znga-10q_20170331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from                     to                   

Commission File Number: 001-35375

 

Zynga Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

42-1733483

(State of or other jurisdiction of incorporation or organization)

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

 

 

699 Eighth Street

 

San Francisco, CA

94103

(Address of principal executive offices)

(Zip Code)

 

(855) 449-9642

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

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

 

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

As of April 14, 2017, there were 769,441,717 shares of the Registrant’s Class A common stock outstanding, 70,142,153 shares of the Registrant’s Class B common stock outstanding and 20,517,472 shares of the Registrant’s Class C common stock outstanding.

 

 


 

Zynga Inc.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

 

 

 

 

 

Page

Cautionary Note Regarding Forward-Looking Statements

 

1

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

2

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016

 

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

27

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Issuer Purchase of Equity Securities

 

50

 

 

 

 

 

 

Item 5.

Other Information

 

50

 

 

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

 

 

 

Signatures

 

52

 

 

 

 

 

 

 

Exhibit Index

 

53

 

Zynga, the Zynga logo and other trademarks or service marks of Zynga appearing in this report are the property of Zynga. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.

 

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward looking statements.  All statements, other than statements of historical fact, made in this Quarterly Report on Form 10-Q are forward looking.  Examples of forward-looking statements include statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie the forward-looking statements. Forward-looking statements often include words such as “outlook,” “projected,” “intends,” “will,” “anticipate,” “believe,” “target,” “expect,” and statements in the future tense are generally forward-looking.

We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves significant risks, uncertainties and assumptions, including those described in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and industry. New risks may also emerge from time to time. It is not possible for our management to predict all of the risks related to our business and operations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur, and reported results should not be considered as an indication of future performance. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Except as required by law, we undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.

 

 

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Zynga Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

720,437

 

 

$

852,467

 

Accounts receivable, net of allowance of $0 at March 31, 2017 and December 31, 2016

 

 

86,224

 

 

 

77,260

 

Income tax receivable

 

 

276

 

 

 

296

 

Restricted cash

 

 

11,382

 

 

 

6,199

 

Prepaid expenses and other current assets

 

 

34,936

 

 

 

29,254

 

Total current assets

 

 

853,255

 

 

 

965,476

 

Goodwill

 

 

632,608

 

 

 

613,335

 

Other intangible assets, net

 

 

47,886

 

 

 

25,430

 

Property and equipment, net

 

 

268,884

 

 

 

269,439

 

Restricted cash

 

 

250

 

 

 

3,050

 

Prepaid expenses and other long-term assets

 

 

29,205

 

 

 

29,119

 

Total assets

 

$

1,832,088

 

 

$

1,905,849

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,803

 

 

$

23,999

 

Income tax payable

 

 

3,141

 

 

 

1,889

 

Other current liabilities

 

 

68,979

 

 

 

75,754

 

Deferred revenue

 

 

155,102

 

 

 

141,998

 

Total current liabilities

 

 

241,025

 

 

 

243,640

 

Deferred revenue

 

 

128

 

 

 

158

 

Deferred tax liabilities

 

 

5,848

 

 

 

5,791

 

Other non-current liabilities

 

 

24,459

 

 

 

75,596

 

Total liabilities

 

 

271,460

 

 

 

325,185

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.00000625 par value, and additional paid in capital - authorized

   shares: 2,020,517; shares outstanding: 862,213 shares (Class A, 771,535, Class B,

   70,161 Class C, 20,517) as of March 31, 2017 and 886,850 (Class A, 770,269,

   Class B, 96,064, Class C, 20,517) as of December 31, 2016

 

 

3,373,988

 

 

 

3,349,714

 

Accumulated other comprehensive income (loss)

 

 

(123,190

)

 

 

(128,694

)

Accumulated deficit

 

 

(1,690,170

)

 

 

(1,640,356

)

Total stockholders’ equity

 

 

1,560,628

 

 

 

1,580,664

 

Total liabilities and stockholders’ equity

 

$

1,832,088

 

 

$

1,905,849

 

 

See accompanying notes.

