to the requirements
described above. When a person acquires shares from one of our
affiliates, that person’s holding period for the purpose of
effecting a sale under Rule 144 would commence on the date
of transfer from the affiliate. Any shares that would
otherwise be eligible for sale under Rule 144 are subject
to the market standoff
and/or
lock-up
agreements described above and will only become eligible for
sale upon the expiration or waiver of those agreements.
Rule 701
In general, under Rule 701, an employee, officer, director,
consultant or advisor who purchased shares from us in connection
with a compensatory stock or option plan or other written
agreement in compliance with Rule 701 is eligible,
90 days after we become subject to the reporting
requirements of the Exchange Act, to resell those shares in
reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in
Rule 144. However, the shares issued pursuant to
Rule 701 are subject to the market standoff
and/or
lock-up
agreements described above and will only become eligible for
sale upon the expiration or waiver of those agreements.
Registration of
Shares Issued Pursuant to Benefits Plans
We intend to file a registration statement under the Securities
Act as promptly as possible after the date of this prospectus to
register shares that we have issued or may issue pursuant to our
employee benefit plans. As a result, the shares resulting from
any options or rights exercised under our 2001 Stock Option
Plan, our 2006 Equity Incentive Plan or our 2006 Employee Stock
Purchase Plan after the filing of this registration statement
will also be freely tradable in the public market, subject to
the market standoff and
lock-up
agreements discussed above. However, shares acquired by
affiliates under these employee benefit plans will still be
subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144. As of
September 30, 2006, there were outstanding options under
our 2001 Stock Option Plan for the purchase of
8,158,311 shares of our common stock.
Registration
Rights
Pursuant to the terms of our amended and restated
investors’ rights agreement, holders of approximately
47,728,168 shares of our common stock outstanding as of
September 30, 2006 or subject to warrants outstanding as of
September 30, 2006 have registration rights with respect to
those shares of common stock. For a discussion of these rights,
please see “Description of Capital Stock —
Registration Rights.” After any of these shares are
registered, they will be freely tradable without restriction
under the Securities Act.
The company and the underwriters named below have entered into
an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Lehman
Brothers Inc., Banc of America Securities LLC and
Needham & Company, LLC are the representatives of the
underwriters.
Underwriters
Number
of Shares
Goldman, Sachs & Co.
Lehman Brothers Inc.
Banc of America Securities LLC
Needham & Company, LLC
Total
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional
shares from the company to cover these sales. They may exercise
that option for 30 days. If any shares are purchased
pursuant to this option, the underwriters will severally
purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by the
company. Such amounts are shown assuming both no exercise and
full exercise of the underwriters’ option to
purchase
additional shares.
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms.
The company, its officers, directors, and holders of
substantially all of the company’s common stock have agreed
with the underwriters, subject to certain exceptions, not to
dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of its common stock
during the period from the date of this prospectus continuing
through the date 180 days after the date of this
prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing
employee benefit plans. See “Shares Eligible for
Future Sale —
Lock-Up
Agreements” for a discussion of certain transfer
restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (i) during the last 17 days
of the
180-day
restricted period the company issues an earnings release or
announces material news or a material event; or (ii) prior
to the expiration of the
180-day
restricted period, the company announces that it will release
earnings results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price has been negotiated
among the company and the representatives. Among the factors to
be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will
be the company’s historical performance, estimates of the
company’s business potential and earnings prospects, an
assessment of the company’s management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
An application has been made to list the common stock on The
NASDAQ Global Market under the symbol “GLUU.”
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
“Covered” short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional shares from the company in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase additional shares pursuant
to the option granted to them. “Naked” short sales are
any sales in excess of such option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of common stock made by the underwriters
in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the company’s
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
The NASDAQ Global Market, in the
over-the-counter
market or otherwise.
Each of the underwriters has represented and agreed that:
(a) it has not made or will not make an offer of shares to
the public in the United Kingdom within the meaning of
section 102B of the Financial Services and Markets Act 2000
(as amended), or FSMA, except to legal entities which are
authorized or regulated to operate in the financial markets or,
if not so authorized or regulated, whose corporate purpose is
solely to invest in securities or otherwise in circumstances
which do not require the publication by the company of a
prospectus pursuant to the Prospectus Rules of the Financial
Services Authority (FSA);
(b) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
the company; and
(c) it has complied with, and will comply with, all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares in, from or otherwise involving the
United Kingdom.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each Underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of Shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
Shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
Shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(i) an average of at least 250 employees during the last
financial year; (ii) a total balance sheet of more than
€43,000,000 and (iii) an annual net turnover of more
than €50,000,000, as shown in its last annual or
consolidated accounts; or
(c) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of Shares to the public” in relation to any
Shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the Shares to be offered so as to enable an
investor to decide to purchase or subscribe the Shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to
“professional investors” within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
“prospectus” within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA), (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance
with the conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (i) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(ii) where no consideration is given for the transfer; or
(iii) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law), and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
A prospectus in electronic format may be made available on
Internet sites or through other online services maintained by
one or more of the underwriters or by their affiliates. In those
cases, prospective investors may view the preliminary prospectus
and the final prospectus online and, depending upon the
particular underwriter, prospective investors may be allowed to
place orders online. The underwriters may agree with Glu to
allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same
basis as other allocations. In addition, one or more of the
underwriters participating in this offering may distribute
prospectuses electronically.
Other than the prospectus in electronic format, information on
any underwriter’s website and any information contained in
any other website maintained by an underwriter is not part of
this prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by Glu or any underwriter in its capacity as
underwriter and should not be relied on by investors.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
The company estimates that its share of the total expenses of
the offering, excluding underwriting discounts and commissions,
will be approximately $ .
The company has agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933.
In connection with this public offering, Banc of America
Securities LLC is providing services as an underwriter.
Ms. Wienbar, one of our directors, is a member of the
general partner of BAVP, L.P., which owns more than 5% of our
capital stock, and an employee of Bank of America, National
Association, each of which is an affiliate of Banc of America
Securities LLC.
Fenwick & West LLP, Mountain View, California will pass
upon the validity of the issuance of the shares of common stock
offered by this prospectus. Certain legal matters in connection
with this offering will be passed upon for the underwriters by
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Menlo Park, California.
The consolidated financial statements as of December 31,2004 and 2005 and September 30, 2006, for each of the three
years in the period ended December 31, 2005 and for the
nine months ended September 30, 2006 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The consolidated financial statements of iFone Holdings Limited
as at December 31, 2004 and 2005, and for each of the two
years in the period ended December 31, 2005 included in
this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the common stock. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement, some items of which are contained in
exhibits to the registration statement as permitted by the rules
and regulations of the SEC. For further information with respect
to us and our common stock, we refer you to the registration
statement, including the exhibits and the consolidated financial
statements and notes filed as a part of the registration
statement. Statements contained in this prospectus concerning
the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed
as an exhibit to the registration statement, please see the copy
of the contract or document that has been filed. Each statement
in this prospectus relating to a contract or document filed as
an exhibit is qualified in all respects by the filed exhibit.
The exhibits to the registration statement should be reviewed
for the complete contents of these contracts and documents. A
copy of the registration statement, including the exhibits and
the financial statements and notes filed as a part of the
registration statement, may be inspected without charge at the
SEC’s Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549, and copies of all or any part
of the registration statement may be obtained from the SEC upon
the payment of fees prescribed by it. You may call the SEC at
1-800-SEC-0330
for more information on the operation of the public reference
facilities. The SEC maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and
other information regarding companies that file electronically
with it.
As a result of this offering, we will become subject to the
information and reporting requirements of the Exchange Act and,
in accordance with this law, will file periodic reports, proxy
statements and other information with the SEC. These periodic
reports, proxy statements and other information will be
available for inspection and copying at the SEC’s public
reference facilities and the website of the SEC referred to
above.
120
GLU MOBILE
INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The reincorporation described in Note 18 to the
consolidated financial statements has not been consummated at
December 19, 2006. When it has been consummated, we will be
in a position to furnish the following report:
“In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of operations, of
redeemable convertible preferred stock and stockholders’
deficit and of cash flows present fairly, in all material
respects, the financial position of Glu Mobile Inc. and its
subsidiaries (collectively, the “Company”) at
December 31, 2004 and 2005 and September 30, 2006, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2005 and for the nine months ended
September 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial
statements, the Company adopted FASB Staff Position
150-5
(“FSP
150-5”),
Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, during the year ended
December 31, 2005. As discussed in Note 12 to the
consolidated financial statements, effective January 1,2006, the Company adopted SFAS No. 123(R),
Share-Based Payment.”
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Accounts payable
$
2,467
$
3,566
$
4,402
Accrued liabilities
1,356
485
130
Accrued compensation
641
913
1,471
Accrued royalties
511
3,758
4,686
Deferred revenues
75
–
197
Accrued restructuring charge
–
273
36
Current portion of long-term debt
–
76
3,226
Total current liabilities
5,050
9,071
14,148
Long-term deferred income tax
liability
2,359
–
–
Other long-term liabilities
122
230
325
Long-term debt, less current portion
–
26
8,331
Preferred stock warrant liability
–
374
2,034
$
–
Total liabilities
7,531
9,701
24,838
Commitments and contingencies
(Note 7)
Mandatorily Redeemable Convertible
Preferred Stock
(Series A -
D-1) $0.0001 par value; 37,639 shares authorized;
27,580, 36,772 and 36,772 shares issued and outstanding at
December 31, 2004 and 2005 and September 30, 2006,
respectively, and no shares outstanding pro forma (unaudited)
(aggregate liquidation value at September 30, 2006: $57,447)
31,495
57,190
57,246
–
Special Junior Redeemable Preferred
Stock; $0.0001 par value; 13,455 shares authorized; no, no
and 10,268 shares issued and outstanding at
December 31, 2004 and 2005 and September 30, 2006,
respectively, and no shares outstanding pro forma (unaudited)
(liquidation value at September 30, 2006: $9,782)
–
–
19,098
–
31,495
57,190
76,344
–
Stockholders’ equity/(deficit);
Common stock: $0.0001 par
value; 100,000 shares authorized; 14,111, 15,243 and
16,129 shares issued and outstanding at December 31,2004 and 2005 and September 30, 2006, respectively,
63,169 shares issued and outstanding pro forma (unaudited)
1
1
2
6
Additional paid-in capital
17,177
19,254
19,234
97,608
Deferred stock-based compensation
(2,366
)
(1,657
)
(562
)
(562
)
Accumulated other comprehensive
income/(loss)
8
(1,324
)
229
229
Accumulated deficit
(16,238
)
(33,667
)
(43,666
)
(43,666
)
Total stockholders’
equity/(deficit)
(1,418
)
(17,393
)
(24,763
)
$
53,615
Total liabilities, redeemable
convertible preferred stock and stockholders’
equity/(deficit)
$
37,608
$
49,498
$
76,419
The accompanying notes are an integral part of these
consolidated financial statements.
Glu Mobile Inc. (the “Company” or “Glu”) was
incorporated as Cyent Studios, Inc. in Nevada on May 16,2001 and changed its name to Sorrent, Inc. On November 21,2001, New Sorrent, Inc., a wholly owned subsidiary of the
Company was incorporated in California. The Company and New
Sorrent, Inc. merged on December 4, 2001 to
form Sorrent, Inc., a California corporation. In
June 2005, the Company changed its name to Glu Mobile Inc.
Glu acquired Macrospace Limited (“Macrospace”) in
December 2004 in efforts to develop and secure direct
distribution relationships in Europe and Asia with leading
wireless carriers, to deepen and broaden its game library
(e.g., more titles and genre diversification), to
acquire access and rights to leading licenses and franchises
(including original intellectual property) and to augment its
internal and external production and publishing capabilities. In
March 2006, Glu Mobile Inc. acquired iFone Holdings
Limited (“iFone”) in order to continue to broaden its
game library and acquire access and rights to leading licenses.
The Company has incurred recurring losses from operations since
inception and had an accumulated deficit of $43,666 as of
September 30, 2006. For the nine months ended
September 30, 2006, the Company incurred a loss from
operations of $8,658 and used approximately $10,554 to fund
operations. The Company may incur additional operating losses
and negative cash flows in the future. Failure to generate
sufficient revenues, reduce spending or raise additional capital
could adversely affect the Company’s ability to achieve its
intended business objectives.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated.
Unaudited Pro
Forma Statement of Stockholders’ Equity/(Deficit) and Pro
Forma Net Loss Per Share
Upon the consummation of the initial public offering
contemplated in this prospectus, all of the outstanding shares
of redeemable convertible preferred stock will automatically
convert into shares of common stock. The September 30, 2006
unaudited pro forma balance sheet data have been prepared
assuming the conversion of the redeemable convertible preferred
stock outstanding into 47,040 shares of common stock and
the reclassification of the redeemable convertible preferred
stock warrants from liabilities to stockholders’
equity/(deficit).
Unaudited
Interim Results for the Nine Months Ended September 30,2005
The accompanying statements of operations and of cash flows for
the nine months ended September 30, 2005 are unaudited. The
September 30, 2005 unaudited interim financial statements
have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments,
necessary to state fairly the Company’s results of
operations and cash flows for the nine months ended
September 30, 2005. The financial data and other
information disclosed in the notes to the consolidated financial
statements related to the nine months ended September 30,2005 are unaudited.
Use of
Estimates
The preparation of financial statements and related disclosures
in conformity with U.S. generally accepted accounting
principles requires the Company’s management to make
judgments,
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
assumptions and estimates that affect the amounts reported in
its consolidated financial statements and accompanying notes.
Management bases its estimates on historical experience and on
various other assumptions it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates and these
differences may be material.
Revenue
Recognition
The Company’s revenues are derived primarily by licensing
software products in the form of mobile games. License
arrangements with the end user can be on a perpetual or
subscription basis. A perpetual license gives an end user the
right to use the licensed game on the registered handset on a
perpetual basis. A subscription license gives an end user the
right to use the licensed game for a limited period of time,
usually one month. The Company distributes its products through
mobile telecommunications service providers
(“carriers”), which then market the games to end
users. License fees for perpetual and subscription licenses are
usually billed by the carrier upon download of the game by the
end user. Subsequent billings for subscription licenses are
generally billed monthly. The Company applies the provisions of
Statement of
Position 97-2,
Software Revenue Recognition, as amended by Statement of
Position 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all transactions.
Revenues are recognized when persuasive evidence of an
arrangement exists, the game has been delivered, the fee is
fixed or determinable, and the collection of the resulting
receivable is probable. For both perpetual and subscription
licenses, management considers a signed license agreement as
evidence of an arrangement with a carrier and a
“clickwrap” agreement as evidence of an arrangement
with an end user. For these licenses, the Company defines
delivery as the download of the game by the end user. The
Company estimates revenues from carriers in the current period
when reasonable estimates of these amounts can be made. Several
carriers provide reliable interim preliminary reporting and
others report sales data within a reasonable time frame
following the end of each month, both of which allow the Company
to make reasonable estimates of revenues and therefore to
recognize revenues during the reporting period when the end user
licenses the game. Determination of the appropriate amount of
revenue recognized involves judgments and estimates that the
Company believes are reasonable, but it is possible that actual
results may differ from the Company’s estimates. When the
Company receives the final carrier reports, to the extent not
received within a reasonable time frame following the end of
each month, the Company records any differences between
estimated revenues and actual revenues in the next reporting
period once the Company determines the actual amounts.
Historically, the license revenues on the final revenue report
have not differed materially from the final settlement from the
carrier. Revenues earned from certain carriers may not be
reasonably estimated. If the Company is unable to reasonably
estimate the amount of revenues to be recognized in the current
period, the Company recognizes revenues upon the receipt of a
carrier revenue report and when the Company’s portion of
the game licensed revenues are fixed or determinable and
collection is probable. In order to mitigate the risk of a
material misstatement, management reviews the revenues by
carrier by game on a weekly basis to identify unusual trends
that could indicate a misstatement. If the Company deems a
carrier not to be creditworthy, the Company defers all revenues
from the arrangement until the Company receives payment and all
other revenue recognition criteria have been met.
In accordance with Emerging Issues Task Force, or EITF,
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, the Company recognizes as revenues the net amount the
carrier reports as payable upon the sale of our games, which is
net of any service or other fees
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
earned and deducted by the carriers. The Company has evaluated
its carrier agreements and has determined that it is not the
principal when selling its games through carriers. Key
indicators that it evaluated to reach this determination include:
• wireless subscribers directly contract with
the carriers, which have most of the service interaction and are
generally viewed as the primary obligor by the subscribers;
• carriers generally have significant control
over the types of games that they offer to their subscribers;
• carriers are directly responsible for billing
and collecting fees from their subscribers, including the
resolution of billing disputes;
• carriers generally pay the Company a fixed
percentage of revenues or a fixed fee for each game;
• carriers generally must approve the price of
the Company’s games in advance of their sale to
subscribers, and the Company’s more significant carriers
generally have the ability to set the ultimate price charged to
their subscribers; and
• the Company has limited risks, including no
inventory risk and limited credit risk.
