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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-193984

Prospectus

22,200,000 shares

 

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Ordinary Shares

 

 

This is the initial public offering of ordinary shares of King Digital Entertainment plc. Prior to this offering, there has been no public market for our ordinary shares. We are offering 15,533,334 ordinary shares and the selling shareholders identified in this prospectus are offering 6,666,666 ordinary shares. We will not receive any proceeds from the sale of the shares by the selling shareholders.

We have been authorized to list our ordinary shares on the New York Stock Exchange under the symbol “KING.”

Investing in our ordinary shares involves risk. See “Risk Factors” beginning on page 13.

 

     Per share      Total  

Initial public offering price

   $ 22.50       $ 499,500,000   

Underwriting discounts and commissions (1)

   $ 1.29375       $ 28,721,250   

Proceeds, before expenses, to us

   $ 21.20625       $ 329,403,764   

Proceeds, before expenses, to the selling shareholders

   $ 21.20625       $ 141,374,986   

 

 

(1)

See “Underwriting” for a description of compensation payable to the underwriters.

The underwriters have an option to purchase a maximum of 3,330,000 additional ordinary shares from the selling shareholders, less the underwriting discounts and commissions, to cover over-allotment shares, if any. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ordinary shares to purchasers on March 31, 2014.

 

J.P. Morgan  

Credit Suisse

  BofA Merrill Lynch
Barclays   Deutsche Bank   RBC Capital Markets
BMO Capital Markets   Cowen and Company   Pacific Crest Securities
Piper Jaffray   Stifel   Wedbush Securities
    Raine Securities LLC    

March 25, 2014


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TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     13   

Forward-Looking Statements

     37   

Market Data and User Metrics

     38   

Use of Proceeds

     40   

Dividend Policy

     40   

Capitalization

     41   

Dilution

     43   

Corporate Structure

     45   

Selected Consolidated Financial Data

     46   

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

     51   

A Message from King CEO and Co-Founder, Riccardo Zacconi

    
79
  

Business

     81   

Management

     104   

Related Party Transactions

     117   

Major and Selling Shareholders

     120   

Description of Share Capital

     123   

Shares Eligible for Future Sale

     142   

Taxation

     144   

Underwriting

     153   

Enforcement of Civil Liabilities

     160   

Expenses Related to this Offering

     160   

Legal Matters

     160   

Experts

     160   

Where You Can Find Additional Information

     161   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus. Neither we, the selling shareholders nor the underwriters have authorized anyone to provide you with any additional information or information that is different from the information contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any free writing prospectus prepared by us or on our behalf may only be used where it is legal to sell these securities. The information in this prospectus or any free writing prospectus prepared by us or on our behalf is only accurate as of the date of this prospectus or such free writing prospectus.

Until April 19, 2014 (25 days after the commencement of this offering), all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our ordinary shares or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

This document has been prepared on the basis that any offer of shares in any relevant European Economic Area member state will be made pursuant to an exemption under European prospectus law from the requirement to publish a prospectus for offers of shares and does not constitute an offer or solicitation to anyone to purchase shares in any jurisdiction in which such offer or solicitation is not authorized nor to any person to whom it is unlawful to make such an offer or solicitation.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read this entire prospectus carefully, especially “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision.

Overview

We are a leading interactive entertainment company for the mobile world. Our mission is to provide highly engaging content to our audience to match their mobile lifestyles: anywhere, anytime and on any device. In December 2013, an average of 128 million daily active users played our games more than 1.2 billion times per day and, in February 2014, an average of 144 million daily active users played our games more than 1.4 billion times per day. In the fourth quarter of 2013, 73% of our gross bookings were derived from our mobile audience. Our leading games include Candy Crush Saga, Pet Rescue Saga, Farm Heroes Saga, Papa Pear Saga and Bubble Witch Saga. We believe Candy Crush Saga, our top title to date, is one of the largest interactive entertainment franchises of all time.

Our focus is to provide a highly engaging, differentiated entertainment experience where the combination of challenge and progress drives a sense of achievement. We make our games available for free, while players can purchase virtual items priced relative to the entertainment value they provide. We embed social features in our content that enhance the player experience. We build on a unique and passionate company culture predicated on collaboration, humility and respect. We believe all of these in combination have made our content a core part of our audience’s daily entertainment.

We have been a leading developer and publisher of casual games on digital platforms since 2003. Casual games typically include a puzzle element, are easy to learn but hard to master, can be played in a few minutes and are suitable for play on a wide range of devices. They have enjoyed broad appeal since they were first offered in a digital format in the 1980s.

Casual gaming is large and growing quickly, driven by key technology and consumer trends, creating the potential for leading entertainment franchises to emerge from the category. The proliferation of mobile devices is dramatically expanding the global gaming audience, much of which is attracted to casual titles. Social connectivity has become a pervasive feature of interactive entertainment, transforming the scale and economics of the industry through viral content distribution. Lastly, free-to-play business models have vastly increased the revenue potential of the category by eliminating upfront barriers and facilitating streams of small payments throughout the game journey.

We believe we have a repeatable and scalable game development process that is unparalleled in our industry. In the last decade, we have developed a catalog of more than 180 game IPs, which we continuously expand. We refer to our game IP as the intellectual property assets that includes its name, game play mechanic, visual expression, graphics and design. We introduce new game IPs in a tournament format on our royalgames.com website, where we are able to gather rapid feedback from a subset of our sophisticated, highly engaged player base, which we refer to as VIPs. We adapt the most popular game IPs to our proven Saga format for launch on mobile and Facebook. We believe this approach has allowed us to develop games faster, at lower risk and at lower cost than our competitors. The result has been category-leading franchises including Candy Crush Saga, Pet Rescue Saga and Farm Heroes Saga.

We believe the inherently social nature of our games, our data-driven marketing processes, our cross-platform technology infrastructure and massive player network are key competitive advantages. We obtain the vast majority of our installs organically or through viral channels that are driven by the effectiveness of our social features. We seed these channels by leveraging our significant capabilities in paid player acquisition. We run

 

 

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thousands of discrete campaigns every 24 hours, each with individual target metrics, and all subject to the same target return parameters. As of December 31, 2013, we had a massive network of 324 million monthly unique users and a track record of long-term retention driven by game longevity and our proven ability to cross-promote new games to our audience.

We have put the long-term retention of our players at the heart of our business model. While our players are able to enjoy our games for free, we generate revenue by selling virtual items to a subset of players who wish to enhance their entertainment experience. Our approach is to make our pricing transparent and consistent throughout the game journey. Following these principles, we have gathered a wide base of approximately 12 million average monthly unique payers, representing approximately 4% of our monthly unique users as of December 31, 2013. We believe that targeting a modest share of our customer’s entertainment spend drives game longevity and customer loyalty, and is the most effective way of building a sustainable business over the long term.

We have built our business to significant scale with limited capital investment and disciplined business management. We have raised only $9 million of primary capital to date and we have generated positive cash flow from operations for each of the last nine years. We have generated significant growth as our game portfolio, player network and mobile footprint have scaled. From the first quarter of 2012 to the fourth quarter of 2013, our gross bookings by quarter grew from $29 million to $632 million. Our revenue, the most directly comparable IFRS measure, grew from $22 million in the first quarter of 2012 to $602 million in the fourth quarter of 2013. Our profit (loss) also grew from $(1) million in the first quarter of 2012 to $159 million in the fourth quarter of 2013. For a description of how we calculate gross bookings and the limitations of this non-GAAP and non-IFRS financial measure, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

Our Mission and Vision

Our mission is to provide highly engaging content to our audience to match their mobile lifestyles: anywhere, anytime and on any device. Our players always come first. We believe this approach is the most effective way of creating lasting value for our stakeholders.

Our vision is to build the leading entertainment company for a mobile world. We aim to deliver our games to a vast and socially-connected audience retained over the long term.

Our Heritage Is the Foundation of Our Success

We have been a leading developer and publisher of casual games on digital platforms since 2003. Over the last decade, we have acquired deep experience in casual game design and have built a massive network of loyal and dedicated players. We have operated a free-to-play business model as well as used social features to drive player engagement and retention. Lastly, we have built a technology infrastructure capable of managing very high volumes of gameplays. These assets, capabilities and business processes have been the foundation of our mobile and social success to date and we believe, position us uniquely to capture the current market opportunity.

Industry Background and Our Opportunity

The digital entertainment industry is currently undergoing dramatic change driven by significant technology and consumer trends, including the rapid growth of mobile platforms, social networks as part of the entertainment fabric, and app stores as key distribution and payment gateways.

These trends are having a significant impact on the digital gaming industry: the size of the global gaming audience is increasing dramatically, free-to-play models have vastly expanded the revenue opportunity and sophisticated targeting strategies have made acquisition of large player populations economically viable in a sustainable way. These developments together are driving disproportionate growth in casual gaming relative to the broader gaming industry. We believe this creates an opportunity to establish leading entertainment franchises in this category:

 

   

Casual has been one of the most popular gaming categories for decades. Casual games are an enduring category of entertainment: they have been enjoyed since Egyptian times. Many of today’s most popular

 

 

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sub-genres were pioneered in Japan in the 1980s and have spawned historical global franchises such as Space Invaders, Pac-Man and Tetris.

 

   

The size of the casual audience is dramatically expanding. Mobile device proliferation and social connectivity are driving growth in the casual audience because of the category’s broad appeal and inherent suitability to mobile.

 

   

Free-to-play has created the potential for casual to lead other categories by revenue. The effectiveness of free-to-play business models combined with this dramatic increase in the casual audience has created the potential for leading entertainment franchises to emerge from the category.

Our Value Proposition for Players

To address this opportunity, we have designed our mobile and social games with the following characteristics:

 

   

Anytime. Our games can be enjoyed in short sessions allowing frequent and unplanned breaks in game play that do not detract from the quality of the experience.

 

   

Anywhere. Our games can be enjoyed wherever our players are and on the vast majority of devices, connected or not.

 

   

Seamlessly synchronized. A distinguishing feature of our platform is to allow players to switch seamlessly between devices and platforms and continue their game wherever they left off. Our platform offers real-time synchronization of level progression, social graph and virtual items.

 

   

Highly engaging. Our games are easy to learn, but hard to master. While gameplay is simple and intuitive, it takes skill to progress. This creates the sense of achievement that underpins the high engagement in our games.

 

   

Inherently social. Our games provide social interactions that enhance the player experience: social connectivity is built around sharing achievements and helping each other to progress.

 

   

Free-to-play. Our players can enjoy our games for free. Most of those that reach the highest level of a game do so without making a purchase. For those who do, we price our virtual items relative to the entertainment value they deliver.

Our Core Strengths

We have developed a repeatable and scalable process for bringing successful mobile and social titles to a global audience quickly and cost effectively, while minimizing business risk. We believe our model is fundamentally differentiated from competitors, will be challenging to replicate and strengthens our ability to deliver business predictability and sustainability.

Game Design Capabilities, IP Catalog and Laboratory

Over the last decade, we have developed a proprietary catalog of more than 180 game IPs which we offer in a tournament format on royalgames.com. Developing a new game IP has typically taken a team of three people 20 weeks, and we have created game IPs in most casual sub-genres over the years. On royalgames.com, we first release new game IPs to a subset of sophisticated, highly experienced players, who we call VIPs. We have found that the underlying game mechanic of a game that is popular with VIPs is highly likely to be successful when adapted for mobile and social platforms.

Unique, Repeatable, Scalable Game Development Process

We have a standardized process to adapt our popular casual game IPs into a proven game format for launch on mobile and social platforms. Our first game format, the Saga, is a game development framework designed to

 

 

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provide a deep, viral and social game experience. It comprises a path through hundreds of game levels, social features that allow interactions with others, viral mechanics and a variety of virtual items available for purchase. Popular new features developed in one game studio are productized and added to the development platform for use by all game studios.

Cross-platform Architecture Enhances Player Experience and Economics

Our unique cross-platform architecture allows our audience to play wherever they are: on Apple’s iOS, Google’s Android or Amazon’s Kindle mobile devices, or on their desktop on Facebook. It also allows players to switch seamlessly between devices and platforms and continue their game wherever they left off. Cross-platform gameplay has been widely adopted by our audience and has driven increased engagement, cross-platform virality and retention. Our architecture provides a shared user database, analytical platform and network marketing infrastructure, so that our Saga games share a substantial majority of common server-side code. This has allowed us to scale organically from one to six game studios in 24 months while preserving a low risk, low cost, high speed development and service platform.

Efficient Engine to Drive Acquisition, Engagement and Retention

Our model for player acquisition is primarily viral and organic, supplemented by a data-centric, rules-based approach to marketing. The inherently social nature of our games drives virality. This virality is enhanced by our cross-platform synchronization. We enjoy a virtuous cycle where players that play our games on various platforms and devices share their enjoyment and progress with their friends who in turn then discover our games. In addition, a large number of players discover our games through organic channels. This results in attracting large numbers of players for whom there is no direct marketing expense. We also make large investments in paid player acquisition, where returns are boosted by the viral impact. We have built extensive proprietary capabilities and technology infrastructure, which allow us to run acquisition campaigns in a highly granular and data-driven way. Every 24 hours, we operate thousands of campaigns targeting hundreds of discrete clusters through a mix of channels and formats across multiple platforms, all subject to the same target return parameters.

Massive Player Network and Loyal Customer Base

As of December 31, 2013, we have amassed a network of 324 million monthly unique users and our players enjoyed over 41 billion gameplays in the month of December 2013. We have a track record of successfully attracting our audience to new games and retaining them within our network. To drive retention and cross-promotion, we use a data-centric, rules-based approach aimed at maximizing aggregate return on investment (ROI) regardless of content, channel or advertising format. Out of this audience, we have built a wide base of approximately 12 million monthly unique payers, representing approximately 4% of our monthly unique users as of December 31, 2013.

Our Business Model

We believe that targeting a modest share of the entertainment spend of a wide base of customers is a source of game longevity and customer loyalty, and the most effective way of building a sustainable business over the long term.

Our Approach

The overarching goal of our business model is to foster long-term player retention within our network. As a result, we have developed, and continue to enhance, our model on the basis of the following principles: we focus on retention, our audience can enjoy our games for free, and our pricing is transparent and consistent throughout the game journey.

 

 

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Our Virtual Items

We offer a range of virtual items to our customers. These currently include entertainment time, where players can extend the duration of their game session; skill enhancements, where players can buy a wide variety of boosters that help them to progress; and access to content, where players can pay to unlock new episodes.

Our Key Metrics

Our key financial metrics, which include gross bookings, revenue and adjusted EBITDA, and our key operating metrics, which include daily active users (DAUs), monthly active users (MAUs) and monthly unique payers (MUPs) have grown significantly in the last two years. We believe this trend is a result of our ability to profitably grow, retain and monetize our massive player network and loyal customer base. For a description of how we calculate each of these metrics and factors that have caused fluctuations in these metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics.”

The charts below highlight our key metrics:

 

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Gross bookings and adjusted EBITDA are not calculated in accordance with IFRS. For a description of how we calculate gross bookings and adjusted EBITDA, the limitations of these financial measures and a reconciliation of these financial measures, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

 

 

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Key Strategies

Our key strategies are:

 

   

Strengthen and broaden our unique game development model. We intend to strengthen our pipeline with new game IP, evolve our tournament portal to keep it fresh and effective, and keep evolving the Saga format while building new formats.

 

   

Continue to provide highly engaging cross-platform content. We seek to nurture and extend our four global franchises while we widen our portfolio of mobile and social titles by building on our game IP catalog.

 

   

Grow our network. We cultivate the loyalty and organic viral growth of our player network by offering an engaging, cohesive and connected experience. We intend to increase the scale and frequency of social interactions across the network and continue to acquire audiences beyond our organic reach through the rigorous execution of our rules-based paid acquisition campaigns.

 

   

Expand to new platforms and geographies. We intend to offer our content on major platforms that provide access to a significant user base in a particular region.

 

   

Foster process innovation through technology stack ownership. We believe that complete control of our technology stack from the King Cloud infrastructure to our game engines and marketing and analytics platforms provides us with key advantages in achieving performance and scale, transparency of operation, speed of innovation and a highly engaging player experience.

Summary of Risk Factors

Our business is subject to numerous risks described in “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

   

we have experienced significant rapid growth in our operations;

 

   

a small number of games currently generate a substantial majority of our revenue;

 

   

we must develop new games and enhance our existing games so that our players will continue to play our games and make purchases of virtual items within our games;

 

   

we face significant competition;

 

   

if players do not find our casual game formats compelling and engaging, we could lose players and our revenue could decline;

 

   

we have a relatively short history offering our games on mobile and social platforms on a free-to-play basis, and this model and these platforms are relatively new and evolving;

 

   

if the use of mobile devices as game platforms and the proliferation of mobile devices generally do not increase, our business could be adversely affected;

 

   

our new games could divert players of our other games without growing the overall size of our network;

 

   

we may experience fluctuations in our quarterly operating results due to a number of factors, which makes our future results difficult to predict;

 

   

we rely on third-party platforms such as the Apple App Store, the Google Play Store, the Amazon Appstore and Facebook to distribute our games and collect revenue; and

 

   

upon the completion of this offering, our directors, executive officers and holders of more than 5% of our ordinary shares will beneficially own 81.7% of our outstanding ordinary shares, including 44.8% held by entities affiliated with Apax WW Nominees Ltd. and 7.8% held by entities affiliated with Index Ventures.

 

 

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Our Corporate Information and Structure

We were originally incorporated as Midasplayer.com Limited in September 2002, a company organized under the laws of England and Wales. In December 2006, we established Midasplayer International Holding Company Limited, a limited liability company organized under the laws of Malta, which became the holding company of Midasplayer.com Limited and our other wholly-owned subsidiaries. The status of Midasplayer International Holding Company Limited changed to a public limited liability company in November 2013 and its name changed to Midasplayer International Holding Company p.l.c. On March 25, 2014, King Digital Entertainment plc, a company incorporated under the laws of Ireland and created for the purpose of facilitating the initial public offering contemplated hereby, became our holding company by way of a share-for-share exchange in which the shareholders of Midasplayer International Holding Company p.l.c. exchanged their shares in Midasplayer International Holding Company p.l.c. for shares having substantially the same rights in King Digital Entertainment plc at a ratio of five shares of King Digital Entertainment plc for every two shares of Midasplayer International Holding Company p.l.c. See “Corporate Structure.” Upon the exchange, the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical consolidated financial statements of King Digital Entertainment plc. Our registered office is located at Fitzwilton House, Wilton Place, Dublin 2, Ireland and our telephone number is +44 (0) 20 3451 5464.

Our website address is www.king.com. Information contained on, or accessible through, our website is not a part of this prospectus. The King logo, “King,” “king.com,” “royalgames.com,” “Candy Crush Saga,” “Pet Rescue Saga,” “Farm Heroes Saga,” “Papa Pear Saga,” “Bubble Witch Saga” and other game titles, trademarks or service marks of ours appearing in this prospectus are our property. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 

 

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The Offering

 

Ordinary shares offered:
By us

  

15,533,334 ordinary shares

By selling shareholders

   6,666,666 ordinary shares

Underwriters’ option to purchase additional shares

   The underwriters have an option, exercisable at any time within 30 days from the date of this prospectus, to purchase a maximum of 3,330,000 additional ordinary shares from the selling shareholders, less underwriting discounts and commissions, to cover over-allotment shares, if any. See “Underwriting.”

Ordinary shares to be outstanding immediately after this offering

   314,932,321 ordinary shares

Use of proceeds

   We estimate that we will receive net proceeds from this offering of $325 million, based upon the initial public offering price of $22.50 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to create a public market for our ordinary shares, increase our visibility in the marketplace, as well as to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include acquisitions. We will not receive any of the proceeds from the sale of shares by selling shareholders. See “Use of Proceeds.”

Risk factors

   See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in our ordinary shares.

New York Stock Exchange symbol

   “KING”

The number of ordinary shares to be outstanding immediately after this offering (i) is based on 299,338,370 ordinary shares outstanding as of December 31, 2013 and (ii) assumes the issuance of 60,617 ordinary shares upon the exercise of share options in connection with this offering and excludes:

 

   

15,494,370 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013 with a per share weighted-average exercise price of $4.55, a portion of which are linked to D3 ordinary shares;

 

   

1,166,666, 1,166,666 and 1,166,668 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013, which are subject to market-based vesting conditions based on our achievement of an average target price per share of $26.00, $32.00 and $38.00, respectively, over a specified time period, with a per share weighted-average exercise price of $7.46 and subsequently linked to D3 ordinary shares;

 

   

347,000 ordinary shares issuable upon the exercise of share options granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $9.87;

 

   

7,422,180 ordinary shares issuable upon the exercise of share options linked to D3 ordinary shares granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $31.37;

 

 

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170,000 ordinary shares issued between January 1, 2014 and March 12, 2014;

 

   

80,000 ordinary shares issuable upon the exercise of vested shadow options outstanding as of the date of this prospectus with a per share exercise price of $0.00008 (an additional 143,750 previously outstanding and unvested shadow options will automatically lapse and be cancelled as of the date of this prospectus);

 

   

17,504,347 shares that were repurchased by us in January 2014; and

 

   

15,000,000 ordinary shares that may be issued under our 2014 Equity Incentive Plan (2014 Plan), which will be reduced by the 904,821 restricted stock units (RSUs) to be issued in connection with the completion of this offering. Our 2014 Plan will provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Management—Share Incentive Arrangements—Post-offering Share Incentive Arrangements.”