 

 

2


Zynga Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Online game

 

$

153,481

 

 

$

137,057

 

Advertising and other

 

 

40,803

 

 

 

49,664

 

Total revenue

 

 

194,284

 

 

 

186,721

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

64,877

 

 

 

57,139

 

Research and development

 

 

69,202

 

 

 

87,737

 

Sales and marketing

 

 

46,620

 

 

 

46,344

 

General and administrative

 

 

22,565

 

 

 

22,384

 

Total costs and expenses

 

 

203,264

 

 

 

213,604

 

Income (loss) from operations

 

 

(8,980

)

 

 

(26,883

)

Interest income

 

 

937

 

 

 

705

 

Other income (expense), net

 

 

1,436

 

 

 

2,100

 

Income (loss) before income taxes

 

 

(6,607

)

 

 

(24,078

)

Provision for (benefit from) income taxes

 

 

2,867

 

 

 

2,480

 

Net income (loss)

 

$

(9,474

)

 

$

(26,558

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.03

)

Diluted

 

$

(0.01

)

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income

   (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

875,712

 

 

 

871,093

 

Diluted

 

 

875,712

 

 

 

871,093

 

 

See accompanying notes.

 

 

3


Zynga Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net income (loss)

 

$

(9,474

)

 

$

(26,558

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

5,481

 

 

 

(17,329

)

Net change on unrealized gains (losses) on available-for-sale

   investments, net of tax

 

 

23

 

 

 

136

 

Other comprehensive income (loss):

 

 

5,504

 

 

 

(17,193

)

Comprehensive income (loss):

 

$

(3,970

)

 

$

(43,751

)

 

See accompanying notes.

 

 

4


Zynga Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,474

)

 

$

(26,558

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,881

 

 

 

10,812

 

Stock-based expense

 

 

17,526

 

 

 

29,608

 

(Gain) loss from sales of investments, assets and other, net

 

 

38

 

 

 

11

 

Accretion and amortization on marketable securities

 

 

 

 

 

259

 

Change in deferred income taxes and other

 

 

1,075

 

 

 

1,422

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(8,964

)

 

 

7,217

 

Income tax receivable

 

 

20

 

 

 

595

 

Other assets

 

 

(5,923

)

 

 

(1,812

)

Accounts payable

 

 

(8,802

)

 

 

(12,818

)

Deferred revenue

 

 

13,074

 

 

 

(5,096

)

Income tax payable

 

 

1,252

 

 

 

 

Other liabilities

 

 

(13,422

)

 

 

(6,945

)

Net cash provided by (used in) operating activities

 

 

(4,719

)

 

 

(3,305

)

Investing activities:

 

 

 

 

 

 

 

 

Sales and maturities of marketable securities

 

 

 

 

 

118,900

 

Acquisition of property and equipment

 

 

(2,285

)

 

 

(2,654

)

Business acquisitions, net of cash acquired

 

 

(35,081

)

 

 

(12,500

)

Proceeds from sale of property and equipment

 

 

15

 

 

 

398

 

Other investing activities, net

 

 

(7,390

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(44,741

)

 

 

104,144

 

Financing activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of equity awards

 

 

(415

)

 

 

(919

)

Repurchases of common stock

 

 

(86,164

)

 

 

(112,392

)

Proceeds from employee stock purchase plan and exercise of stock options

 

 

3,152

 

 

 

2,476

 

Net cash provided by (used in) financing activities

 

 

(83,427

)

 

 

(110,835

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

857

 

 

 

(770

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(132,030

)

 

 

(10,766

)

Cash and cash equivalents, beginning of period

 

 

852,467

 

 

 

742,217

 

Cash and cash equivalents, end of period

 

$

720,437

 

 

$

731,451

 

 

See accompanying notes.

 

 

5


Zynga Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Overview and Summary of Significant Accounting Policies

Organization and Description of Business

Zynga Inc. (“Zynga,” “we” or the “Company”) is a leading provider of social game services. We develop, market and operate social games as live services played on mobile platforms such as iOS and Android and social networking sites such as Facebook. Generally, all of our games are free to play, and we generate revenue through the in-game sale of virtual goods and advertising services. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S. as well as various international office locations in North America, India and Europe.