Cash and Cash
Equivalents
The Company considers all investments purchased with an original
maturity of three months or less to be cash equivalents. The
Company deposits cash and cash equivalents with financial
institutions that management believes are of high credit
quality. Deposits held with financial institutions are likely to
exceed the amount of insurance on these deposits.
Short-Term
Investments
The Company invests in auction rate securities that are
classified as short-term investments and carried at their market
values. At December 31, 2004 and 2005 and
September 30, 2006, the Company had $5,500, $19,200 and
$8,900, respectively, invested in auction rate securities, which
are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch Auction.” After the
initial issuance of the securities, the interest rate on the
securities is reset periodically, at intervals set at the time
of issuance (e.g., every seven, twenty-eight or
thirty-five days or every six months), based on the market
demand at the reset period. The “stated” or
“contractual” maturities for these securities,
however, generally are 20 to 30 years. Despite the
long-term maturities, the Company has the ability and intent, if
necessary, to liquidate any of these investments in order to
meet the Company’s liability needs within its normal
operating cycles.
The Company has classified these investments as
available-for-sale
securities under Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and
Equity Securities (“SFAS No. 115”). In
accordance with SFAS No. 115, these securities are
reported at fair value with any changes in market value reported
as a part of comprehensive income/(loss). Because these
securities trade at their par value, the Company has not
recorded any gains or losses in comprehensive loss during the
years ended December 31, 2003, 2004 and 2005 or the nine
months ended September 30, 2005 (unaudited) and
September 30, 2006.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable.
The Company derives its accounts receivable from revenues earned
from customers located in the U.S. and other locations outside
of the U.S. The Company performs ongoing credit evaluations of
its customers’ financial condition and, generally, requires
no collateral from its customers. The Company bases its
allowance for doubtful accounts on management’s best
estimate of the amount of probable credit losses in the
Company’s existing accounts receivable. The Company reviews
past due balances over a specified amount individually for
collectibility on a monthly basis. It reviews all other balances
quarterly. The Company charges off accounts receivable balances
against the allowance when it determines that the amount will
not be recovered.
The following table summarizes the revenues from customers in
excess of 10% of the Company’s revenues:
Revenues from the customer were less than 10% during the period.
At December 31, 2004, Verizon Wireless and Sprint Nextel
accounted for 30% and 22% of total accounts receivable,
respectively. At December 31, 2005, Verizon Wireless
accounted for 23% of total accounts receivable. At
September 30, 2006, Verizon Wireless, Vodafone and Sprint
Nextel accounted for 21%, 11% and 10% of total accounts
receivable, respectively. No other customers represent greater
than 10% of the Company’s revenues or accounts receivable
in these periods or as of these dates.
Fair Value of
Financial Instruments
For certain of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and other current liabilities, the carrying
amounts approximate their fair value due to their relatively
short maturity. Based on the borrowing rates available to the
Company for loans with similar terms, the carrying value of
borrowings outstanding approximates their fair value. The
carrying amount of the preferred stock warrant liability
represents its fair value (see Note 11).
Freestanding
Preferred Stock Warrants
The Company accounts for freestanding warrants and other similar
instruments related to shares that are redeemable in accordance
with SFAS No. 150. Under SFAS No. 150, the
freestanding warrants that are related to the Company’s
convertible preferred stock are classified as liabilities on the
consolidated balance sheet. The warrants are subject to
re-measurement at each balance sheet
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
date and any change in fair value is recognized as a component
of other income/(expense), net. The Company will continue to
adjust the liability for changes in fair value until the earlier
of the exercise or expiration of the warrants or the completion
of a liquidation event, including the completion of an initial
public offering, at which time all preferred stock warrants will
be converted into warrants to purchase common stock and,
accordingly, the liability will be reclassified to
stockholders’ equity/(deficit).
Prepaid or
Guaranteed Licensor Royalties
The Company records advance royalty payments made to content
licensors as prepaid royalties on the balance sheet when payment
is made to the licensor. The Company recognizes royalties in
cost of revenues based upon revenues from the relevant game
multiplied by the applicable royalty rate. If licensors earn
royalties in excess of their advance royalties, the Company
recognizes these excess royalties as cost of revenues in the
period they are earned by the licensor. If applicable, the
Company records a write-down of prepaid royalties or accrues for
future guaranteed royalties that are in excess of anticipated
demand or net realizable value. At each balance sheet date, the
Company performs a detailed review of prepaid royalties and
guarantees that considers multiple factors, including demand
forecasts, game life-cycle status, game development plans and
current and anticipated sales levels.
In accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(“SFAS No. 142”), the Company’s
goodwill is not amortized but is tested for impairment on an
annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. Under SFAS No. 142, the Company performs
the annual impairment review of its goodwill balance as of
September 30. This impairment review involves a two-step
process as follows:
Step 1 — The Company compares the fair value of each
of its reporting units to the carrying value including goodwill
of that unit. For each reporting unit where the carrying value,
including goodwill, exceeds the unit’s fair value, the
Company moves on to step 2. If a unit’s fair value exceeds
the carrying value, no further work is performed and no
impairment charge is necessary. To date, the fair values of our
reporting units have exceeded their carrying values and thus no
goodwill impairment charges have been recorded.
Step 2 — The Company performs an allocation of the
fair value of the reporting unit to its identifiable tangible
and nongoodwill intangible assets and liabilities. This allows
the Company to derive an implied fair value for the unit’s
goodwill. The Company then compares the implied fair value of
the reporting unit’s goodwill with the carrying value of
the unit’s goodwill. If the carrying amount of the
unit’s goodwill is greater than the implied fair value of
its goodwill, an impairment charge would be recognized for the
excess.
Purchased intangible assets with finite lives are amortized
using the straight-line method over their useful lives ranging
from one to six years and are reviewed for impairment in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Long-Lived
Assets
The Company evaluates its long-lived assets, including property
and equipment and intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of these assets may not be recoverable
in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Factors considered important that could
result in an impairment review include significant
underperformance relative to expected historical or projected
future operating results, significant changes in the manner of
use of acquired assets, significant negative industry or
economic trends, and a significant decline in the Company’s
stock price for a sustained period of time. The Company
recognizes impairment based on the difference between the fair
value of the asset and its carrying value. Fair value is
generally measured based on either quoted market prices, if
available, or a discounted cash flow analysis.
Property and
Equipment
The Company states property and equipment at cost. The Company
computes depreciation or amortization using the straight-line
method over the estimated useful lives of the respective assets
or, in the case of leasehold improvements, the lease term of the
respective assets, whichever is shorter.
The depreciation and amortization periods for the Company’s
property and equipment are as follows:
Computer equipment
Three years
Computer software
Three years
Furniture and fixtures
Three years
Leasehold improvements
Shorter of the estimated useful life or remaining term of lease
Research and
Development Costs
The Company charges costs related to research, design and
development of products to research and development expense as
incurred. The types of costs included in research and
development expenditures include salaries, contractor fees and
allocated facilities costs.
Software
Development Costs
The Company applies the principles of SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed. SFAS No. 86
requires that software development costs incurred in conjunction
with product development be charged to research and development
expense until technological feasibility is established.
Thereafter, until the product is released for sale, software
development costs must be capitalized and reported at the lower
of unamortized cost or net realizable value of the related
product. The Company has adopted the “tested working
model” approach to establishing technological feasibility
for its games. Under this approach, the Company does not
consider a game in development to have passed the technological
feasibility milestone until the Company has completed a model of
the game that contains essentially all the functionality and
features of the final game and has tested the model to ensure
that it works as expected. To date, the Company has not incurred
significant costs between the establishment of technological
feasibility and the release of a game for sale; thus, the
Company has expensed all software development costs as incurred.
In the future, the Company will consider the following factors
in determining whether costs can be capitalized: the emerging
nature of the mobile game market; the gradual evolution of the
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
wireless carrier platforms and mobile phones for which it
develops games; the lack of pre-orders or sales history for its
games; the uncertainty regarding a game’s
revenue-generating potential; its lack of control over the
carrier distribution channel resulting in uncertainty as to
when, if ever, a game will be available for sale; and its
historical practice of canceling games at any stage of the
development process.
Internal Use
Software
The Company recognizes software development costs in accordance
with the Statement of Position (SOP)
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Thus, the Company capitalizes
software development costs, including costs incurred to purchase
third-party software, beginning when it determines certain
factors are present including, among others, that technology
exists to achieve the performance requirements
and/or buy
versus internal development decisions have been made. The
Company has capitalized certain internal use software costs
totaling approximately $0, $37 and $1,283 during the years ended
December 31, 2003, 2004 and 2005, respectively, and $1,068
(unaudited) and $235 during the nine months ended
September 30, 2005 and 2006, respectively. The estimated
useful life of costs capitalized is generally three years.
During the years ended December 31, 2003, 2004 and 2005 and
the nine months ended September 30, 2005 and 2006, the
amortization of capitalized costs totaled approximately $0, $13,
$121, $52 (unaudited) and $323, respectively. Capitalized
internal use software costs are included in property and
equipment, net.
Income
Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes
(“SFAS No. 109”), which requires
recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
included in its financial statements or tax returns. Under
SFAS No. 109, the Company determines deferred tax
assets and liabilities based on the temporary difference between
the financial statement and tax bases of assets and liabilities
using the enacted tax rates in effect for the year in which it
expects the differences to reverse. The Company establishes
valuation allowances when necessary to reduce deferred tax
assets to the amount it expects to realize.
Restructuring
The Company accounts for costs associated with employee
terminations and other exit activities in accordance with
Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. The Company records employee termination
benefits as an operating expense when it communicates the
benefit arrangement to the employee and it requires no
significant future services from the employee to earn the
termination benefits other than a minimum retention period.
Stock-Based
Compensation
Prior to January 1, 2006, the Company accounted for
stock-based employee compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”), and related interpretations,
and followed the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”). Under APB
No. 25, compensation expense is based on the difference, if
any, on the date of the grant, between the fair value of a
company’s common
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
stock and the exercise price of the option. Employee stock-based
compensation determined under APB No. 25 is recognized
using the multiple option method prescribed by the Financial
Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans (“FIN 28”), over
the option vesting period.
Effective January 1, 2006, the Company adopted the fair
value provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment
(“SFAS No. 123R”), which supersedes its
previous accounting under APB No. 25.
SFAS No. 123R requires the recognition of compensation
expense, using a fair-value based method, for costs related to
all share-based payments including stock options.
SFAS No. 123R requires companies to estimate the fair
value of share-based payment awards on the date of grant using
an option-pricing model. The Company adopted
SFAS No. 123R using the prospective transition method,
which requires that for nonpublic entities that used the minimum
value method for either pro forma or financial statement
recognition purposes, SFAS No. 123R shall be applied
to option grants after the required effective date. For options
granted prior to the SFAS No. 123R effective date for
which the requisite service period had not been performed as of
January 1, 2006, the Company will continue to recognize
compensation expense on the remaining unvested awards under the
intrinsic-value method of APB No. 25. In addition the
Company will continue amortizing those awards valued prior to
January 1, 2006 utilizing an accelerated amortization
schedule while all option grants valued after January 1,2006 will be expensed on a straight-line basis.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123, Emerging Issues Task Force Abstract
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18),
and FIN 28.
Advertising
Expenses
The Company expenses the production costs of advertising,
including direct response advertising, the first time the
advertising takes place. Advertising expense was $0, $84 and
$476 during the years ended December 31, 2003, 2004 and
2005, respectively, and $199 (unaudited) and $412 during the
nine months ended September 30, 2005 and 2006, respectively.
Comprehensive
Income/(Loss)
Comprehensive income/(loss) consists of two components, net
income/(loss) and other comprehensive income/(loss). Other
comprehensive income/(loss) refers to gains and losses that
under generally accepted accounting principles are recorded as
an element of stockholders’ equity but are excluded from
net income/(loss). The Company’s other comprehensive
income/(loss) includes adjustment for foreign currency
translation.
For the nine months ended September 30, 2005, comprehensive
loss was $12,275 (unaudited), which was comprised of a net loss
of $11,348 (unaudited) and other comprehensive loss of $927
(unaudited).
Foreign
Currency Translation
In preparing its consolidated financial statements, the Company
translated the financial statements of its foreign subsidiaries
from their functional currencies, the local currency, into
United States Dollars. This process resulted in unrealized
exchange gains and losses, which are included as a component of
accumulated other comprehensive loss within stockholders’
deficit.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Cumulative translation adjustments include any gain or loss
associated with the translation of a subsidiary’s financial
statements when the functional currency of a subsidiary is the
local currency. However, if the functional currency is deemed to
be the United States Dollar, any gain or loss associated with
the translation of these financial statements would be included
within our statements of operations. If the Company disposes of
any of its subsidiaries, any cumulative translation gains or
losses would be realized and recorded within the Company’s
statement of operations in the period during which the disposal
occurs. If the Company determines that there has been a change
in the functional currency of a subsidiary relative to the
United States Dollar, any translation gains or losses arising
after the date of change would be included within the
Company’s statement of operations.
Net Loss Per
Share
The Company computes basic net income/(loss) per share
attributable to common stockholders by dividing its net loss
attributable to common stockholders for the period by the
weighted average number of common shares outstanding during the
period as reduced by the weighted average unvested common shares
subject to repurchase by the Company. Net loss attributable to
common stockholders is calculated using the two-class method,
however preferred stock dividends were not included in the
Company’s diluted net loss per share calculations because
to do so would be anti-dilutive for all periods presented.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
The following weighted average convertible preferred stock,
warrants to purchase outstanding convertible preferred stock,
options and warrants to purchase common stock and unvested
shares of common stock subject to repurchase have been excluded
from the computation of diluted net loss per common stock for
the periods presented because including them would have had an
antidilutive effect:
Convertible preferred stock upon
conversion to common stock
12,860
22,167
33,019
31,767
43,732
Warrants to purchase convertible
preferred stock
178
343
368
368
547
Warrants to purchase common stock
60
60
60
60
38
Unvested common shares subject to
repurchase
1,875
1,080
2,892
3,109
1,071
Options to purchase common stock
2,601
4,531
6,079
5,722
6,493
17,574
28,181
42,418
41,026
51,881
Unaudited Pro
Forma Net Loss per Share
Pro forma basic and diluted net loss per share have been
computed to give effect to the conversion of the Company’s
preferred stock (using the if converted method) into common
stock as though the conversion had occurred on the original
dates of issuance and adjustments to eliminate accretion to
preferred stock and the expense that was recorded as the
cumulative effect of the change in accounting principle and
subsequent remeasurement to fair value of the preferred stock
warrants.
Add: Cumulative effect of adoption
of and change in value associated with preferred stock warrants
230
1,052
Pro forma net loss
(17,671
)
(8,947
)
Denominator
Weighted average common shares
used to compute basic and diluted net loss per share
12,072
14,534
Pro forma adjustments to reflect
assumed weighted effect of conversion of redeemable convertible
preferred stock
33,019
43,732
Weighted average shares used to
compute basic and diluted pro forma net loss per share
45,091
58,266
Pro forma net loss per share:
Basic and diluted
$
(0.39
)
$
(0.15
)
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(“FASB”) issued Interpretation 48, Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. This Interpretation
prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return (including a decision whether to
file or not to file a return in a particular jurisdiction).
Under the Interpretation, financial statements will reflect
expected future tax consequences of these positions presuming
the taxing authorities’ full knowledge of the position and
all relevant facts. The Interpretation also revises disclosure
requirements and introduces a prescriptive, annual, tabular
roll-forward of the unrecognized tax benefits. This
Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company will adopt this provision in
the first quarter of fiscal 2007 and is currently evaluating the
impact of this provision on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. Earlier
adoption is permitted, provided the company has not yet issued
financial statements, including for interim periods, for that
fiscal year. The Company is currently evaluating the impact of
adopting SFAS No. 157 on the Company’s
consolidated financial statements.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, or
SAB No. 108, which provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. The Company will be required to adopt the
provisions of SAB No. 108 in its fiscal year 2006. The
Company does not believe the adoption of SAB No. 108
will have a material impact on its consolidated financial
position, results of operations or cash flows.
NOTE 3 –
CHANGE IN ACCOUNTING POLICY
On June 29, 2005, the FASB issued Staff Position
150-5,
Issuer’s Accounting under FASB Statement No. 150
(“SFAS 150”) for Freestanding Warrants and Other
Similar Instruments on Shares That Are Redeemable
(“FSP
150-5”).