Except as otherwise indicated, the information in this prospectus reflects and assumes:

 

   

the adoption of our amended and restated memorandum and articles of association, which will be in effect prior to the completion of this offering;

 

   

unless otherwise indicated, our 1,000-for-1 forward share split effected in November 2011;

 

   

the completion on March 25, 2014 of the share-for-share exchange at a 5-for-2 forward exchange ratio with our predecessor Midasplayer International Holding Company p.l.c., as more fully described in “Corporate Structure”;

 

   

the conversion of all of our outstanding A, B, C, D1 and D2 ordinary shares and A and B preference shares into 299,338,370 ordinary shares and the acquisition by us and cancellation of our deferred shares to be completed prior to the completion of this offering; and

 

   

no exercise by the underwriters of their option to acquire up to an additional 3,330,000 ordinary shares from the selling shareholders.

 

 

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Summary Consolidated Financial Data

The following tables summarize certain consolidated financial and other data for our business. You should read the following summary consolidated financial data in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have historically conducted our business through Midasplayer International Holding Company p.l.c. (formerly Midasplayer International Holding Company Limited) and its subsidiaries. On March 25, 2014, King Digital Entertainment plc, a company incorporated under the laws of Ireland and created for the purpose of facilitating the public offering contemplated hereby, became our holding company by way of a share-for-share exchange in which the shareholders of Midasplayer International Holding Company p.l.c. exchanged their shares in Midasplayer International Holding Company p.l.c. for shares having substantially the same rights in King Digital Entertainment plc, which had nominal assets and liabilities prior to the share-for-share exchange and will not have conducted any operations prior to the completion of this offering. Upon the exchange, the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical consolidated financial statements of King Digital Entertainment plc. The corporate reorganization is reflected in the calculation of King Digital Entertainment plc’s earnings (loss) per share calculations attributable to the equity holders of the company during the year. See “Corporate Structure.”

The consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated statement of financial position data as of December 31, 2013 are derived from our annual consolidated financial statements included elsewhere in this prospectus. Our financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our historical results are not necessarily indicative of the results that should be expected in any future period.

 

     Year Ended December 31,  
         2011             2012              2013      

Consolidated Statements of Operations Data:

       

(in thousands, except per share data)

       

Revenue

   $   63,901      $ 164,412       $ 1,884,301   

Costs and expenses (1):

       

Cost of revenue

     25,915        54,713         584,358   

Research and development

     12,373        28,600         110,502   

Sales and marketing

     18,402        55,188         376,898   

General and administrative

     7,958        14,846         96,537   
  

 

 

   

 

 

    

 

 

 

Total costs and expenses

     64,648        153,347         1,168,295   
  

 

 

   

 

 

    

 

 

 

Total revenue less expenses

     (747     11,065         716,006   

Net finance income (costs)

     49        52         (1,731
  

 

 

   

 

 

    

 

 

 

Profit (loss) before tax

     (698     11,117         714,275   

Tax expense

     617        3,272         146,681   
  

 

 

   

 

 

    

 

 

 

Profit (loss)

   $ (1,315   $ 7,845       $ 567,594   
  

 

 

   

 

 

    

 

 

 

Earnings (loss) per share attributable to the equity holders of the company (2):

       

Basic

   $ (0.00   $ 0.03       $ 1.86   
  

 

 

   

 

 

    

 

 

 

Diluted

   $ (0.00   $ 0.02       $ 1.75   
  

 

 

   

 

 

    

 

 

 

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     Year Ended December 31,  
     2011     2012       2013    
              

Other Financial Data:

      

(in thousands, except percentage data)

      

Gross bookings (3)

   $   77,706      $ 181,570      $ 1,979,821   

Adjusted EBITDA (4)

   $ 4,442      $ 28,478      $ 824,742   

Adjusted EBITDA margin (5)

     7     17     44

 

(1) Costs and expenses include share-based and other equity-related compensation expense as follows (in thousands):

 

     Year Ended December 31,  
       2011          2012          2013    
Share-based and other equity-related compensation:         

Cost of revenue

   $       $ 820       $ 4,583   

Research and development

     807         6,576         62,493   

Sales and marketing

     67         2,033         3,617   

General and administrative

     770         1,704         25,373   
  

 

 

    

 

 

    

 

 

 

Total share-based and other equity-related compensation expense

   $     1,644       $   11,133       $ 96,066   
  

 

 

    

 

 

    

 

 

 

 

(2) See Note 10 to our consolidated financial statements for further details on the calculation of basic and diluted earnings (loss) per share attributable to equity holders of the company during the year.
(3) Gross bookings is defined as the total amount paid by our users for virtual items and for access to skill tournaments. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Gross Bookings” for a description of how we calculate gross bookings and for a reconciliation between gross bookings and revenue.
(4) Adjusted EBITDA is profit (loss), adjusted for provision for income taxes, other income (expense), net finance income (cost), depreciation, amortization, share-based and other equity-related compensation (including social security charges associated therewith), and changes in deferred revenue. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a description of how we calculate adjusted EBITDA and for a reconciliation between adjusted EBITDA and profit (loss).
(5) Adjusted EBITDA margin is adjusted EBITDA as a percentage of adjusted revenue. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a description of how we calculate adjusted EBITDA margin and for a reconciliation between adjusted EBITDA margin and profit (loss) and see “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted Revenue” for a reconciliation between adjusted revenue and revenue.

The following consolidated financial position data as of December 31, 2013 is presented:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the repurchase by us of all of our outstanding E ordinary shares in January 2014, the acquisition by us and cancellation of our deferred shares and A deferred shares, and the declaration and payment of a dividend to shareholders of $217 million in the aggregate in February 2014; and

 

   

on a pro forma as adjusted basis to give further effect to the issuance and sale by us of 15,533,334 ordinary shares in this offering at the initial public offering price of $22.50 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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     As of December 31, 2013  
     Actual      Pro Forma (1)      Pro Forma As
Adjusted (2)
 

Consolidated Statement of Financial Position Data:

        

(in thousands)

        

Cash and cash equivalents

   $  408,695       $ 190,355       $ 515,655   

Trade and other receivables

     216,881         216,881         216,881   

Total assets

     806,863         588,523         913,823   

Trade and other payables

     172,107         172,107         172,107   

Deferred revenue

     10,942         10,942         10,942   

Total liabilities

     439,476         439,476         439,476   

Share capital

     65         24         25   

Total shareholders’ equity

     367,387         149,047         474,347   

 

(1) The pro forma consolidated statement of financial position as of December 31, 2013 included in our annual consolidated financial statements has been presented to reflect the payment of a dividend to shareholders of $217 million in the aggregate in February 2014. The pro forma information above differs from the pro forma consolidated statement of position included in our annual consolidated financial statements as of December 31, 2013.
(2) The pro forma as adjusted cash and cash equivalents, total assets and total shareholders’ equity include the expenses related to this offering not yet recognized in our historical consolidated financial statements.

Non-GAAP Financial Measures

For more information about gross bookings, adjusted revenue, adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures that are not prepared in accordance with IFRS, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

Exchange Rate Information

Certain information contained in this prospectus is expressed in euro, such as the nominal value of certain of our ordinary shares, share option exercise prices and transactions values in “Related Party Transactions,” among others. The exchange rate between the U.S. dollar and the euro as of December 31, 2011, December 31, 2012, and December 31, 2013 was $1.2939, $1.3215, and $1.3767 respectively, per €1.00 according to the exchange rate according to the European Central Bank and OANDA Corporation.

Presentation of Financial Information

We report under IFRS as issued by the IASB. None of the financial statements were prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). We have historically conducted our business through Midasplayer International Holding Company p.l.c. (formerly Midasplayer International Holding Company Limited) and its subsidiaries. On March 25, 2014, we completed a corporate reorganization and share-for-share exchange as described in “Corporate Structure” pursuant to which Midasplayer International Holding Company p.l.c. became a wholly-owned subsidiary of King Digital Entertainment plc, a company created for the purpose of facilitating the public offering contemplated hereby. The consolidated financial statements included in this prospectus are those of King Digital Entertainment plc, which are the historical financial statements of Midasplayer International Holding Company p.l.c. reflected retrospectively for the corporate reorganization and share-for-share exchange described in “Corporate Structure.” Upon the exchange, the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical consolidated financial statements of King Digital Entertainment plc.

 

 

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RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. Before you invest in our ordinary shares, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our ordinary shares to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto.

Risks Related to Our Business

We have experienced significant rapid growth in our operations, and we cannot assure you that we will effectively manage our growth.

We have experienced a period of significant rapid growth and expansion in our operations that has placed, and continues to place, significant strain on our management and resources. For example, our staff headcount and the scope and complexity of our business have increased significantly, with the number of employees increasing from 144 as of December 31, 2011 to 665 as of December 31, 2013, and we expect headcount growth to continue for the foreseeable future. Since October 2011, we have also opened five more game studios in Europe to support our growth and game development. The growth and expansion of our business and headcount create significant challenges for our management and operational resources. We cannot assure you that this level of significant growth will be sustainable in the future. In the event of continued growth of our operations, our information technology systems or our internal controls and procedures will need to be scaled to support our operations. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively. We also recently hired our Chief Financial Officer in October 2013. To effectively manage our growth, we must continue to improve our operational and management processes and systems, and identify, hire, integrate, develop and motivate a large number of qualified employees. If we fail to do so, our ability to grow our business could be harmed. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new games. This could negatively affect our business performance.

A small number of games currently generate a substantial majority of our revenue.

In the fourth quarter of 2013, our top three games Candy Crush Saga, Pet Rescue Saga and Farm Heroes Saga accounted for 95% of our total gross bookings (across the web and mobile channels in the aggregate), with Candy Crush Saga accounting for 78% of our total gross bookings (across the web and mobile channels in the aggregate) or 86% and 58% of our mobile channel and web channel gross bookings, respectively. During 2013, we had fewer games launched on the mobile channel than on the web channel. In future periods, we expect Candy Crush Saga to represent a smaller percentage of our total mobile channel gross bookings as we diversify our mobile game portfolio. If the gross bookings of our top games, including Candy Crush Saga are lower than anticipated and we are unable to broaden our portfolio of games or increase gross bookings from those games, we will not be able to maintain or grow our revenue and our financial results could be adversely affected.

We must develop new games and enhance our existing games so that our players will continue to play our games and make purchases of virtual items within our games.

Our continued growth will depend on our ability to regularly develop new games and enhance our existing games in ways that improve the gaming experience for both paying and non-paying players while encouraging the purchase of virtual items within our games. In the event our current game development model ceases to be effective so that a game IP that is popular with VIPs fails to be successful when adapted for mobile and social platforms, our current development costs would increase and our operating results would suffer. It is possible that only a small number of our games, if any, become successful and generate significant purchases of virtual items.

 

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Our ability to successfully develop new games and enhance existing games and their ability to achieve commercial success are subject to a number of challenges, including:

 

   

our need to continually anticipate and respond to changes in the game industry, particularly in the mobile and social platforms;

 

   

our ability to compete successfully against a large and growing number of industry participants;

 

   

our ability to develop and launch new game IP and games on time and on budget;

 

   

our ability to develop new game formats that drive engagement and monetization;

 

   

our ability to adapt to changing player preferences;

 

   

our ability to enhance existing games by adding features and functionality that will encourage continued engagement with the game;

 

   

our ability to hire and retain skilled personnel as we seek to expand our development capabilities;

 

   

our ability to achieve a positive return on our advertising investments and continue to experience success with organic viral growth; and

 

   

the need to minimize and quickly resolve bugs or outages.

If we are unable to develop new and enhance existing games that generate meaningful revenue, our business and financial results could be harmed.

We face significant competition, there are low barriers to entry in the digital gaming industry, and competition is intense.

The digital gaming industry is highly competitive, and we expect more competitors to emerge and a wider range of games, including in the casual category, to be introduced. We face competition from a number of competitors who develop games on social networks, mobile, PC and consoles, some of which include features that compete with our casual games and have community functions where game developers can engage with their players. These competitors include companies such as Electronic Arts Inc., Zynga Inc. and numerous smaller privately-held companies. In addition, we face competition from online game developers and distributors who are primarily focused on specific international markets, such as Tencent Holdings Limited in Asia. Many new developers enter the gaming market on a regular basis, some of which see significant success in a short period of time. We could also face increased competition if large companies with significant online presences such as Amazon.com, Inc., Apple, Inc., Facebook, Inc., Google Inc., The Walt Disney Company or Yahoo! Inc., choose to enter or expand in the games space or develop competing games. Some of these current, emerging and potential competitors have significant resources for developing or acquiring additional games, may be able to incorporate their own strong brands and assets into their games or distribution of their games, have a more diversified set of revenue sources than we do and may be less severely affected by changes in consumer preferences, regulations or other developments that may impact the casual game industry.

As there are relatively low barriers to entry to develop a mobile or online casual game, we expect new game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications. We also compete or will compete with a vast number of small companies and individuals who are able to create and launch games and other content for these devices and platforms using relatively limited resources and with relatively limited start-up time or expertise. Increased competition could result in loss of players or our ability to acquire new players cost-effectively, both of which could harm our business.

Our players may decide to select competing forms of entertainment instead of playing our games.

We also face competition for the leisure time, attention and discretionary spending of our players. Other forms of leisure time activities, such as offline, traditional online, personal computer and console games,

 

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television, movies, sports, and the Internet, are much larger and more well-established options for consumers. If our players do not find our games to be compelling or if other leisure time activities are perceived by our players to offer greater variety, affordability, interactivity and overall enjoyment, our business could be materially and adversely affected.

If players do not find our casual game formats compelling and engaging, we could lose players and our revenue could decline.

Our most successful games to date have been our games that are in the casual game genre and we intend to continue to develop new games in this genre. In addition, we launch our casual games in our Saga format, which involves the progression of the game through numerous levels and through a background story. It is possible that players could lose interest in this format over time due to a variety of reasons, including the emergence of new formats that players find more engaging, increased popularity of other game titles, or lack of sustained interest or loss of interest in particular games or the genre of games. If large numbers of players were to lose interest in the casual game genre or in our Saga format or if we are not able to develop games in new casual sub-genres or if we cannot develop new game formats, we could lose players, and our revenue and business could be harmed.

Frequent and unpredictable changes in consumer preferences may cause player interest in the casual game format to decline.

Our most successful games to date are in the casual game genre and our future success will depend on the continued popularity of casual games with consumers. Consumer tastes and preferences are subject to frequent changes, and it is possible that new gaming formats could replace casual games in popularity. We may not be able to predict future shifts in gaming formats and may not take timely action to adapt our products to new gaming formats or to develop games that consumers continue to enjoy. If player interest in the casual game format declines, and we are unable to anticipate future consumer preferences in gaming formats, then our business, financial performance and results of operations may be adversely and substantially affected.

We have a relatively short history offering our games on mobile and social platforms on a free-to-play basis. This model and these platforms are relatively new and evolving. These factors make it difficult to evaluate our future prospects and financial results.

Prior to 2010, we primarily generated revenue from online casual skills games with an emphasis on tournament play and from sales of advertising inventory available on our website. With the emergence of mobile and social platforms as a means for broad digital distribution, we began offering some of our games through Facebook beginning in late 2010, on mobile platforms through the Apple App Store and the Google Play Store in 2011 and through the Amazon Appstore and on KakaoTalk in 2013. Accordingly, we have had limited experience offering games using these new distribution platforms, which makes it difficult to effectively assess their long-term prospects. In addition, mobile platforms and social networks have only recently become significant distribution platforms. As a result, we have limited experience with our model and we also have limited information operating in these markets. Thus, it is difficult for us to forecast our future revenue growth, if any, and to plan our operating expenses appropriately, which in turn makes it difficult to predict our future operating results.

If the use of mobile devices as game platforms and the proliferation of mobile devices generally do not increase, our business could be adversely affected.

While the number of people using mobile Internet-enabled devices, such as smartphones and handheld tablets, has increased dramatically in the past few years, the mobile market, particularly the market for mobile games, is still emerging and it may not grow as we anticipate. Our future success is substantially dependent upon the continued growth of use of mobile devices for games. The proliferation of mobile devices may not continue to develop at historical rates and consumers may not continue to use mobile Internet-enabled devices as a platform for games. In addition, we do not yet offer our games on all mobile devices. Therefore, if the mobile devices on which our games are available decline in popularity, we could experience a decline or a slow in

 

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growth in revenue until we are able to develop versions of our games for other mobile devices or platforms. Any decline in the usage of mobile devices for games could harm our business.

If we are able to develop new games that achieve success, it is possible that these games could divert players of our other games without growing the overall size of our network, which could harm our operating results.

Although it is important to our future success that we develop new games that become popular with players, it is possible that these games could cause players to reduce their playing time and purchases of virtual items in our existing games but without the new games making up the difference. In addition, we also plan to cross-promote our new games in our other games, which could further encourage players of existing games to divert some of their playing time and spend on existing games. If new games do not grow the size of our network or generate sufficient additional purchases of virtual items to offset any declines in purchases from our other games, our revenue could be materially and adversely affected.

Our free-to-play business model depends on purchases of virtual items within our games, and our business, financial condition and results of operations will be materially and adversely affected if we do not continue to successfully implement this model.

We derived nearly all of our revenue from the sale of virtual items in our games during the year ended December 31, 2013. Our games are available to players for free, and we generally generate revenue from them only if they purchase in-game virtual items, such as “boosters” that enhance their skills to help players progress, “extra lives” or “level unlocks” to progress further in the game. If we fail to offer popular virtual items, make unpopular changes to existing virtual items or offer games that do not attract purchases of virtual items, or if our distribution partners make it more difficult or expensive for players to purchase in-game virtual items, our business, financial condition and results of operations will be materially and adversely affected.

A relatively small percentage of our player network accounts for a large portion of our revenue and if we are unable to continue to retain players or if they decrease their spending, our revenue could be harmed.

A relatively small portion of our player network accounts for a large portion of our revenue. For example, during the month of December 2013, approximately 4% of our monthly unique users (MUUs), or approximately 12 million monthly unique payers (MUPs), purchased virtual items from us. If we are unable to continue to offer games that encourage these customers to purchase virtual items, if these players do not continue to play our games, or if we cannot encourage significant additional players to purchase virtual items in our games, we would not be able to sustain our revenue growth rate, and our business would be harmed.

As we achieve greater market penetration, the rate at which we acquire new players will decline, we may fail to retain existing customers, and the number of customers we have will fluctuate, any of which will materially and adversely affect our results of operations and financial condition. 

For the quarter ended December 31, 2013, we had 408 million average monthly average users (MAUs), an increase of 341 million from 67 million for the quarter ended December 31, 2012, or 509%, and an increase of 47 million, or 13%, from 361 million for the quarter ended September 30, 2013. As we achieve greater market penetration, we do not expect to attract new players at a similar rate in the future. Accordingly the growth rates of our MAUs, DAUs and other key operating metrics may decline as compared to the growth rates from historic periods. In order to sustain our revenue, we must attract new players and retain existing players that purchase virtual items. To retain players, we must devote significant resources so that the games they play retain their interest, encourage them to purchase virtual items and attract them to our other games. If the number of our players, the rates at which we attract and retain players, the rate at which players purchase virtual items from us, or the volume and/or price of their purchases declines, our results of operations and financial condition will be adversely affected.

In order to acquire new players, we utilize a variety of marketing channels, including advertising online through mobile and social networks, and on television. Acquiring players can be costly and the effectiveness of

 

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such efforts can vary widely by game, geography and platform. Furthermore, the success of our business depends in large part on our ability to retain our players, generate revenue from new players and migrate our existing players to new games and new platforms. In 2012 and 2013, we incurred $55 million and $377 million, respectively, in sales and marketing expenses to promote our games. We also encourage our existing players to play our new games and use new platforms through cross-promotions. As our player network continues to evolve, it is possible that the composition of our player network may change in a manner that makes it more difficult to generate sufficient revenue to offset the costs associated with acquiring new players and retaining our current players. Additionally, our cross-promotions may be ineffective or could be restricted by platforms thereby reducing retention of our existing players. If the cost to acquire players is greater than the revenue we generate over time from those players and if we cannot successfully migrate our current players to new games and new platforms as we have historically done so, our business and operating results will be harmed.

We will not maintain our recent annual revenue and gross bookings growth rates.

Our recent annual revenue and gross bookings growth rates should not be considered indicative of our future performance. As we grow our business, we expect these annual growth rates to slow in future periods as the size of our player network increases and as we achieve higher market penetration rates. As these growth rates decline, investors’ perceptions of our business may be adversely affected and the market price of our ordinary shares could decline. For a discussion of movements in gross bookings and revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Key Financial Metrics.”

We may not maintain profitability in the future.