We completed our initial public offering in December 2011 and our Class A common stock is listed on the NASDAQ Global Select Market under the symbol “ZNGA.”

Basis of Presentation and Consolidation

The accompanying consolidated financial statements are presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the operations of us and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Unaudited Interim Financial Information

The accompanying interim consolidated balance sheet as of March 31, 2017, the interim consolidated statements of operations, the interim consolidated statements of comprehensive income (loss) for the three months ended March 31, 2017 and 2016, the interim consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 and the related footnote disclosures are unaudited. These unaudited consolidated interim financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited consolidated interim financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three months ended March 31, 2017 are not necessarily indicative of the results expected for the full fiscal year or any other future period.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated lives of virtual goods that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, accounting for business combinations, stock-based expense and evaluation of goodwill, intangible assets, and long-lived assets for impairment. Actual results could differ materially from those estimates.

In the first quarter of 2017, there were no changes in our estimated average life of durable virtual goods or discontinued games that required adjusting the recognition period of deferred revenue generated in prior periods. In the first quarter of 2016, changes in our estimated average life of durable virtual goods for various games resulted in an increase in revenue and income from operations of $2.6 million, which was the result of adjusting the remaining recognition period of deferred revenue generated in prior periods at the time of a change in estimate. We also recognized $1.3 million of revenue and income from operations in the first quarter of 2016 due to changes in our estimated average life of durable virtual goods for games that have been discontinued as there is no further service obligation after the closure of these games. These changes in estimates had a $0.01 per share impact on our reported earnings per share in the first quarter of 2016.

6


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 supersedes the existing revenue recognition guidance in “Revenue Recognition (Topic 605)” and is effective for interim and annual reporting periods beginning after December 15, 2017. The standard permits the use of either a full retrospective or modified retrospective (cumulative effect) transition method and we will apply the modified retrospective approach when we adopt the standard in the first quarter of 2018.

 

Based on our initial assessment, the impact of the application of the new standard will likely result in a change in timing of our revenue recognition for software licensing related to NaturalMotion technology, which is currently recognized as revenue over time, rather than at a point in time. Under the new standard, we will be required to estimate the standalone selling price of software licenses separate from any associated maintenance services and recognize revenue for the license when control is transferred. While software licensing related to NaturalMotion is not material to our revenue, this will likely result in an acceleration in revenue recognition compared to the current method. Another key change in the standard that impacts our revenue recognition relates to the explicit collectability threshold a contract must meet before revenue can be recognized. For certain advertising arrangements where we have assessed that collectability is not reasonably assured due to unfavorable payment terms or a history of slow collections, the current practice is to defer revenue recognition until payment is received. However, under the new standard, we will be required to make an assessment of collectability at the inception of the contract and if deemed probable for collection, recognize revenue as advertisements are delivered, which will result in an acceleration in revenue recognition compared to the current method. While we are still completing our assessment for the population of advertisers under consideration, we do not expect this change to have a material impact on our revenue. We are currently in the process of evaluating other possible impacts on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. For lessors, accounting for leases will remain substantially the same as in prior periods. The standard is effective in the first quarter of 2019 and early adoption is permitted. While the Company expects adoption of this new standard to increase reported assets and liabilities, we are currently in the process of evaluating the timing of adoption of ASU 2016-02 as well as the full impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting”, which simplifies and improves several aspects of the accounting for employee share-based payment transactions for public entities. The new guidance requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of operations when the awards vest or are settled, eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statement of cash flows and provides the option to recognize share-based compensation expense with actual forfeitures recognized as they occur, rather than estimate expected forfeitures. We adopted the standard in the first quarter of 2017. Upon adoption, we recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $48.2 million to retained earnings (a reduction in the accumulated deficit). The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Without the valuation allowance, our deferred tax asset would have increased by $97.3 million. We elected to apply the change in presentation of excess tax benefits as an operating activity in the statement of cash flow prospectively and thus no prior periods were adjusted. We also elected to account for forfeitures as they occur using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $3.9 million to retained earnings (an increase in the accumulated deficit).