FSP 150-5
affirms that warrants of this type are subject to the
requirements in SFAS 150, regardless of the redemption
price or the timing of the redemption feature. Therefore, under
SFAS 150, the freestanding warrants that are related to the
Company’s convertible preferred stock are liabilities that
must be recorded at fair value.
The Company adopted FSP
150-5 and
accounted for the cumulative effect of the change in accounting
principle as of July 1, 2005. For the year ended
December 31, 2005, the impact of the change in accounting
principle was to increase net loss by $315, or $0.02 per
share. There was $85 of income recorded in other income
(expense), net to reflect the decrease in fair value between
July 1, 2005 and December 31, 2005. In the nine months
ended September 30, 2006, the Company recorded
$1.1 million of additional expense reflected as other
income (expense), net to reflect the increase in fair value
between January 1, 2006 and September 30, 2006.
These warrants are subject to revaluation at each balance sheet
date, and any change in fair value will be recorded as a
component of other income (expense), until the earlier of their
exercise or completion of a liquidation event, including the
consummation of an initial public offering, at which time the
warrant liability will be reclassified to stockholders’
equity (deficit).
The pro forma effect of the adoption of SFAS No. 150
on the Company’s results of operations for 2004 and 2005,
if applied retroactively as if SFAS No. 150 had been
adopted in those years, was not material.
NOTE 4 –
ACQUISITIONS
Acquisition of
Macrospace Limited
On December 15, 2004, the Company acquired the net assets
of Macrospace in order to continue to develop and secure direct
distribution relationships with the leading wireless carriers,
deepen and broaden its game library, acquire access and rights
to leading licenses and franchises (including original
intellectual property), and to augment its internal production
and publishing resources. These factors contributed to a
purchase price in excess of the fair value of net tangible and
intangible assets acquired, and, as a result, the Company
recorded goodwill in connection with this transaction.
The Company purchased all of the issued and outstanding shares
of Macrospace in exchange for the issuance of 8,199 shares
of the Company’s common stock and $5,000 in cash. In
conjunction with this transaction, the Company’s Board of
Directors approved an increase in the number of authorized
shares of the Company’s common stock to 51,000 shares.
The total purchase price consideration of approximately $21,111
consisted of the following: 8,199 shares of common stock of
the Company (valued at $15,415 based on an independent
valuation
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
of the Company’s common stock on that date using a weighted
income and market comparable approach), $5,000 in cash and
transaction costs of $630. The Company signed a loan agreement
with Macrospace shareholders and agreed to pay $1,076 of the
$5,000 cash consideration over the year ended December 31,2005.
The Company’s consolidated financial statements include the
results of operations of Macrospace since the date of
acquisition. Under the purchase method of accounting, the
Company allocated the total purchase price of $21,111 to the net
tangible and intangible assets acquired and liabilities assumed
based upon their respective estimated fair values as of the
acquisition date as follows:
Assets acquired:
Cash
$
401
Accounts receivable
2,196
Prepaid and other current assets
82
Property and equipment
275
Intangible assets (see Note 6)
7,547
Goodwill (see Note 6)
14,331
Total assets acquired
24,832
Liabilities assumed:
Accounts payable
(645
)
Accrued liabilities
(717
)
Total liabilities acquired
(1,362
)
Long-term deferred income tax
liability
(2,359
)
Total liabilities
(3,721
)
Net acquired assets
$
21,111
The tangible assets acquired and the liabilities assumed were
valued at their respective fair values at the acquisition date.
In the initial purchase price allocation, the Company allocated
$9,200 to amortizable intangible assets. During the year ended
December 31, 2005, the Company finalized its intangible
asset valuation and preliminary purchase price allocation,
resulting in a reduction of $1,653 in the value previously
ascribed to intangible assets and a corresponding increase in
goodwill. The Company is amortizing the amortizable intangible
assets using a straight-line method over their estimated useful
lives of one to six years (see Note 6). The Company
allocated the residual value of $14,331 to goodwill. Goodwill
represents the excess of the purchase price over the fair value
of the net tangible and intangible assets acquired. In
accordance with SFAS No. 142, goodwill will not be
amortized but will be tested for impairment at least annually.
Goodwill is not deductible for tax purposes.
Acquisition of
iFone Holdings Limited
On March 29, 2006, the Company acquired the net assets of
iFone in order to continue to deepen and broaden its game
library, acquire access and rights to leading licenses and
franchises and to augment its external production resources.
These factors contributed to a purchase price in excess of the
fair value of net tangible and intangible assets acquired, and,
as a result, the Company recorded goodwill in connection with
this transaction.
The Company purchased all of the issued and outstanding shares
of iFone in exchange for the issuance of 10,268 shares of
Special Junior Preferred Stock of the Company and $3,500 in
cash. In
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
addition, subject to the completion of certain milestones, the
Company committed to issue a total of 3,187 shares of
Special Junior Preferred Stock of the Company and $4,500 in
subordinated unsecured promissory notes to the iFone
shareholders. In conjunction with this transaction, the
Company’s Board of Directors approved an increase in the
number of authorized shares of preferred stock of Glu to
51,094 shares. As of September 30, 2006, the
milestones outlined in the purchase agreement for which
contingent consideration was agreed to be issued had not been
achieved and the period to earn this additional consideration
had lapsed. Management communicated this fact to the iFone
shareholders. The Company has received a response from the iFone
shareholders contesting the Company’s interpretation of the
milestone achievement date. The Company believes the iFone
shareholders’ understanding is without merit. As the
Company believes the milestone consideration has not been
earned, these amounts have not been reflected in these financial
statements.
The total preliminary purchase price of approximately $23,502
consisted of the following: 10,268 shares of Special Junior
Preferred Stock of the Company (valued at $19,098 based on an
independent valuation of the preferred stock issued using a
weighted income and market comparable approach), $3,500 of cash
and transaction costs of $904.
The Company’s consolidated financial statements include the
results of operations of iFone from the date of acquisition.
Under the purchase method of accounting, the Company allocated
the total purchase price of $23,502 to the net tangible and
intangible assets acquired and liabilities assumed based upon
their respective estimated fair values as of the acquisition
date.
Net liabilities assumed were valued at their determined fair
values at the acquisition date.
The Company has recorded an estimate for costs to terminate
certain activities associated with the iFone operations in
accordance with the guidance of Emerging Issues Task Force Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. This restructuring accrual of $1,180
principally related to the termination of 41 iFone
employees. At September 30, 2006, a total of $36 of
restructuring liabilities related to iFone employees remained
and is expected to be paid in the first quarter of 2007.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Of the total purchase price, $4,500 was allocated to amortizable
intangible assets. The amortizable intangible assets are being
amortized using a straight-line method over the respective
estimated useful life of two to five years.
In conjunction with the acquisition of iFone, the Company
recorded a $1,500 expense for acquired in process research and
development (“IPR&D”) during the first quarter of
2006 because feasibility of the acquired technology had not been
established and no future alternative uses existed. The
IPR&D expense is included in operating expenses in its
consolidated statements of operation for the nine months ended
September 30, 2006.
The IPR&D is related to the development of new game titles.
The Company determined the value of acquired IPR&D using the
discounted cash flow approach. The Company calculated the
present value of the expected future cash flows attributable to
the in-process technology using a 21% discount rate. This rate
takes into account the percentage of completion of the
development effort of approximately 20% and the risks associated
with the Company’s developing this technology given changes
in trends and technology in the industry. As of
September 30, 2006, these acquired IPR&D projects were
approximately 90% completed. Management expects that the
remaining projects will be completed by the end of 2006 at costs
similar to the original projections.
The Company based the valuation of identifiable intangible
assets and IPR&D acquired on management’s estimates,
currently available information and reasonable and supportable
assumptions. The Company based the allocation of the purchase
price on the fair value of these net assets acquired determined
using the income and market valuation approaches.
The Company allocated the residual value of $22,920 to goodwill.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and intangible assets acquired.
In accordance with SFAS No. 142, goodwill will not be
amortized but will be tested for impairment at least annually.
Goodwill is not deductible for tax purposes.
The purchase price allocation is preliminary and as such is
subject to further revision as more detailed analysis is
completed and additional information becomes available. Any
change in the fair value of the net assets would change the
amount of the purchase price allocated to goodwill.
The Company has included the results of operations of Macrospace
and iFone in its consolidated financial statements subsequent to
the dates of the respective acquisitions. The unaudited
financial information in the table below summarizes the combined
results of operations of the Company, Macrospace and iFone, on a
pro forma basis, as though the companies had been combined as of
the beginning of each of the periods presented:
Pro forma loss before effect of
change in accounting principle
(6,782
)
(19,737
)
(12,598
)
(14,418
)
Pro forma net loss
(6,782
)
(20,052
)
(11,413
)
(14,418
)
Pro forma net loss per
share — basic and diluted
(1.51
)
(1.66
)
(0.99
)
(0.99
)
The Company is presenting pro forma financial information for
informational purposes only, and this information is not
intended to be indicative of the results of operations that
would have been
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
achieved if the acquisitions had taken place at the beginning of
each of the periods presented. The pro forma financial
information for each of the periods includes a charge of $1,500
for IPR&D since the above table assumes the acquisition
occurred as of the beginning of each period.
Depreciation and amortization for the years ended
December 31, 2003, 2004 and 2005 and for the nine months
ended September 30, 2005 and 2006 was $108, $141, $816,
$507 (unaudited) and $1,096, respectively.
Accounts receivable includes amounts billed and unbilled as of
the respective balance sheet dates. The Company had no
significant write-offs or recoveries during the years ended
December 31, 2003, 2004 and 2005 or during the nine months
ended September 30, 2005 (unaudited) and 2006.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
NOTE 6 –
GOODWILL AND INTANGIBLE ASSETS
The Company’s intangible assets were acquired in connection
with the acquisitions of Macrospace and iFone. The carrying
amounts and accumulated amortization expense of the acquired
intangible assets at December 31, 2004 and 2005 and
September 30, 2006 were as follows:
Other intangible assets
amortized to operating expenses:
Emux Technology
6 yrs
1,600
(11
)
1,589
1,600
–
(277
)
1,323
1,600
–
(478
)
1,122
Noncompete agreement
2 yrs
700
(15
)
685
700
–
(365
)
335
700
–
(626
)
74
2,300
(26
)
2,274
2,300
–
(642
)
1,658
2,300
–
(1,104
)
1,196
Total intangibles assets
$
9,200
$
(152
)
$
9,048
$
7,547
$
(1,103
)
$
(3,591
)
$
2,853
$
12,047
$
(1,103
)
$
(5,277
)
$
5,667
The Company has included amortization of acquired intangible
assets directly attributable to revenue generating activities in
cost of revenues. The Company has included amortization of
acquired intangible assets not directly attributable to revenue
generating activities in operating expenses. During the years
ended December 31, 2004 and 2005 and the nine months ended
September 30, 2005 and September 30, 2006, the Company
recorded amortization expense in the amounts of $126, $2,823,
$2,202 (unaudited) and $1,224, respectively, in cost of
revenues. During the years ended December 31, 2004 and 2005
and the nine months ended September 30, 2005 and 2006, the
Company recorded amortization expense in the amounts of $26,
$616, $463 (unaudited) and $476, respectively, in operating
expenses. No amortization expense was recognized prior to the
year ended December 31, 2004.
During the year ended December 31, 2005, the Company
impaired certain titles, content and technology intangible
assets as certain titles were discontinued or their current
anticipated cash flows were significantly lower than the
estimated cash flows used in the initial valuation. The Company
used a discounted cash flow approach to determine the current
fair value of these intangibles. The Company recorded a charge
of $1,103 for the impairment during the nine months ended
September 30, 2005 (unaudited) and the year ended
December 31, 2005. No impairment was recorded during the
years ended December 31, 2003 and 2004 or the nine months
ended September 30, 2006.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
As of September 30, 2006, the total expected future
amortization related to intangible assets was as follows:
Amortization
Amortization
Included in
Included in
Total
Cost of
Operating
Amortization
Period
Ending December 31,
Revenues
Expenses
Expense
Remainder of 2006
$
552
$
140
$
692
2007
2,072
266
2,338
2008
883
267
1,150
2009
526
267
793
2010
354
256
610
2011
84
–
84
$
4,471
$
1,196
$
5,667
At September 30, 2006, the Company performed its annual
test for goodwill impairment as required by
SFAS No. 142. The Company determined that it operates
three reporting units for the purposes of
SFAS No. 142. The Company attributes its goodwill to
both its Americas and Europe, Middle East and Africa
(“EMEA”) reporting units. The Company concluded that
goodwill was not impaired since the fair value of its reporting
units exceeded their respective carrying values, including
goodwill. The primary methods used to determine the fair values
for SFAS No. 142 impairment purposes were the
discounted cash flow and market methods. The Company determined
the assumptions supporting the discounted cash flow method,
including the assumed 18% discount rate, using its best
estimates as of the date of the impairment review.
The Company attributes all of the goodwill resulting from the
Macrospace acquisition to its EMEA reporting unit. The goodwill
resulting from the iFone acquisition is evenly attributed to the
Americas and EMEA reporting units. The goodwill allocated to the
Americas reporting unit is denominated in United States Dollars
and the goodwill allocated to the EMEA reporting unit is
denominated in pounds sterling. As a result, the goodwill
attributed to the EMEA reporting unit is subject to foreign
currency fluctuations. During the year ended December 31,2005, goodwill decreased by $1,354 due to the United States
Dollar strengthening against the pounds sterling. During the
nine months ended September 30, 2006, goodwill increased by
$1,897 due to the United States Dollar weakening against the
pounds sterling. Goodwill at December 31, 2004, 2005 and
September 30, 2006 was $12,678, $12,467 and $37,284,
respectively
NOTE 7 –
COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under noncancelable operating
facility leases with various expiration dates through August
2008. Rent expense for the years ended December 31, 2003,
2004 and 2005 and the nine months ended September 30, 2005
and 2006 was $200, $354, $1,236, $877 (unaudited) and $1,207,
respectively. The terms of the facility leases provide for
rental payments on a graduated scale. The Company recognizes
rent expense on a straight-line basis over the lease period, and
has accrued for rent expense incurred but not paid. The deferred
rent balance was $0, $151 and $114 at December 31, 2004 and
2005 and September 30, 2006, respectively, included within
other long-term liabilities.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
At September 30, 2006, future minimum lease payments under
noncancelable operating leases were as follows:
Minimum
Operating
Lease
Period
Ending December 31,
Payments
Remainder of 2006
$
452
2007
1,352
2008
337
$
2,141
Capital
Lease
The Company has one lease that it accounts for as a capital
lease. It capitalized a total of $114 as computer equipment
under this lease during the year ended December 31, 2005.
The Company recorded no capital lease obligations prior to the
year ended December 31, 2005 or during the nine months
ended September 30, 2006. Accumulated depreciation
associated with this capital lease was $10 and $32 at
December 31, 2005 and September 30, 2006,
respectively. The Company has a commitment to pay $19 and $31
under this lease during the three months ending
December 31, 2006 and the year ending December 31,2007, respectively.
Minimum
Guaranteed Royalties
The Company has entered into license and development agreements
with various owners of brands and other intellectual property so
that it could develop and publish games for mobile handsets.
Pursuant to some of these agreements, the Company is required to
pay minimal royalties over the term of the contracts regardless
of actual game sales. Future minimum royalty payments for those
agreements as of September 30, 2006 were as follows:
Minimum
Guaranteed
Period
Ending December 31,
Royalties
Remainder of 2006
$
581
2007
1,061
2008
525
2009
950
2010
575
2011 and thereafter
725
$
4,417
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
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
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. As a
result of its insurance policy coverage, the Company believes
the estimated fair value of these indemnification agreements is
minimal. Accordingly, the Company had recorded no liabilities
for these agreements as of December 31, 2004, 2005 and
September 30, 2006.
In the ordinary course of its business, the Company includes
standard indemnification provisions in most of its license
agreements with carriers and other distributors. Pursuant to
these provisions, the Company indemnifies these parties for
losses suffered or incurred in connection with its games,
including as a result of intellectual property infringement and
viruses, worms and other malicious software. The term of these
indemnity provisions is generally perpetual after execution of
the corresponding license agreement and the maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is generally unlimited.
The Company has never incurred costs to defend lawsuits or
settle indemnified claims of these types. As a result, the
Company believes the estimated fair value of these indemnity
provisions is minimal. Accordingly, the Company had recorded no
liabilities for these provisions as of December 31, 2004,
2005 and September 30, 2006.
Contingencies
The Company is subject to claims and assessments from time to
time in the ordinary course of business. The Company’s
management does not believe that any of these matters,
individually or in the aggregate, will have a materially adverse
effect on the Company’s business, financial condition or
results of operation and as such no amounts have been accrued
for these exposures at September 30, 2006.