Although we were profitable in the past, we expect to make significant investments in growing our business and significantly increase our employee headcount, which could reduce our profitability compared to past periods. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. As a result of these increased expenditures, our profitability could decline in future periods. While our revenue has grown substantially from 2011, this growth may not be sustainable, and we may not achieve sufficient revenue growth in future periods to maintain profitability. In future periods, our revenue could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors. Accordingly, we may not be able to maintain profitability, and we may incur losses in the future.

We may experience fluctuations in our quarterly operating results due to a number of factors, which make our future results difficult to predict.

Our revenue and other operating results could vary significantly from quarter to quarter due to a variety of factors, many of which are outside our control. In addition, we may not be able to accurately predict our future revenue or results of operations. We base our current and future expense levels on our internal operating plans and forecasts, and some of our operating costs are to a large extent fixed in the near term. As a result, we may not be able to reduce our costs quickly enough to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue could adversely affect financial results for that quarter.

Factors that may contribute to the variability of our quarterly results include:

 

   

the ability of games released in prior periods to sustain their popularity and monetization rates and the popularity and monetization rates of new games or enhancements to existing games released during the quarter;

 

   

a loss of popularity of the casual sub-genres of our games or our Saga game format;

 

   

our ability to maintain and increase the number of our players who purchase virtual items and the volume of their purchases;

 

   

delays in launching our games on mobile or social platforms;

 

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changes to the terms and conditions offered by our platform partners and our ability to effectively use those platforms for distribution and marketing;

 

   

the timing of new games released by our competitors;

 

   

fluctuations in the size and rate of growth of overall consumer demand for games on mobile devices and social media or mobile platforms;

 

   

increases in marketing and other operating expenses that we may incur to grow and expand our operations;

 

   

system failures or breaches of data security;

 

   

changes in privacy laws affecting how we may market to our players or use the personal information we collect;

 

   

regulatory changes such as in consumer protection;

 

   

inaccessibility of the distribution platforms for our games;

 

   

changes in accounting rules;

 

   

fluctuations in foreign currency exchange rates; and

 

   

macro-economic conditions and their effect on discretionary consumer spending.

Our core value of putting our players first may conflict with the short-term interests of our business.

One of our core values is that the player comes first in everything we do, which we believe is essential to our success in increasing our growth and engagement and in serving the best, long-term interests of the company and our shareholders. Therefore, we may forgo certain expansion or short-term revenue opportunities that we do not believe will enhance the experience of our players, even if our decision negatively impacts our operating results in the short term. It is possible that our decisions may not result in the long-term benefits that we expect, in which case our business and operating results could be harmed.

If we fail to anticipate or successfully develop games for new technologies, platforms and devices, the quality, timeliness and competitiveness of our games could suffer.

The casual category is characterized by rapid technological changes that can be difficult to anticipate. New technologies, including distribution platforms and gaming devices, such as consoles, connected TVs or a combination of existing and new devices, may force us to adapt our current game development processes or adopt new processes. If consumers shift their time to platforms other than the mobile and social platforms where our games are currently distributed, the size of our audience could decline and our performance could be impacted. It may take significant time and resources to shift our focus to such technologies, platforms and devices, putting us at a competitive disadvantage. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development to adapt to these new technologies, distribution platforms and devices, either to preserve our games or a game launch schedule or to keep up with our competition, which would increase our development expenses. We could also devote significant resources to updating developing games to work with such technologies, platforms or devices, and these new technologies, platforms or devices may not experience sustained, widespread consumer acceptance. The occurrence of any of these events could adversely affect the quality, timeliness and competitiveness of our games, or cause us to incur significantly increased costs, which could harm our operating results.

We rely on third-party platforms such as the Apple App Store, the Google Play Store, the Amazon Appstore and Facebook to distribute our games and collect revenue. If we are unable to maintain a good relationship with such platform providers, if their terms and conditions or pricing changed to our detriment, if we violate, or if a platform provider believes that we have violated, the terms and conditions of its platform, or if any of these platforms were unavailable for a prolonged period of time, our business will suffer.

In 2012 and 2013, we derived a majority of our revenue from distribution of our games on the Apple App Store, the Google Play Store, the Amazon Appstore and Facebook, and most of the virtual items we sell are

 

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purchased using the payments processing systems of these platform providers. These platforms also serve as significant online distribution platforms for our games. We are subject to their standard terms and conditions for application developers, which govern the promotion, distribution and operation of games and other applications on their platforms. In addition, if we violate, or if a platform provider believes that we have violated, its terms and conditions, the particular platform provider may discontinue or limit our access to that platform, which would harm our business. Our business would be harmed if they discontinue or limit our access to their platforms, if their platforms decline in popularity, if they modify their current discovery mechanisms, communication channels available to developers, respective terms of service or other policies, including fees, or change how the personal information of players is made available to developers or develop their own competitive offerings.

We also rely on the continued operation of third-party platforms such as the Apple App Store, the Google Play Store, Facebook, the Amazon Appstore and KakaoTalk. In the past, some of these platform providers have been unavailable for short periods of time or experienced issues with their in-app purchasing functionality. If either of these events recurs on a prolonged, or even short-term, basis or other similar issues arise that impact players’ ability to download our games, access social features or purchase virtual items, it would have a material adverse effect on our revenue, operating results and brand. Furthermore, any change or deterioration in our relationship with these platform providers could materially harm our business and likely cause our share price to decline.

Becoming a public company will increase our compliance costs significantly and require the expansion and enhancement of a variety of financial and management control systems and infrastructure and the hiring of significant additional qualified personnel.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), or the other rules and regulations of the Securities and Exchange Commission (SEC), or any securities exchange relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include financial planning and analysis, tax, corporate governance, accounting policies and procedures, internal controls, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, significant changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management and will also require us to successfully hire and integrate a significant number of additional qualified personnel into our existing finance, legal, human resources and operations departments.

The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

We currently depend on the continued services and performance of our key personnel, including Riccardo Zacconi, our Chief Executive Officer, and John Sebastian Knutsson, our Chief Creative Officer, and our other executive officers and senior development personnel. Although we have entered into employment agreements with Messrs. Zacconi and Knutsson, the agreements have no specific duration and these employees can terminate their employment at any time, subject to the agreed notice periods and post-termination restrictive covenants. In addition, our games are created, developed, enhanced and supported in our in-house game studios. The loss of key game studio personnel, including members of management as well as key engineering, game development, artists, product, marketing and sales personnel, could disrupt our current games, delay new game development, and decrease player retention, which would have an adverse effect on our business.

As we continue to grow, we cannot guarantee we will continue to attract the personnel we need to maintain our competitive position. In particular, we intend to hire a significant number of engineering, development, operations and design personnel in 2014, and we expect to face significant competition from other companies in

 

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hiring such personnel as well as recruiting well-qualified staff in multiple international jurisdictions. As we mature, the incentives to attract, retain and motivate our staff provided by our equity awards or by future arrangements, such as through cash bonuses, may not be as effective as in the past. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.

We currently operate in multiple jurisdictions and plan to continue expanding to jurisdictions where we have limited operating experience and may be subject to increased business and economic risks that could affect our financial results.

We plan to continue the expansion of our game offerings to various other jurisdictions, where we have limited or no experience in marketing, developing and deploying our games. For example, we intend to expand our operations in Asia, and some Asian markets have substantial legal and regulatory complexities. We are subject to a variety of risks inherent in doing business internationally, including:

 

   

risks related to the legal and regulatory environment in non-U.S. jurisdictions, including with respect to privacy and data security, and unexpected changes in laws, regulatory requirements and enforcement;

 

   

burdens of complying with a variety of foreign laws in multiple jurisdictions;

 

   

potential damage to our brand and reputation due to compliance with local laws, including requirements to provide player information to local authorities;

 

   

fluctuations in currency exchange rates;

 

   

political, social or economic instability;

 

   

the potential need to recruit and work through local partners;

 

   

cultural differences which may affect market acceptance of our games;

 

   

reduced protection for or increased violation of intellectual property rights in some countries;

 

   

difficulties in managing global operations and legal compliance costs associated with multiple international locations;

 

   

compliance with the U.K. Bribery Act, U.S. Foreign Corrupt Practices Act and similar laws in other jurisdictions;

 

   

natural disasters, including earthquakes, tsunamis and floods;

 

   

inadequate local infrastructure; and

 

   

exposure to local banking, currency control and other financial-related risks.

If we are unable to manage our global operations successfully, our financial results could be adversely affected.

We are dependent on a small number of data center providers and any failure or significant interruption in our network could impact our operations and harm our business.

We host the backend systems that our games use from a primary data center located in Stockholm, Sweden. We have a back-up system also hosted at a separate data center in Stockholm, Sweden. We do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible lengthy service interruptions in connection with doing so.

Problems faced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity

 

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among their customers, including us, could adversely affect the experience of our players. Our third-party data center operators could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy, faced by our third-party data centers operators or any of the service providers with which we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our games could adversely affect our reputation and adversely affect the game playing experience. If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all. Interruptions in our services might reduce our revenue, subject us to potential liability, or adversely affect our renewal rates.

To the extent that our disaster recovery systems are not adequate, or we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer. Our insurance may be insufficient to compensate us for any losses.

We will need to continue to expand and enhance our network infrastructure to accommodate the growth of our business.

We rely on our internal network infrastructure to manage our operations and to provide us with the data we need to analyze the performance of our business and to report our operational and financial performance accurately. With our recent growth, we have had to invest in expanding and enhancing our network systems and we plan to continue to invest in our network systems, which could involve additional purchases of computer hardware and software as well as the hiring of additional operations personnel. We may not be able to successfully install and implement any new computer hardware and software needed to enhance our operational systems and we may not be able to attract a sufficient number of additional qualified operations personnel. If we are unable to successfully expand and enhance our network infrastructure and operational systems, or experience difficulties in implementing such systems, our business could be harmed.

Catastrophic events may disrupt our business.

Our systems and operations are vulnerable to damage or interruption from fires, floods, power losses, telecommunications failures, cyber attacks, terrorist attacks, acts of war, human errors, break-ins and similar events. Additionally, we rely on our network, data centers and third-party infrastructure and enterprise applications, internal technology systems and our website for our development, marketing and operational support activities. In the event of a catastrophic event, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.

Unforeseen “bugs” or errors in our games could harm our brand, which could harm our operating results.

Our games have in the past contained and may in the future contain errors or “bugs” that are not detected until after they are broadly released. Any such errors could harm the overall game playing experience for our players, which could cause players to reduce their playing time or in game purchases, discontinue playing our games altogether, or not recommend our games. Such errors could also result in our games being non-compliant with applicable laws or create legal liability for us. Resolving such errors could also disrupt our operations, cause us to divert resources from other projects, or harm our operating results.

Security breaches could harm our business.

Security breaches have become more prevalent in the technology and gaming industries. We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect, use, store and disclose, but there is no guarantee that inadvertent (e.g., software bugs or other technical malfunctions, employee error or malfeasance, or other factors) or unauthorized data access or use will not occur despite our

 

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efforts. Although we have not experienced any material security breaches to date, we have in the past experienced and we may in the future experience attempts to disable our systems or to breach the security of our systems. Techniques used to obtain unauthorized access to personal information, confidential information and/or the systems on which such information are stored and/or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.

If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers and/or suffer other negative consequences to our business. A security breach could adversely affect the game playing experience and cause the loss or corruption of data, which could harm our business, financial condition and operating results. Any failure to maintain the security of our infrastructure could result in loss of personal information and/or other confidential information, damage to our reputation and customer relationships, early termination of our contracts and other business losses, indemnification of our customers, financial penalties, litigation, regulatory investigations and other significant liabilities. In the event of a major third-party security incident, we may incur losses in excess of their insurance coverage. Further, certain incidents that we can experience may not be covered by the insurance that we carry.

Moreover, if a high profile security breach occurs with respect to us or another digital entertainment company, our customers and potential customers may lose trust in the security of our business model generally, which could adversely impact our ability to retain existing customers or attract new ones.

The laws and regulations concerning data privacy and data security are continually evolving; our or our platform providers’ actual or perceived failure to comply with these laws and regulations could harm our business.

Players can play our games online, using third-party platforms and networks and on mobile devices. We collect and store significant amounts of information about our players—both personally identifying and non-personally identifying information. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this player information. For example, the European Union (EU) has traditionally taken a broader view than the United States and certain other jurisdictions as to what is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children’s Online Privacy Protection Act (COPPA) also regulates the collection, use and disclosure of personal information from children under 13 years of age. While none of our games are directed at children under 13 years of age, if COPPA were to apply to us, failure to comply with COPPA may increase our costs, subject us to expensive and distracting government investigations and could result in substantial fines.

Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future. The U.S. government, including the Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices and the EU has proposed reforms to its existing data protection legal framework. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our players that is necessary for compliance with these various types of regulations.

Player interaction with our games is subject to our privacy policy and terms of service. If we fail to comply with our posted privacy policy or terms of service or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If regulators, the media or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, and negatively impact our financial condition and damage our business.

In the area of information security and data protection, many jurisdictions have passed laws requiring notification when there is a security breach for personal data or requiring the adoption of minimum information

 

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security standards that are often vaguely defined and difficult to implement. Our security measures and standards may not be sufficient to protect personal information and we cannot guarantee that our security measures will prevent security breaches. A security breach that compromises personal information could harm our reputation and result in a loss of player confidence in our products and ultimately in a loss of players, which could adversely affect our business and impact our financial condition. This could also subject us to liability under applicable security breach-related laws and regulations and could result in additional compliance costs, costs related to regulatory inquries and investigations, and an inability to conduct our business.

We are subject to the rules and regulations adopted by the payment card networks, such as Visa and MasterCard, and if we fail to adhere to their rules and regulations, we would be in breach of our contractual obligations to payment processors and merchant banks, which could subject us to damages and liability and could eventually prevent us from processing or accepting credit card payments.

The payment card networks, such as Visa and MasterCard, have adopted rules and regulations that apply to all merchants who process and accept credit cards for payment of goods and services. Parts of our business require us to comply with these rules and regulations as part of the contracts we enter into with payment processors and merchant banks. The rules and regulations adopted by the payment card networks include the Payment Card Industry Data Security Standards (PCI DSS). Under the PCI DSS, we are required to adopt and implement internal controls over the use, storage and security of payment card data to help prevent fraud. If we fail to comply with the rules and regulations adopted by the payment card networks, including the PCI DSS, we would be in breach of our contractual obligations to payment processors and merchant banks. Such failure to comply may subject us to fines, penalties, damages, higher transaction fees, civil liability and loss of certification and could eventually prevent us from processing or accepting debit and credit cards or could lead to a loss of payment processor partners. Further, there is no guarantee that even if we currently comply with the rules and regulations adopted by the payment card networks, we will be able to maintain our compliance. We also cannot guarantee that such compliance will prevent illegal or improper use of our payments systems or the theft, loss or misuse of the debit or credit card data of customers or participants or regulatory or criminal investigations. A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and any increases in our credit card and debit card fees could adversely affect our business, operating results and financial condition. Moreover, any such illegal or improper payments could harm our reputation and may result in a loss of service for our customers, which would adversely affect our business, operating results and financial condition.

Cheating programs or guides could affect the player experience and may lead players to stop purchasing virtual items.

Unrelated third parties have developed, and may continue to develop, “cheating” programs or guides that enable players to advance in our games, which could reduce the demand for virtual items. In addition, unrelated third parties could attempt to scam our players with fake offers for virtual items. In addition, vulnerabilities in the design of our applications and of the platforms upon which they run could be discovered after their release, which may result in lost revenue opportunities. This may lead to lost revenue from paying players or increased cost of developing technological measures to respond to these, either of which could harm our business.

If we fail to maintain our brand or further develop widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our games and attracting new players. Brand promotion activities may not generate consumer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. In addition, our brand can be harmed if we experience adverse publicity for our games for any reason, including due to “bugs,” outages, security breaches or violations of laws. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our applications.

 

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If we are unable to maintain and nurture our company culture, our business may be harmed.

We believe that building and maintaining a unique culture benefits our players and staff. As we transition to being a public company and continue staff headcount growth and expand our operations, it will be more challenging to maintain our company culture. If we fail to maintain our culture, we may not be able to recruit and retain talented staff that develop and support highly engaging games for our players and our business may be harmed.

Our business is subject to a variety of laws worldwide, many of which are untested and still developing and which could subject us to further regulation, claims or otherwise harm our business.

We are subject to a variety of laws in Europe, the United States and other non-U.S. jurisdictions, including laws regarding consumer protection (including with respect to the use of email, telephonic, text messaging and other forms of electronic marketing), intellectual property, virtual items and currency, export and national security, all of which are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. It is also likely that as our business grows and evolves and our games are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our games, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.

It is possible that a number of laws and regulations may be adopted or construed to apply to us in Ireland, the United States, Europe and elsewhere that could restrict the online and mobile industries, including player privacy, advertising, taxation, gaming, payments, copyright, distribution and antitrust, among others. Furthermore, the growth and development of electronic commerce and virtual items and currency may prompt calls for more stringent consumer protection laws that may impose additional burdens on or limitations on operations of companies such as ours conducting business through the Internet and mobile devices. For example, the EU has recently stated that it intends to meet with the industry and consumer-protection groups to discuss certain aspects of free-to-play games. We anticipate that scrutiny and regulation of our industry will increase, and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency, banking institutions, unclaimed property and money laundering may be interpreted to cover virtual currency or goods, or laws regarding the regulation of gambling may be interpreted to encompass our games. We have structured and operate our skill tournaments with gambling laws in mind and believe that playing these games does not constitute gambling. However, our skill tournaments could in the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also sometimes offer our players various types of contests and promotion opportunities. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games, many of which are still evolving and could be interpreted in ways that could harm our business. If these were to occur we might be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, such as reporting to regulators, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States, Europe or elsewhere regarding these activities may lessen the growth of casual game services and impair our business.

Changes in the tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results.

Due to the global nature of the Internet, it is possible that various states or countries might attempt to regulate our transmissions or levy sales, income, consumption, use or other taxes relating to our activities, or

 

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impose obligations on us to collect such taxes. Tax authorities in non-U.S. jurisdictions and at the U.S. federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce such as the sale of virtual items and the provision of online services. The imposition of new or revised non-U.S. or U.S. federal, state or local tax laws or regulations may subject us or our players to additional sales, income, consumption, use or other taxes. We cannot predict the effect of current attempts to impose such taxes on commerce over the Internet. New or revised taxes and, in particular, sales, use or consumption taxes, the Value Added Tax and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling virtual items over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.

The intended tax benefits of our corporate structure and intercompany arrangements may not be realized, which could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business.

Our corporate structure and intercompany arrangements, including the manner in which we develop and use our intellectual property and the transfer pricing of our intercompany transactions, are intended to provide us worldwide tax efficiencies. The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

A certain degree of judgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. As a result, our tax positions could be challenged and our income tax expenses could increase in the future.

For instance, if tax authorities in any of the countries in which we operate were to successfully challenge our transfer prices, they could require us to reallocate our income to reflect transfer pricing adjustments, which could result in an increased tax liability to us. In addition, if the country from which the income was reallocated did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.

Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results.

We regard the protection of our trade secrets, copyrights, trademarks, domain names and other intellectual property rights as critical to our success and we rely on trademark and patent law, trade secret protection, copyright law and confidentiality and license agreements to protect our proprietary rights.

 

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We pursue the registration of our domain names, trademarks and service marks in Europe, the United States and in certain additional jurisdictions. We are seeking to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced.

We enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to confirm our ownership of intellectual property and to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others. Further, our corporate structure includes several different subsidiaries in many countries, which increases our burden with respect to policing our employees’ compliance with their confidentiality obligations. Finally, in some instances we may be required to obtain licenses to intellectual property in lieu of ownership. Such licenses may be limited in scope and require us to renegotiate on a frequent basis for additional use rights. Moreover, to the extent we only have a license to any intellectual property used in any of our games, there may be no guarantee of continued access to such intellectual property, including on commercially reasonable terms.

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. For example, some companies have released games that are very similar to other successful games in an effort to confuse the market and divert players from their competitor’s games to their copycat games. To the extent that these tactics are employed with respect to any of our games, it could reduce our revenue that we generate from these 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 in certain non-U.S. jurisdictions, such as certain Asian jurisdictions, where the laws may not protect our intellectual property rights as fully as in Europe and the United States. To the extent we expand our activities worldwide, our exposure to unauthorized copying and use of our games and proprietary information may increase. In the future, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets to determine the validity and scope of proprietary rights claimed by others or to defend against claims of infringement or invalidity. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.

There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology or games. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. These steps may be inadequate to protect our intellectual property. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property.

We could be required to cease certain activities and/or incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

Some of our competitors may own technology patents, copyrights, trademarks, trade secrets and website content, which they may use to assert claims against us. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies in the Internet and technology industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights. As we face increasing competition and as litigation becomes a more common way to resolve disputes, we face a higher risk of being the subject of intellectual property infringement claims. Although we have not been subject to successful claims or lawsuits against us in the past, we cannot assure you that we will not become in the

 

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future, subject to claims that we have misappropriated or misused other parties’ intellectual property rights. If we are sued by a third party that claims that our technology infringes its rights, the litigation (with or without merit) could be expensive and could divert our management resources.