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on specific issues related to how certain cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. We will adopt the standard in the first quarter of 2018 and are currently in the process of evaluating the impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU  2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows, with the objective of reducing diversity in practice. This guidance is effective for interim and annual reporting periods beginning after December 31, 2017 and early adoption is permitted. We will adopt the standard in the first quarter of 2018 and are currently in the process of evaluating the impact on our consolidated financial statements and related disclosures.

7


In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business,” which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The standard is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. We will adopt the standard in the first quarter of 2018 and are currently in the process of evaluating the impact on our consolidated financial statements and related disclosures.

 

2. Fair Value Measurements

Our financial instruments consist of cash equivalents and accounts receivable. Accounts receivable, net is stated at its carrying value, which approximates fair value.

Cash equivalents, consisting of money market funds and corporate debt securities, are carried at fair value, which is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants.

Our contingent consideration liability represents the estimated fair value of the additional consideration payable in connection with our acquisitions of Zindagi Games, Inc. (“Zindagi”) and PuzzleSocial, Inc. (“PuzzleSocial”). The amounts payable are contingent upon the achievement of certain performance targets. We estimated the acquisition date fair value of the contingent consideration payable using discounted cash flow models, and applied a discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. The significant unobservable inputs used in the fair value measurement of the acquisition-related contingent consideration payable were forecasted future cash flows and the timing of those cash flows and the risk-adjusted discount rate. Significant changes in actual and forecasted future cash flows may result in significant charges or benefits to our future operating expenses. We recorded the change in estimated fair value of the contingent consideration liabilities for our acquisitions as a net benefit of $0.1 million in the first quarter of 2017 within research and development expense in our consolidated statement of operations.

In the first quarter of 2016, we acquired Zindagi. Under the terms of the acquisition agreement, the contingent consideration of up to $60.0 million may be payable based on the achievement of certain future performance targets during the three year period following the acquisition date. We initially estimated the acquisition date fair value of the contingent consideration payable using discounted cash flow models, and applied a risk-adjusted discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. As of March 31, 2017, the current contingent consideration liability is $0.2 million. There was no change in the estimated fair value of the contingent consideration liability from December 31, 2016.

In the third quarter of 2016, we acquired PuzzleSocial. Under the terms of the acquisition agreement, the contingent consideration of up to $42.0 million may be payable based on the achievement of certain future performance targets during the two and a half year period following the acquisition date. We initially estimated the acquisition date fair value of the contingent consideration payable using discounted cash flow models, and applied a risk-adjusted discount rate that appropriately captured a market participant’s view of the risk associated with the obligations. As of March 31, 2017, the current contingent consideration liability is $0.6 million, reflecting a $0.1 million decrease in the estimated fair value of the contingent consideration liability from December 31, 2016.

Fair value is a market-based measurement that should be determined based on assumptions that knowledgeable and willing market participants would use in pricing an asset or liability. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. We use a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Includes inputs, other than Level 1 inputs, that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs that are supported by little or no market activity.

8


The composition of our financial assets and liabilities among the three Levels of the fair value hierarchy are as follows (in thousands):

 

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

379,050

 

 

$

 

 

$

 

 

$

379,050

 

Corporate debt securities (1)

 

 

 

 

 

201,083

 

 

 

 

 

 

201,083

 

Total

 

$

379,050

 

 

$

201,083

 

 

$

 

 

$

580,133

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

807

 

 

$

807

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

439,330

 

 

$

 

 

$

 

 

$

439,330

 

U.S. government and government agency debt securities

 

 

 

 

 

19,987

 

 

 

 

 

 

19,987

 

Corporate debt securities (1)

 

 

 

 

 

269,768

 

 

 

 

 

 

269,768

 

Total

 

$

439,330

 

 

$

289,755

 

 

$

 

 

$

729,085

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

901

 

 

$

901

 

 

(1)

Includes amounts classified as cash and cash equivalents.