NOTE 8 –
DEBT
Loan
Agreement
In May 2006, the Company entered into a loan agreement with a
principal in the amount of $12,000. The loan carries an interest
rate of 11%. The Company is obligated to pay only interest
through December 31, 2006. Thereafter, the Company is
obligated to pay 30 equal payments of principal and accrued
interest until the entire principal is paid. If the Company
elects to make any advance payments, they would be subject to a
premium equal to 3% of the principal amount repaid unless the
payments were made (1) in connection with an issuance of
shares of stock that are publicly traded on a national market or
exchange, (2) in connection with a change of control or
(3) more than 18 months after the funding of the loan.
The loan is collateralized by all of the assets of the Company,
including intellectual property, and restricts the payment of
any dividends prior to the effective date of
Less amounts representing
interest, including debt discount
2,512
11,473
Less current portion of long-term
debt
3,142
Long-term debt, net of current
portion
$
8,331
In conjunction with this loan agreement, the Company issued to
entities affiliated with the lender warrants to purchase
319 shares of Series D Preferred Stock with an
exercise price of $3.01 per share. These warrants have a
contractual life of seven years (see Note 11).
The table above does not include $84 of other current debt.
NOTE 9 –
STOCKHOLDERS’ EQUITY/(DEFICIT)
Common
Stock
The Company’s Articles of Incorporation were amended in
2006 to increase the number of authorized shares of the
Company’s no par value common stock to 100,000 shares.
Warrants to purchase redeemable
convertible preferred stock
687
62,052
Early Exercise
of Employee Options
Stock options granted under the Company’s stock option plan
provide certain employee option holders the right to elect to
exercise unvested options in exchange for shares of restricted
common stock. Unvested shares, in the amounts of 705, 485 and
367 at December 31, 2004 and 2005 and September 30,2006, respectively, were subject to a repurchase right held by
the Company at the original issuance price in the event the
optionees’ employment is terminated either voluntarily or
involuntarily. For exercises of employee options, this right
generally lapses as to 25% of the shares subject to the option
on the first anniversary of the vesting start date and as to
1/48th of the shares monthly thereafter. These repurchase
terms are considered to be a forfeiture provision and do not
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
result in variable accounting. The restricted shares issued upon
early exercise of stock options are legally issued and
outstanding and have been reflected in stockholders’
equity/(deficit). The Company treats cash received from
employees for exercise of unvested options as a refundable
deposit shown as a liability in its consolidated financial
statements. As of December 31, 2004 and 2005 and
September 30, 2006, the Company included cash received for
early exercise of options of $173, $121 and $102, respectively,
in accrued liabilities. Amounts from accrued liabilities are
recorded into common stock and additional paid-in capital as the
shares vest.
Warrant to
Purchase Common Stock
In connection with the issuance of its Series A Preferred
Stock, the Company issued warrants to purchase 60 shares of
common stock. These warrants had an exercise price of
$0.12 per share and an expiration date of December 31,2007. During the nine months ended September 30, 2006,
these warrants were exercised for gross proceeds of $7. As of
September 30, 2006, no warrants to purchase common stock
remained outstanding.
NOTE 10 –
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 2001, the Company issued 6,940 shares of
Series A Preferred Stock at $0.616 per share for a
total purchase price of $4,275.
In April 2003, the Company authorized the issuance of
8,962 shares of Series B Preferred Stock and issued
5,098 shares of Series B Preferred Stock at
$0.64 per share for a total purchase price of $3,263, which
included the conversion of the principal and interest from a
convertible promissory notes payable issued in March 2003.
Shortly thereafter, the Company issued another 2,447 shares
of Series B Preferred Stock at $0.64 per share for a
total purchase price of $1,566. In June 2003, the Company issued
1,049 shares of Series B Preferred Stock at
$0.64 per share for a total purchase price of $671.
In June and August 2004, the Company issued 12,046 share of
Series C Preferred Stock at $1.6603 per share for a
total purchase price of $20,000.
In April and July 2005, the Company issued 6,645 and
56 shares, respectively, of Series D Preferred Stock
at $3.01 per share for a total purchase price of $20,172.
In addition, the lead investor in this financing purchased
249 shares of common stock at $1.00 per share, for a
total purchase price of $249.
In July 2005, the Company issued 2,491 shares of
Series D-1
Preferred Stock at $3.01 per share for a total purchase
price of $7,500.
In March 2006, the Company issued 10,268 shares of Special
Junior Preferred Stock at $1.86 per share as part of the
iFone acquisition (see Note 4).
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Redeemable convertible preferred stock outstanding at
September 30, 2006 consists of the following:
Carrying
Proceeds
Value
Net of
of
Shares
Liquidation
Issuance
Preferred
Series
Authorized
Outstanding
Amount
Costs
Stock
A
6,940
6,940
$
4,275
$
4,208
$
4,412
B
8,962
8,594
5,500
5,412
5,400
C
12,046
12,046
20,000
19,885
19,933
D
7,200
6,701
20,172
20,031
20,071
D-1
2,491
2,491
7,500
7,421
7,430
Special Junior Preferred
13,455
10,268
9,782
–
19,098
51,094
47,040
$
67,229
$
56,957
$
76,344
Series A, B, C, D and
D-1 are
mandatorily redeemable and the Special Junior Preferred Stock is
classified as redeemable due to the deemed liquidation provision
in the instrument.
Rights and preferences of the redeemable convertible preferred
stock include:
Voting
Rights
Holders of shares of the Company’s common stock, voting
together as a separate class, elect one member of the
Company’s Board of Directors, holders of shares of the
Series A Preferred Stock, voting together as a separate
series, elect two members of the Company’s Board of
Directors, holders of shares of the Series B Preferred
Stock, voting together as a separate series, elect one member of
the Company’s Board of Directors, holders of shares of the
Series C Preferred Stock, voting together as a separate
series, elect one member of the Company’s Board of
Directors, holders of shares of the Series D Preferred
Stock and
Series D-1
Preferred Stock, voting together as a separate series, elect two
members of the Company’s Board of Directors, holders of
shares of the Special Junior Preferred Stock, voting together as
a separate class, elect one director, and holders of shares of
common stock and preferred stock (on an
as-if
converted to common stock basis), voting together as a single
class, elect the remaining members of the Company’s Board
of Directors.
Dividend
Rights
The holders of Series D Preferred Stock and
Series D-1
Preferred Stock are entitled to receive, on a pro rata
basis, out of any funds legally available, noncumulative
dividends at a rate per share equal to 8% of the original
issuance price, when and if declared by the Company’s Board
of Directors. Subject to the payment of the dividends described
above, the holders of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock
are entitled to receive, on a pro rata basis, out of any
funds legally available, noncumulative dividends at a rate per
share equal to 8% of the original issuance price, when and if
declared by the Company’s Board of Directors. Any
additional dividends or distributions would be distributed among
all holders of common stock and all holders of preferred stock
in proportion to the number of shares of common stock held on an
as-if converted basis.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
Liquidation
Preferences
Upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of shares of
Series D and
D-1 Preferred
Stock are entitled to receive an amount of cash equal to their
original purchase price of $3.01 per share plus all
declared by unpaid dividends before any amount is paid with
respect to any other series of preferred stock or common stock.
If the amounts available for distribution are not sufficient to
pay the full amount, then all assets of the Company legally
available for distribution will be distributed to the holders of
Series D and
D-1
Preferred Stock on a proportionate basis. After payment in full
of the liquidation preference amount of the Series D and
D-1
Preferred Stock, the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock are entitled to a liquidation preference equal
to their original issue prices of $0.616, $0.64 and
$1.66 per share, respectively, plus any declared but unpaid
dividends. If the amounts available for distribution are not
sufficient to pay the full amount, then any remaining assets of
the Company legally available for distribution will be
distributed to the holders of Series A, B and C Preferred
Stock on a proportionate basis. After the above payments are
made in full, the holders of Special Junior Preferred Stock are
entitled to a liquidation preference equal to $0.95272 per
share. Upon full payment of the liquidation preference amounts
of all preferred stock, any remaining assets of the Company
legally available for distribution will be distributed to the
holders of common stock and preferred stock pro rata based on
the number of shares on an “as-if converted” basis.
Conversion
Rights
Each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D
and D-1
Preferred Stock and Special Junior Preferred Stock is
convertible, at the option of the holder, by dividing their
original issuance prices of $0.616, $0.64, $1.66, $3.01 and
$1.75, respectively, by the conversion price at the conversion
date. Each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D
and D-1
Preferred Stock and Special Junior Preferred Stock automatically
converts into the number of shares of common stock into which
these shares are convertible at the then-effective conversion
ratio upon: (i) the closing of a public offering of common
stock at a per share price of at least $4.98 (as adjusted for
recapitalizations stock combinations, stock dividends, stock
splits and the like) and for an aggregate offering price of at
least $50.0 million or (ii) the written consent of the
then-outstanding shares of Series A Preferred Stock, the
holders of at least
662/3%
of the then-outstanding Series B Preferred Stock, the
holders of at least a majority of the then-outstanding shares of
Series C Preferred Stock, each voting as a separate series,
and the holders of at least 72% of the then-outstanding shares
of Series D and
Series D-1
Preferred Stock, voting together as a single series.
Redemption Rights
Any time after May 2010, the holders of more than 50% of
the then-outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and
Series D-1
Preferred Stock, voting as a single class, may upon written
request require that the Company redeem all or a portion of the
shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and
Series D-1
Preferred Stock. The redemption amount is to be paid in cash in
two equal installments — to the holders of
Series A Preferred Stock, an amount per share equal to
$0.616 plus all declared but unpaid dividends; to the holders of
Series B Preferred Stock, an amount per share equal to
$0.64 plus all declared but unpaid dividends; to the holders of
Series C Preferred Stock, an amount per share equal to
$1.6603 plus all
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
declared but unpaid dividends; to the holders of Series D
Preferred Stock, an amount per share equal to $3.01 plus all
declared but unpaid dividends; and to the holders of
Series D-1
Preferred Stock, an amount per share equal to $3.01 plus all
declared but unpaid dividends. The second installment payment
would occur on the first anniversary of the first redemption
payment. Any redemption of preferred stock must be made on a
proportionate basis among the holders of the Series A
Preferred Stock, the holders of the Series B Preferred
Stock, the holders of Series C Preferred Stock, the holders
of Series D Preferred Stock and the holders of
Series D-1
Preferred Stock, in proportion to the number of shares of that
series proposed to be redeemed by those holders. The Special
Junior Preferred Stock is not redeemable.
For the years ended December 31, 2003, 2004 and 2005 and
the nine months ended September 30, 2006, the Company
recorded cumulative charges to additional paid-in capital of
$533, $1,351, $63 and $56, respectively, related to the
accretion of the preferred stock to its redemption value.
As a requirement of the issuance of the Series D Preferred
Stock in April and July 2005 and
Series D-1
Preferred Stock in July 2005, the Company amended its Articles
of Incorporation. This amendment modified certain of the terms
of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock. The most significant
amendments included removing the cumulative dividend rights upon
redemption of these series of preferred stock. As this
modification was made concurrently with the sale of the new
preferred stock, the Company considered this modification and
determined that it involved only the different classes of
preferred stockholders. As a result, the Company recorded a
capital contribution in the amount of the historical accretion
recorded in respect of the cumulative dividend rights that were
removed as part of the modification.
At September 30, 2006, the Company had reserved
6,940 shares of common stock for the conversion of
Series A Preferred Stock, 8,962 shares of common stock
for the conversion of Series B Preferred Stock,
12,046 shares of common stock for the conversion of
Series C Preferred Stock, 7,200 shares of common stock
for the conversion of Series D Preferred Stock and
2,491 shares of common stock for the conversion of
Series D-1
Preferred Stock.
NOTE 11 –
WARRANTS FOR PREFERRED STOCK
In March 2003, the Company issued warrants to purchase
212 shares of Series B Preferred Stock in conjunction
with the issuance of the convertible notes payable. The warrants
have an exercise price of $0.64 and a term of five years. The
Company calculated the fair value of each warrant using the
Black-Scholes option pricing model with the following
assumptions: volatility of 90%, term of five years, risk-free
interest rate of 2.6% and a dividend yield of 0%. The Company
recorded the fair value of the warrants of $61 as a discount to
the carrying value of the convertible notes. These warrants were
outstanding at September 30, 2006.
In March 2004, the Company issued warrants to purchase
156 shares of common stock in conjunction with obtaining a
line of credit. In June 2004, the warrants to purchase common
stock were converted to warrants to purchase 156 shares of
Series B Preferred Stock. The warrants have an exercise
price of $0.64 and a five year term. The Company calculated the
fair value of each warrant using the Black-Scholes option
pricing model with the following assumptions: volatility of 90%,
term of five years, risk-free interest rate of 3.1% and a
dividend yield of 0%. The Company recorded the fair value of the
warrants of $83 as a short-term asset, of which $63 was
amortized to interest expense in 2004 and the remainder was
amortized in 2005. These warrants were outstanding at
September 30, 2006.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
In May 2006, the Company issued warrants to purchase
319 shares of Series D Preferred Stock in conjunction
with the loan agreement. The warrants have an exercise price of
$3.01 and a term of seven years. The Company calculated the fair
value of each warrant using the Black-Scholes option pricing
model with the following assumptions: volatility of 73%, term of
seven years, risk-free interest rate of 5.1% and dividend yield
of 0%. The Company recorded the fair value of the warrants of
$607 as a discount to the carrying value of the loan. These
warrants were outstanding at September 30, 2006.
As discussed in Note 3, in 2005 the Company reclassified
all of its freestanding preferred stock warrants as a liability
and began adjusting the warrants to their respective fair values
at each reporting period.
NOTE 12 —
STOCK OPTION PLAN
In December 2001, the Company adopted the 2001 Stock Option Plan
(the “Plan”). The Plan provides for the granting of
stock options to employees, directors, consultants, independent
contractors and advisors of the Company. Options granted under
the Plan may be either incentive stock options or nonqualified
stock options. Incentive stock options (“ISO”) may be
granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options
(“NSO”) may be granted to Company employees,
directors, consultants, independent contractors and advisors. As
of September 30, 2006, the Company had authorized
13,495 shares of common stock for issuance under the Plan.
The Company may grant options under the Plan at prices no less
than 85% of the estimated fair value of the shares on the date
of grant as determined by its Board of Directors, provided,
however, that (i) the exercise price of an ISO or NSO may
not be less than 100% or 85%, respectively, of the estimated
fair value of the underlying shares of common stock on the grant
date, and (ii) the exercise price of an ISO or NSO granted
to a 10% stockholder may not be less than 110% of the estimated
fair value of the shares on the grant date.
Generally, options granted under the Plan are exercisable for a
period of five or ten years after the date of grant, and the
shares of common stock subject to the option vest at a rate of
1/4 of
the shares on the first anniversary of the grant date of the
option and an additional
1/48 of
the shares upon completion of each succeeding full month of
continuous employment thereafter. The Board of Directors may
terminate the Plan at any time at its discretion.
In December 2004, the Company’s Board of Directors elected
to allow the Company’s officers (vice president and above)
to exercise their options to purchase unvested shares of common
stock
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
(i.e., “early exercise”). If an employee
terminates his or her employment with the Company, the Company
would have the right to repurchase the then-unvested stock at
the original issuance price. Prior to termination, the stock
would continue to vest as set forth in the employee’s
original stock option agreement.
The Company may repurchase shares of common stock subject to the
right of repurchase by providing written notice to the
stockholder within 90 days of the stockholder’s
termination. The repurchase price is equal to the original
exercise price per share. If a stockholder is terminated without
cause or resigns for good reason, none of the shares would be
subject to repurchase. Cause and good reason are each defined in
the stock restriction agreements entered into by the Company and
each of the stockholders.
The following table summarizes activity under the Plan:
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
At September 30, 2006, the options outstanding and
currently exercisable by exercise price were as follows:
Options
Outstanding
Options
Exercisable
Weighted
Weighted
Average
Average
Remaining
Weighted
Remaining
Weighted
Range of
Contractual
Average
Aggregate
Contractual
Average
Aggregate
Exercise
Number
Life
Exercise
Intrinsic
Number
Life
Exercise
Intrinsic
Prices
Outstanding
(in
Years)
Price
Value
Exercisable
(in
Years)
Price
Value
$0.06 - $0.06
831
1.74
$
0.06
$
2,868
280
1.36
$
0.06
$
965
$0.07 - $0.25
1,584
2.80
0.19
5,256
875
2.76
0.18
2,912
$0.26 - $1.19
1,007
7.69
1.01
2,518
151
5.35
0.76
416
$1.20 - $1.30
1,722
9.81
1.30
3,807
104
9.80
1.30
230
$1.50 - $1.60
1,210
4.22
1.53
2,397
454
4.35
1.53
900
$3.51 - $3.51
1,804
9.94
3.51
–
–
–
–
–
$0.06 - $3.51
8,158
6.56
1.45
$
16,846
1,864
3.54
0.60
$
5,423
The Company has computed the aggregate intrinsic value amounts
disclosed in the above table based on the difference between the
original exercise price of the options and management’s
estimate of the deemed fair value of the Company’s common
stock of $3.51 at September 30, 2006. The aggregate
intrinsic value of awards exercised during the nine months ended
September 30, 2006 was $85.