The results of any intellectual property litigation to which we might become a party may require us to do one or more of the following:

 

   

cease making, selling, offering for sale or using technologies that incorporate the challenged intellectual property;

 

   

make substantial payments for legal fees, settlement payments or other costs or damages;

 

   

obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or

 

   

redesign technology to avoid infringement.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us, such payments or costs could have a material adverse effect upon our business and financial results.

We use open source software in our games that may subject our software code to general release or require us to re-engineer such code, which may cause harm to our business.

We use open source software in our game development. Some open source software licenses require developers who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. The terms of various open source licenses have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our games. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our games, discontinue distribution in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our game development efforts, any of which could harm our reputation, result in player losses, increase our costs or otherwise adversely affect our business and operating results.

Risks Related to Investing in a Foreign Private Issuer or an Irish Company

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices in lieu of certain requirements under the New York Stock Exchange listing standards. This may afford less protection to holders of our ordinary shares than U.S. regulations.

As a foreign private issuer whose ordinary shares are listed on the New York Stock Exchange, we are permitted to follow certain home country corporate governance practices in lieu of certain requirements under the New York Stock Exchange listing standards. A foreign private issuer must disclose in its annual reports filed with the SEC each requirement under the New York Stock Exchange listing standards with which it does not comply, followed by a description of its applicable home country practice. Our home country practices in Ireland may afford less protection to holders of our ordinary shares. For example, under Irish law, there is no general statutory requirement for equity compensation plans to be approved by way of shareholder resolution, which is different than the requirements of the New York Stock Exchange listing standards. As such, while we may choose to seek shareholder approval for any equity compensation plans, we do not intend to adopt any requirements for shareholder approval of such plans in our amended and restated memorandum and articles of association. We may rely on exemptions available under the New York Stock Exchange listing standards to a foreign private issuer and follow our home country practices in the future, and as a result, you may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange listing standards.

 

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We will be a foreign private issuer and, as a result, we will not be subject to U.S. proxy rules and will be subject to Exchange Act reporting obligations that, to some extent, are more lenient and less detailed than those of a U.S. issuer.

Upon consummation of this offering, we will report under the Exchange Act, as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including: the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, we will not be required to provide as detailed disclosure as a U.S. registrant, particularly in the area of executive compensation. It is possible that some investors may not be as interested in investing in our ordinary shares as the securities of a U.S. registrant that is required to provide more frequent and detailed disclosure in certain areas, which could adversely affect our share price.

We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur additional legal, accounting and other expenses.

In order to maintain our current status as a foreign private issuer, either (1) a majority of our ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (2) (a) a majority of our executive officers or directors must not be U.S. citizens or residents, (b) more than 50 percent of our assets cannot be located in the United States and (c) our business must be administered principally outside the United States. If we lost this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC rules and the New York Stock Exchange listing standards. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors.

Judgments of U.S. courts may be difficult to enforce in Ireland.

It may not be possible to enforce court judgments obtained in the United States against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the United States currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.

Summary judgment against us or our directors or officers, as the case may be, may be granted by the Irish court without requiring the issues in the U.S. litigation to be reopened on the basis that those matters have already been decided by the U.S. court provided that the Irish court is satisfied that:

 

   

the judgment is final and conclusive;

 

   

the U.S. court had jurisdiction to determine the claim(s) (which is a matter of Irish law);

 

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the U.S. judgment is not impeachable for fraud and is not contrary to Irish rules of natural or substantial justice;

 

   

the enforcement of the judgment will not be contrary to public policy or statute in Ireland;

 

   

the judgment is for a definite sum of money;

 

   

the Irish proceedings were commenced within the relevant limitation period;

 

   

the judgment is not directly or indirectly for the payment of taxes or other charges of a like nature or a fine or other penalty (for example, punitive or exemplary damages);

 

   

the judgment remains valid and enforceable in the court in which it was obtained unless and until it is set aside; and

 

   

before the date on which the U.S. court gave judgment, the issues in question had not been the subject of a final judgment of an Irish court or of a court of another jurisdiction whose judgment is enforceable in Ireland.

Irish Law may afford less protection to holders of our securities.

As an Irish company, we are governed by the Irish Companies Acts 1963-2013 (Irish Companies Acts), which differ in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or other officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. The rights of shareholders to bring proceedings against us or against our directors or officers in relation to public statements are more limited under Irish law than the civil liability provisions of the U.S. securities laws. You should also be aware that Irish law does not allow for any form of legal proceedings directly equivalent to the class action available in U.S. courts. Accordingly, holders of our ordinary shares may have more difficulty protecting their interests than would holders of shares of a corporation incorporated in a jurisdiction of the United States.

Our board of directors may be limited by the Irish Takeover Rules in its ability to defend an unsolicited takeover attempt.

Following the listing of our ordinary shares on the New York Stock Exchange, we will become subject to the Irish Takeover Panel Act, 1997, Irish Takeover Rules 2013 (Irish Takeover Rules), under which we will not be permitted to take certain actions that might “frustrate” an offer for our ordinary shares once our board of directors has received an offer, or has reason to believe an offer is or may be imminent, without the approval of more than 50% of shareholders entitled to vote at a general meeting of our shareholders or the consent of the Irish Takeover Panel. This could limit the ability of our board of directors to take defensive actions even if it believes that such defensive actions would be in our best interests or the best interests of our shareholders.

The operation of the Irish Takeover Rules may affect the ability of certain parties to acquire our ordinary shares.

Under the Irish Takeover Rules if an acquisition of ordinary shares were to increase the aggregate holding of the acquirer and its concert parties to ordinary shares that represent 30% or more of the voting rights of the company, the acquirer and, in certain circumstances, its concert parties would be required (except with the consent of the Irish Takeover Panel) to make an offer for the outstanding ordinary shares at a price not less than the highest price paid for the ordinary shares by the acquirer or its concert parties during the previous 12 months. This requirement would also be triggered by an acquisition of ordinary shares by a person holding (together with its concert parties) ordinary shares that represent between 30% and 50% of the voting rights in the company if the effect of such acquisition were to increase that person’s percentage of the voting rights by 0.05% within a 12 month period. Following the listing of our ordinary shares on the New York Stock Exchange, under the Irish Takeover Rules, certain separate concert parties (including, among others, our shareholder Apax WW Nominees Ltd. and its affiliates and all of the members of our board of directors) will be presumed to be acting in concert.

 

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The application of these presumptions may result in restrictions upon the ability of any of the concert parties and/or members of our board of directors to acquire more of our securities, including under the terms of any executive incentive arrangements. Following the listing of our ordinary shares on the New York Stock Exchange, we may consult with the Irish Takeover Panel with respect to the application of this presumption and the restrictions on the ability to acquire further securities although, we are unable to provide any assurance as to whether the Irish Takeover Panel will overrule this presumption. For a description of certain takeover provisions applicable to us, see “Description of Share Capital—Irish Takeover Rules and Substantial Acquisition Rules.” Accordingly the application of the Irish Takeover Rules may frustrate the ability of certain of our shareholders and directors to acquire our ordinary shares.

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation and these differences may make our ordinary shares less attractive to investors.

We are incorporated under Irish law and, therefore, certain of the rights of holders of our shares are governed by Irish law, including the provisions of the Irish Companies Acts, and by our memorandum and articles of association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations and these differences may make our ordinary shares less attractive to investors. The principal differences include the following:

 

   

under Irish law, dividends may only be declared by us if we have, on an individual entity basis, profits available for distribution, within the meaning of the Irish Companies Acts;

 

   

under Irish law, each shareholder present at a meeting has only one vote unless a poll is called, in which case each shareholder gets one vote per share owned;

 

   

under Irish law, unless disapplied in accordance with Irish law in the articles of association of a company or a special resolution of the shareholders, each shareholder generally has preemptive rights to subscribe on a proportionate basis to any issuance of shares, whereas under typical U.S. state law, shareholders generally do not have preemptive rights unless specifically granted in the certificate of incorporation or otherwise;

 

   

under Irish law, certain matters require the approval of 75% of the votes cast at a general meeting of our shareholders, including amendments to our articles of association, which may make it more difficult for us to complete corporate transactions deemed advisable by our board of directors. Under U.S. state law, generally only majority shareholder approval is required to amend the certificate of incorporation or to approve other significant transactions;

 

   

under Irish law, a bidder seeking to acquire us would need, on a tender offer, to receive shareholder acceptance in respect of 80% of our outstanding shares. If this 80% threshold is not achieved in the offer, under Irish law, the bidder cannot complete a “second step merger” to obtain 100% control of us. Accordingly, a tender of 80% of our outstanding ordinary shares will likely be a condition to a tender offer to acquire us, not more than 50% as is becoming more common in tender offers for corporations organized under U.S. state law; and

 

   

under Irish law, shareholders may be required to disclose information regarding their equity interests upon our request, and the failure to provide the required information could result in the loss or restriction of rights attaching to the shares, including prohibitions on the transfer of the shares, as well as restrictions on voting, dividends and other payments.

Following the completion of the transaction, a future transfer of your ordinary shares, other than one effected by means of the transfer of book-entry interests in the Depository Trust Company, may be subject to Irish stamp duty.

Transfers of ordinary shares effected by means of the transfer of book-entry interests in the Depository Trust Company (DTC) will not be subject to Irish stamp duty. It is anticipated that the majority of our shares will be traded through DTC by brokers who hold such shares on behalf of customers. The exemption for transfers of

 

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book-entry interests in DTC is available because our shares will be traded on a recognized stock exchange in the United States. However, if you hold ordinary shares directly rather than beneficially through DTC (or through a broker that holds your ordinary shares through DTC), any transfer of your ordinary shares could be subject to Irish stamp duty (currently at the rate of 1% of the higher of the price paid or the market value of the ordinary shares acquired, which must be paid prior to the registration of the transfer on our official Irish share register). Payment of Irish stamp duty is generally a legal obligation of the transferee. The potential for stamp duty to arise could adversely affect the price of our ordinary shares.

U.S. holders of our shares could be subject to material adverse tax consequences if we are considered a “passive foreign investment company” for U.S. federal income tax purposes.

We do not believe that we are a passive foreign investment company, and we do not expect to become a passive foreign investment company. However, our status in any taxable year will depend on our assets, income and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a passive foreign investment company for the current taxable year or any future taxable years. If we were a passive foreign investment company for any taxable year while a taxable U.S. holder held our shares, such U.S. holder would generally be taxed at ordinary income rates on any sale of our shares and on any dividends treated as “excess distributions.” An interest charge also generally would apply based on any taxation deferred during such U.S. holder’s holding period in the shares. For further discussion, see “Material U.S. Federal Income Tax Consequences to U.S. Holders—Passive Foreign Investment Company.”

Risks Related to Offering and Ownership of Ordinary Shares

In the future, our ability to raise additional capital to expand our operations and invest in our business may be limited, and our failure to raise additional capital, if required, could impair our business.

While we currently anticipate that our available funds will be sufficient to meet our cash needs for at least the next 12 months and beyond, we may need or elect to seek, additional financing at any time. Our ability to obtain financing will depend on, among other things, our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. If we need or elect to raise additional funds, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests and the per share value of our ordinary shares could decline. If we engage in additional debt financing, we may be required to accept terms that further restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios and limit the operating flexibility of our business. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

   

develop or enhance our games;

 

   

continue to expand our development, sales and marketing teams;

 

   

acquire complementary technologies, products or businesses;

 

   

expand our global operations;

 

   

hire, train and retain employees;

 

   

respond to competitive pressures or unanticipated working capital requirements; or

 

   

continue our operations.

Our share price may be volatile, and the market price of our ordinary shares after this offering may drop below the price you pay.

Market prices for securities of newly-public companies have historically been particularly volatile in response to various factors, some of which are beyond our control. As a result of this volatility, you may not be

 

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able to sell your ordinary shares at or above the initial public offering price in this offering. Some of the factors that may cause the market price for our ordinary shares to fluctuate include:

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;

 

   

loss of existing players due to declining popularity of existing games or lack of new highly successful games;

 

   

actual or anticipated changes in our growth rate;

 

   

competitors developing more compelling games attracting our players;

 

   

our announcement of actual results for a fiscal period that are lower than projected or expected or our announcement of revenue or earnings guidance that is lower than expected;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

the loss of, or changes to, one of our other distribution platforms such as the Apple App Store, the Google Play Store, the Amazon Appstore or Facebook;

 

   

changes in market valuations of similar companies;

 

   

success of competitive games or products;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of debt;

 

   

announcements by us or our competitors of significant products or services, contracts, acquisitions or strategic alliances;

 

   

regulatory developments in Europe, the United States or other countries;

 

   

actual or threatened litigation involving us or our industry;

 

   

additions or departures of key personnel;

 

   

general trends in the gaming industry as a whole;

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

further issuances of ordinary shares by us;

 

   

sales or ordinary shares by our shareholders;

 

   

repurchases of ordinary shares; and

 

   

changes in general economic, industry and market conditions.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our shares shortly following this offering. If the market price of our ordinary shares after this offering does not exceed the offering price, you may not realize any return on your investment in us and may lose some or all of your investment. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources, and harm our business, operating results and financial condition. In addition, recent fluctuations in the financial and capital markets have resulted in volatility in securities prices.

We have broad discretion over the use of proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion in the application of the net proceeds from this offering and, as a result, you will have to rely upon the judgment of our management with respect to the use of these proceeds.

 

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Our management may spend a portion or all of the net proceeds in ways that not all shareholders approve of or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.

The price of our ordinary shares could decline if there are substantial sales of our ordinary shares, particularly sales by our directors, executive officers and significant shareholders, or if there is a large number of shares of our ordinary shares available for sale. All of the ordinary shares sold in this offering will be available for sale in the public market. Substantially all of our remaining outstanding ordinary shares are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.” These shares will become available to be sold 181 days after the date of this prospectus. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended (Securities Act), and various vesting restrictions.

Following the completion of this offering, certain of our shareholders will have rights, subject to some conditions, to require us to file registration statements covering their shares to include their shares in registration statements that we may file for ourselves or our shareholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until 181 days after the date of this prospectus. We also intend to register the ordinary shares 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 the shareholder completing the applicable vesting period in the case of some shares issued under our existing share incentive arrangements, and subject to existing market standoff or lock-up agreements.

J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC may, at their discretion, permit our shareholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements.

The market price of our ordinary shares could decline as a result of the sale of a substantial number of ordinary 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.

Purchasers of ordinary shares in this offering will experience immediate and substantial dilution in the net tangible book value of their investment.

The initial public offering price of our ordinary shares will be substantially higher than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. Therefore, if you purchase our ordinary shares in this offering, you will incur immediate dilution of $21.02 in the net tangible book value per share from the price you paid based upon the initial public offering price of $22.50.

There has been no prior public market for our ordinary shares, and an active trading market may not develop.

Prior to this offering, there has been no public market for our ordinary shares. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of share capital and may impair our ability to acquire other companies by using our ordinary shares as consideration.

 

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our ordinary shares adversely, our share price and/or trading volume could decline.

The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of our company, our share price and trading volume would likely be negatively impacted. If any of the analysts who may cover us adversely change their recommendation regarding our shares, or provide more favorable relative recommendations about our competitors, our share price would likely decline. If any of the analysts who may cover us were to cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

Our directors, executive officers and holders of more than 5% of our ordinary shares prior to this offering together with their affiliates, will continue to have substantial control over us after this offering and will beneficially own, in the aggregate, approximately 81.7% of our outstanding ordinary shares, which could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our ordinary shares prior to this offering, together with their affiliates, will beneficially own, in the aggregate, approximately 81.7% of our outstanding ordinary shares, including 44.8% held by entities affiliated with Apax WW Nominees Ltd. and 7.8% held by entities affiliated with Index Ventures, assuming no exercise of the underwriters’ option to acquire additional ordinary shares in this offering. As a result, these shareholders, acting together, may have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any sale, merger or consolidation. In addition, these shareholders, acting together, may have the ability to control or influence the management of our affairs. These holders acquired their shares for substantially less than the price of the shares being acquired in this offering, and these holders may have interests, with respect to their shares, that are different from those of investors in this offering and the concentration of voting power among these holders may have an adverse effect on our share price.

We may not pay dividends on our ordinary shares in the future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our ordinary shares.

We may not pay any cash dividends on our ordinary shares in the future. As a matter of Irish law, we can only pay dividends to the extent that we have distributable reserves and, in the case of cash dividends, cash resources available for this purpose. Any future determination to declare cash dividends will be made at the discretion of our board of directors. In the short term, the distributable reserves will depend on the Irish High Court approval of our resolution to cancel our share premium account (and it is expected that such a cancellation will convert our entire current share premium account that arises from the share-for-share exchange into distributable profits). The ability to pay cash dividends will depend on the extent of any profits available for distribution, subject to compliance with applicable laws, including the Irish Companies Acts which require Irish companies to have profits available for distribution before they can pay dividends, and covenants under our current or any future credit facilities, which may restrict or limit our ability to pay dividends and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. More specifically, our current credit facility contains restrictions on our ability to pay cash dividends. As a result, a return on your investment may only occur if our share price appreciates.

We will seek Irish High Court approval of the creation of distributable reserves. While we expect to receive this approval, it is not guaranteed.

Under Irish law, dividends may only be paid, and share repurchases and redemptions must generally be funded, out of distributable reserves, which we will not have immediately following this offering. The creation of our distributable reserves requires Irish High Court approval, which we expect to receive in the second half of

 

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2014. While we are not currently aware of any reason why the Irish High Court would not approve the creation of our distributable reserves, this matter is solely within the discretion of the Irish High Court. In the event that our distributable reserves are not created, no distributions by way of dividends, share repurchases, redemptions or otherwise will be permitted under Irish law until such time as the group has created sufficient distributable reserves from its trading activities.

Our existing shareholders may be entitled to pre-emptive rights under Irish law, which could limit our ability to raise funds through future issuances of our ordinary shares.

Subject to specified exceptions, including the opt-out described in our articles of association, Irish law grants statutory pre-emptive rights to existing shareholders to subscribe for new issuances of shares in exchange for cash. The opt-out described in our articles of association must be renewed every five years by a resolution approved by not less than 75% of the votes cast by our shareholders at a general meeting. We expect that we will seek renewal of the opt-out at an annual general meeting within five years from the adoption date of our articles of association. However, we cannot guarantee that the pre-emptive rights opt-out will always be approved. If this opt-out is not renewed, it can make any future equity fundraising more cumbersome, costly and time consuming.

We currently report our financial results under IFRS, which differs in certain significant respect from U.S. GAAP.

Currently we report our financial statements under IFRS. There have been and there may in the future be certain significant differences between IFRS and U.S. GAAP, including differences related to revenue recognition, share-based compensation expense, income tax and earnings per share. As a result, our financial information and reported earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. In addition, we do not intend to provide a reconciliation between IFRS and U.S. GAAP unless it is required under applicable law. As a result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.

In certain limited circumstances, dividends paid by us may be subject to Irish dividend withholding tax.

In certain limited circumstances, dividend withholding tax (DWT), which is currently at a rate of 20%, may arise in respect of dividends, if any, paid on our ordinary shares. A number of exemptions from DWT exist such that certain shareholders resident in the United States and shareholders resident in certain other countries (the “relevant territories”) may be entitled to exemptions from DWT. For a list of these “relevant territories,” and a discussion of the requirement to complete certain Irish DWT declaration forms to qualify for many of the exemptions, see “Taxation—Taxation in Ireland—Dividend Withholding Tax.”

Shareholders resident in the United States that hold their shares through DTC will not be subject to DWT provided the addresses of the beneficial owners is recorded as being within the United States in the particular broker’s records (and such brokers have further transmitted the relevant information to a qualifying intermediary appointed by us).

Dividends paid in respect of shares in an Irish resident company that are owned by (1) residents of the United States and held outside of DTC and (2) shareholders resident in “relevant territories” will not be subject to DWT provided that the shareholder has completed the relevant Irish DWT declaration form and this declaration form remains valid. Such shareholders must provide the relevant Irish DWT declaration form to our transfer agent at least seven business days before the record date for the first dividend payment to which they are entitled. However, other shareholders may be subject to DWT, which could adversely affect the price of your shares.

After the transaction, dividends received by Irish residents and certain other shareholders may be subject to Irish income tax.

A shareholder who is not resident or ordinarily resident for tax purposes in Ireland and who is entitled to an exemption from DWT generally has no liability for Irish income tax or income charges on a dividend from an

 

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Irish resident company unless that shareholder holds the shares through a branch or agency that carries on a trade in Ireland. A shareholder who is not resident or ordinarily resident for tax purposes in Ireland and who is not entitled to an exemption from DWT generally has no additional liability for Irish income tax or income charges unless that shareholder holds the shares through a branch or agency which carries on a trade in Ireland. A shareholder’s liability for Irish income tax is effectively limited to the amount of DWT already deducted by the company.

Irish resident or ordinarily resident individual shareholders may be subject to Irish income tax and income charges such as pay related social insurance (PRSI) and the Universal Social Charge (USC) on dividends received from us. Such shareholders should consult their own tax advisor. Irish resident corporate shareholders should not be subject to tax on dividends from us on the basis that the dividend is not in respect of preference shares. For more information, see “Taxation—Income Tax on Dividends.”