The following table presents the activity for the first quarter of 2017 related to our Level 3 liabilities (in thousands):

 

Level 3 Liabilities:

 

Zindagi

 

 

PuzzleSocial

 

 

Total

 

Contingent consideration –  December 31, 2016

 

$

180

 

 

$

721

 

 

$

901

 

Fair value adjustments

 

 

 

 

 

(94

)

 

 

(94

)

Contingent consideration –  March 31, 2017

 

$

180

 

 

$

627

 

 

$

807

 

 

 

 

 

 

 

3. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Computer equipment

 

$

28,839

 

 

$

27,046

 

Software

 

 

31,941

 

 

 

31,102

 

Land

 

 

89,130

 

 

 

89,130

 

Building

 

 

197,606

 

 

 

197,689

 

Furniture and fixtures

 

 

10,529

 

 

 

10,494

 

Leasehold improvements

 

 

8,355

 

 

 

8,071

 

 

 

$

366,400

 

 

$

363,532

 

Less accumulated depreciation

 

 

(97,516

)

 

 

(94,093

)

Total property and equipment, net

 

$

268,884

 

 

$

269,439

 

 

 

 

4. Acquisitions

Acquisition of Solitaire Mobile Gaming Applications

 

On February 14, 2017, we purchased Solitaire mobile game applications from Harpan LLC (“Harpan”) and, in connection with the transaction, executed noncompetition agreements with the founders. We acquired these games to expand our card game portfolio. The total consideration paid to Harpan was approximately $42.5 million in cash, of which approximately $35.1 million was allocated to the business combination and the remaining $7.4 million was allocated to the noncompetition agreements with a useful life of 2 years. We refer to the Solitaire mobile games acquired from Harpan as our “Solitaire games”.

9


The following table summarizes the purchase date fair value of acquired net intangible assets from Harpan (in thousands, unaudited):

 

 

 

Total

 

Developed technology, useful life of 5 years

 

$

20,471

 

Goodwill

 

 

14,610

 

Total

 

$

35,081

 

 

Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of the net intangible assets acquired and is primarily attributable to the expected synergies at the time of the acquisition.

 

The results of operations for Solitaire games have been included in our consolidated statement of operations since the date of acquisition. Pro forma results of operations related to our acquisition have not been presented as they are not material to our consolidated statement of operations.

 

5. Goodwill and Other Intangible Assets

Changes in the carrying value of goodwill from December 31, 2016 to March 31, 2017 are as follows (in thousands):

 

Goodwill –  December 31, 2016

 

$

613,335

 

Additions

 

 

14,610

 

Foreign currency translation and other adjustments (1)

 

 

4,663

 

Goodwill –  March 31, 2017

 

$

632,608

 

 

 

(1)

The increase is primarily related to cumulative translation gains (losses) on goodwill associated with the acquisition of NaturalMotion denominated in British Pounds.

 

The details of our acquisition-related intangible assets as of March 31, 2017 are as follows (in thousands):

 

 

 

March 31, 2017

 

 

 

Gross Carrying

Value

 

 

Accumulated Amortization

 

 

Net Book Value

 

Developed technology

 

$

179,472

 

 

$

(138,167

)

 

$

41,305

 

Trademarks, branding and domain names

 

 

16,290

 

 

 

(10,170

)

 

 

6,120

 

Acquired lease intangibles

 

 

5,708

 

 

 

(5,247

)

 

 

461

 

Total

 

$

201,470

 

 

$

(153,584

)

 

$

47,886

 

 

The details of our acquisition-related intangible assets as of December 31, 2016 are as follows (in thousands):

 

 

 

December 31, 2016

 

 

 

Gross Carrying Value

 

 

Accumulated Amortization

 

 

Net Book Value

 

Developed technology

 

$

150,826

 

 

$

(132,123

)

 

$

18,703

 

Trademarks, branding and domain names

 

 

16,290

 

 

 

(10,063

)

 

 

6,227

 

Acquired lease intangibles

 

 

5,708

 

 

 

(5,208

)

 

 

500

 

Total

 

$

172,824

 

 

$

(147,394

)

 

$

25,430

 

 

10


These assets include $6.1 million of indefinite-lived intangible assets. The remaining assets were, and continue to be, amortized on a straight-line basis.