Included in the above table are non-employee stock options
granted in the year ended December 31, 2003, 2004 and 2005
and the nine months ended September 30, 2006 for 49, 344, 4
and 2 shares of common stock, respectively. The Company had
non-employee stock options outstanding of 59, 338, 34 and
2 shares of common stock at weighted average exercise
prices of $0.06, $0.10, $0.06 and $1.30 at December 31,2003, 2004, 2005 and September 30, 2006, respectively. The
non-employee options outstanding had an exercise price of $1.30,
a remaining contractual term of 9.80 years and no intrinsic
value at September 30, 2006.
Prior to the
Adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), the Company
applied SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, which
allowed companies to apply the accounting rules under APB
No. 25, and related interpretations.
Stock-based compensation expense, under APB No. 25, is
recognized for employee stock option grants in those instances
in which the fair value of the underlying common stock is
greater than the exercise price of the stock options at the date
of grant. The Company recorded deferred stock-based compensation
related to employees of $2,596 and $1,129 for stock options
granted in the years ended December 31, 2004 and 2005,
respectively. Stock-based compensation of $0, $288, $1,487, $994
(unaudited) and $713 was expensed during the years ended
December 31, 2003, 2004 and 2005 and the nine months ended
September 30, 2005 and 2006, respectively, using an
accelerated basis over the vesting period of the individual
options, in accordance with FIN 28.
During the years ended December 31, 2004 and 2005, the
Company issued stock options to certain employees with exercise
prices below the fair market value of the Company’s common
stock at the date of grant, determined with hindsight. The
Company retrospectively estimated the fair value of its common
stock based upon several factors, including its operating and
financial performance, progress and milestones attained in its
business, past sales of convertible preferred stock, the results
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
of retrospective independent valuations, and the expected
valuation that the Company would obtain in an initial public
offering. The retrospective independent valuations utilized the
probability-weighted expected return and the option pricing
valuation methodologies. The Company has reviewed these key
factors and events between each date and has determined that the
combination of these factors and events reflect a true
measurement of the Company’s fair value over an extended
period of time and believes that the fair value of its common
stock is appropriately reflected in the chart below.
In June 2006, the Company offered to the employees who were
granted options from January 2005 to March 2005 the ability to
amend the terms of their options to increase the exercise prices
in order to help them avoid potential adverse personal income
tax consequences. The Company repriced certain stock option
awards granted to 15 of its employees in the first quarter of
2005. Under the terms of this repricing, no terms of the
original option grants were changed other than the exercise
price and the term, which was extended from the fifth
anniversary to the tenth anniversary of the grant date. The
Company repriced 87 vested options and 729 unvested options
having a weighted average original exercise price of $0.78 and
$0.76, respectively. Such options were repriced at a new
exercise price of $1.30 per share. The Company has
accounted for the repricing as a modification under
SFAS No. 123R and recorded any net incremental fair
value related to vested awards as compensation expense on the
date of modification. In accordance with
SFAS No. 123R, the Company will record the incremental
fair value related to the unvested awards, together with
unamortized stock-based compensation expense associated with the
unvested awards, as determined under APB No. 25 over the
remaining requisite service period of the option holders. In
connection with the repricing, the Company recorded stock
compensation expense of $59 in the nine months ended
September 30, 2006. Total incremental compensation cost
resulting from the modification was $150.
In connection with the repricing of stock options during 2006,
the Company followed the provisions of SFAS No. 123R
and eliminated its remaining deferred stock-based compensation
related to modified stock options. Stock compensation charges
for the modified options will be recorded in accordance with
SFAS No. 123R.
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
The Company granted certain options to employees with exercise
prices below the estimated fair value of common stock,
determined with hindsight, on the date of the grant. The
following table summarizes information with respect to stock
option grants since April 2004:
Stock-based compensation expense recorded under
APB No. 25 and SFAS No. 123 for periods
prior to the adoption of SFAS No. 123R is allocated as
follows:
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
The Company estimates the fair value of each option granted on
the date of grant, based on the minimum value method, using the
Black-Scholes option valuation model with the following
weighted-average assumptions:
The weighted average grant date fair value per share, based on
the minimum value method, of options granted during the years
ended December 31, 2003, 2004 and 2005 and the nine months
ended September 30, 2005 was $0.01, $0.82, $0.35 and $0.39
(unaudited), respectively.
The weighted average fair value per share, based on the minimum
value method, of options granted during the years ended
December 31, 2004 and 2005 with exercise prices less than
the estimated fair value of the stock at the date of grant was
$0.95 and $1.24, respectively. The weighted average fair value
of options granted during the year ended December 31, 2005
with exercise prices greater than the estimated fair value of
the stock at the date of grant was $0.06.
Adoption of
SFAS No. 123R
The Company adopted SFAS No. 123R on January 1,2006. Under SFAS No. 123R, the Company estimated the
fair value of each option award on the grant date using the
Black-Scholes option valuation model and the weighted average
assumptions noted in the following table.
The Company based expected volatility on the historical
volatility of a peer group of publicly traded entities. The
expected term of options gave consideration to early exercises,
post-vesting cancellations and the options’ contractual
term, which was extended for all options granted subsequent to
September 12, 2005 from five to ten years. The risk-free
interest rate for the expected term of the option is based on
the U.S. Treasury Constant Maturity rate as of the date of
grant.
SFAS No. 123R requires nonpublic companies that used
the minimum value method under SFAS No. 123 to apply
the prospective transition method of SFAS No. 123R.
Prior to adoption of SFAS No. 123R, the Company used
the minimum value method and it therefore has not restated its
financial results for prior periods. Under the prospective
method, stock-based compensation expense for the nine months
ended September 30, 2006 includes compensation expense for
(i) all new stock-
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
based compensation awards granted after January 1, 2006
based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123R, (ii) unmodified
awards granted prior to, but not vested as of December 31,2005 continuing to be accounted for under APB No. 25 and
(iii) awards outstanding as of December 31, 2005 that were
modified after the adoption of SFAS No. 123R.
The Company calculated employee stock-based compensation expense
recognized in the nine months ended September 30, 2006
based on awards ultimately expected to vest and reduced it for
estimated forfeitures. SFAS No. 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
The following table summarizes the consolidated stock-based
compensation expense by line items in the consolidated statement
of operations:
Consolidated net cash proceeds from option exercises were $141
for the nine months ended September 30, 2006. The Company
realized no income tax benefit from stock option exercises
during the nine months ended September 30, 2006. As
required, the Company presents excess tax benefits from the
exercise of stock options, if any, as financing cash flows
rather than operating cash flows.
As a result of adopting SFAS No. 123R on
January 1, 2006, the Company’s net loss for the nine
months ended September 30, 2006, was higher by $244, net of
tax effect, than if the Company had continued to account for
stock-based compensation under APB No. 25. Basic and
diluted net loss per share for the nine months ended
September 30, 2006 would have been $0.02 lower than if the
Company had not adopted SFAS No. 123R. At
September 30, 2006, the Company had $4,885 of total
unrecognized compensation expense under SFAS No. 123R,
net of estimated forfeitures, related to stock option plans that
will be recognized over a weighted-average period of
1.77 years.
During 2006, the Company modified four additional option
agreements, including grants made to two members of the
Company’s Board of Directors. The modifications included
the repricing of one option for 150 shares of common stock
from $1.60 per share to $1.19 per share and
accelerating the vesting of three other grants totaling
63 shares of common stock. The Company recorded a charge of
$2 in connection with these modifications for the nine months
ended September 30, 2006. Total incremental compensation
costs resulting from the modifications were $9.
Non-employee
Stock Options
During the years ended December 31, 2004 and 2005 and the
nine months ended September 30, 2006, the Company granted
options to purchase 344, 4 and 2, shares of common stock,
respectively, to non-employees at exercise prices ranging from
$0.10 to $1.50 and with contractual terms generally of
five years. The Company determined estimated fair value on
the grant date using the Black-Scholes
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
option pricing model and the following assumptions: dividend
yield of 0%, expected volatility of 100%, risk-free interest
rate of 3.77% to 4.73% and contractual lives of 5 to
10 years. The Company accounts for stock options, which
vest over the service period, using the variable accounting
model and re-measuring them each accounting period. Compensation
expense related to options granted to consultants was $253
during the year ended December 31, 2004 and $4 for the nine
months ended September 30, 2006. During the year ended
December 31, 2005, the Company cancelled options issued to
consultants in prior years. As these options were not vested at
the time of cancellation, the Company reversed the expense
recognized in previous years totaling $210 relating to the
unvested portion of these options.
NOTE 13 –
INCOME TAXES
The components of loss before income taxes and cumulative effect
of change in accounting principle by tax jurisdiction were as
follows:
The Company has not provided deferred taxes on unremitted
earnings attributable to foreign subsidiaries that have been
considered to be reinvested indefinitely.
In accordance with SFAS No. 109 and based on all
available evidence on a jurisdictional basis, the Company
believes that, it is more likely than not that its deferred tax
assets will not be utilized, and has recorded a full valuation
allowance against the net deferred tax asset.
At September 30, 2006, the Company had net operating loss
carryforwards of approximately $28,498 and $28,571 for federal
and state tax purposes, respectively. These carryforwards will
expire from 2011 to 2025. In addition, the Company had research
and development tax credit carryforwards of approximately $400
for federal income tax purposes and $573 for California tax
purposes. The research and development tax credit carryforwards
will begin to expire in 2021. The California state
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
research credit will carry forward indefinitely. In addition, at
September 30, 2006, the Company had net operating loss
carryforwards of approximately $10,140 for United Kingdom tax
purposes.
The Company’s ability to use its net operating loss
carryforwards and federal and state tax credit carryforwards to
offset future taxable income and future taxes, respectively, may
be subject to restrictions attributable to equity transactions
that result in changes in ownership as defined by Internal
Revenue Code Section 382.
NOTE 14 –
SEGMENT REPORTING
Statement of Financial Accounting Statements No. 131,
Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information
about operating segments. It defines operating segments as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in
deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision-maker is its Chief
Executive Officer. The Company’s Chief Executive Officer
reviews financial information on a geographic basis, however
these aggregate into one operating segment for purposes of
allocating resources and evaluating financial performance.
Accordingly, the Company reports as a single operating
segment — mobile games. It attributes revenues to
geographic areas based on the country in which the
carrier’s operations are located.
The Company generates its revenues in the following geographic
regions:
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:
GLU MOBILE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (in thousands, except per share data)
NOTE 15 –
RESTRUCTURING
During December 2005, the Company undertook restructuring
activities to reduce operating expenses. The Company eliminated
27 positions, of which 17 were in research and development, 4 in
sales and marketing and 6 in general and administrative. A
restructuring charge of $450 was recorded in December 2005,
including $225 in the United States and $225 in Europe. Of these
costs, a total of $177 was paid in December 2005 and the
remainder was paid in the first quarter of 2006. No
restructuring took place in 2003 and 2004 or during the nine
months ended September 30, 2005 (unaudited) or 2006.
NOTE 16 –
EMPLOYEE BENEFIT PLAN
The Company sponsors a Simple IRA covering all United States
employees. The Company’s management team determines
contributions to be made by the Company annually. Employer
matching contributions under this plan amounted to $19, $30 and
$104 for the years ended December 31, 2003, 2004 and 2005,
respectively, and $40 (unaudited) and $0 during the nine months
ended September 30, 2005 and 2006, respectively.
NOTE 17 –
RELATED PARTY TRANSACTIONS
The Company developed certain games in the ordinary course of
business utilizing licenses obtained from a media company whose
executive is a member of the Company’s Board of Directors.
Total royalty expense for these games for the years ended
December 31, 2003, 2004 and 2005 and the nine months ended
September 30, 2005 and 2006 was $0, $31, $1,082, $732
(unaudited) and $841, respectively. Total royalties payable at
December 31, 2004 and 2005 were $410 and $1,239,
respectively. Total royalties payable at September 30, 2006
were $796.
NOTE 18 –
SUBSEQUENT EVENTS
On December 18, 2006, the Company’s board of directors and
preferred stockholders approved an amendment to the Restated
Articles of Incorporation to reduce the price at which shares of
the Company’s redeemable convertible preferred stock
convert automatically into common stock upon completion of an
underwritten public offering from $4.98 per share to
$4.50 per share.
On December 13, 2006, the Company’s Board of Directors
approved the filing of a registration statement with the
Securities and Exchange Commission for an initial public
offering of the Company’s common stock and a
reincorporation into Delaware prior to the consummation of the
offering.
To the Board of Directors and Shareholder
of iFone Holdings Limited:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated profit and loss accounts and cash flows
present fairly, in all material respects, the financial position
of iFone Holdings Limited and its subsidiaries at
31 December 2004 and 2005, and the results of their
operations and their cash flows for each of the two years in the
period ended 31 December 2005 in conformity with accounting
principles generally accepted in the United Kingdom. These
financial statements are the responsibility of the
Company’s management and directors. Our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Accounting principles generally accepted in the United Kingdom
vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information
relating to the nature and effect of such differences is
presented in Note 24 to the consolidated financial
statements.
Profit/(loss) on ordinary
activities before taxation
420
(301
)
Tax on profit/(loss) on ordinary
activities
7
(49
)
(68
)
Profit/(loss) for the financial
year
16, 17
371
(369
)
All amounts relate to continuing operations.
All recognised gains and losses are included in the profit and
loss accounts above.
There is no difference between the profit/(loss) on ordinary
activities before taxation and the profit/(loss) for the periods
stated above and their historical cost equivalents.
The accompanying notes are an integral part of the consolidated
financial statements
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended 31 December 2004 and 2005
1 —
STATEMENT OF
DIRECTORS’ RESPONSIBILITIES
The directors are responsible for preparing these consolidated
financial statements for iFone Holdings Limited and its
subsidiaries (together “the Group”) as at
31 December 2004 and 2005 and for each of the two years in
the period ended 31 December 2005, in conformity with
generally accepted accounting principles in the United Kingdom
(“UK GAAP”) with a reconciliation to generally
accepted accounting principles in the United States of America
(“US GAAP”).
The directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Group, and for identifying and
ensuring that the Group complies with the law and regulations
applicable to their activities. They are also responsible for
safeguarding the assets of the Group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The directors confirm that suitable accounting policies have
been used and applied consistently for the periods presented.
They also confirm that reasonable and prudent judgements and
estimates have been made in preparing the consolidated financial
statements and that applicable accounting standards have been
followed.
2 —
BASIS OF
PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Changes in
Accounting Policies
The accounting policies have been reviewed by the directors in
accordance with Financial Reporting Standard (‘FRS’)
18 “Accounting policies”. FRS 17 “Retirement
benefits”, FRS 21 “Events after the balance sheet
date”, FRS 25 “Financial instruments” and FRS 28
“Corresponding amounts” have been adopted in 2005. The
adoption of these policies has had no impact on the consolidated
financial statements of the Group.
Nature of
Operations
The Group is engaged in the business of providing wireless
entertainment to mobile phone network operators, portals and
wireless equipment manufacturers, who in turn will offer these
entertainment services to their end customers.
Basis of
Preparation
These consolidated financial statements of the Group for each of
the two years in the period ended 31 December 2005 have
been prepared under the historical cost convention and in
accordance with UK GAAP, with a reconciliation of net income and
shareholder’s equity to US GAAP. The Group has incurred
recurring losses from operations for most years since inception
and has a deficit on its profit and loss account reserves, under
UK GAAP, of £4.7 million as at 31 December 2005.
For the year ended 31 December 2005, the Group incurred an
operating loss, under UK GAAP, of £266,000, although it
provided a net cash inflow from operating activities, under UK
GAAP, of £484,000. The Group may incur additional operating
losses and negative operating cash flows in the future. Failure
to generate sufficient revenues or reduce spending could
adversely affect the Group’s ability to achieve its
intended business objectives. On 29 March 2006, the Company
entered into a purchase agreement with Glu Mobile Inc. for the
sale of all of the issued and outstanding ordinary shares in the
Company to Glu Mobile Inc. (See Note 23).