Ordinary shares received by means of a gift or inheritance could be subject to Irish capital acquisitions tax.

Irish capital acquisitions tax (CAT) could apply to a gift or inheritance of our ordinary shares irrespective of the place of residence, ordinary residence, or domicile of the parties. This is because our ordinary shares will be regarded as property situated in Ireland. The person who receives the gift or inheritance has primary liability for CAT. See “Taxation—Capital Acquisitions Tax.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. Words such as “believe,” “project,” “plan,” “anticipate,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” “may,” “potential,” “continue” or the negative of these terms, and similar expressions intended to identify future events or outcomes indicate such forward-looking statements. Not all forward-looking statements contain these identifying words. Forward-looking statements in this prospectus may include statements about:

 

   

our growth strategies;

 

   

launching new games and additional functionality to games that are commercially successful;

 

   

updating, supporting and sustaining our global franchise games;

 

   

our ability to retain and increase our player base and increase in-game microtransactions;

 

   

our player acquisition costs;

 

   

competition from companies in a number of industries, including other casual game developers and publishers and both large and small, public and private Internet companies;

 

   

our relationships with Apple, Google, Amazon, Facebook and other platforms;

 

   

protecting and developing our brand and intellectual property portfolio;

 

   

our ability to successfully enter new markets and manage our international expansion;

 

   

costs associated with defending intellectual property infringement and other claims;

 

   

attracting and retaining qualified employees and key personnel;

 

   

our future business development, results of operations and financial condition;

 

   

descriptions of tax laws;

 

   

rulings by courts or other governmental authorities;

 

   

the use of proceeds from this offering; and

 

   

assumptions underlying any of the foregoing.

The forward-looking statements included in this prospectus are subject to risks, uncertainties and assumptions. Our actual results of operations may differ materially from those stated in or implied by such forward-looking statements as a result of a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus.

We operate in an evolving environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the effect 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.

Forward-looking statements speak only as of the date of this prospectus. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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MARKET DATA AND USER METRICS

Market Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position and market opportunity, is based on information from various sources, including independent industry publications by App Annie Limited (App Annie), AppData, a division of Mediabistro Inc. (AppData), comScore, Inc. (comScore), eMarketer Inc. (eMarketer), Flurry, Inc. (Flurry Analytics), Gartner, Inc. (Gartner), International Data Corporation (IDC) and Strategy Analytics Inc. (Strategy Analytics). These industry publications, reports, surveys and forecasts 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. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of the information contained in these industry publications and reports, based on our industry experience we believe that the publications and reports are reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in these publications, reports, surveys and forecasts.

The Gartner report described herein (Gartner Report), represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice. Certain information in the text of the prospectus is contained in independent industry publications. This information is identified with a superscript number. The source of, and selected additional information contained in, these independent industry publications are provided below:

 

  1. Strategy Analytics, Inc., Global Smartphone Installed Base Forecast by Operating System for 88 Countries: 2007 to 2018, January 2014.

 

  2. Strategy Analytics, Inc., Tablet Operating Systems Installed Base Forecast by Country: 2010-2018, March 2014.

 

  3. IDC, Worldwide New Media Market Model, July 2013.

 

  4. eMarketer Inc., Social Networking Reaches Nearly One in Four Around the World, June 18, 2013.

 

  5. Gartner, Inc., Forecast: Mobile App Stores, Worldwide, 2013 Update, September 5, 2013.

 

  6. IDC, Worldwide Gaming-Optimized Handheld, Smartphone, and Tablet Gaming 2013-2017 Forecast, April 2013.

 

  7. comScore, Inc., Worldwide Online Gaming Community Reaches 127 Million People, July 10, 2007.

User Metrics

In this prospectus, when we refer to MAUs, MUUs, MUPs, DAUs, MGABPPU and GABPU, unless otherwise indicated, we are referring to information we have compiled based on our internal analytics system. For information concerning these internally-measured metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Key Operating Metrics.” We also refer in this prospectus to DAUs and MAUs as measured and published by AppData, an independent service that publicly reports traffic data for games and other applications on third-party platforms such as the Apple App Store, the Google Play Store, the Amazon Appstore and Facebook. We rely on AppData information whenever we refer to the ranking of our games on the third-party platforms. Each of these references is identified by the phrase “according to AppData” or a similar phrase. We base our DAU and MAU data on our own internal analytics system, which may differ from the corresponding information published by AppData.

 

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For our calculation of non-unique user metrics, an individual who either plays two of our games on a single platform or device, or the same game on two platforms or devices in the relevant period, would be counted as two users. For our calculation of unique user metrics, we did not de-duplicate user data, so that a user who plays our games on multiple platforms or devices in the relevant period will be counted as a unique user for each platform or device on which the user played during the period.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of $325 million, based upon the initial public offering price of $22.50 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (which expenses do not include approximately $7 million of offering expenses that were already recognized as of December 31, 2013).

The principal purposes of this offering are to create a public market for our ordinary shares, facilitate access to the public equity markets, increase our visibility in the marketplace, as well as to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include acquisitions. We have not allocated any specific portion of the net proceeds to any particular purpose, and our management will have the discretion to allocate the proceeds as it determines. Pending these uses, we intend to invest the net proceeds to us from the offering in short-term, investment-grade, interest-bearing instruments. We will not receive any of the proceeds from sales of ordinary shares by the selling shareholders.

DIVIDEND POLICY

On October 21, 2013, our board of directors declared a dividend of $1.050 per share with respect to our equity securities that are eligible to receive dividends, amounting to a total dividend of $287 million in aggregate, which was paid on October 24, 2013. On January 31, 2014, our board of directors declared a dividend of $0.795 per share with respect to our equity securities that are eligible to receive dividends, amounting to a total dividend of $217 million in the aggregate, which was paid on February 6, 2014.

Our ability to pay dividends on our ordinary shares in the future is limited by restrictions, including under Irish law and under our asset-based loan facility (ABL Credit Facility). Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Furthermore, as a matter of Irish law, the ability to pay dividends will depend on the extent of any profits available for distribution, subject to compliance with applicable laws, including the Irish Companies Acts, which require Irish companies to have profits available for distribution before they can pay dividends and, in the case of cash dividends, cash resources available for this purpose. In the short term, the distributable reserves will depend on the Irish High Court approval of our resolution to cancel our share premium account (and it is expected that such a cancellation will convert our entire current share premium account that arises from the share-for-share exchange into distributable profits).

Cash dividends on our ordinary shares, if any, are expected to be paid in U.S. dollars. As we are an Irish company, dividend withholding tax (DWT), currently at a rate of 20%, will arise in respect of dividends or other distributions to our shareholders unless an exemption applies. Where DWT does arise, we are responsible for deducting DWT at source and accounting for the relevant amount to the Irish Revenue Commissioners. For additional information on Irish tax considerations and limits on our ability to pay dividends, see “Taxation—Taxation in Ireland—Dividend Withholding Tax” and “Description of Share Capital—Dividends.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all of our outstanding A and B preference shares into ordinary shares prior to the completion of this offering, the repurchase by us of all of our outstanding E ordinary shares in January 2014, the acquisition by us and cancellation of our deferred shares and A deferred shares, and the declaration and payment of a dividend to shareholders of $217 million in the aggregate in February 2014; and

 

   

on a pro forma as adjusted basis to give further effect to (i) the issuance and sale by us of 15,533,334 ordinary shares in this offering at the initial public offering price of $22.50 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the issuance of 60,617 ordinary shares upon the exercise of share options in connection with this offering.

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.

 

     As of December 31, 2013  
       Actual        Pro Forma (1)      Pro Forma
As Adjusted (2)
 
(in thousands, except share and per share data)       

Cash and cash equivalents

   $ 408,695       $ 190,355       $ 515,655  
  

 

 

    

 

 

    

 

 

 

Shareholders’ equity:

        

Share capital:

        

Ordinary shares, $0.00008 nominal value, 3,330,101,138 shares authorized, 641,620,917 shares issued and outstanding, actual; ordinary shares, $0.00008 nominal value, 1,000,000,000 shares authorized, 299,338,370 shares issued and outstanding, pro forma; ordinary shares, $0.00008 nominal value, 1,000,000,000 shares authorized, 314,932,321 shares issued and outstanding, pro forma as adjusted

     65         24         25   

Preference shares, $0.00008 nominal value, 190,607,500 shares authorized, 178,577,500 issued and outstanding, actual; preference shares, $0.00008 nominal value, 12,500,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                       

Other reserves

     65,995         64,796         390,095   

Retained earnings

     301,327         84,227         84,227   
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     367,387         149,047         474,347   
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 367,387       $ 149,047       $ 474,347   
  

 

 

    

 

 

    

 

 

 

 

(1) The pro forma consolidated statement of financial position as of December 31, 2013 included in our annual consolidated financial statements has been presented to reflect the payment of a dividend to shareholders of $217 million in the aggregate in February 2014. The pro forma information above differs from the pro forma consolidated statement of position included in our annual consolidated financial statements as of December 31, 2013.
(2) The pro forma as adjusted cash and cash equivalents, total assets and total shareholders’ equity includes the expenses related to this offering not yet recognized in our historical consolidated financial statements.

 

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Except as otherwise indicated, the table above excludes:

 

   

15,554,987 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013 with a per share weighted-average exercise price of $4.54, a portion of which are linked to D3 ordinary shares, and 60,617 of which will be issued upon exercise of share options in connection with this offering;

 

   

1,166,666, 1,166,666 and 1,166,668 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013, which are subject to market-based vesting conditions based on our achievement of an average target price per share of $26.00, $32.00 and $38.00, respectively, over a specified time period, with a per share weighted-average exercise price of $7.46 and subsequently linked to D3 ordinary shares;

 

   

347,000 ordinary shares issuable upon the exercise of share options granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $9.87;

 

   

7,422,180 ordinary shares issuable upon the exercise of share options linked to D3 ordinary shares granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $31.37;

 

   

170,000 ordinary shares issued between January 1, 2014 and March 12, 2014;

 

   

80,000 ordinary shares issuable upon the exercise of vested shadow options outstanding as of the date of this prospectus with a per share exercise price of $0.00008 (an additional 143,750 previously outstanding and unvested shadow options will automatically lapse and be cancelled as of the date of this prospectus); and

 

   

15,000,000 ordinary shares that may be issued under our 2014 Plan, which will be reduced by the 904,821 RSUs to be issued in connection with the completion of this offering. Our 2014 Plan will provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Management—Share Incentive Arrangements—Post-offering Share Incentive Arrangements.”

 

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DILUTION

If you invest in our ordinary shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our ordinary shares and the pro forma as adjusted net tangible book value per share of our ordinary shares immediately following the completion of this offering.

Our pro forma net tangible book value as of December 31, 2013 was $140 million, or $0.47 per share. 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 our ordinary shares outstanding as of December 31, 2013, after giving effect to the repurchase by us of all of our outstanding E ordinary shares in January 2014, the acquisition by us and cancellation of our deferred shares and A deferred shares, and the declaration and payment of a dividend to shareholders of $217 million in the aggregate in February 2014.

After giving effect to the issuance and sale by us of 15,533,334 ordinary shares in this offering at the initial public offering price of $22.50 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (which expenses do not include approximately $7 million of offering expenses that were already recognized as of December 31, 2013), our pro forma as adjusted net tangible book value as of December 31, 2013, would have been $465 million, or $1.48 per share. This amount represents an immediate increase in pro forma net tangible book value of $1.01 per share to our existing shareholders and an immediate dilution of $21.02 per share, or 93.4% to new investors purchasing ordinary shares in this offering.

 

Initial public offering price per share

      $ 22.50   

Pro forma net tangible book value per share as of December 31, 2013

   $ 0.47      

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

     1.01      
  

 

 

    

Pro forma as adjusted net tangible book value per share

        1.48   
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $ 21.02   
     

 

 

 

The following table summarizes, as of December 31, 2013, on the pro forma as adjusted basis described above, the number of our ordinary shares, the total consideration and the average price per share (1) paid to us by existing shareholders and (2) to be paid by new investors purchasing our ordinary shares in this offering at the initial public offering price of $22.50 per ordinary share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Acquired     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing shareholders

     299,398,987         95.1   $ 8,972,666         2.5   $ 0.03   

New investors

     15,533,334         4.9        349,500,015         97.5      $ 22.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     314,932,321               100   $ 358,472,681               100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The total number of shares reflected in the discussion and tables above does not reflect the shares purchased by new investors from the selling shareholders. The discussion and tables above also assume no exercise of any outstanding share options or shadow options other than the exercise of share options in connection with this offering. To the extent that any of these events occur, there will be further dilution to new investors.

Sales by the selling shareholders in this offering will cause the number of ordinary shares held by existing shareholders to be reduced to 292,732,321 shares, or 93.0% of the total number of our ordinary shares outstanding following the completion of this offering, and will increase the number of shares held by new investors to 22,200,000 shares, or 7.0% of the total number of shares outstanding following the completion of this offering.

In addition, if the underwriters’ option to acquire additional ordinary shares from the selling shareholders is exercised in full, the number of shares held by the existing shareholders following the completion of this offering

 

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would be reduced to 289,404,261 shares, or 91.9% of the total number of shares outstanding after this offering, and the number of shares held by new investors would be increased to 25,530,000 shares, or 8.1% of the total number of shares outstanding following the completion of this offering.

The number of ordinary shares to be outstanding after this offering (i) is based on 299,338,370 ordinary shares outstanding as of December 31, 2013 and (ii) assumes the issuance of 60,617 ordinary shares upon the exercise of share options in connection with this offering and excludes:

 

   

15,494,370 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013 with a weighted-average exercise price of $4.55 per share, a portion of which are linked to D3 ordinary shares;

 

   

1,166,666, 1,166,666 and 1,166,668 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013, which are subject to market-based vesting conditions based on our achievement of an average target price per share of $26.00, $32.00 and $38.00, respectively, over a specified time period, with a per share weighted-average exercise price of $7.46 and subsequently linked to D3 ordinary shares;

 

   

347,000 ordinary shares issuable upon the exercise of share options granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $9.87;

 

   

7,422,180 ordinary shares issuable upon the exercise of share options linked to D3 ordinary shares granted between January 1, 2014 and March 12, 2014 with a per share weighted-average exercise price of $31.37;

 

   

170,000 ordinary shares issued between January 1, 2014 and March 12, 2014;

 

   

80,000 ordinary shares issuable upon the exercise of vested shadow options outstanding as of the date of this prospectus with a per share exercise price of $0.00008 (an additional 143,750 previously outstanding and unvested shadow options will automatically lapse and be cancelled as of the date of this prospectus);

 

   

17,504,347 shares that were repurchased by us in January 2014; and

 

   

15,000,000 ordinary shares that may be issued under our 2014 Plan, which will be reduced by the 904,821 RSUs to be issued in connection with the completion of this offering. Our 2014 Plan will provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Management—Share Incentive Arrangements—Post-offering Share Incentive Arrangements.”

 

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CORPORATE STRUCTURE

We were originally incorporated as Midasplayer.com Limited in September 2002, a company organized under the laws of England and Wales. In December 2006, we established Midasplayer International Holding Company Limited, a limited liability company incorporated under the laws of Malta, which became the holding company of Midasplayer.com Limited and our other wholly-owned subsidiaries. The status of Midasplayer International Holding Company Limited changed to a public limited liability company in November 2013 and its name changed to Midasplayer International Holding Company p.l.c. On March 25, 2014, King Digital Entertainment plc, a company incorporated under the laws of Ireland and created for the purpose of facilitating the initial public offering contemplated hereby, became our holding company by way of a share-for-share exchange in which the shareholders of Midasplayer International Holding Company p.l.c. exchanged their shares in Midasplayer International Holding Company p.l.c. for shares having substantially the same rights in King Digital Entertainment plc at a ratio of five shares of King Digital Entertainment plc for every two shares of Midasplayer International Holding Company p.l.c. Upon the exchange, the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical consolidated financial statements of King Digital Entertainment plc. Our registered office is located at Fitzwilton House, Wilton Place, Dublin 2, Ireland and our telephone number is +44 (0) 20 3451 5464. We have additional offices in Stockholm and Malmö, Sweden; Barcelona, Spain; Bucharest, Romania; London, United Kingdom; St. Julians, Malta; and San Francisco, California.

All of our operations are conducted through various subsidiaries, which are organized and operated according to the laws of their country of incorporation.

The following chart shows our corporate structure after giving effect to the reorganization described above:

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

We have historically conducted our business through Midasplayer International Holding Company p.l.c. (formerly Midasplayer International Holding Company Limited) and its subsidiaries. On March 25, 2014, King Digital Entertainment plc, a company incorporated under the laws of Ireland and created for the purpose of facilitating the public offering contemplated hereby, became our holding company by way of a share-for-share exchange in which the shareholders of Midasplayer International Holding Company p.l.c. exchanged their shares in Midasplayer International Holding Company p.l.c. for shares having substantially the same rights in King Digital Entertainment plc, which had nominal assets and liabilities prior to the share-for-share exchange and will not have conducted any operations prior to the completion of this offering. The historical consolidated financial statements included in this prospectus are those of King Digital Entertainment plc, which are the historical financial statements of Midasplayer International Holding Company p.l.c. reflected retrospectively for the corporate reorganization and share-for-share exchange. Upon the exchange, the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical consolidated financial statements of King Digital Entertainment plc. See “Corporate Structure.”

The consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated statements of financial position data as of December 31, 2012 and 2013 are derived from our annual consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the year ended December 31, 2010 and the consolidated statements of financial position data as of December 31, 2010 and 2011 are derived from our consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the year ended December 31, 2009 and the consolidated statements of financial position data as of December 31, 2009 are derived from our unaudited consolidated financial statements not included in this prospectus. Our financial statements are prepared in accordance with IFRS as issued by the IASB. Our historical results are not necessarily indicative of the results that should be expected in any future period.

 

     Year Ended December 31,  
     2009      2010     2011     2012          2013      

Consolidated Statements of Operations Data:

            

(in thousands, except per share data)

            

Revenue

   $   59,722       $   58,448      $   63,901      $  164,412       $ 1,884,301   

Costs and expenses (1):

            

Cost of revenue

     25,065         29,655        25,915        54,713         584,358   

Research and development

     5,758         8,156        12,373        28,600         110,502   

Sales and marketing

     14,601         13,042        18,402        55,188         376,898   

General and administrative

     7,116         6,049        7,958        14,846         96,537   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total costs and expenses

     52,540         56,902        64,648        153,347         1,168,295   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total revenue less expenses

     7,182         1,546        (747     11,065         716,006   

Net finance income (costs)

     160         76        49        52         (1,731
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Profit (loss) before tax

     7,342         1,622        (698     11,117         714,275   

Tax expense (credit)

     1,563         (122     617        3,272         146,681   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Profit (loss)

   $ 5,779       $ 1,744      $ (1,315   $ 7,845       $ 567,594   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Earnings (loss) per share attributable to the equity holders of the company (2):

            

Basic

   $ 0.02       $ 0.00      $ (0.00   $ 0.03       $ 1.86   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.02       $ 0.00      $ (0.00   $ 0.02       $ 1.75   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(footnotes appear on following page)

 

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     Year Ended December 31,  
     2011     2012     2013  

Other Financial Data:

      

(in thousands, except percentage data)

      

Gross bookings (3)

   $   77,706      $   181,570      $   1,979,821   

Adjusted EBITDA (4)

   $ 4,442      $ 28,478      $ 824,742   

Adjusted EBITDA margin (5)

     7     17     44

 

(1) Costs and expenses include share-based and other equity-related compensation expense as follows (in thousands):

 

     Year Ended December 31,  
      2009        2010        2011        2012        2013   

Share-based and other equity-related compensation:

              

Cost of revenue

   $   —       $   —       $       $ 820       $ 4,583   

Research and development

                     807         6,576         62,493   

Sales and marketing

                     67         2,033         3,617   

General and administrative

     77         17         770         1,704         25,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based and other equity-related compensation expense

   $   77       $   17       $ 1,644       $ 11,133       $ 96,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 10 to our consolidated financial statements for further details on the calculation of basic and diluted earnings (loss) per share attributable to equity holders of the company during the year.
(3) Gross bookings is defined as the total amount paid by our users for virtual items and for access to skill tournaments. See “—Non-GAAP Financial Measures—Gross Bookings” for a description of how we calculate gross bookings and for a reconciliation between gross bookings and revenue.
(4) Adjusted EBITDA is profit (loss), adjusted for provision for income taxes, other income (expense), net finance income (cost), depreciation, amortization, share-based and other-equity related compensation (including social security charges associated therewith), and changes in deferred revenue. See “—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a description of how we calculate adjusted EBITDA and for a reconciliation between adjusted EBITDA and profit (loss).
(5) Adjusted EBITDA margin is adjusted EBITDA as a percentage of adjusted revenue. See “—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a description of how we calculate adjusted EBITDA margin and for a reconciliation between adjusted EBITDA margin and profit (loss) and see “—Non-GAAP Financial Measures—Adjusted Revenue” for a reconciliation between adjusted revenue and revenue.