As of March 31, 2017, future amortization expense related to the intangible assets is expected to be recognized as shown below (in thousands):

 

Quarter ending March 31:

 

 

 

 

2017

 

$

10,778

 

2018

 

 

12,258

 

2019

 

 

7,525

 

2020

 

 

6,293

 

2021 and thereafter

 

 

4,912

 

Total

 

$

41,766

 

 

 

 

6. Income Taxes

The expense from income taxes increased by $0.4 million in the first quarter of 2017 compared to the same period of the prior year. This increase was primarily attributable to an increase in foreign tax expense of $0.4 million related to a change in our jurisdictional mix of earnings.

Once the Company is profitable, we expect our global effective tax rate to be less than the U.S. statutory income tax rate.

 

 

7. Other Current Liabilities

Other current liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued accounts payable

 

$

25,170

 

 

$

24,119

 

Accrued compensation liability

 

 

14,677

 

 

 

22,554

 

Accrued restructuring liability

 

 

4,083

 

 

 

4,987

 

Other current liabilities

 

 

25,049

 

 

 

24,094

 

Total other current liabilities

 

$

68,979

 

 

$

75,754

 

 

Accrued compensation liability represents employee bonus and other payroll withholding expenses. Accrued restructuring liability represents amounts payable related to our restructuring plans. Other current liabilities include various expenses that we accrue for transaction taxes, customer deposits, vendor expenses and amounts held in escrow related to acquisitions.

 

 

8. Restructuring

During the second quarter of 2015, our Board of Directors authorized, and we implemented a restructuring plan, which included a reduction in work force as part of the overall plan to reduce the Company’s long-term cost structure. As a result of ongoing initiatives associated with this restructuring, we recorded a net benefit of $0.8 million in the first quarter of 2017, of which $0.9 million of benefit was classified as research in development within our consolidated statement of operations, offset by $0.1 million of expense classified as general and administrative within our consolidated statement of operations. As of March 31, 2017, the remaining liability related to the restructuring is $17.2 million and is expected to be paid out over the next 5.2 years.

The following table presents the restructuring plan activity for the first quarter of 2017 (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

Restructuring liability - beginning of period

 

$

19,388

 

Restructuring expense and adjustments

 

 

(800

)

Cash payments

 

 

(1,384

)

Restructuring liability - end of period

 

$

17,204

 

 

 

 

11


 

 

9. Stockholders’ Equity

We recorded stock-based expense related to grants of employee and consultant stock options, restricted stock and restricted stock units (“ZSUs”) in our consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cost of revenue

 

$

619

 

 

$

649

 

Research and development

 

 

11,713

 

 

 

24,203

 

Sales and marketing

 

 

1,787

 

 

 

1,991

 

General and administrative

 

 

3,407

 

 

 

2,765

 

Total stock-based expense

 

$

17,526

 

 

$

29,608

 

 

The following table shows stock option activity for the first quarter of 2017 (in thousands, except weighted-average exercise price and weighted-average contractual term):

 

 

 

Outstanding Options

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

Intrinsic Value of

 

 

Average

 

 

 

 

 

 

 

Exercise

 

 

Stock Options

 

 

Contractual Term

 

 

 

Stock Options

 

 

Price

 

 

Outstanding

 

 

(in years)

 

Balance as of December 31, 2016

 

 

36,858

 

 

$

2.08

 

 

$

26,411

 

 

 

6.81

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

(591

)

 

 

3.74

 

 

 

 

 

 

 

 

 

Exercised

 

 

(957

)

 

 

0.64

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2017

 

 

35,310

 

 

$

2.09

 

 

$

30,240

 

 

 

6.47

 

 

The following table shows a summary of ZSU activity for the first quarter of 2017 (in thousands, except weighted-average grant date fair value):

 

 

 

Outstanding ZSUs

 

 

 

 

 

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

Average Grant Date

 

 

Intrinsic Value of

 

 

 

Shares

 

 

Fair Value

 

 

Unvested ZSUs

 

Unvested as of December 31, 2016

 

 

59,452

 

 

$

2.66

 

 

$

152,792

 

Granted

 

