znga-10q_20170630.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 June 30, 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 July 15, 2017, there were 776,684,172 shares of the Registrant’s Class A common stock outstanding, 68,259,136 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 June 30, 2017 and December 31, 2016

 

2

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016

 

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

 

28

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

28

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

29

 

 

 

 

 

 

Item 1A.

Risk Factors

 

29

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Issuer Purchase of Equity Securities

 

49

 

 

 

 

 

 

Item 5.

Other Information

 

49

 

 

 

 

 

 

Item 6.

Exhibits

 

49

 

 

 

 

 

 

 

Signatures

 

51

 

 

 

 

 

 

 

Exhibit Index

 

52

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

738,975

 

 

$

852,467

 

Accounts receivable, net of allowance of $0 at June 30, 2017 and December 31, 2016

 

 

85,228

 

 

 

77,260

 

Income tax receivable

 

 

249

 

 

 

296

 

Restricted cash

 

 

11,182

 

 

 

6,199

 

Prepaid expenses and other current assets

 

 

28,078

 

 

 

29,254

 

Total current assets

 

 

863,712

 

 

 

965,476

 

Goodwill

 

 

642,681

 

 

 

613,335

 

Other intangible assets, net

 

 

43,896

 

 

 

25,430

 

Property and equipment, net

 

 

267,453

 

 

 

269,439

 

Restricted cash

 

 

250

 

 

 

3,050

 

Prepaid expenses and other long-term assets

 

 

39,401

 

 

 

29,119

 

Total assets

 

$

1,857,393

 

 

$

1,905,849

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,264

 

 

$

23,999

 

Income tax payable

 

 

4,638

 

 

 

1,889

 

Other current liabilities

 

 

76,935

 

 

 

75,754

 

Deferred revenue

 

 

155,085

 

 

 

141,998

 

Total current liabilities

 

 

250,922

 

 

 

243,640

 

Deferred revenue

 

 

92

 

 

 

158

 

Deferred tax liabilities

 

 

6,259

 

 

 

5,791

 

Other non-current liabilities

 

 

23,213

 

 

 

75,596

 

Total liabilities

 

 

280,486

 

 

 

325,185

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   shares: 2,020,517; shares outstanding: 865,461 shares (Class A, 776,685, Class B,

   68,259 Class C, 20,517) as of June 30, 2017 and 886,850 (Class A, 770,269,

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

 

 

3,390,996

 

 

 

3,349,714

 

Accumulated other comprehensive income (loss)

 

 

(111,686

)

 

 

(128,694

)

Accumulated deficit

 

 

(1,702,403

)

 

 

(1,640,356

)

Total stockholders’ equity

 

 

1,576,907

 

 

 

1,580,664

 

Total liabilities and stockholders’ equity

 

$

1,857,393

 

 

$

1,905,849

 

 

See accompanying notes.

 

 

2


Zynga Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Online game

 

$

163,745

 

 

$

135,823

 

 

$

317,226

 

 

$

272,880

 

Advertising and other

 

 

45,486

 

 

 

45,912

 

 

 

86,289

 

 

 

95,576

 

Total revenue

 

 

209,231

 

 

 

181,735

 

 

 

403,515

 

 

 

368,456

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

64,172

 

 

 

56,103

 

 

 

129,049

 

 

 

113,242

 

Research and development

 

 

64,615

 

 

 

66,233

 

 

 

133,817

 

 

 

153,970

 

Sales and marketing

 

 

51,201

 

 

 

40,631

 

 

 

97,821

 

 

 

86,975

 

General and administrative

 

 

23,551

 

 

 

25,374

 

 

 

46,116

 

 

 

47,758

 

Total costs and expenses

 

 

203,539

 

 

 

188,341

 

 

 

406,803

 

 

 

401,945

 

Income (loss) from operations

 

 

5,692

 

 

 

(6,606

)

 

 

(3,288

)

 

 

(33,489

)

Interest income

 

 

1,109

 

 

 

761

 

 

 

2,046

 

 

 

1,466

 

Other income (expense), net

 

 

1,614

 

 

 

1,905

 

 

 

3,050

 

 

 

4,005

 

Income (loss) before income taxes

 

 

8,415

 

 

 

(3,940

)

 

 

1,808

 

 

 

(28,018

)

Provision for (benefit from) income taxes

 

 

3,322

 

 

 

506

 

 

 

6,189

 

 

 

2,986

 

Net income (loss)

 

$

5,093

 

 

$

(4,446

)

 

$

(4,381

)

 

$

(31,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.04

)

Diluted

 

$

0.01

 

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income

   (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

863,125

 

 

 

873,393

 

 

 

869,025

 

 

 

872,243

 

Diluted

 

 

887,991

 

 

 

873,393

 

 

 

869,025

 

 

 

872,243

 

 

See accompanying notes.