 

 

     As of December 31,  
     2009      2010      2011      2012      2013  

Consolidated Statements of Financial Position Data:

              

(in thousands)

              

Cash and cash equivalents

   $ 27,101       $ 25,611       $ 21,658       $ 27,912       $ 408,695   

Trade and other receivables

     5,718         5,585         7,292         33,401         216,881   

Total assets

     38,150         36,682         35,804         75,223         806,863   

Trade and other payables

     13,171         13,589         15,467         31,948         172,107   

Deferred revenue

                     2,326         5,681         10,942   

Total liabilities

     15,496         13,473         18,923         41,692         439,476   

Share capital

     27         27         24         25         65   

Total shareholders’ equity

     22,654         23,209         16,881         33,531         367,387   

 

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The following unaudited quarterly consolidated statements of operations data for each of the quarters indicated have been prepared on a basis consistent with our annual consolidated financial statements. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Quarter Ended  
     Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
     Dec. 31,
2012
     Mar. 31,
2013
     Jun. 30,
2013
     Sep. 30,
2013
    Dec. 31,
2013
 

Quarterly Consolidated Statements of Operations Data:

(in thousands)

                    

Revenue

   $ 21,626      $ 31,903      $ 41,274       $ 69,609       $ 205,918       $ 455,472       $ 621,196      $ 601,715   

Costs and expenses (1)

                    

Cost of revenue

     9,473        10,974        13,084         21,182         64,014         142,421         188,716        189,207   

Research and development

     4,170        5,220        6,091         13,119         22,183         28,761         11,039        48,519   

Sales and marketing

     6,220        14,266        12,339         22,363         47,629         112,843         110,164        106,262   

General and administrative

     2,217        2,954        4,351         5,324         6,514         16,285         22,786        50,952   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total costs and expenses

     22,080        33,414        35,865         61,988         140,340         300,310         332,705        394,940   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue less expenses

     (454     (1,511     5,409         7,621         65,578         155,162         288,491        206,775   

Net finance income (costs)

     8        21        12         11         3         7         (1,795     54   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Profit (loss) before tax

     (446     (1,490     5,421         7,632         65,581         155,169         286,696        206,829   

Tax expense

     258        490        974         1,550         12,930         29,254         56,914        47,583   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Profit (loss)

   $ (704   $ (1,980   $ 4,447       $ 6,082       $ 52,651       $ 125,915       $ 229,782      $ 159,246   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other Data:

                    

Capital expenditures (2)

   $ 966      $ 1,529      $ 939       $ 1,823       $ 3,486       $ 4,163       $ 6,867      $ 8,442   

 

(1) Costs and expenses include share-based and other equity-related compensation expense (credit) as follows (in thousands):

 

     Quarter Ended  
     Mar. 31,
2012
     Jun. 30,
2012
     Sep. 30,
2012
     Dec. 31,
2012
     Mar. 31,
2013
     Jun. 30,
2013
     Sep. 30,
2013
    Dec. 31,
2013
 

Share-based and other equity-related compensation

                      

Cost of revenue

   $   58       $ 70       $ 109       $ 583       $ 1,123       $ 1,647       $ 275      $ 1,538   

Research and development

     477         928         1,102         4,069         13,271         18,554         (1,963     32,631   

Sales and marketing

     23         1,533         218         259         453         365         296        2,503   

General and administrative

     199         993         233         279         451         1,088         907        22,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total share-based and other equity-related compensation expense (credit)

   $   757       $ 3,524       $ 1,662       $ 5,190       $ 15,298       $ 21,654       $ (485   $ 59,599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(2) Includes purchases of intangible assets.

Non-GAAP Financial Measures

In this prospectus, we use gross bookings, adjusted revenue, adjusted EBITDA and adjusted EBITDA margin. These measures are not calculated in accordance with IFRS or U.S. GAAP and we collectively refer to these as non-GAAP financial measures.

Gross Bookings

Gross bookings is a non-GAAP financial measure that is not calculated in accordance with IFRS. Gross bookings is equal to the total amount paid by our users for virtual items and for access to skill tournaments. In these periods, gross bookings included amounts paid for advertising space, which have become immaterial in recent periods.

We use gross bookings to evaluate the results of our operations, generate future operating plans and assess our performance. While we believe that this non-GAAP financial measure provides a meaningful measurement of our business performance during a particular period because it measures the total cash spend by our players in the period, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with

 

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IFRS. In addition, other companies, including companies within our industry, may calculate gross bookings differently or not at all, which reduces its usefulness as a comparative measure.

The following table reflects the reconciliation of revenue to gross bookings for each of the periods indicated (in thousands):

 

    Year Ended     Quarter Ended  
    December 31,     Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun.  30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
 
    2011     2012     2013                  

Reconciliation of Revenue to Gross Bookings:

                     

Revenue

  $   63,901      $ 164,412      $ 1,884,301      $ 21,626      $ 31,903      $ 41,274      $ 69,609      $ 205,918      $ 455,472      $ 621,196      $ 601,715   

Sales tax

    7,277        11,891        99,688        2,209        2,566        2,700        4,416        14,735        23,338        30,085       
31,530
  

Other income(1)

    (1,870     (3,181     (14,917     (549     (620     (606     (1,406     (3,497     (4,825     (4,153     (2,442

Movement in player wallet and other adjustments(2)

    6,052        5,106        5,483        1,229        1,438        1,092        1,347        1,339        1,208        1,337        1,599   

Change in deferred revenue

    2,346        3,342        5,266        4,625        2,272        (1,005     (2,550     101        5,726        (285     (276
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross bookings

  $ 77,706      $ 181,570      $ 1,979,821      $ 29,140      $ 37,559      $ 43,455      $ 71,416      $ 218,596      $ 480,919      $ 648,180      $ 632,126   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other income includes other marketing-related rebates from platform providers, European Union sales tax rebates from platform providers and other immaterial and minor elements of income related to skill tournaments.
(2) Calculated as the change of the net withdrawable cash balance in skill tournament players’ accounts after adjustments for tournament fees, deposits, withdrawals, chargebacks and confiscated funds.

Adjusted Revenue

Adjusted revenue is a non-GAAP financial measure that is not calculated in accordance with IFRS. We define adjusted revenue as revenue adjusted for changes in deferred revenue. We believe that adjusted revenue is a useful metric for calculating adjusted EBITDA margin and understanding our operating results and ongoing profitability.

The following table reflects the reconciliation of revenue to adjusted revenue for each of the periods indicated (in thousands):

 

    Year Ended     Quarter Ended  
    December 31,     Mar.  31,
2012
    Jun.  30
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
 
    2011     2012     2013                  

Reconciliation of Revenue to Adjusted Revenue:

                     

Revenue

  $   63,901      $ 164,412      $ 1,884,301      $ 21,626      $ 31,903      $ 41,274      $ 69,609      $ 205,918      $ 455,472      $ 621,196      $ 601,715   

Change in deferred revenue

    2,346        3,342        5,266        4,625        2,272        (1,005     (2,550     101        5,726        (285     (276
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted revenue

  $ 66,247      $ 167,754      $ 1,889,567      $ 26,251      $ 34,175      $ 40,269      $ 67,059      $ 206,019      $ 461,198      $ 620,911      $ 601,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures that are not calculated in accordance with IFRS. We define adjusted EBITDA as profit (loss), adjusted for income tax expense, other income (expense), net finance income (costs), depreciation, amortization, share-based and other equity-related compensation (including social security charges associated therewith) and changes in deferred revenue. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of adjusted revenue. We believe that adjusted EBITDA and adjusted EBITDA margin are useful metrics for investors to understand and evaluate our operating results and ongoing profitability because it permits investors to evaluate our recurring profitability from our ongoing operating activities. We also use these measures internally to establish forecasts, budgets and operational goals and to manage and monitor our business, as well as evaluating our ongoing and historical performance.

 

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Adjusted EBITDA and adjusted EBITDA margin have certain limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under IFRS. These limitations include:

 

   

adjusted EBITDA does not include change in deferred revenue, other income (expense), which includes foreign exchange gains and losses;

 

   

adjusted EBITDA does not include share-based and other equity-related compensation expense (includes social security charges associated therewith) and periodic charges; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, limiting its usefulness as a direct comparative measure.

The following table reflects the reconciliation of profit (loss) to adjusted EBITDA for each of the periods indicated (in thousands, except percentage data):

 

    Year Ended     Quarter Ended  
    December 31,     Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
 
    2011     2012     2013                  

Reconciliation of Profit (Loss) to Adjusted EBITDA:

                     

Profit (loss)

  $ (1,315   $ 7,845      $ 567,594      $ (704   $ (1,980   $ 4,447      $ 6,082      $ 52,651      $ 125,915      $ 229,782      $ 159,246   

Add:

                     

Income tax expense

    617        3,272        146,681        258        490        974        1,550        12,930        29,254        56,914        47,583   

Other income (expense) , net

    (859     112        1,041        310        (1,170     752        220        (589     267        675        688   

Net finance (income) costs

    (49     (52     1,731        (8     (21     (12     (11     (3     (7     1,795        (54

Share-based and other equity-related compensation(1)

    1,644        11,133        96,066        757        3,524        1,662        5,190        15,298        21,654        (485     59,599   

Change in deferred revenue

    2,346        3,342        5,266        4,625        2,272        (1,005     (2,550     101        5,726        (285     (276

Depreciation and amortization

    2,058        2,826        6,363        548        614        715        949        1,034        1,345        1,798        2,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $     4,442      $   28,478      $ 824,742      $     5,786      $     3,729      $     7,533      $   11,430      $   81,422      $ 184,154      $ 290,194      $ 268,972   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

    7     17     44     22     11     19     17     40     40     47     45

 

(1) Includes the vested portion of a special grant of $24 million, for the quarter ended December 31, 2013, to be paid in cash at the completion of this offering on a per share or per award basis to our current personnel and directors that hold equity securities or other share-based incentive awards. A second special grant was made in early 2014 and the vested portion is to be paid in cash at the completion of this offering. Any unvested portion is paid, subsequently over the remaining vesting period. No such future grants are expected. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dividends and Other Payments.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The consolidated financial statements included elsewhere in this prospectus, which are the subject of the following discussion and analysis, are those of King Digital Entertainment plc and its consolidated subsidiaries. We have historically conducted our business through Midasplayer International Holding Company p.l.c. (formerly Midasplayer International Holding Company Limited) and its subsidiaries, and, upon completion of the share-for-share exchange, Midasplayer International Holding Company p.l.c. became our wholly-owned subsidiary whereby the historical consolidated financial statements of Midasplayer International Holding Company p.l.c. became the historical financial statements of King Digital Entertainment plc. See “Corporate Structure.”

You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with the consolidated financial statements and related notes of King Digital Entertainment plc included elsewhere in this prospectus for each of the years ended December 31, 2011, 2012 and 2013. Our financial statements are prepared in accordance with IFRS as issued by the IASB. Our historical results are not necessarily indicative of the results that should be expected in the future. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading interactive entertainment company for the mobile world. In December 2013, an average of 128 million DAUs played our games more than 1.2 billion times per day and, in February 2014, an average of 144 million DAUs played our games more than 1.4 billion times per day. We make casual games, which appeal to a wide and growing audience. Users access our games for free anywhere and anytime they wish to, either on their mobile devices, through social networks or via our website, king.com. The combination of wide game appeal, accessibility, and our multi-platform capabilities enables us to attract a broad user base, foster viral growth, and create a compelling, fun and social experience. We generate revenue primarily through sales of virtual items by means of microtransactions, where certain of our users pay for items and features that enhance their entertainment experience, such as extra lives, boosters and additional game content.

We have been developing and publishing online casual games since 2003. Following our formation, we became a leading game portal, developing and publishing proprietary games in a tournament format through our website, as well as distributing our content on other leading web portals of the time, such as AOL, MSN and Yahoo!. In recent years, as the market has shifted materially to mobile and social platforms, we have embraced new distribution channels for our games such as the Apple App Store, the Google Play Store, Facebook, the Amazon Appstore and KakaoTalk and by doing so have significantly expanded our reach and market opportunity. Today, the majority of our users now access our content through their mobile devices, a trend that continues to grow.

During the last decade, we have developed a proprietary catalog of more than 180 game IPs across a wide range of casual sub-genres, which we continue to grow. We use a well-practiced, low-cost, low risk process for game development where we have typically developed a new game IP with a team of three people in 20 weeks. We launch new game IPs on our royalgames.com website, where we receive rapid feedback from our core user base of VIP customers. We then identify the games that we believe have the highest potential, based on deep performance analytics and our historical experience, and enhance them with additional features and capabilities in our Saga format before releasing them on other leading distribution channels, such as the Apple App Store, the Google Play Store, the Amazon Appstore and Facebook.

Prior to 2011, our primary source of revenue was multi-player skill tournament games, or skill tournaments, accessed on our website. In these games, users typically pay us a portion of their tournament fees to play a game, which we recognize as revenue. In the third quarter of 2011, we began launching games on Facebook. By

 

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December 2011, revenue from the sale of virtual items through the games we offer on mobile and social platforms exceeded revenue from our skill tournaments. In the fourth quarter of 2013, revenue from these skill tournaments represented 1% of our revenue.

The launch of our games on mobile and social platforms has driven significant revenue growth. We launched Bubble Witch Saga on mobile in July 2012, followed by Candy Crush Saga in November 2012, Pet Rescue Saga in June 2013, Papa Pear Saga in November 2013 and Farm Heroes Saga in January 2014. Our mobile games were installed over 76 million times and played approximately 1 billion times a day during the month of December 2013. Our mobile games were installed over 65 million times and played over 1.4 billion times a day during the month of February 2014. From their launch until February 28, 2014, our mobile games have been installed more than 600 million times. These mobile games were the primary driver for the acceleration in our revenue growth during the fourth quarter of 2012 and 2013.

We have also achieved substantial momentum distributing our games on social networks. Our first major game launch on Facebook was Bubble Witch Saga, which launched in September 2011, and has shown significant staying power in terms of users and monetization. We subsequently launched Candy Crush Saga in April 2012, Pet Rescue Saga in November 2012, Farm Heroes Saga in April 2013 and Papa Pear Saga in May 2013. As of December 31, 2013, we had five games among Facebook’s top 15 games, as measured by DAUs, which were all leaders in their respective sub-genres.

Across all of our distribution platforms, our network of games had over 128 million average DAUs in December 2013 and 144 million average DAUs in February 2014. Our top games in terms of total average DAUs in December 2013 and February 2014, respectively, were Candy Crush Saga (93 million and 97 million average DAUs), Pet Rescue Saga (15 million and 15 million average DAUs), Farm Heroes Saga (8 million and 20 million average DAUs), Papa Pear Saga (5 million and 5 million average DAUs) and Bubble Witch Saga (3 million and 3 million average DAUs).

From 2011 to 2012, our revenue increased 156% from $64 million to $164 million, our adjusted EBITDA increased from $4 million to $28 million, and our profit (loss) before tax increased from $(0.7) million to $11 million. From 2012 to 2013, our revenue increased from $164 million to $1,884 million, an increase of 1,049%, our adjusted EBITDA increased from $28 million to $825 million, and our profit before tax increased from $11 million to $714 million. This continued growth was driven by significant increases in average DAUs and gross average bookings per user, or GABPU, for the year ended December 31, 2013, which were up 659% and 49%, respectively, as compared to the year ended December 31, 2012. For a description of how we calculate adjusted EBITDA and the limitations of this financial measure, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin.”

Our operating philosophy can be broken down into the execution of four distinct steps: creating and distributing high quality content wherever our users want it; increasing our network size and reach by growing and sustaining the active base of users playing our games; generating strong engagement with those users and driving increased frequency of play across our portfolio of games; and monetization by converting our active users into paying customers. These critical components define our operating strategy and will underpin our financial and operational growth in the future.

Our financial focus is to grow our gross bookings and revenue and convert that growth to profitability. We believe that our business model is highly scalable and has demonstrated strong operating leverage in terms of our ability to convert incremental revenue growth into incremental growth in adjusted EBITDA and cash flow. The majority of our cost base is variable. One of our largest operating costs, performance marketing expenses, is discretionary and follows a data-centric rules-based approach aimed at maximizing aggregate ROI regardless of content, channel or advertising format. Our business generates significant cash flows from operations and requires limited capital expenditures. As of December 31, 2013, we have only raised $9 million of primary capital for our business since inception and we had net cash generated from operating activities of $680 million for the year ended December 31, 2013.

 

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How We Generate Revenue

We generate our revenue primarily through the sale of virtual items to users. Our users can purchase virtual items, which enhance and expand their game experience. These virtual items include items such as extra lives and skill-enhancing boosters, as well as the ability to unlock additional game content. Our microtransaction model includes multiple opportunities throughout gameplay for our users to buy virtual items. A typical “consumable” virtual item is used immediately, priced at approximately $1 and revenue is recognized upon the consumption. We offer “durable” virtual items in some of our games. A player can use these items over extended periods of gameplay and they typically have a higher purchase price of $5 to $30. Revenue from these durable virtual items is recognized over the estimated life of a paying player for that specific game, which is between five and eight months for our top three games by revenue. The majority of our sales of virtual items are consumable in nature, with durable goods making up a relatively small percentage of the total mix. Durable virtual items accounted for 4%, 13% and 1% of revenue for the years ended December 31, 2011, 2012 and 2013, respectively. In the future, we intend to focus on the sale of consumable virtual items, and we therefore expect durable virtual items to represent a declining percentage of revenue.

In September 2012, we began to offer virtual currency to our players on Facebook. Our virtual currency can only be redeemed for virtual items and cannot be withdrawn. Virtual currency purchased in one of our games cannot be used in another of our games. Revenue from the sale of our virtual currency is deferred and recognized when the virtual item, purchased with the virtual currency, is used by the player.

Most of the purchases of virtual items are currently processed by the platform provider used by the individual player. Nearly all purchases of virtual items were made through Apple’s iOS, Google’s Android, Amazon’s Kindle and Facebook platforms during the year ended December 31, 2013. These platforms typically charge us approximately 30% of the after-tax payments they collect, which reflects their normal terms of trade. We recognize the gross amount of these transactions as revenue and record a corresponding cost of revenue for the amount paid to our platform partners.

We generate a portion of our revenue from skill tournaments on our royalgames.com website. On skill tournaments, we retain a portion of the amount that users pay to play as revenue. In the year ended December 31, 2013, revenue from these skill tournaments represented 1% of our revenue.

We have also historically generated a portion of our revenue from the sale of advertising space to third parties on our king.com website and in our games; however, advertising accounted for 12%, 10% and 1% of revenue in the years ended December 31, 2011, 2012 and 2013, respectively. In the second quarter of 2013, we discontinued selling such advertising space, and we do not expect to derive any significant portion of our revenue from the sale of advertising space in the foreseeable future.

Key Business Metrics

We use the following key financial and operating metrics to evaluate and manage our business on an ongoing basis, which we believe are useful for investors to compare key financial data both within and across reporting periods:

 

   

Financial Metrics

 

   

Gross Bookings

 

   

Revenue

 

   

Adjusted EBITDA

 

   

Adjusted EBITDA margin

 

   

Operating Metrics

 

   

Monthly Active Users (MAUs)

 

   

Monthly Unique Users (MUUs)

 

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Monthly Unique Payers (MUPs)

 

   

Monthly Gross Average Bookings per Paying User (MGABPPU)

 

   

Daily Active Users (DAUs)

 

   

Gross Average Bookings per User (GABPU)

Key Financial Metrics

Gross Bookings. We define gross bookings as the total amount paid by our users for virtual items and for access to skill tournaments. We believe that this metric provides a meaningful measurement of our business performance during a particular period because it measures the total cash spend by our players in the period. Gross bookings is not computed in accordance with IFRS and, prior to June 2013, included amounts collected for advertising space sold. For a discussion of the limitations of this financial measure and a reconciliation of revenue to gross bookings, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Gross Bookings.”

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012      2012      2012      2012      2013      2013      2013      2013  

Gross bookings

   $   29       $   38       $   43       $   71       $   219       $   481       $   648       $   632   

Revenue

     22         32         41         70         206         455         621         602   

Our top three games accounted for 94% of our gross bookings in 2013. This compares to 61% of our gross bookings in 2012. As we continue to launch new games, we anticipate that the concentration of gross bookings across our top games will decline.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012      2012      2012      2012      2013      2013      2013      2013  

North America

   $ 7       $   10       $   14       $   25       $ 98       $   263       $   375       $   354   

Rest of world

       22         28         29         46          121         218         273         278   

We also review our gross bookings by geography. Our gross bookings in North America are higher relative to all other geographies due to the size and maturity of its mobile and online markets. In 2013, 55% of our gross bookings were generated by users in North America, an increase from 31% of our gross bookings in North America in 2012, and 11% of our gross bookings were generated by users in the United Kingdom in 2013. As a result of the significant growth in North America, no other country, other than the United Kingdom, represented more than 10% of gross bookings during 2013.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012      2012      2012      2012      2013      2013      2013      2013  

Mobile

   $       $       $ 2       $ 16       $   126       $   328       $   475       $   460   

Web

       26           34           37           49         88         147         173         172   

Other

     3         4         4         6         5         6                   

In all regions, an increasing number of our users are accessing our games through their mobile devices. In the year ended December 31, 2013, 70% of our gross bookings were generated by mobile users, an increase from 10% in the year ended December 31, 2012. We introduced Candy Crush Saga on mobile in the fourth quarter of 2012 and have seen mobile gross bookings as a percentage of total gross bookings expand from 23% in the fourth quarter of 2012 to 73% in the fourth quarter of 2013.