 

4,016

 

 

 

2.80

 

 

 

 

 

Vested

 

 

(4,236

)

 

 

2.79

 

 

 

 

 

Forfeited and cancelled

 

 

(7,824

)

 

 

2.45

 

 

 

 

 

Unvested as of March 31, 2017

 

 

51,408

 

 

$

2.69

 

 

$

146,513

 

 

The following table shows a summary of changes in accumulated other comprehensive income by component for the first quarter of 2017 (in thousands):

 

 

 

Foreign Currency Translation

 

 

Unrealized Gains (Losses) on

Available-for-Sale

Securities

 

 

Total

 

Balance as of December 31, 2016

 

$

(128,671

)

 

$

(23

)

 

$

(128,694

)

Other comprehensive income (loss) before

   reclassifications

 

 

5,481

 

 

 

23

 

 

 

5,504

 

Net current-period other comprehensive income

   (loss)

 

 

5,481

 

 

 

23

 

 

 

5,504

 

Balance as of March 31, 2017

 

$

(123,190

)

 

$

 

 

$

(123,190

)

 

In November 2016, we announced that our Board Directors authorized a share repurchase program allowing us to repurchase up to $200 million of our outstanding shares of Class A common stock (“2016 Share Repurchase Program”). In the first quarter of 2017, we repurchased 31.2 million shares of our Class A common stock under the 2016 Share Repurchase Program at a weighted average price of $2.70 per share for a total of $84.5 million. As of March 31, 2017, in the aggregate, we repurchased 43.6 million shares under the 2016 Share Repurchase Program at an average price of $2.72 per share for a total of $118.7 million.

12


 

10. Net Income (Loss) Per Share of Common Stock

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. In computing diluted net income (loss) attributable to common stockholders, net income (loss) is re-allocated to reflect the potential impact of dilutive securities, including stock options, warrants, unvested restricted stock and unvested ZSUs. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive securities. For periods in which we have generated a net loss or there is no income attributable to common stockholders, we do not include stock options, warrants, unvested restricted stock and unvested ZSUs in our computation of diluted net income (loss) per share, as the impact of these awards is anti-dilutive. The net per share amounts are the same for Class A, Class B and Class C common stock because the holders of each class are legally entitled to equal per share distributions whether through dividend or distribution. Further, as we assume the conversion of Class B and Class C common shares into Class A common shares (on a one-to-one basis) for the Class A diluted net income (loss) per share computation, the net income (loss) is equal to total net income (loss) for that computation.

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock (in thousands, except per share data):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

Class

 

 

Class

 

 

Class

 

 

Class

 

 

Class

 

 

Class

 

 

 

A

 

 

B

 

 

C

 

 

A

 

 

B

 

 

C

 

 

 

(unaudited)

 

BASIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common

   stockholders

 

$

(8,356

)

 

$

(896

)

 

$

(222

)

 

$

(22,471

)

 

$

(3,461

)

 

$

(626

)

Weighted-average common shares outstanding

 

 

772,364

 

 

 

82,831

 

 

 

20,517

 

 

 

737,061

 

 

 

113,515

 

 

 

20,517

 

Basic net income (loss) per share

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.03

)

 

$

(0.03

)

 

$

(0.03

)

DILUTED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common

   stockholders

 

$

(8,356

)

 

$

(896

)

 

$

(222

)

 

$

(22,471

)

 

$

(3,461

)

 

$

(626

)

Reallocation of net income (loss) as a result of

   conversion of Class C shares to Class A shares

 

 

(222

)

 

 

 

 

 

 

 

 

(626

)

 

 

 

 

 

 

Reallocation of net income (loss) as a result of

   conversion of Class B shares to Class A shares

 

 

(896

)

 

 

 

 

 

 

 

 

(3,461

)

 

 

 

 

 

 

Net income (loss) attributable to common

   stockholders-diluted

 

$

(9,474

)

 

$

(896

)

 

$

(222

)

 

$

(26,558

)

 

$

(3,461

)

 

$

(626

)

Weighted-average common shares outstanding-basic

 

 

772,364

 

 

 

82,831