 

 

3


Zynga Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

5,093

 

 

$

(4,446

)

 

$

(4,381

)

 

$

(31,004

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

11,508

 

 

 

(30,931

)

 

 

16,989

 

 

 

(48,260

)

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

   investments, net of tax

 

 

(4

)

 

 

(6

)

 

 

19

 

 

 

130

 

Other comprehensive income (loss), net of tax

 

 

11,504

 

 

 

(30,937

)

 

 

17,008

 

 

 

(48,130

)

Comprehensive income (loss):

 

$

16,597

 

 

$

(35,383

)

 

$

12,627

 

 

$

(79,134

)

 

See accompanying notes.

 

 

4


Zynga Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,381

)

 

$

(31,004

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,279

 

 

 

21,647

 

Stock-based compensation expense

 

 

33,758

 

 

 

56,507

 

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

 

 

(184

)

 

 

242

 

Accretion and amortization on marketable securities

 

 

 

 

 

311

 

Change in deferred income taxes and other

 

 

2,268

 

 

 

1,570

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(7,968

)

 

 

14,536

 

Income tax receivable

 

 

47

 

 

 

772

 

Other assets

 

 

(2,641

)

 

 

(4,442

)

Accounts payable

 

 

(8,341

)

 

 

(14,316

)

Deferred revenue

 

 

13,021

 

 

 

(12,178

)

Income tax payable

 

 

2,749

 

 

 

 

Other liabilities

 

 

(11,496

)

 

 

(22,404

)

Net cash provided by (used in) operating activities

 

 

33,111

 

 

 

11,241

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Sales and maturities of marketable securities

 

 

 

 

 

204,802

 

Acquisition of property and equipment

 

 

(4,141

)

 

 

(3,947

)

Business acquisitions, net of cash acquired

 

 

(35,081

)

 

 

(14,220

)

Proceeds from sale of property and equipment

 

 

148

 

 

 

1,577

 

Other investing activities, net

 

 

(7,225

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(46,299

)

 

 

188,212

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of stockholders' equity awards

 

 

(9,423

)

 

 

(1,665

)

Repurchases of common stock

 

 

(96,924

)

 

 

(112,392

)

Proceeds from issuance of common stock

 

 

4,017

 

 

 

2,885

 

Net cash provided by (used in) financing activities

 

 

(102,330

)

 

 

(111,172

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,026

 

 

 

(2,110

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(113,492

)

 

 

86,171

 

Cash and cash equivalents, beginning of period

 

 

852,467

 

 

 

742,217

 

Cash and cash equivalents, end of period

 

$

738,975

 

 

$

828,388

 

 

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 June 30, 2017, the interim consolidated statements of operations, the interim consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016, the interim consolidated statements of cash flows for the six months ended June 30, 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 and six months ended June 30, 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 compensation expense and evaluation of goodwill, intangible assets, and long-lived assets for impairment. Actual results could differ materially from those estimates.

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 three and six months ended June 30, 2017. Changes in our estimated average life of durable goods resulted in an increase in revenue and income from operations of $1.9 million during the three months ended June 30, 2016 and $2.2 million during the six months ended June 30, 2016, 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 $2.3 million during the three months ended June 30, 2016 and $3.6 million during the six months ended June 30, 2016 of revenue and income from operations, 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 did not impact our reported earnings per share for the three months ended June 30, 2016 and had a $0.01 per share impact on our reported earnings per share in the six months ended June 30, 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 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. We will apply the modified retrospective approach when we adopt the standard in the first quarter of 2018.

 

Based on our initial assessment, a 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 previously disclosed the standard would also have an impact on our software licensing related to NaturalMotion technology, which is currently recognized as revenue over time, rather than a point in time. However, as a result of a restructuring plan we implemented in the second quarter of 2017, we will no longer provide maintenance services for any new software licenses sold after June 30, 2017. Therefore, the requirement 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 will only apply to a small subset of our existing licensing contracts. While this change will result in an acceleration in revenue recognition compared to the current method, the impact is expected to be minimal.  

 

We do not anticipate significant changes to our current business processes and systems to support the adoption of the standard in the first quarter of 2018. We are currently in the process of evaluating required disclosures, including the disaggregation of revenue, reconciliation of contract balances and significant judgments used to allow users of our financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers. We are also continually 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 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 topics related to how certain cash receipts and cash payments are classified in the statement of cash flows. 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. Both standards are effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption is permitted. We will adopt the standards in the first quarter of 2018.  While we continue to assess the potential impact of the new standards, we expect the adoption of these standards will have a material impact on our consolidated financial statements.