Gross bookings in the quarter ended December 31, 2013 slightly declined compared to the quarter ended September 30, 2013. The decline was driven by a decrease in Candy Crush Saga gross bookings, which was mostly offset by an increase in gross bookings across all of our other games. This growth in the other games was driven by a further diversification of our portfolio in the mobile channel as we released more games on that channel in the middle and later part of 2013.

 

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In January 2014, we also released Farm Heroes Saga on the mobile channel. Following this launch, gross bookings from this game have increased and we have seen further diversification of our overall gross bookings. We believe these recent launches, in combination with new content releases, have contributed to recent gross bookings consistent with those of the fourth quarter of 2013. In future periods, as we continue to diversify our mobile game portfolio, we expect Candy Crush Saga to represent a smaller percentage of our total mobile channel and overall gross bookings.

Revenue. Revenue increased by $1,720 million from $164 million in the year ended December 31, 2012 to $1,884 million in the year ended December 31, 2013. The key drivers of this increase were consistent with those affecting gross bookings. From the fourth quarter of 2012 to the fourth quarter of 2013, deferred revenue related to in-period bookings increased from $3 million to $6 million due to an increase in total revenue but declined as a proportion of adjusted revenue. For additional detail on our revenue recognition policies, see “—Critical Accounting Policies and Estimates.”

 

     Quarter Ended  
     Mar. 31,     Jun. 30,     Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012     2012     2012      2012      2013      2013      2013      2013  

Adjusted EBITDA

   $ 6      $ 4      $ 8       $   11       $   81       $   184       $   290       $   269   

Profit (loss)

      (1      (2       4         6         53         126         230         159   

Adjusted EBITDA. We define adjusted EBITDA as profit (loss), adjusted for income tax expense, other income (expense), net finance income (costs), depreciation, amortization, share-based and other equity-related compensation and changes in deferred revenue. We believe that adjusted EBITDA is a useful metric for investors to understand and evaluate our operating results and ongoing profitability because it permits investors to evaluate our recurring profitability from our ongoing operating activities. Adjusted EBITDA is not calculated in accordance with IFRS. For a discussion of the limitations of this non-GAAP financial measure and a reconciliation of profit (loss) to adjusted EBITDA, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin.”

Adjusted EBITDA increased from $28 million in the year ended December 31, 2012 to $825 million in the year ended December 31, 2013. This growth was primarily driven by increases in gross bookings and revenue, and increased monetization across most platforms, partially offset by planned increases in performance marketing spend and increased investment in permanent and temporary headcount. Adjusted EBITDA and adjusted EBITDA margin decreased from $290 million and 47%, respectively, in the third quarter of 2013 to $269 million and 45%, respectively, in the fourth quarter of 2013. We believe that the reasons for this decrease are consistent with the factors driving the movement in gross bookings over the same periods. Adjusted EBITDA margin increased from 17% in the year ended December 31, 2012 to 44% in the year ended December 31, 2013 reflecting the strong economies of scale in our business model.

Key Operating Metrics

We track a variety of operating metrics to measure our ability to grow, retain and monetize our user network. These metrics are shown on a quarterly basis to be consistent with how they are tracked internally and will be reported going forward. For our calculation of non-unique user metrics, an individual who either plays two of our games on a single platform or device, or the same game on two platforms or devices in the relevant period would be counted as two users. For our calculation of unique user metrics, we do not de-duplicate user data, so that a user who plays our games on multiple platforms or devices in the relevant period will be counted as a unique user for each platform or device on which the user played during the period. However, due to certain technological limitations, a user who plays on more than one platform or device will likely be counted more than once as a unique user. For additional information on these user metrics, see “Market Data and User Metrics—User Metrics.”

Monthly Active Users (MAUs). We monitor MAUs as a key measure of the overall size of our network of users and as a measure of their regular engagement with our portfolio of games. MAUs are the number of individuals who played a particular game in the 30-day period ending with the measurement date. We calculate

 

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average MAUs by adding the total number of active users as of the end of each month in a given period and dividing by the number of months in the period.

 

     Quarter Ended  
(in millions)    Mar. 31,
2012
     Jun. 30,
2012
     Sep. 30,
2012
     Dec. 31,
2012
     Mar. 31,
2013
     Jun. 30,
2013
     Sep. 30,
2013
     Dec. 31,
2013
 

Average MAUs

     30        49        52        67        138        265        361        408  

Average MAUs increased by 341 million, or 509%, from 67 million in the quarter ended December 31, 2012 to 408 million in the quarter ended December 31, 2013. Average MAUs increased by 47 million, or 13%, from 361 million in the quarter ended September 30, 2013 to 408 million in the quarter ended December 31, 2013. We believe our growth in MAUs was driven by our focus on the introduction of additional popular games combined with the increased consumer usage of mobile devices, which has positively impacted the viral growth of our user network.

Monthly Unique Users (MUUs). We monitor MUUs as a key measure of total network reach across our games. MUUs are the number of unique individuals who played any of our games on a particular platform in the 30-day period ending with the measurement date. We calculate average MUUs by adding the total number of unique users as of the end of each month in a given period and dividing by the number of months in the period.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012      2012      2012      2012      2013      2013      2013      2013  

Average MUUs

     20        28        31        43        101        194        269        304  

Average MUUs increased by 261 million, or 607%, from 43 million in the quarter ended December 31, 2012 to 304 million in the quarter ended December 31, 2013. Average MUUs increased by 35 million, or 13%, from 269 million in the quarter ended September 30, 2013 to 304 million in the quarter ended December 31, 2013. We believe that the reasons for the growth in our MUUs were consistent with the factors driving the growth in our MAUs.

Monthly Unique Payers (MUPs). We monitor MUPs as a key measure of total paid network reach across our network of games. MUPs are the number of unique individuals who made a purchase of a virtual item at least once on a particular platform in the 30-day period ending with the measurement date. We calculate average MUPs by adding the total number of unique payers as of the end of each month in a period and dividing by the number of months in the period. Average MUPs for periods prior to April 2013 exclude Google’s Android payers due to technological limitations.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in thousands)    2012      2012      2012      2012      2013      2013      2013      2013  

Average MUPs

     411        674        854        1,321        4,095        10,339        13,012        12,165  

Average MUPs increased by 11 million, or 821%, from 1 million in the quarter ended December 31, 2012 to 12 million in the quarter ended December 31, 2013. We believe the reasons for the growth in our MUPs from December 31, 2012 were consistent with the factors driving the growth in our MAUs and MUUs, as well as improved in-game monetization. Average MUPs decreased by 0.9 million, or 7%, from 13 million in the quarter September 30, 2013 to 12 million in the quarter ended December 31, 2013. We believe the movement is as a result of less payment activity among occasional payers in our earlier Saga games, such as Bubble Witch Saga and Candy Crush Saga, in North America where we have enjoyed a rapid proliferation of network and payer growth. However, we have noted an increase in the number of payers playing in more than one game. These more engaged players are now driving an increase in average spend per paying player as discussed further below.

Daily Active Users (DAUs). We monitor DAUs as a key measure of our active player audience. DAUs are the number of individuals who played one of our games during a particular day. We calculate average DAUs by adding the total number of DAUs for each day in a period and dividing by the number of days in the period.

 

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     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
(in millions)    2012      2012      2012      2012      2013      2013      2013      2013  

Average DAUs

     7        11        12        15        36        76        109        124  

Average DAUs increased by 109 million, or 727%, from 15 million in the quarter ended December 31, 2012, to 124 million in the quarter ended December 31, 2013. Average DAUs increased by 15 million, or 14%, from 109 million in the quarter ended September 30, 2013 to 124 million in the quarter ended December 31, 2013. DAUs as a percentage of MAUs were 22% and 30% in the quarter ended December 31, 2012 and 2013, respectively, which we believe was mainly driven by increased mobile usage and the introduction of additional games. We believe the ratio of DAUs to MAUs is a useful measure of the engagement of our audience with our games, and the ongoing strength of our overall network. We calculate the DAU to MAU ratio for the period by adding the DAU to MAU ratio for each individual month in a period and dividing by the number of months in the period. We believe that increases in DAUs have had a positive impact on our overall gross bookings as a larger audience creates more opportunities for monetization. We believe the reasons for the growth in our DAUs were consistent with the factors driving the growth in our MAUs and MUUs.

We expect our growth in MAUs, MUUs and DAUs to slow in future periods as the size of our player network increases and we achieve greater market penetration.

Monthly Gross Average Bookings per Paying User (MGABPPU). We monitor MGABPPU as a key measure of overall monetization across our network on a monthly basis. MGABPPU is calculated by dividing (1) our total gross bookings in a given period by (2) the number of months in that period, divided by (3) the average number of MUPs during the period.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
     2012      2012      2012      2012      2013      2013      2013      2013  

MGABPPU

   $  23.65       $  18.58       $  16.96       $  17.64       $  15.92       $  15.51       $  16.60       $  17.32   

MGABPPU decreased by $0.32, or 2%, from $17.64 in the quarter ended December 31, 2012 to $17.32 in the quarter ended December 31, 2013. The decrease from December 31, 2012 reflects an increase in the number of paying users on mobile and social platforms driven by the success of our new games, in particular Candy Crush Saga, albeit at more moderate payment levels on average than our legacy skill tournament players. MGABPPU is also positively impacted by advertising in earlier periods, as it made up a greater percentage of gross bookings and were spread over a smaller player base at that time. MGABPPU increased by $0.72, or 4%, from $16.60 in the quarter ended September 30, 2013 to $17.32 in the quarter ended December 31, 2013. We believe the increase in MGABPPU is a result of our ability to keep our loyal customer base engaged with new content on existing games and attracting them to new games within our network.

Gross Average Bookings per User (GABPU). We monitor GABPU as a key measure of overall monetization across our network on a daily basis. GABPU is calculated by dividing (1) our total gross bookings in a given period by (2) the number of days in that period, divided by (3) the average number of DAUs during the period. We believe that GABPU provides useful information to investors and others in understanding and evaluating our results given that it quantifies the daily monetization levels of our users.

 

     Quarter Ended  
     Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,      Mar. 31,      Jun. 30,      Sep. 30,      Dec. 31,  
     2012      2012      2012      2012      2013      2013      2013      2013  

GABPU

   $  0.044       $  0.036       $  0.040       $  0.052       $  0.067       $  0.069       $  0.065       $  0.056   

GABPU increased by $0.004, or 8%, from $0.052 in the quarter ended December 31, 2012 to $0.056 in the quarter ended December 31, 2013. The increase from December 31, 2012 reflects improved overall monetization of our network driven by our increased presence across mobile networks and the success of our games launched during 2013, in particular Candy Crush Saga. GABPU decreased by $0.009, or 14%, from $0.065 in the quarter ended September 30, 2013 to $0.056 in the quarter ended December 31, 2013. The decrease from September 30, 2013

 

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reflects an increase in our active player audience as we targeted a broader player base and new markets outside of our traditional markets of North America and Western Europe, which monetized more moderately.

 

LOGO

LOGO

 

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Factors Affecting Our Performance

Studio and Game Development

We have invested in expanding our game studios across Europe as well as our technical and creative teams. We plan to continue to invest in our existing game studios while creating additional studio capacity so that we can continue to develop new game IPs, operate existing titles and release new titles on an ongoing basis. Our ability to hire quality engineering, technical and creative staff will be important for successful new game launches and to sustain our profitability.

Content Development: New Game Launches and Franchise Expansion

We have built a unique and differentiated model for developing and scaling our games. Our future revenue will depend on our ability to continue to efficiently develop and launch high-quality titles that become and remain popular, while expanding our existing successful franchises. The success and timing of our title and franchise developments could vary in the future, which may in turn impact our future financial performance on a quarterly or annual basis.

Our Technology Platform

We have developed a proprietary technology infrastructure that offers a seamlessly synchronized cross-platform gameplay for our users, creates an integrated development and service platform for our game studios, and provides scalability and efficiency across our core operations. This infrastructure has been a critical factor in support of our user growth, and has allowed us to maintain robust service levels for our users while scaling our operations with far lower levels of capital investment than many our industry peers. Our ability to expand and enhance our technology and infrastructure will determine the scale of operation we can support and the quality of service we are able to provide our users, as well as the required level of capital investment in the future, which in turn may affect our future financial performance and profitability.

Distribution Platforms and User Acquisition Channels

Our future success will depend on our ability to attract and retain users and to provide our games on the most relevant platforms. To the extent that the way users access and interact with our games changes, either through the introduction of new technologies, distribution platforms, or devices, or through changes to existing user acquisition channels, the effectiveness and engagement with our games, as well as our ability to reach customers and potential customers, may vary, which may in turn affect our financial performance and future profitability.

Sustaining and Growing Our User Network

We believe that building and sustaining a sizeable and loyal network of users is critical to our future success, as the size of our user network determines the maximum potential audience for the purchase of virtual items. While the majority of our user acquisition has been through unpaid channels, we have also built extensive capabilities and technology infrastructure around paid player acquisition. This has allowed us to achieve a return greater than twice our historical investment in paid player acquisition, which we believe demonstrates an attractive rate of return. Our ability to continue acquiring players at attractive rates of return, sustain our current base of users and maintain our network virality to enable cross-selling across our portfolio of games may change, which could in turn impact our financial performance.

Delivering User Engagement

The ability of our games to engage and maintain the interest of our users and encourage repeated play of not only a specific game, but our entire portfolio of games, on a regular basis, is critical to building a dynamic user network that creates demand for the purchase of virtual items. The enduring quality of the games we develop, and our users’ ability to access them on the most relevant platforms, may directly impact our user engagement and in turn impact our financial performance.

 

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Monetization

While users are able to play our games for free, we generate the majority of our revenue from in-game sales of virtual items. Our ability to create engaging and relevant content and to offer virtual items, which enhance the user experience, and therefore maintain or increase their propensity to purchase more, will be critical to our financial performance. Future monetization will therefore depend on the quality of the games we develop and distribute, and our ability to convert and retain users as paying customers.

Components of Cost and Expenses

Cost of Revenue

Our cost of revenue primarily consists of direct expenses incurred in order to generate revenue from our games. This includes amounts charged by our platform distribution partners, payments for third-party licensed intellectual property usage related to audio content, fees paid to payment processing providers, salaries, bonuses, benefits and share-based payments for our customer support and infrastructure teams, as well as their related travel, occupancy and facility costs. We expect cost of revenue to increase proportionally with revenue as we enter new markets for the foreseeable future. As we expand our mobile and social platform opportunities globally this may change in the future.

Research and Development

Our research and development expenses primarily consist of salaries, bonuses, benefits and share-based compensation payments for our engineers and associated developers. In addition, research and development expenses include outside services and consulting, as well as allocated facilities and other overhead costs.

Costs associated with maintaining our computer software and associated infrastructure are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of our identifiable and unique games are recognized as intangible assets, and amortized within research and development expense over an 18-month period for our mobile and social games, and over a three-year period for our skill tournaments.

We believe continued investment in enhancing existing games and developing new games is extremely important to achieve our strategic objectives. As a result, we expect research and development expenses to increase in absolute U.S. dollars for the foreseeable future as we expand and grow our business.

Sales and Marketing

Our sales and marketing expenses primarily consist of performance marketing spend related to player acquisition across a variety of mobile and media platforms worldwide. Sales and marketing also includes salaries, bonuses, benefits and share-based compensation for our sales and marketing colleagues, as well as consulting fees. In addition, sales and marketing expenses include general marketing, branding, advertising and public relations costs, as well as allocated facilities and other overhead costs. Our plan is to continue to invest in sales and marketing to retain and grow our network, and to continue building brand awareness, subject to the rigorous application of our rules-based process to achieve our required returns on investment. As a result, we expect sales and marketing expenses to increase in absolute U.S. dollars for the foreseeable future as we grow our business.

General and Administrative

Our general and administrative expenses primarily consist of salaries, bonuses, benefits and share-based compensation for our executive, finance, legal, information technology, human resources and other administrative colleagues, and outside consulting, legal and accounting services, as well as facilities and other overhead costs not allocated to other areas across the business. In addition, general and administrative expenses include all of our depreciation expenses, as well as our non-game amortization. We expect that our general and administrative expenses will increase for the foreseeable future in absolute U.S. dollars, for the foreseeable future as we grow our business, as well as to cover the additional cost and expenses associated with becoming a publicly-listed company.

 

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Net Finance Income (Cost)

Net finance income (cost) consists primarily of arrangement and other fees incurred to secure our asset-based loan facility (ABL Credit Facility). In periods in which we have borrowings under the ABL Credit Facility, net finance income (cost) will include interest payable on outstanding borrowings and loan fees. Net finance income (cost) also includes interest income earned on our cash and cash equivalents.

Tax Expense

Tax expense consists of income taxes in the various jurisdictions where we are subject to taxation. Our historical effective tax rate has fluctuated based on our financial results, as well as the product mix and geographic breakdown of operations and sales, but is expected to be steady in the future within a range of 15%—22%, subject to the tax regimes in which we operate remaining consistent with their current arrangements.

Results of Operations

The following table summarizes our historical consolidated statements of operations data:

 

     Year Ended December 31,  
     2011     2012          2013      

Consolidated Statements of Operations Data:

       

(in thousands)

       

Revenue

   $   63,901      $ 164,412       $ 1,884,301   

Costs and expenses (1):

       

Cost of revenue

     25,915        54,713         584,358   

Research and development

     12,373        28,600         110,502   

Sales and marketing

     18,402        55,188         376,898   

General and administrative

     7,958        14,846         96,537   
  

 

 

   

 

 

    

 

 

 

Total costs and expenses

     64,648        153,347         1,168,295   
  

 

 

   

 

 

    

 

 

 

Total revenue less expenses

     (747     11,065         716,006   

Net finance income (cost)

     49        52         (1,731
  

 

 

   

 

 

    

 

 

 

Profit (loss) before tax

     (698     11,117         714,275   

Tax expense

     617        3,272         146,681   
  

 

 

   

 

 

    

 

 

 

Profit (loss)

   $ (1,315   $ 7,845       $ 567,594   
  

 

 

   

 

 

    

 

 

 

 

(1) Costs and expenses include share-based and other equity-related compensation expense as follows (in thousands):

 

     Year Ended December 31,  
     2011      2012      2013  

Share-based and other equity-related compensation:

        

Cost of revenue

   $          —       $ 820       $ 4,583   

Research and development

     807         6,576         62,493   

Sales and marketing

     67         2,033         3,617   

General and administrative

     770         1,704         25,373   
  

 

 

    

 

 

    

 

 

 

Total share-based and other equity-related compensation expense

   $ 1,644       $     11,133         96,066   
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes our historical consolidated annual statements of operations data as a percentage of revenue for the periods shown:

 

     Year Ended December 31,  
     2011     2012     2013  

Consolidated Statements of Operations Data:

      

Revenue

     100     100     100

Costs and expenses (1):

      

Cost of revenue

     41        33     

 

31

  

Research and development

     19        17        6   

Sales and marketing

     29        34        20   

General and administrative

     12        9        5   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     101        93        62   

Total revenue less expenses

     (1     7        38   

Net finance income (cost)

                     
  

 

 

   

 

 

   

 

 

 

Profit (loss) before tax

     (1     7        38   

Tax expense

     1        2        8   
  

 

 

   

 

 

   

 

 

 

Profit (loss)

     (2 )%      5     30
  

 

 

   

 

 

   

 

 

 

 

(1) Costs and expenses include the following share-based and other equity-related compensation expense as follows as a percentage of revenue:

 

     Year Ended December 31,  
     2011     2012     2013  

Share-based and other equity-related compensation:

      

Cost of revenue

            

Research and development

     1        4        3   

Sales and marketing

            1          

General and administrative

     1        1        1   
  

 

 

   

 

 

   

 

 

 

Total share-based and other equity-related compensation expense

     3     7     5
  

 

 

   

 

 

   

 

 

 

Years Ended December 31, 2011, 2012 and 2013

Revenue

 

     Year Ended December 31,      2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011      2012      2013       

(dollars in thousands)

       

Mobile revenue

   $ 30       $ 15,572       $ 1,324,368         NM        8,405

Web revenue

     52,042         130,766         539,918         151     313

Other revenue

     11,829         18,074         20,015         53     11
  

 

 

    

 

 

    

 

 

      

Revenue

   $ 63,901       $ 164,412       $ 1,884,301         157     1,046
  

 

 

    

 

 

    

 

 

      

2013 Compared to 2012. Revenue increased $1,720 million from 2012 to 2013. Mobile revenue increased by $1,309 million to $1,324 million in 2013 from $16 million in 2012. Web revenue increased by $409 million to $540 million in 2013 from $131 million in 2012. Both mobile and web revenue were positively impacted by increased mobile and social usage, largely driven, particularly in mobile, by the growth and success of Candy Crush Saga. We expect our revenue growth to slow in future periods as the size of our player network increases and we achieve higher market penetration.