The Company has obtained a letter of support from Glu Mobile
Inc. and consequently the directors believe that it is
appropriate for these consolidated financial statements to be
prepared on a going concern basis.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
These consolidated financial statements do not constitute the
statutory consolidated financial statements of the Group. Copies
of the consolidated statutory financial statements of the Group
can be obtained from the Registrar at Companies House in the
United Kingdom.
Basis of
Consolidation
The financial statements consolidate the accounts of iFone
Holdings Limited and its subsidiaries from the date of
acquisition. The net assets of companies acquired are included
in the consolidated accounts at their fair value to the Group at
the date of acquisition.
Goodwill
Goodwill, which represents the fair value of consideration paid
for the purchase of a subsidiary less the fair value of the net
assets, is capitalised as an intangible asset and written off to
the profit and loss account over its useful economic life.
Prepaid
Royalties
Prepaid royalties consist primarily of licence fees paid to
licensors for the rights to use certain brand names and
contents. The costs of acquiring intellectual property are
amortized to cost of sales when related games are sold to end
users. Management periodically evaluates the future realization
of prepaid royalties and should the carrying costs of the
licences exceed their recoverable amount, the excess will be
charged to the profit and loss account.
Trade
Debtors
Trade debtors which are subject to full recourse financing
represent debtors discounted with a factoring company in the
ordinary course of business, so that the proceeds received by
the Group on discounting is fully refundable, and carries
interest at variable rates. The proceeds received from the
factor are recorded as a liability under the heading of other
creditors.
Tangible Fixed
Assets
Tangible fixed assets are carried at historical cost.
Depreciation is provided on all fixed assets at rates calculated
to write off the cost, less estimated residual value, of each
asset evenly over its expected useful life, at the following
annual rates:
Office and computer equipment: 3-5 years
Research and
Development
Research and development expenditure is charged to the profit
and loss account as incurred.
Operating
Leases
The costs in respect of operating leases are charged on a
straight-line basis over the lease term.
Foreign
Currency
Transactions denominated in foreign currencies are translated
into pounds sterling at the rates of exchange ruling at the date
of the transaction. Monetary assets and liabilities denominated
in foreign
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
currencies at the balance sheet date are translated at year-end
rates of exchange. Any gain or loss arising from a change in
exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the profit and loss
account.
Taxation
Corporation tax is provided on the assessable profits of the
Company at the appropriate rates in force. Deferred tax is
recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more
tax or a right to pay less tax in the future have occurred at
the balance sheet date. Timing differences are differences
between the company’s taxable profits and its results as
stated in the financial statements. Deferred tax is measured at
average tax rates that are expected to apply in the years in
which the timing differences are expected to reverse, based on
tax rates and laws that have been enacted or substantially
enacted by the balance sheet date. Deferred tax assets and tax
debtors arising from withholding tax credits are recognised to
the extent that they are more likely than not to be recoverable.
Deferred tax is measured on a non-discounted basis.
Turnover
Turnover is comprised of the net proceeds receivable to the
Group from the sale of gaming products which have been sold by
wireless network operators, handset manufacturers and licencees
to retail customers, net of VAT.
3 —
OTHER OPERATING
INCOME
In April 2005 iFone Limited (a subsidiary of the Company)
entered into a settlement agreement with The Tetris Company LLC
(‘‘Tetris’’), a company based in Delaware.
iFone Limited received $1.5 million (£812,000) from
Tetris as settlement for a dispute arising between the parties
in relation to a Copyright and Trademarks Licence and
Distribution Agreement entered into in December 2002. Under such
settlement, iFone Limited agreed to cease using the Copyright
and Trademark licence from Tetris.
4 —
OPERATING
PROFIT/(LOSS)
The operating profit/(loss) is stated after charging:
2004
2005
£000
£000
Depreciation of tangible fixed
assets
11
59
Other operating lease
charges – related party (See Note 22)
156
230
Research and development
244
453
5 —
INTEREST
PAYABLE
2004
2005
£000
£000
Interest payable on bank
overdrafts, loans and factoring of debts
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
6 —
STAFF
COSTS
Particulars of employees costs (including directors) are shown
below:
2004
2005
£000
£000
Wages and salaries
926
1,547
Social security costs
95
242
1,021
1,789
7 —
TAX ON
PROFIT/(LOSS) ON ORDINARY ACTIVITIES
2004
2005
£000
£000
Current
taxation – UK
–
–
– Overseas
49
68
Tax on profit/(loss) on ordinary
activities
49
68
The tax assessed for 2005 is higher, and for 2004 is lower than
the standard rate of corporation tax in the UK. The differences
are explained below:
2004
2005
£000
£000
Profit/(loss) on ordinary
activities before taxation
420
(301
)
Profit/(loss) on ordinary
activities before taxation multiplied by standard rate in the UK
(30%)
126
(90
)
Effects of expenses not deductible
for tax purposes
161
30
Timing differences
–
60
Losses not recognised
(287
)
–
Overseas tax
49
68
Current tax charge for the year
49
68
The directors have considered the utilisation of the significant
unrelieved trading losses carried forward and have concluded
that the availability of future taxable profits is not
sufficiently certain to recognise a deferred tax asset in
respect of the unrelieved losses (See Note 14).
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
13 —
BANK AND OTHER
BORROWINGS DUE WITHIN ONE YEAR
2004
2005
£000
£000
Overdraft
72
147
Bank loan
47
32
Shareholder loan note
280
292
Other loan – related
party
230
111
629
582
The overdraft is supported by a personal guarantee given by
Morgan O’Rahilly, a director of the Company. (See
Notes 22 and 23).
The bank loan is unsecured and bears interest at 4% per
annum over the variable base rate, which at 31 December
2005 was 4.5%.
The shareholder loan note is unsecured and bears interest at
10% per annum (See Note 22).
The other loan is unsecured and bears interest at 6.5% per
annum (See Note 22).
14 —
DEFERRED
TAXATION
2004
2005
Recognised
Unrecognised
Recognised
Unrecognised
£000
£000
£000
£000
Losses
–
634
–
700
The directors have considered the utilisation of the significant
unrelieved trading losses carried forward and have concluded
that the availability of future taxable profits is not
sufficiently certain to recognise a deferred tax asset in
respect of the unrelieved losses.
The value of the above unrecognised deferred tax asset could be
significantly reduced due to the surrender of losses in pending
research & development claims.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
15 —
CALLED UP EQUITY
SHARE CAPITAL
2004
2005
£000
£000
Authorised
2,500,000 “A” Ordinary
1p Shares
25
25
46,500,000 “B” Ordinary
1p Shares
465
465
5,000,000 “C” Ordinary
1p Shares
50
50
1,000,000 “D” Ordinary
1p Shares
10
10
550
550
Allotted, called up and fully
paid
2,500,000 “A” Ordinary
1p Shares
25
25
43,241,260 “B” Ordinary
1p Shares
432
432
5,000,000 “C” Ordinary
1p Shares
50
50
507
507
At Board meetings in February 2004, March 2004, April 2004 and
July 2004, the following resolutions were approved:
•
100,000,000 “D” Ordinary shares of 0.0001p were
reclassified as 1,000,000 “D” Ordinary 1p shares.
•
29,000,000 Ordinary 1p shares were reclassified as 29,000,000
“B” Ordinary 1p shares.
•
Infogrames returned their 5,000,000 “C” Ordinary 1p
shares, which were re-distributed to existing shareholders pro
rata (See Note 22).
•
Galloway Investments converted £461,219 of outstanding
loans to equity in return for 9,508,635 “B” Ordinary
1p shares (See Note 22).
Capital
Distribution
On a return of assets due to
winding-up
or reduction of capital or otherwise (except in the case of the
purchase by the Company of its own shares) the assets and
retained profits available for distribution among the members
shall be applied as amended on 7 April 2003:
The shareholders’ agreement following the simplification of
the share structure was amended to state that under the same
circumstances the assets and profits will be distributed amongst
the “A” ordinary shareholders’ and the ordinary
shareholders’ (pari passu as if the same constituted one
class of share) in proportion to the number of shares held by
them respectively.
The shareholders’ agreement states that in winding up
circumstances the assets and profits will be distributed amongst
the “A” ordinary shareholders’ and the ordinary
shareholders’ (pari passu as if the same constituted one
class of share) in proportion to the number of shares held by
them respectively.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
Voting
Rights
On a show of hands every member who is present in person or is
present by a duly authorised representative shall have one vote
and on a poll every member who is present in person or by proxy
or is present by a duly authorised representative shall have one
vote for every share which is paid up or credited as paid up, of
which he is a holder.
Details regarding Variation of Rights, Lien, Transfer of Shares
(and specifically transfers by “A” Ordinary
Shareholder’s due to death or bankruptcy) are contained
within the Company’s Articles of Association as adopted on
6 December 2000, and were restated in the Company’s
revised Articles of Association as adopted on 7 April 2003.
16 —
RESERVES
Profit and
Share premium
Merger
loss
account
reserve
account
£000
£000
£000
At 1 January 2004
2,790
586
(4,684
)
Premium on issue of shares
366
–
–
Profit for the financial year
–
–
371
At 31 December 2004
3,156
586
(4,313
)
Loss for the financial year
–
–
(369
)
At 31 December 2005
3,156
586
(4,682
)
17 —
RECONCILIATION OF
MOVEMENTS IN EQUITY SHAREHOLDER’S FUNDS
2004
2005
£000
£000
Profit/(loss) for the financial
year
371
(369
)
New share capital subscribed
94
–
Premium on issue of shares
366
–
Net (decrease)/increase in equity
shareholder’s funds/(deficit)
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
Analysis of
Net debt
At 1
At 31
January
Non-cash
December
2005
movement
Cash flow
2005
£000
£000
£000
£000
Cash at bank and in hand
1
–
58
59
Overdraft
(72
)
–
(75
)
(147
)
(71
)
–
(17
)
(88
)
Bank loan
(47
)
–
15
(32
)
Shareholder loan note
(280
)
–
(12
)
(292
)
Other loan – related
party
(230
)
–
119
(111
)
Total net debt
(628
)
–
105
(523
)
The non-cash movement represents the conversion of a loan note
to share capital on 1 January 2004.
20 —
ULTIMATE PARENT
UNDERTAKING
At 31 December 2005, the ultimate parent undertaking of the
Company was Galloway Investments Holdings Limited, a company
registered in the British Virgin Islands and the ultimate
controlling parties were David Ward and David Bates, who are
directors of the Company.
On 29 March 2006, all of the outstanding share capital of
iFone Holdings Limited was acquired by Glu Mobile Inc., a
company incorporated in California, which is now the ultimate
parent undertaking of the Company (See Note 23).
21 —
CONTINGENT
LIABILITIES
The Company holds an unscheduled mortgage debenture with the
Natwest Bank to cover BACS and credit card payments. The
debenture is secured as a specific equitable charge over the
leasehold properties and as a fixed and floating charge over the
assets of the company including goodwill, book debts and
licences.
22 —
RELATED PARTY
TRANSACTIONS
During the periods, the Group entered into agreements with a
number of related parties including Infogrames Europe S.A. a
shareholder of the Company, Atari Inc., Atari Europe Limited and
Atari UK Limited, who are all subsidiaries of Infogrames Europe
S.A.
In June 2000, the Company entered into an agreement with
Infogrames Europe S.A. where Infogrames Europe S.A. would
provide an exclusive licence to the Company to market selected
trademarks and other intellectual property of Infogrames Europe
S.A., and its subsidiary companies, for the development of games
to wireless telephone devices. The licence included an option,
which expired within 160 days of entering into the
agreement, to Infogrames Europe S.A., to receive a prepaid
royalty payment of either £1 million in cash or an
equity stake in the Company for £1 million as
settlement for the provision of such licence. In November 2000,
Infogrames Europe S.A. chose to receive the equity stake in the
Company, and in January 2001, “C” Ordinary 1p shares
were issued to Infogrames Europe S.A. in settlement for such
royalty payments. Under UK GAAP, such prepaid royalty charge was
accounted for at fair market value, deemed to be
£1 million, which was then charged to the profit and
loss account over the attributable licence period, through to
31 December 2004. The amounts included in cost of sales for
the two years ended 31 December 2004 and 2005,
respectively, were £167,000 and £nil. David Ward was a
director of both the Company and Infogrames Europe S.A.
In 2004, as a consequence of an overall commercial renegotiation
of the original licence, the Company entered into a new licence
agreement with Atari Inc., a subsidiary of Infogrames Europe
S.A. (see below), which replaced the original licence.
Infogrames Europe S.A. returned the “C” Ordinary 1p
shares to the Company for £nil consideration. These shares
were redistributed to the remaining shareholders on a pro-rata
basis.
Atari
In 2004, iFone Limited entered into a three year development and
distribution agreement with Atari Inc., a subsidiary of
Infogrames Europe S.A., where iFone Limited received exclusive
distribution and development licences for all Atari and Hasbro
titles to develop games for wireless telephone devices. Total
royalty fees included in cost of sales for the two years ended
31 December 2004 and 2005, respectively, were £152,000
and £528,000. Total amounts due to Atari Inc., at
31 December 2004 and 2005, respectively, were £63,000
and £271,000 and were included in accruals. David Ward was
a director of both the Company and Atari Inc.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
In 2002, Atari Europe Limited, a wholly owned subsidiary of
Infogrames Europe S.A., entered into an agreement with iFone
Limited to provide rental and support services. Total amounts
included rolled forward outstanding interest, giving an interest
owed for the year ended 31 December 2004 of £15,000.
Total amounts due to Atari Europe Limited, at 31 December
2004 were £230,000 and were originally included in trade
creditors. In 2005, an agreement was reached where such trade
creditor was converted into an unsecured interest bearing loan,
bearing interest at 6.5% per annum, such amounts becoming
due and payable on demand. Total amounts included in interest
expense for the year ended 31 December 2005 were
£8,000. Total amounts due to Atari Europe Limited, at
31 December 2005 were £111,000 and were included in
Other loans. Amounts payable at 31 December 2004 were
reclassified to Other loans for comparative disclosure purposes.
Atari UK Limited, a wholly owned subsidiary of Infogrames Europe
S.A., entered into a rolling
month-to-month
operating lease agreement with iFone Limited for
sub-leasing
of premises from Atari UK Limited. Total operating lease costs
charged to administrative expenses for the two years ended
31 December 2004 and 2005, respectively, were £156,000
and £230,000. Total amounts due to Atari UK Limited, at
31 December 2004 and 2005, respectively, were £17,000
and £62,000 and were included in trade creditors.
Galloway
Investment Holdings Limited
During 2003 & 2004, Galloway Investment Holdings
Limited, had loaned the Company through a number of cash
injections, a total of £736,000, of which £461,219 was
converted into 9,508,635 “B” Ordinary 1p shares. Any
outstanding loans with Galloway Investment Holdings Limited bear
interest at 10% per annum. Total interest charged for the
two years ended 31 December 2004 and 2005, respectively
were £8,000 and £21,000. Total amounts due to Galloway
Investment Holdings Limited, at 31 December 2004 and 2005,
respectively, were £280,000 and £292,000 and were
included in shareholder loan note. The shareholder loan note is
unsecured and bears interest at 10% per annum.
In December 2004, iFone Limited purchased tangible fixed assets
from Galloway Investment Holdings Limited. The purchase price of
these tangible fixed assets was £250,000. At 31 December
2004 this was included in other creditors. Total depreciation
charges for the two years ended 31 December 2004 and 2005,
respectively, were £nil and £50,000, and were included
in administrative expenses. The net book value of these tangible
fixed assets at 31 December 2004 and 2005, respectively,
were £250,000 and £200,000.
Transactions
with Directors
iFone Limited was charged the sum of £nil and £10,000
in 2004 and 2005, respectively, from SMD & Co. a
consultancy business owned by David Bates, a director of the
Company, and were included in administrative expenses. These
costs were for expenses incurred wholly on iFone Limited
business. Payments outstanding totalled £nil and
£4,000 at the end of the respective periods, and were
included in trade creditors.
In December 2000 the Company and Morgan O’Rahilly entered
into an option agreement whereby the Company granted Morgan
O’Rahilly the right to subscribe for A Ordinary 1p shares,
providing Morgan with 5% of the aggregate number of equity
shares which were in issue immediately after the completion of
certain contingent events.
On 9 September 2005 Morgan O’Rahilly entered into a
personal guarantee with the National Westminster Bank plc in
support of the Company’s overdraft.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
23 —
SUBSEQUENT
EVENTS
On 27 March 2006, in a reorganisation by the Company,
2,500,000 “A” Ordinary 1p shares, 43,241,260
“B” Ordinary 1p shares, and 5,000,000 “C”
Ordinary 1p shares were reclassified into Ordinary 1p shares.
All Ordinary 1p shares ranked pari passu.