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.

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” to simplify the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. We are currently in the process of evaluating the impact on our consolidated financial statements.

 

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.

7


Cash equivalents, consists of money market funds, U.S. government and government agency securities and corporate debt securities, are carried at fair value.  We estimate fair value as the exit price, which represents 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.

As of December 31, 2016, our contingent consideration liability represented the estimated fair value of the additional consideration payable in connection with our acquisitions of Zindagi Games, Inc. (“Zindagi”) in the first quarter of 2016 and PuzzleSocial, Inc. (“PuzzleSocial”) in the third quarter of 2016. Under the terms of the acquisition agreements, the contingent consideration of up to $60.0 million for Zindagi and $42.0 million for PuzzleSocial could be payable based on the achievement of certain future performance targets during a period of time following the acquisition date (three years for Zindagi and two and a half years for PuzzleSocial). We initially estimated the acquisition date fair value of the contingent consideration liabilities 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. As of June 30, 2017, we do not expect the future performance of the acquired games to meet the required performance targets. Accordingly, we reduced the estimated contingent consideration liabilities for Zindagi and PuzzleSocial to zero, and recorded a net benefit of $0.8 million and $0.9 million during the three and six months ended June 30, 2017, respectively within research and development expense in our consolidated statement of operations.

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 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.


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

 

 

 

June 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

381,385

 

 

$

 

 

$

 

 

$

381,385

 

U.S. government and government agency debt securities (1)

 

 

 

 

 

69,913

 

 

 

 

 

 

69,913

 

Corporate debt securities (1)

 

 

 

 

 

129,867

 

 

 

 

 

 

129,867

 

Total

 

$

381,385

 

 

$

199,780

 

 

$

 

 

$

581,165

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

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 (1)

 

 

 

 

 

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.

We did not have any transfers between valuation levels during the six months ended June 30, 2017.

The following table presents the activity for the six months ended June 30, 2017 related to our Level 3 liabilities (in thousands):

 

Level 3 Liabilities:

 

Zindagi

 

 

PuzzleSocial

 

 

Total

 

Contingent consideration liability –  December 31, 2016

 

$

180

 

 

$

721

 

 

$

901

 

Fair value adjustments

 

 

(180

)

 

 

(721

)

 

 

(901

)

Contingent consideration liability –  June 30, 2017

 

$

 

 

$

 

 

$

 

 

 

 

8


 

 

 

3. Property and Equipment

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Computer equipment

 

$

29,406

 

 

$

27,046

 

Software

 

 

31,968

 

 

 

31,102

 

Land

 

 

89,130

 

 

 

89,130

 

Building

 

 

198,721

 

 

 

197,689

 

Furniture and fixtures

 

 

10,612

 

 

 

10,494

 

Leasehold improvements

 

 

8,510

 

 

 

8,071

 

 

 

$

368,347

 

 

$

363,532

 

Less accumulated depreciation

 

 

(100,894

)

 

 

(94,093

)

Total property and equipment, net

 

$

267,453

 

 

$

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”.

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 our 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

The following table presents the goodwill activity for the six months ended June 30, 2017 (in thousands):

 

Goodwill –  December 31, 2016

 

$

613,335

 

Additions

 

 

14,610

 

Foreign currency translation and other adjustments (1)

 

 

14,736

 

Goodwill –  June 30, 2017

 

$

642,681

 

 

 

(1)

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

 

The details of our acquisition-related intangible assets as of June 30, 2017 are as follows (in thousands):

 

 

 

June 30, 2017

 

 

 

Gross Carrying

Value

 

 

Accumulated Amortization

 

 

Net Book Value

 

Developed technology

 

$

181,149

 

 

$

(143,796

)

 

$

37,353

 

Trademarks, branding and domain names

 

 

16,290

 

 

 

(10,170

)

 

 

6,120

 

Acquired lease intangibles

 

 

5,708

 

 

 

(5,285

)

 

 

423

 

Total

 

$

203,147

 

 

$

(159,251

)

 

$

43,896

 

9


 

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

 

 

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 June 30, 2017, future amortization expense related to the intangible assets is expected to be recognized as shown below (in thousands):

 

Year ending December 31:

 

 

 

 

Remaining 2017

 

$

6,729

 

2018

 

 

12,309

 

2019

 

 

7,533

 

2020

 

 

6,293

 

2021 and thereafter

 

 

4,912

 

Total

 

$

37,776

 

 

 

 

6. Income Taxes

The expense from income taxes increased by $2.8 million and $3.2 million in the three and six months ended June 30, 2017, respectively, as compared to the same period of the prior year. The increase in the three and six months ended June 30, 2017 was primarily attributable to an increase in foreign tax expense related to changes 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):