2012 Compared to 2011. Revenue increased $101 million from 2011 to 2012 as a result of our continued growth on Facebook and the introduction of certain games on various mobile platforms. Mobile revenue

 

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increased from an immaterial amount in 2011 to $16 million in 2012. Web revenue, which arises from the Facebook platform and our own website, increased by $79 million to $131 million from $52 million. Other revenue primarily includes revenue from our advertising operations which were closed down in June 2013. Revenue from our mobile and web platforms comprised 9% and 80% respectively, of revenue in 2012 versus 0% and 81% in 2011. Revenue from North America increased to 33% of revenue in 2012, from 19% in 2011, primarily driven by the success of our mobile and social games, which was enabled by the prevalence of smartphone usage and high levels of social media penetration in the U.S. market.

Costs and Expenses

Cost of Revenue

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011     2012     2013      

(dollars in thousands)

        

Cost of revenue

   $   25,915      $   54,713      $ 584,358        111     968

Percentage of revenue

     41     33     31    

2013 Compared to 2012. Cost of revenue increased by $530 million from 2012 to 2013. This increase was driven by a $528 million increase in amounts charged by our mobile and social platform partners, in line with our growth in revenue. Cost of revenue as a percentage of revenue decreased to 31% for the year ended December 31, 2013, from 33% for the year ended December 31, 2012.

2012 Compared to 2011. Cost of revenue increased by $29 million from 2011 to 2012. This increase was driven by a $32 million increase in amounts charged by our mobile and social platform partners offset by a $7 million decline in skill tournament expenses. This reflects a full year impact of some of our games launched on Facebook, as well as new game launches on this platform, as well as the launch of some of our games on mobile in 2012. Cost of revenue as a percentage of revenue declined from 41% to 33% due to change in platform mix.

Research and Development

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011     2012     2013      

(dollars in thousands)

        

Research and development

   $   12,373      $   28,600      $ 110,502        131     286

Percentage of revenue

     19     17     6    

2013 Compared to 2012. Research and development expenses increased by $82 million from 2012 to 2013. This reflects a $79 million increase in headcount-related expenses, including $35 million increase in share-based compensation expense. We capitalized $5 million of game development costs during 2013, an increase of $3 million from 2012.

2012 Compared to 2011. Research and development expenses increased by $16 million from 2011 to 2012. This increase was primarily attributable to a $13 million increase in direct salary expenses, including a $5 million increase in share-based compensation expense and a $2 million increase in facilities costs. We capitalized $2 million in development costs during 2012, an increase of $1 million from 2011.

Sales and Marketing

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011     2012     2013      

(dollars in thousands)

        

Sales and marketing

   $   18,402      $   55,188      $ 376,898        200     583

Percentage of revenue

     29     34     20    

 

 

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2013 Compared to 2012. Sales and marketing expenses increased by $322 million from 2012 to 2013. This increase was primarily attributable to $312 million increase in performance marketing spend focused on user acquisition. Sales and marketing expenses decreased from 34% of revenue for the year ended December 31, 2012, to 20% for the year ended December 31, 2013.

2012 Compared to 2011. Sales and marketing expenses increased by $37 million from 2011 to 2012. This increase was primarily due to a $27 million increase in social media performance marketing spend focused on user acquisition.

General and Administrative

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011     2012     2013      

(dollars in thousands)

        

General and administrative

   $     7,958      $   14,846      $   96,537        87     550

Percentage of revenue

     12     9     5    

2013 Compared to 2012. General and administrative expenses increased by $82 million from 2012 to 2013. This increase was primarily driven by a $55 million increase in headcount-related, growth and expansion expenses, and a $27 million increase in professional and consulting fees related to our proposed corporate restructuring and preparations for our initial public offering. General and administrative expenses decreased from 9% of revenue in the year ended December 31, 2012 to 5% of revenue in the year ended December 31, 2013

2012 Compared to 2011. General and administrative expenses increased by $7 million from 2011 to 2012. This increase was primarily due to a $5 million increase in headcount-related expenses and a $1 million increase in professional fees.

Net Finance Income (Costs)

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011      2012      2013      

(dollars in thousands)

      

Net finance income (costs)

   $         49       $         52       ($ 1,731     6     (3,429 %) 

Net finance income (costs) was ($2) million in the year ended December 31, 2013, compared to an immaterial amount in the year ended December 31, 2012. This reflects the cost of arrangement and other fees incurred to secure the ABL Credit Facility in 2013.

Tax Expense

 

     Year Ended December 31,     2011 to 2012
% Change
    2012 to 2013
% Change
 
     2011      2012     2013      

(dollars in thousands)

        

Tax expense

   $ 617       $ 3,272      $ 146,681        430     4,383

Effective tax rate

     NM         29     21    

Tax expense was $147 million in 2013, $3 million in 2012 and $0.6 million in 2011, representing effective tax rates of 21%, 29% and an immaterial percentage, respectively. The differences in our effective tax rates were largely due to the transitioning mix of the business across the products and geographies in which we operate. Our 2011 tax expense of $0.6 million, despite $(0.7) million in consolidated profit (loss) before tax, was primarily caused by non-deductible operating losses at our former Italian operations.

 

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Liquidity and Capital Resources

 

     Year Ended December 31,  
     2011      2012      2013  

Consolidated Statement of Cash Flows Data:

        
(in thousands)              

Net cash generated from operating activities

   $   5,177       $ 11,567       $ 679,572   

Net cash flows used in investing activities

     2,359         5,926         22,958   

Net cash flows used in financing activities

     6,340                 286,679   

As of December 31, 2013, we had cash and cash equivalents of $409 million, which consisted of $406 million of cash and cash equivalents maintained at various financial institutions, and $3 million held on behalf of customers who maintain accounts with us for tournament play. We paid a dividend subsequent to December 31, 2013. See “—Dividends and Other Payments.”

We have funded our operations and capital expenditures primarily through cash flows from operations and have raised only $9 million of primary capital to date. Our business model has not historically required extensive outside capital investment, and we do not expect it to become capital intensive in the future.

We believe that our existing cash and cash equivalents, together with cash internally generated from ongoing operations, will be sufficient to fund our operations and capital expenditures for at least the next 12 months and beyond.

We will repatriate cash from our subsidiaries by repayment of intercompany balances. We do not intend to repatriate cash in the form of dividend distributions or any other form of taxable payment. Accordingly, we do not expect tax would arise in Ireland in connection with the repatriation of cash from foreign subsidiaries. However, any repatriation of cash in the form of a taxable payment, such as a dividend distribution, would be subject to taxation at the Irish statutory tax rate, which is currently 12.5%.

Operating Activities

Operating activities provided $680 million of cash in 2013. The cash flow from operating activities primarily came from $714 million of profit before tax, adjusted for $26 million of non-cash items, changes in our working capital and $27 million of tax paid in the period. Changes in our working capital used $34 million of cash in 2013, primarily due to a $189 million increase in trade and other receivables, partially offset by a $150 million increase in trade and other payables.

Operating activities provided $12 million of cash in 2012. The cash flow from operating activities primarily came from $11 million of profit before tax, adjusted for $8 million of non-cash items, changes in our working capital and $2 million of tax paid in the period. Changes in our working capital used $5 million of cash in 2012, primarily due to an increase of $26 million in trade and other receivables, partially offset by a $17 million increase in trade and other payables due to higher performance marketing expenditure, in particular due to our expansion on both mobile and social platforms during the period.

Operating activities provided $5 million of cash in 2011. The cash flow generated by operating activities primarily came from $(0.7) million of profit (loss) before tax, adjusted for $4 million of non-cash items, a $2 million increase in working capital and $0.3 million of tax paid in the period.

Investing Activities

Our main capital investing activities historically have consisted of the purchases of office equipment, leasehold improvements, computer hardware, domain names, computer software and licenses, and internally developed software. We estimate that our ongoing capital requirements will scale proportionately with the overall size of the business, but will remain a small percentage of the overall cash generated by the business.

We also capitalize the cost of game development as an intangible asset prior to launch of the game and amortize those costs over the expected useful lives of the games.

 

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We used $15 million and $3 million to purchase property, plant and equipment in 2013 and 2012, respectively. We also spent $8 million and $3 million to purchase intangible assets in 2013 and 2012, respectively. In 2012, we spent $0.7 million to purchase King Mobile AB.

Financing Activities

The only financing activities undertaken from January 1, 2010 to December 31, 2013 was the $6 million repurchase of ordinary shares from shareholders in 2011 and payment of an interim dividend of $287 million in October 2013.

Credit Facility

On October 7, 2013, Midasplayer International Holding Company p.l.c. (formerly Midasplayer International Holding Company Limited) and our wholly-owned subsidiaries, King.com Limited, a limited liability company organized under the laws of Malta (Maltese ABL Borrower), and Midasplayer Vertriebs GmbH, a limited liability company organized under the laws of Germany (German ABL Borrower and, together with the Maltese ABL Borrower, the ABL Borrowers), entered into a $150 million asset-based revolving credit facility pursuant to the terms of an ABL Credit Agreement (ABL Credit Facility) with the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent, collateral agent, L/C issuer and swing line lender. Loans under the ABL Credit Facility accrue interest initially at London Interbank Offered Rate (LIBOR) plus 2.25% until March 31, 2014 and at LIBOR plus 2.00% to 2.50% thereafter, subject to adjustment based on average daily excess availability under the ABL Credit Facility over the preceding quarter. The maturity date of the ABL Credit Facility is October 7, 2018 unless otherwise extended.

The ABL Credit Facility will be used for working capital and other general corporate purposes. The ABL Credit Facility allows for swing line loans to the German ABL Borrower of up to $20 million and the issuance of letters of credit to the ABL Borrowers of up to $25 million. The availability of credit at any given time under the ABL Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including but not limited to, the value of eligible accounts receivable and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the ABL Credit Facility could be less than the stated amount of the ABL Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the ABL Credit Facility).

The ABL Credit Facility is secured by a first-priority security interest in all of the right, title and interest in certain accounts, payment intangibles, instruments, other general intangibles and deposit accounts of the ABL Borrowers. Obligations under the ABL Credit Facility are guaranteed by the ABL Borrowers and certain of our other subsidiaries.

The ABL Credit Facility contains a number of covenants that, among other things, restrict our ability and the ability of our subsidiaries, subject to specified exceptions, to incur additional liens; make investments; incur additional debt; merge, dissolve, liquidate or consolidate with or into another entity; sell or dispose of assets; and engage in transactions with affiliates. We are required to maintain a consolidated fixed-charge coverage ratio of 1.00 to 1.00 if excess availability under the ABL Credit Facility is less than the greater of $10 million and 10.0% of the revolving credit commitments at any time. As of March 25, 2014, there were no outstanding loans or issued letters of credit under the ABL Credit Facility and as of January 15, 2014 we had approximately $136 million available for borrowing under the facility.

Commitments and Contingencies

Our principal commitments consist of obligations under our operating leases. The following table sets forth our principal commitments as of December 31, 2013:

 

      Payments Due by Period  
     Total      Less than
1 year
     1-3 Years      3-5 Years      More than
5 Years
 
(in thousands)                                   

Operating lease obligations

   $ 44,739       $ 6,971       $ 16,325       $ 13,575       $ 7,868   

 

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Dividends and Other Payments

On October 21, 2013, our board of directors declared a dividend of $1.050 per share with respect to our equity securities that are eligible to receive dividends, amounting to a total dividend of $287 million in aggregate, which was paid on October 24, 2013. On January 31, 2014, our board of directors declared a dividend of $0.795 per share with respect to our equity securities that are eligible to receive dividends, amounting to a total dividend of $217 million in aggregate, which was paid on February 6, 2014. Any determination to pay dividends in the future will be at the discretion of our board of directors and subject to the restrictions described in “Dividend Policy.”

Certain of our equity securities and other share-based incentive awards are not eligible to receive dividends. On October 21, 2013 and January 31, 2014, our board of directors approved aggregate special cash grants of $28 million and $31 million, respectively, to our current personnel and directors that hold such securities and awards. These special grants are recognized in the statement of operations over the vesting period of the underlying equity securities or awards. The vested portion of this grant is paid at the earlier of the completion of this offering or December 31, 2014 with the remaining portion paid, subsequently, over the vesting period.

In addition, in connection with the completion of our offering, we will pay approximately $29 million to employees who held our discretionary bonus units, which represents 50% of the aggregate amounts payable under these non-share incentive arrangements. The remaining 50% will be payable one year after the completion of this offering, provided such employees are still employed by us at that time.

Off Balance Sheet Arrangements

As of December 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with IFRS requires the directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are continually evaluated and are based on historical experience and other factors, including the expectation of future events that are believed to be reasonable under the circumstances at any particular point in time. The resulting accounting estimates will, by definition, seldom equate to the related actual results. The estimates and assumptions that are material to our financial reporting are discussed further below and are subject to a degree of subjectivity and complexity.

The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that the preparation of the financial statements included in this prospectus requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

Revenue is derived from the sale of virtual items available for purchase in-game on third-party mobile and social platforms, from the provision of online skill games accessed on our website and from advertising, though third-party advertising was closed down as a business operation in the second quarter of 2013.

We recognize revenue when it can be reliably measured, it is probable that future economic benefits will flow to us and when specific criteria have been met for each of our activities as described below. Revenue is recorded at the fair value of consideration received or receivable, net of sales tax, prizes, discounts and any the cost of any other promotions, and after eliminating intra-group sales.

 

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Mobile and Social Platforms

We offer our games on mobile and social platforms, whereby players can play games for free, though they can purchase in-game virtual items. Virtual items provide various game enhancements such as boosting player ability or extending game play and are not transferable between different games. Virtual items are classified into two categories: consumable or durable, depending on whether the virtual item’s value is consumed immediately or if the item has an ongoing value in game play. Our data systems can differentiate between revenue generated from durable and consumable items for games offered on mobile and social platforms.

Consumable items provide a benefit to the player that is consumed by a specific player action, after which the consumable items are no longer available for reuse in future game play. Consumable goods are eliminated from the player’s game board after they have been consumed and do not provide the player with any continuing benefit following their consumption. Consumable items can be purchased in a single item format or a multiple item pack. Revenue is recognized at the time the item is consumed for single item formats and is recognized at the time the final item in a multiple item pack is consumed, which approximates its time of purchase.

Durable items are used by players from the time of purchase onward. They provide game enhancement throughout play and do not immediately expire. The enhancement or benefit ends at the earliest of a player completing or abandoning the game. We recognize revenue from the sale of durable virtual items ratably over the estimated average playing period of paying players on that specific game, which is typically between two and nine months depending on the game. The average playing period of paying players on a specific game is our best estimate of the average life of a durable item sold in that game. We reassess the estimated average life of durable items on a periodic basis, which is typically every quarter.

We determine, on a game by game basis, the estimated average playing period begins when a player makes a first purchase, and ends when a player is determined to be inactive. Based on an assessment of the historical pattern of players’ game play, we consider a paying player inactive if that player has not logged on to a game in any one month. The rate by which paying players become inactive for any given month is calculated to be the proportion of players who have purchased at least one virtual item in any previous month, who were active in the previous month and who have not logged in to the gaming environment during that given month. Through this analysis we have determined that players become inactive at a relatively consistent rate. Based on this consistent rate, we determine the estimated average playing period of a paying player by computing the average amount of time that a paying playing will remain active. If future data indicates paying players do not become inactive at a relatively consistent rate, we revise our method of calculation accordingly.

As of December 31, 2013, in all our games on social platforms and in one game on mobile platforms, players receive free virtual currency upon installing a game and subsequently can purchase additional virtual currency. The price of virtual currency can vary based on volume discounts, other discounts and occasional promotional free grants of virtual currency. Virtual currency can be redeemed for our virtual items. A player’s virtual currency balance cannot be withdrawn and virtual currency purchased or granted in one game on a particular platform can only be used in that game and on that particular platform.

We do not recognize any revenue from the sale of virtual currency. Amounts collected from the sale of virtual currency are deferred and recognized as the player uses the virtual items purchased with the virtual currency. Revenue from the sale of virtual items purchased with virtual currency are measured by multiplying the price of the virtual item denominated in the virtual currency and the cost per virtual currency unit. The cost per virtual currency unit is determined to be the maximum weighted-average unit cost a player could have paid during the period. This unit cost is reassessed quarterly. We do not recognize revenue from virtual items purchased with virtual currency when the player has never purchased virtual currency.

Customers purchase virtual items or virtual currency directly from the platform service providers who remit the payments to us net of a platform service charge. We are responsible for the operation and maintenance of our games on these platforms as well as setting the prices of our virtual items. On this basis, we have determined that we are the principal in these arrangements and recognize revenue from the sale of virtual items on a gross, as opposed to net, basis.

 

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Online Skill Games

We generate revenue from skill games on our royalgames.com website. Skill game revenue is measured as the amount we retain from game and tournament entry fees when a player has concluded his or her participation in the tournament and after a deduction of incentives, or bonus money. Revenue is recognized on the completion of a game or tournament. An associated liability is raised for bonus money at the point in time when it becomes withdrawable, which is when bonus money is won by a player from another player within a tournament.

Internally-generated IP and Software

Costs associated with maintaining both product and application computer software programs are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of our identifiable and unique games and software are recognized as intangible assets when the following criteria are met:

 

   

it is technically feasible to complete the software product so that it will be available for use;

 

   

management intends to complete the software or gaming product and to utilize or sell it;

 

   

there is an ability to use or sell the software product;

 

   

it can be demonstrated how the software product will generate probable future economic benefits;

 

   

the expenditure attributable to the software product during its development can be reliably measured; and

 

   

the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset.

Directly attributable costs that are capitalized as part of the software or gaming product include the cost of software development staff. These costs are calculated applying an average staff daily rate to the number of days each game studio staff member has worked on a specific game.

Computer software development costs recognized as assets are amortized over their estimated useful lives of three years for skill games software and 18 months for mobile and social games software.

Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

Income Taxes

The tax expense for the period comprises current and deferred tax. Tax is recognized in the statement of operations except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively.

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

 

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We are subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for taxes. The final taxes paid are dependent on many factors, including negotiations with taxing authorities in various jurisdictions and international tax audits from time to time. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Reserves are adjusted in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of tax liabilities.

Share-based Payments

We operate several cash- and equity-settled share-based compensation plans under which we receive services from staff as consideration for equity awards. The fair value of the employees’ services received in exchange for the grant of the instruments is recognized as an expense. The table below summarizes the classes of shares and securities we have granted to employees and the methods of valuation.

 

Type of Award

  

Vesting Period

  

Fair Value Measure

  

Classification

D1 Share Options

   Predominantly over a four-year period with a one-year cliff, followed by quarterly vesting    Monte Carlo valuation model    Equity-settled

D1 Share Options with linked D3 Restricted Shares

  

Predominantly over a four-year period with a one-year cliff, followed by quarterly vesting
  

Monte Carlo valuation model

  

Equity-settled

D1 Restricted Shares

   Predominantly over a four-year period with a one-year cliff, followed by quarterly vesting    Monte Carlo valuation model    Equity-settled

D2 Restricted Shares

   Predominantly over a four-year period with quarterly vesting    Monte Carlo valuation model    Equity-settled

Shadow Options

   Upon completion of a qualifying exit event    Black-Scholes option pricing model    Equity-settled

Discretionary Bonus Units

   50% upon initial public offering (IPO), 50% on first anniversary of IPO    Black-Scholes option pricing model    Cash-settled

The fair value of the equity-settled awards is determined using the Monte Carlo valuation model with the exception of the Shadow Options as discussed below in “—Shadow Options.” The fair value of the cash-settled awards and Shadow Options are determined using the Black-Scholes option-pricing model. Both models require the use of the following assumptions: (1) expected volatility of ordinary shares, which is based on the volatilities of comparable public companies in a similar industry, (2) expected term of the award, which is determined based on the expected period to settlement date, (3) expected dividend yield, and (4) the risk-free interest rate, which is based on the implied yield of U.S. Treasury bonds with a term equal to the expected term.

As described further in Note 18 to the consolidated financial statements, we have D1 and D2 ordinary shares which convert to A ordinary shares upon an exit, if our enterprise value exceeds a defined hurdle price. As a result, the share price used in the models incorporates the value of the underlying share price before and after the anticipated exit event. These are not considered to be vesting conditions of the awards.

The methodology we have used to date in measuring share-based payment expense is described below. Following the completion of this offering, option pricing and values will be determined based on the quoted market price of our ordinary shares.

 

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D1 Share Options

We have awarded options to purchase D1 ordinary shares (D1 Share Options) to executive officers and selected employees. The D1 Share Options generally vest over a service period of four years with a one-year cliff and quarterly vesting thereafter. The share-based payment expense relating to a particular award is spread over the relevant vesting period, net of forfeitures. The options expire ten years after their grant date.

The fair values of the D1 Share Options were determined using the Monte Carlo valuation model based on the probability that the expected enterprise value will exceed the hurdle price upon an exit event. The following table summarizes the per option assumptions used in the valuation of the D1 Share Options granted in 2011, 2012 and 2013:

 

     Year Ended December 31,  
     2011     2012     2013  

Weighted-average fair value ($)

 &nb