On 27 March 2006, the options provided to Morgan
O’Rahilly were cancelled and also on 27 March 2006,
approximately 2.3 million Ordinary 1p shares were
transferred, by Marlborough Holdings Limited, Zebec Corporation
and Galloway Investment Holdings Limited in equal proportion to
their existing shareholdings, to The Buckingham Trust, a trust
held for the beneficial ownership of members of Morgan
O’Rahilly’s family. Morgan O’Rahilly was an
existing shareholder, director and employee of the Company at
this date.
On 29 March 2006, the directors completed the sale of all
of the issued and outstanding ordinary shares of the Company,
which were sold to Glu Mobile Inc. in exchange for the issuance
of 10,267,881 shares of Special Junior Preferred Stock of
Glu Mobile Inc. and $3.5 million in cash. In addition,
subject to completion of certain milestones, a total of
3,186,585 shares of Special Junior Preferred Stock of Glu
Mobile Inc, and $4.5 million in subordinated unsecured
promissory notes were to be issued to the Company’s
shareholders. Such milestone events were not achieved and the
purchase price of the shares was determined as being
$22.6 million consisting of the following:
10.3 million shares of Special Junior Preferred Stock of
Glu Mobile Inc. (valued at $19.1 million), and
$3.5 million in cash.
On 29 March 2006 David Ward, David Bates and Morgan
O’Rahilly, resigned as directors of the Company and they
were replaced by Rocky Pimentel and Greg Ballard. Subsequent to
this, the Company’s overdraft was repaid, and there was no
longer a requirement for a personal guarantee from Morgan
O’Rahilly.
24 —
SUMMARY OF
DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The accompanying consolidated financial statements have been
prepared in accordance with UK GAAP, which differs in
certain significant respects from US GAAP. The significant
differences that affect (loss)/profit for the financial year and
equity shareholder’s funds of the Group are set forth below:
2004
2005
Note
£000
£000
Reconciliation of profit/(loss)
for the financial year from
UK GAAP to US GAAP
Profit/(loss) for the financial
year under UK GAAP
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
2004
2005
Note
£000
£000
Reconciliation of equity
shareholder’s deficit from
UK GAAP to US GAAP
Equity shareholder’s deficit
under UK GAAP
(64
)
(433
)
Software revenue recognition
A
–
–
Deferred taxes
B
–
–
Shareholder’s deficit
under US GAAP
(64
)
(433
)
A.
Software Revenue
Recognition
The UK accounting standard FRS 5 – Application
Note G is not specific in dealing with software revenue
recognition. Under US GAAP, revenue generated from licensing
software and providing services is recognized in accordance with
Statement of Position (‘‘SOP’’)
97-2,
‘Software Revenue Recognition’ and
SOP 98-9,
‘Modification of
SOP 97-2,
Software Revenue Recognition, With respect to Certain
Transactions’. This can lead to differences between UK and
US GAAP.
The following adjustments have been made to the profit/(loss)
for the financial year to apply
US GAAP:
i.
Certain multiple element software licence arrangements that the
Group is party to provide for development of additional features
and functionality that, under US GAAP, require deferral of the
associated arrangement fees until such time that the features
and functionality are delivered and accepted. In such cases,
software licences are deferred until such software is delivered
and accepted, subject to other revenue recognition criteria
being met. Under UK GAAP, the Group has recognized revenues
ratably over the period that the products have been delivered.
ii.
Certain multiple element arrangements that the Group is party
to, involve the provision of a licence and other elements such
as exclusivity periods, that, under US GAAP, require vendor
specific-objective evidence (‘‘VSOE’’) of
fair value to be used to allocate the total fee to each of the
elements of the arrangement, or if VSOE of fair value for each
element does not exist that all revenue from the arrangement
must be deferred until the earlier of:
a.
when such evidence does exist for each element;
b.
all elements have been delivered; or
c.
the evidence of fair value exists for the undelivered elements.
VSOE of fair value is based on the price generally charged when
an element is sold separately or, if not yet sold separately, is
established by authorised management. In such cases, the entire
fee from the arrangement is allocated to each of the individual
elements based on each element’s fair value and revenue is
recorded for the delivered elements. If the evidence of fair
value for each of the undelivered elements does not exist, then
all revenue is deferred until all elements without VSOE of fair
value are delivered. Under UK GAAP, such criteria for VSOE of
fair value does not exist, and the Group has recognized revenues
ratably over the period that the products have been delivered.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
B.
Deferred
Taxes
Deferred taxes have been provided at the applicable effective
tax rate on relevant US GAAP adjustments shown in the
reconciliation above. The Group has net operating loss carry
forwards available to offset against future taxable income. Due
to the uncertainty surroundings the realisation of these
deferred tax assets in future years, the Group has recorded a
valuation allowance against all of its net deferred tax assets,
except amounts to cover the tax effect on applicable US GAAP
adjustments shown in the reconciliation above.
C.
Sales and
Marketing
Under UK GAAP, the Group has total sales and marketing cost of
£422,000 and £1,093,000 in 2004 and 2005,
respectively, of which £75,000 and £313,000 in 2004
and 2005, respectively, is included in cost of sales and
£347,000 and £780,000 in 2004 and 2005, respectively,
is included in administrative expenses.
Under US GAAP, such costs would be disclosed in sales and
marketing expense, normally shown below gross profit. This has
no effect on net income/(loss) in either year.
Cash
Flows
The consolidated cash flow statements have been prepared under
UK GAAP in accordance with FRS 1 (revised) and present
substantially the same information as required under
SFAS 95. There are certain differences between FRS1
(revised) and SFAS 95 with regard to classification of
items within the cash flow statement.
In accordance with FRS 1 (revised) cash flows are prepared
separately for operating activities, returns on investments and
servicing of finance, taxation, capital expenditure and
financial investment, acquisitions and disposals, equity
dividends paid, management of liquid resources and financing.
Under SFAS 95 cash flows are classified under operating
activities, investing activities and financing activities. Under
FRS 1(revised), cash is defined as cash in hand and deposits
repayable on demand, less overdrafts repayable on demand. Under
SFAS 95, cash and cash equivalents are defined as cash and
investments with original maturities of three months or less.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
A reconciliation between the consolidated statements of cash
flows presented in accordance with UK GAAP to US GAAP
classification, based on UK GAAP measurement principles, is
shown below for the periods ended 31 December:
2004
2005
£000
£000
Operating activities:
Net cash (outflow)/inflow from
operating activities (UK GAAP)
(374
)
484
Net cash outflow from returns on
investments and servicing of finance
(29
)
(47
)
Taxation – overseas
withholding taxes
(49
)
(68
)
Net cash (used in)/provided by
operating activities (US GAAP)
(452
)
369
Investing activities:
Net cash outflow for capital
expenditure and financial investment
(5
)
(264
)
Net cash used in investing
activities (US GAAP)
(5
)
(264
)
Financing activities:
Net cash inflow/(outflow) from
financing (UK GAAP)
437
(122
)
Increase in overdrafts
21
75
Net cash provided by/(used in)
financing activities (US GAAP)
458
(47
)
Net increase in cash and cash
equivalents under US GAAP
1
58
Cash and cash equivalents under US
GAAP at beginning of period
–
1
Cash and cash equivalents under
US GAAP at end of period
1
59
Recently
Issued Accounting Standards
Several new standards, amendments and interpretations to
existing standards have been published that are mandatory for
the Group’s accounting periods beginning on or after
1 January 2006 or later periods, but which the Group has
not early adopted. The new standards which are expected to be
relevant to the Group’s operations are as follows:
New Accounting
Developments Under UK GAAP
In April 2004, the Accounting Standards Board (“ASB”)
issued FRS 20 “Share-based payments” which is
effective for unlisted entities for accounting periods beginning
on or after 1 January 2006. FRS 20 establishes a framework
for measuring share-based payment awards and requires an entity
to reflect in its profit or loss and financial position the
effects of share-based payment transactions, including expenses
associated with transactions in which share options are granted
to employees. For equity-settled share-based payment
transactions, an entity shall apply FRS 20 to grants of shares,
share options or other equity instruments that were granted
after 7 November 2002 and had not yet vested at the
relevant effective date of this FRS. Had FRS 20 applied to the
Group as of 1 January 2005, there would have been no impact
on the results of operations or net assets of the Group under
UK GAAP. For events triggered during 2006, as a consequence
of the sale of the outstanding issued share capital of the
Company, the adoption of FRS 20 has created a share-based
compensation charge to the profit and loss account for
stock-based compensation of £591,000, with no effect on net
assets, under UK GAAP.
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
In December 2004, the ASB issued FRS 23 “The effects of
changes in foreign exchange rates”, which is effective for
the Company from 1 January 2006. The objective of this
standard is to prescribe how to include foreign currency
transactions and foreign operations in the financial statements
of an entity and how to translate financial statements into a
presentation currency. We do not believe that the adoption of
this standard will have a material effect on the results of
operations or net assets of the Group under UK GAAP.
In December 2004, the ASB issued FRS 24 “Financial
reporting in hyperinflationary economies” which is
effective for the Company from 1 January 2006. This
standard requires that the financial statements of an entity
whose functional currency is the currency of a hyperinflationary
economy must be restated prior to translation into a different
presentation currency. It requires such an entity’s results
to be restated in terms of the measuring unit current at the
balance sheet date. We do not believe that the adoption of this
standard will have a material effect on the results of
operations or net assets of the Group under UK GAAP.
In December 2004, the ASB issued FRS 26 “Financial
instruments: measurement” which is effective for the
Company from 1 January 2006 The objective of this Standard
is to establish principles for measuring financial assets,
financial liabilities and certain contracts to buy or sell
non-financial items. We do not believe that the adoption of this
standard will have a material effect on the results of
operations or net assets of the Group under UK GAAP.
In April 2006, the Urgent Issues Task Force (“UITF”)
issued Abstract 41, ‘Scope of FRS 20’
(“UITF 41”), which is effective for the Company
from 1 August 2006. UITF 41 clarifies that transactions
within the scope of FRS 20 “Share Based Payment”
include those in which the entity cannot specifically identify
some or all of the goods and services received. We do not
believe that the adoption of this standard will have a material
effect on the results of operations or net assets of the Group
under UK GAAP.
New Accounting
Developments Under US GAAP
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109”
(“FIN 48”) which clarifies the accounting for
uncertainty in income taxes recognised in an enterprise’s
financial statements in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes”. This Interpretation
prescribes a comprehensive model for how a company should
recognise, measure, present, and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return (including a decision whether to
file or not to file a return in a particular jurisdiction).
Under the Interpretation, the financial statements will reflect
expected future tax consequences of such positions presuming the
tax authorities’ full knowledge of the position and all
relevant facts. The Interpretation also revises disclosure
requirements and introduces a prescriptive, annual, tabular
roll-forward of the unrecognised tax benefits. This
Interpretation is effective for fiscal years beginning after
15 December 2006. The Group will adopt this provision in
fiscal 2007 but is not yet possible to estimate the effect of
the adoption of FIN 48 on the net results of operations or
net assets of the Group under US GAAP.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”. SFAS No. 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of this
statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after 15 November
iFONE HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
For the Years Ended 31 December 2004 and 2005
2007. Earlier adoption is permitted, provided the company has
not yet issued financial statements, including for interim
periods, for the fiscal year. It is not yet possible to estimate
the effect of the adoption of SFAS No. 157 on the
results of operations or net assets of the Group under US GAAP.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, or
SAB No. 108, “Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements”, which provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. We will be required to adopt the
provisions of SAB No. 108 in our fiscal year 2006. We
do not believe the adoption of SAB No. 108 will have a
material impact on the results of operations or net assets of
the Group under US GAAP.
UNAUDITED PRO
FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Introductory
Note
On March 29, 2006, Glu Mobile Inc. (the
“Company”) acquired the net assets of iFone Holdings
Limited (“iFone”) in order to continue, deepen and
broaden its game library, acquire access and rights to leading
licenses and franchises and to augment its external production
resources. All of the issued and outstanding shares of iFone
were sold to the Company in exchange for the issuance of
10.3 million shares of Special Junior Preferred Stock of
the Company and $3.5 million in cash. In addition, in the
event of the completion of certain milestones prior to
September 28, 2006, contingent consideration of
3.2 million shares of Special Junior Preferred Stock of the
Company and $4.5 million in subordinated unsecured
promissory notes will be issued to the iFone shareholders. In
conjunction with this transaction, the Company’s Board of
Directors and stockholders approved an increase in the number of
authorized shares of preferred stock of the Company to
51.1 million shares. The total preliminary purchase price
of approximately $23.5 million consisted of the following:
10.3 million shares of Special Junior Preferred Stock of
the Company (valued at $19.1 million), $3.5 million
cash and transaction costs of $0.9 million. The financial
position and operating results of iFone have been included in
the financial position and operating results of the Company from
the date of the acquisition.
As of September 28, 2006, milestone achievement date, the
milestones outlined in the exchange agreement between the
Company and iFone had not been achieved. Thus, the
Company’s management believes that the additional
consideration for achieving these milestones has not been
earned. The Company’s management has communicated this fact
to the iFone shareholders. The Company has received a response
from the iFone shareholders contesting the Company’s
interpretation of the milestone achievement date. The Company
believes the iFone shareholders’ view is without merit. As
the Company believes the milestone consideration has not been
earned, the unaudited pro forma combined condensed financial
statements detailed below do not reflect any of this contingent
consideration.
The following unaudited pro forma combined condensed financial
information gives effect to the acquisition by the Company of
all of the outstanding shares of iFone. The unaudited pro forma
combined condensed statements of operations combine the results
of operations of the Company and iFone for the year ended
December 31, 2005 and the nine months ended
September 30, 2006, as if the acquisition had occurred on
January 1, 2005. An unaudited pro forma combined condensed
balance sheet for the Company and iFone at September 30,2006 was not presented as iFone’s balance sheet including
related acquisition adjustments has already been included in the
consolidated balance sheet of the Company as of this date.
The unaudited pro forma combined condensed financial information
has been prepared from, and should be read in conjunction with,
the respective historical consolidated financial statements of
the Company and iFone. The Company’s historical
consolidated financial statements for the year ended
December 31, 2005 and the nine months ended
September 30, 2006 are included in this
Form S-1
filing. iFone’s historical consolidated financial
statements for the year ended December 31, 2005 are also
included in this
Form S-1
filing. The unaudited pro forma results for the nine months
ended September 30, 2006 include the results of operations
for iFone for the period ended March 29, 2006. iFone’s
historical consolidated financial statements for the period
ended March 29, 2006 are not included in this Form S-1 filing.
The historical profit and loss account and balance sheet of
iFone have been prepared in accordance with UK GAAP. For the
purpose of presenting the unaudited pro forma combined condensed
financial information, the profit and loss account relating to
iFone has been adjusted to conform with US GAAP as described in
note 3. In addition, certain adjustments have been made to
the historical financial statements of iFone to reflect
reclassifications to conform with the Company’s
presentation under US GAAP. The historical financial statements
of iFone were presented in pounds sterling. For the
purposes of presenting the unaudited pro forma combined
condensed financial information, the adjusted income statements
of iFone for the period ended March 29, 2006 and the year
ended December 31, 2005 have been translated into U.S.
Dollars at the average daily closing rate for the period ended
March 29, 2006 and the year ended December 31, 2005,
respectively.
The preliminary pro forma acquisition adjustments described in
note 2 are based on available information and certain
assumptions made by the Company’s management and may be
revised as additional information becomes available. The
unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily
intended to represent what the Company’s financial position
is or results of operations would have been if the acquisition
had occurred on those dates or to project the Company’s
results of operations for any future period. Since the Company
and iFone were not under common control or management for any
period presented, the unaudited pro forma combined condensed
financial results may not be comparable to, or indicative of,
future performance.
The unaudited pro forma combined condensed statement of
operations included herein has been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and certain footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to these rules
and regulations; however, management believes that the
disclosures are adequate to make the information presented not
misleading.
The unaudited pro forma combined condensed consolidated
financial information reflect an estimated purchase price of
approximately $23.5 million consisted of the following:
10.3 million shares of Special Junior Preferred Stock of
the Company (valued at $19.1 million), $3.5 million
cash and transaction costs of $0.9 million. The fair value
of the Special Junior Preferred Stock was determined with the
assistance of an independent valuation firm using the income and
market approach.