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued accounts payable

 

$

21,922

 

 

$

24,119

 

Accrued compensation liability

 

 

19,738

 

 

 

22,554

 

Accrued restructuring liability

 

 

3,670

 

 

 

4,987

 

Other current liabilities

 

 

31,605

 

 

 

24,094

 

Total other current liabilities

 

$

76,935

 

 

$

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 three months ended June 30, 2017, we recorded a net restructuring charge of $1.4 million, of which $1.3 million was included in research and development and $0.1 million was included in general and administrative within our consolidated statement of operations. During the six months ended June 30, 2017, we recorded a net restructuring charge of $0.6 million, of which $0.3 million was included as research and development and $0.3 million was included as general and administrative within our consolidated statement of operations.

Q2 2017 Restructuring Plan

10


During the second quarter of 2017, we implemented a restructuring plan, which included a reduction in work force to reduce the Company’s long-term cost structure. As a result of ongoing initiatives associated with restructuring, we recorded $1.3 million of expense in the three and six months ended June 30, 2017, which is included in operating expenses in our consolidated statement of operations. The $1.3 million restructuring charge is comprised of $1.2 million of employee severance costs and $0.1 million of other costs. The remaining liability related to the Q2 2017 restructuring plan as of June 30, 2017 was $0.1 million and is expected to be paid out over the next year.

The following table presents the activity for the Q2 2017 restructuring plan (in thousands):

 

 

Q2 2017

 

 

 

Restructuring Plan

 

Restructuring liability –  December 31, 2016

 

$

 

Restructuring expense and adjustments

 

 

1,273

 

Cash payments

 

 

(1,148

)

Restructuring liability –  June 30, 2017

 

$

125

 

Cumulative costs to date, as of June 30, 2017

 

$

1,273

 

Total costs expected to be incurred, as of June 30, 2017

 

$

1,429

 


Q2 2015 Restructuring Plan

During the second quarter of 2015, we implemented a restructuring plan, which included a reduction in work force to reduce the Company’s long-term cost structure. As a result of ongoing initiatives associated with restructuring, we recorded additional expense of $0.1 million in the three months ended June 30, 2017 and a net benefit of $0.7 million in the six months ended June 30, 2017, which is included in operating expenses in our consolidated statement of operations. The remaining liability related to the Q2 2015 restructuring plan as of June 30, 2017 was $15.9 million and is expected to be paid out over the next 4.9 years.

The following table presents the activity for the Q2 2015 restructuring plan (in thousands):

 

 

 

Q2 2015

 

 

 

Restructuring Plan

 

Restructuring liability –  December 31, 2016

 

$

19,388

 

Restructuring expense and adjustments

 

 

(676

)

Cash payments

 

 

(2,772

)

Restructuring liability –  June 30, 2017

 

$

15,940

 

Cumulative costs to date, as of June 30, 2017

 

$

34,099

 

Total costs expected to be incurred, as of June 30, 2017

 

$

34,099

 

 

 

 

 

9. Stockholders’ Equity

We recorded stock-based compensation 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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenue

 

$

371

 

 

$

1,127

 

 

$

990

 

 

$

1,776

 

Research and development

 

 

10,483

 

 

 

20,213

 

 

 

22,196

 

 

 

44,416

 

Sales and marketing

 

 

1,751

 

 

 

2,206

 

 

 

3,538

 

 

 

4,197

 

General and administrative

 

 

3,627

 

 

 

3,353

 

 

 

7,034

 

 

 

6,118

 

Total stock-based compensation expense

 

$

16,232

 

 

$

26,899

 

 

$

33,758

 

 

$

56,507

 

 

11


The following table shows stock option activity for the six months ended June 30, 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

 

 

848

 

 

 

3.62

 

 

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

(2,514

)

 

 

3.58

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,633

)

 

 

0.91

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2017

 

 

33,559

 

 

$

2.06

 

 

$

54,062

 

 

 

6.67

 

 

The following table shows a summary of ZSU activity for the six months ended June 30, 2017 (in thousands, except weighted-average grant date fair value):

 

 

 

Outstanding ZSUs

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

Average Grant Date

 

 

Aggregate

 

 

 

 

 

 

 

Fair Value

 

 

Intrinsic Value of

 

 

 

Shares

 

 

(per share)

 

 

Unvested ZSUs

 

Unvested as of December 31, 2016

 

 

59,452

 

 

$

2.66

 

 

$

152,792

 

Granted

 

 

15,177

 

 

 

3.34

 

 

 

 

 

Vested

 

 

(12,430

)

 

 

2.85