Under the purchase method of accounting, the total purchase
price is allocated over net tangible and intangible assets
acquired and liabilities assumed based upon their respective
estimated fair values as of the acquisition date. The purchase
price of approximately $23.5 million was initially
allocated over the fair values of the assets acquired and
liabilities assumed as follows:
Assets acquired:
Cash
$
–
Accounts receivable
2,518
Prepaids and other current assets
2,271
Property and equipment
89
Intangible assets
4,500
In process research and development
1,500
Goodwill
22,920
Total assets acquired
33,798
Liabilities assumed
Accounts payable
(4,301
)
Accrued liabilities
4,815
Restructuring liabilities
(1,180
)
Total liabilities acquired
10,296
Net acquired assets
$
23,502
The Company has recorded an estimate for costs to terminate
certain activities associated with the iFone operations in
accordance with the guidance of Emerging Issues Task Force Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. This restructuring accrual of
$1.2 million principally related to the termination of 41
iFone employees.
The preliminary valuation of the identifiable intangible assets
acquired was based on management’s estimates, currently
available information and reasonable and supportable
assumptions. The allocation was generally based on the fair
value of these assets determined using the income and market
approach. Of the total purchase price, $4.5 million was
allocated to amortizable intangible assets. The amortizable
intangible assets are being amortized using a straight-line
method over the expected cash flows to be received from the
underlying assets over their respective estimated useful life of
two to
In conjunction with the acquisition of iFone, the Company
recorded a $1.5 million expense for acquired in-process
research and development (“IPR&D”) during the
first quarter of 2006 because feasibility of the acquired
technology had not been established and no future alternative
uses existed. The IPR&D expense is included in operating
expenses in our consolidated statements of operation for the
nine months ended September 30, 2006.
The IPR&D is related to the development of new games titles.
The value of acquired IPR&D was determined using the
discounted cash flow approach. The expected future cash flows
attributable to the in-process technology were calculated using
a 21% discount rate. This rate takes into account the percentage
of completion of the development effort of approximately 20% and
the risks associated with the Company’s developing this
technology given changes in trends and technology in the
industry. As of September 30, 2006, acquired IPR&D
projects were approximately 90% completed. Management expects
that the remaining projects will be completed by the end of 2006.
The residual value of $22.9 million has been allocated to
goodwill. Goodwill represents the excess of the purchase price
over the fair value of the net tangible and intangible assets
acquired. In accordance with SFAS No. 142, goodwill
will not be amortized but will be tested for impairment at least
annually.
The pro forma adjustments do not reflect any integration
adjustments to be incurred in connection with the merger or
operating efficiencies and costs savings that may be achieved
with respect to the combined entities as these costs are not
directly attributable to the purchase agreement.
NOTE 2 – PRO
FORMA ADJUSTMENTS
Certain reclassifications have been made to conform iFone
historical and pro forma amounts to the Company’s
consolidated financial statement presentation.
The accompanying unaudited pro forma combined condensed
financial statements have been prepared as if the merger was
completed on January 1, 2005 for statement of operations
purposes and reflect the following pro forma adjustments:
(1) Adjustment to record intangible amortization for the
year ended December 31, 2005 and period ended
March 29, 2006. The weighted average life of amortizable
intangible assets is approximately 2.5 years.
(2) Adjustment to record write-off of in-process research
and development of $1.5 million acquired from iFone.
(3) Adjustment to reduce interest income for the cash
consideration paid from the assumed acquisition date of
January 1, 2005 using the average interest rate over the
respective periods.
(4) Adjustment to reverse certain expenses incurred by
iFone that are non-recurring and a direct result of the
acquisition, including legal and investment banker fees as well
as a stock-based compensation charge triggered by the change in
control.
Based on the finalization of the valuation, purchase price
allocation, integration plans and other factors, the pro forma
adjustments may change from those presented in these pro forma
combined condensed financial statements. A change in the value
assigned to long-lived tangible and intangible assets and
liabilities could result in a reallocation of the purchase price
and a change in the pro forma adjustments. The statement of
operations effect of these changes will depend on the nature and
amount of the assets or liabilities adjusted.
NOTE 3–UK
GAAP TO US GAAP ADJUSTMENTS
The following table shows a reconciliation of the historical
profit and loss accounts of iFone for the unaudited period ended
March 29, 2006 and the year ended December 31, 2005,
prepared in
accordance with UK GAAP and in pounds sterling, to the statement
of operations under US GAAP and in U.S. Dollars included in the
unaudited pro forma combined condensed statement of operations.
The UK to US GAAP adjustments represent the significant
adjustments that are required to present the statement of
operations of iFone to US GAAP and descriptions of the nature of
each adjustment as follows (in thousands):
Reclassification from iFone’s UK GAAP profit and loss
account presentation to US GAAP statement of operations
presentation. This includes conforming adjustments to make the
iFone presentation for cost of sales and research and
development consistent with the presentation of Glu Mobile Inc.
financial statement line items.
(2)
Adjustment to accrue for earned and unpaid vacation for iFone
employees.
(3)
Adjustment to accrue for transaction expenses of the iFone
shareholders of £1.7 million paid by the Company upon
the closing of the acquisition of iFone.
(4)
Results are converted to U.S. Dollars using the average exchange
rate for the period presented. The exchange rates used for the
year ended December 31, 2005, and the period ended
March 29, 2006 were 1.82 and 1.75, respectively.
No dealer, salesperson or
other person is authorized to give any information or to
represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations.
This prospectus is an offer to sell only the shares offered
hereby, but only under circumstances and in jurisdictions where
it is lawful to do so. The information contained in this
prospectus is current only as of its date.
Through and
including ,
2007 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer’s obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
The following table sets forth the costs and expenses to be paid
by the Registrant in connection with the sale of the shares of
common stock being registered hereby. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and The
NASDAQ Global Market listing fee.
SEC registration fee
$
9,844
NASD filing fee
9,700
The NASDAQ Global Market listing
fee
100,000
Printing and engraving
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
*
Road show expenses
*
Transfer agent and registrar fees
and expenses
*
Miscellaneous
*
Total
$
*
* To be filed by amendment.
ITEM 14.
Indemnification
of Directors and Officers.
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporation’s board of
directors to grant, indemnity to directors and officers under
certain circumstances and subject to certain limitations. The
terms of Section 145 of the Delaware General Corporation
Law are sufficiently broad to permit indemnification under
certain circumstances for liabilities, including reimbursement
of expenses incurred, arising under the Securities Act of 1933,
as amended (the “Securities Act”).
As permitted by the Delaware General Corporation Law, the
Registrant’s restated certificate of incorporation contains
provisions that eliminate the personal liability of its
directors for monetary damages for any breach of fiduciary
duties as a director, except liability for the following:
•
any breach of the director’s duty of loyalty to the
Registrant or its stockholders;
•
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
•
under Section 174 of the Delaware General Corporation Law
(regarding unlawful dividends and stock purchases); or
•
any transaction from which the director derived an improper
personal benefit.
As permitted by the Delaware General Corporation Law, the
Registrant’s restated bylaws provide that:
•
the Registrant is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions;
•
the Registrant may indemnify its other employees and agents as
set forth in the Delaware General Corporation Law;
•
the Registrant is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding
to the fullest extent permitted by the Delaware General
Corporation Law, subject to very limited exceptions; and
•
the rights conferred in the bylaws are not exclusive.
Prior to the completion of this offering, the Registrant intends
to enter into indemnity agreements with each of its current
directors and executive officers to provide these directors and
executive officers additional contractual assurances regarding
the scope of the indemnification set forth in the
Registrant’s restated
certificate of incorporation and restated bylaws and to provide
additional procedural protections. At present, there is no
pending litigation or proceeding involving a director, executive
officer or employee of the Registrant regarding which
indemnification is sought. Reference is also made to
Section 9 of the Underwriting Agreement, which provides for
the indemnification of executive officers, directors and
controlling persons of the Registrant against certain
liabilities. The indemnification provision in the
Registrant’s restated certificate of incorporation,
restated bylaws and the indemnification agreements entered into
or to be entered into between the Registrant and each of its
directors and executive officers may be sufficiently broad to
permit indemnification of the Registrant’s directors and
executive officers for liabilities arising under the Securities
Act.
The Registrant has directors’ and officers’ liability
insurance for securities matters.
Certain of Registrant’s directors (Sharon L. Weinbar,
Daniel L. Skaff and A. Brooke Seawell) are also indemnified by
their respective employers with regards to their serving on
Registrant’s board.
Reference is made to the following documents filed as exhibits
to this Registration Statement regarding relevant
indemnification provisions described above and elsewhere herein:
Since December 1, 2003, we have issued and sold the
following securities:
1.
In March 2004, the Registrant issued warrants to purchase
156,250 shares of its common stock to Silicon Valley Bank.
In June 2004, the warrants were converted into warrants to
purchase 156,250 shares of the Registrant’s
Series B Preferred Stock. The warrants have an exercise
price of $0.64.
2.
In June 2004 and August 2004, the Registrant sold an aggregate
of 12,046,016 shares of its Series C Preferred Stock
at $1.6603 per share for an aggregate purchase price of
approximately $20.0 million to 12 accredited investors.
3.
In December 2004, the Registrant issued 8,199,233 shares of
its common stock (valued at approximately $15.4 million) in
connection with its acquisition of Macrospace Limited, a company
registered in England and Wales.
4.
In April 2005 and July 2005, the Registrant sold an aggregate of
6,701,510 shares of its Series D Preferred Stock at
$3.01 per share for an aggregate purchase price of
approximately $20.2 million to 23 accredited investors.
5.
In April 2005, the Registrant sold an aggregate of
249,169 shares of its common stock at $1.00 per share
for an aggregate purchase price of $249,169 to two entities
affiliated with Granite Global Ventures.
6.
In July 2005, the Registrant sold an aggregate of
2,491,694 shares of its
Series D-1
Preferred Stock at $3.01 per share for an aggregate
purchase price of approximately $7.5 million to TWI Glu
Mobile Holdings Inc.
7.
In March 2006, the Registrant issued an aggregate of
10,267,879 shares of its Special Junior Preferred Stock, in
connection with its acquisition of iFone Holdings Limited, a
company registered in England and Wales.
In May 2006, the Registrant issued warrants to purchase an
aggregate of 318,937 shares of its Series D Preferred
Stock at an exercise price of $3.01 per share to three entities
affiliated with Pinnacle Ventures.
9.
In November 2006, the Registrant issued an aggregate of
43,383 shares of its common stock to seven former employees
of iFone.
10.
Since December 1, 2003, the Registrant has issued options
to its employees, consultants and directors to purchase an
aggregate of 12,708,374 shares of its common stock under
its 2001 Stock Option Plan.
11.
Since December 1, 2003, the Registrant has issued
3,178,267 shares of its common stock to its employees,
directors, consultants and other service providers upon exercise
of options granted by it under its 2001 Stock Option Plan, with
exercise prices ranging from $0.06 to $1.60 per share.
Unless otherwise stated, the sales of the above securities were
deemed to be exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act or
Regulation D or Regulation S promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving any
public offering or pursuant to benefit plans and contracts
relating to compensation as provided under Rule 701. The
recipients of the securities in each of these transactions
represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
placed upon the share certificates issued in these transactions.
All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
Publishing and Distribution
Agreement dated as of October 1, 2004, as amended, by and
among PopCap Games, Inc., PopCap Games International, Ltd. and
the Registrant.
10
.08*†
Wireless Games Agreement dated as
of December 8, 2004, as amended, by and between Celador
International Limited and the Registrant.
10
.09*†
Wireless Content License Agreement
dated as of December 16, 2004, as amended, by and between
Fox Mobile Entertainment Inc. and the Registrant.
10
.10*†
Wireless Information Service
Licensing Agreement dated as of October 15, 2004 by and
between Cingular Wireless, LLC and the Registrant.
10
.11*†
BREW Application License Agreement
dated as of February 12, 2002 by and between Cellco
Partnership (d.b.a. Verizon Wireless) and the Registrant and the
BREW Developer Agreement dated as of November 2, 2001, as
amended, by and between Qualcomm Inc. and the Registrant.
10
.12*†
Master Reseller Agreement dated as
of July 7, 2003 by and between Vodafone Global Content
Services Limited and the Registrant.
10
.13
Amended and Restated Voting
Agreement dated as of March 29, 2006 by and among the
persons listed on Exhibit A attached thereto, certain
shareholders listed on Exhibit B attached thereto, the
iFone Shareholders listed on Exhibit C attached thereto and
the Registrant.
Employee Contract dated
July 25, 2003 by and between Kristian Segerstrale and the
Registrant.
10
.19
Loan and Security Agreement dated
as of May 2, 2006 by and between Pinnacle Ventures LLC and
the Registrant.
10
.20
Form of Warrant dated as of
May 2, 2006 by and between Pinnacle Ventures I Equity
Holdings LLC and the Registrant, by and between Pinnacle
Ventures I Affiliates, L.P. and the Registrant, and by and
between Pinnacle Ventures II Equity Holdings, LLC and the
Registrant.
10
.21
Form of Warrant dated as of
March 6, 2003 by and between New Enterprise
Associates 10, LP and the Registrant, by and between Sienna
Limited Partnership III, LP and the Registrant, and by and
between Preston Gates & Ellis Investments LLC and the
Registrant.
Form of Severance and Change in
Control Agreement dated as of March 22, 2006 by and between
L. Gregory Ballard and the Registrant, and by and between
Albert A. Pimentel and the Registrant.
Consent of m:metrics, Inc., a
market research firm, dated as December 8, 2006.
99
.02
Consent of Juniper Research, a
market research firm, dated as of December 11, 2006.
* To be filed by amendment.
†
Registrant has omitted portions of the referenced exhibit and
filed such exhibit separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment
under Rule 406 promulgated under the Securities Act of 1933.
(b) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or the information is included in the
Registrant’s consolidated financial statements or related
notes.
ITEM 17.
Undertakings.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to provisions
described in Item 14 above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, State of California,
on December , 2006.
GLU MOBILE INC.
By:
Albert A. Pimentel
Chief Financial Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints L. Gregory
Ballard and Albert A. Pimentel, and each of them, his or her
true and lawful
attorneys-in-fact
and agents with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities,
to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities
Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said
attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said
attorneys-in-fact
and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done or by virtue
hereof.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
Name
Title
Date
Principal Executive Officer:
L.
Gregory Ballard
President, Chief Executive Officer
and Director
December ,
2006
Principal Financial Officer:
Albert
A. Pimentel
Executive Vice President and Chief
Financial Officer
Publishing and Distribution
Agreement dated as of October 1, 2004, as amended, by and
among PopCap Games, Inc., PopCap Games International, Ltd. and
the Registrant.
10
.08*†
Wireless Games Agreement dated as
of December 8, 2004, as amended, by and between Celador
International Limited and the Registrant.
10
.09*†
Wireless Content License Agreement
dated as of December 16, 2004, as amended, by and between
Fox Mobile Entertainment Inc. and the Registrant.
10
.10*†
Wireless Information Service
Licensing Agreement dated as of October 15, 2004 by and
between Cingular Wireless, LLC and the Registrant.
10
.11*†
BREW Application License Agreement
dated as of February 12, 2002 by and between Cellco
Partnership (d.b.a. Verizon Wireless) and the Registrant and the
BREW Developer Agreement dated as of November 2, 2001, as
amended, by and between Qualcomm Inc. and the Registrant.
10
.12*†
Master Reseller Agreement dated as
of July 7, 2003 by and between Vodafone Global Content
Services Limited and the Registrant.
10
.13
Amended and Restated Voting
Agreement dated as of March 29, 2006 by and among the
persons listed on Exhibit A attached thereto, certain
shareholders listed on Exhibit B attached thereto, the
iFone Shareholders listed on Exhibit C attached thereto and
the Registrant.
Employee Contract dated
July 25, 2003 by and between Kristian Segerstrale and the
Registrant.
10
.19
Loan and Security Agreement dated
as of May 2, 2006 by and between Pinnacle Ventures LLC and
the Registrant.
10
.20
Form of Warrant dated as of
May 2, 2006 by and between Pinnacle Ventures I Equity
Holdings LLC and the Registrant, by and between Pinnacle
Ventures I Affiliates, L.P. and the Registrant, and by and
between Pinnacle Ventures II Equity Holdings, LLC and the
Registrant.
10
.21
Form of Warrant dated as of
March 6, 2003 by and between New Enterprise
Associates 10, LP and the Registrant, by and between Sienna
Limited Partnership III, LP and the Registrant, and by and
between Preston Gates & Ellis Investments LLC and the
Registrant.
Form of Severance and Change in
Control Agreement dated as of March 22, 2006 by and between
L. Gregory Ballard and the Registrant, and by and between
Albert A. Pimentel and the Registrant.
Consent of m:metrics, Inc., a
market research firm, dated as December 8, 2006.
99
.02
Consent of Juniper Research, a
market research firm, dated as of December 11, 2006.
* To be filed by amendment.
†
Registrant has omitted portions of the referenced exhibit and
filed such exhibit separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment
under Rule 406 promulgated under the Securities Act of 1933.
II-10
Dates Referenced Herein and Documents Incorporated by Reference
