NOTE 1A — RESTATEMENT OF FINANCIAL STATEMENTS

Restatement Background

While preparing the Company’s financial outlook for the third quarter and full year of 2013, the Company’s management consulted with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, regarding the appropriate revenue recognition methodology for a new type of online-only game – the Company’s “Games-as-a-Service” titles – that the Company expects to introduce in the second half of 2013. The Company expects that these titles will primarily be sold through Digital Storefronts. As a result of these discussions, it was determined that revenues generated from sales to end customers through the Digital Storefronts of the Company’s existing games should have been recorded on a gross basis because, upon further review of the agreements with the Digital Storefronts, it was determined that the Company should be considered the principal in the sales transaction. The Company has therefore corrected its revenue recognition policy to record on a gross basis the revenues attributable to sales to end customers through the Digital Storefronts.

Accordingly, the Company is restating its previously issued consolidated financial statements for the years ended December 31, 2011 and 2012 and revising its previously issued consolidated financial statements for the year ended December 31, 2010 to correct for the error in the Company’s presentation of smartphone revenues and cost of revenues, as well as corresponding adjustments to the Company’s deferred revenues and deferred cost of revenues. This resulted in an increase in the Company’s previously reported revenues and a corresponding identical increase in cost of revenues. This decreased the Company’s gross margin (gross profit as a percent of revenue) in each reporting period, but had no effect on gross profit, operating income/(loss), net income/(loss), cash flows or any per share amounts for any period. In addition, these changes did not change the timing of recognition of any revenues or costs among reporting periods.

The following tables summarize the impact of the restatements on each affected line of the Company’s Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011:


	December 31, 2012						December 31, 2011
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Prepaid expenses and other	$	2,487	$	2,680	$	5,167	$	1,881	$	2,206	$	4,087
Total assets		72,275		2,680		74,955		82,804		2,206		85,010
Deferred revenues		9,031		2,680		11,711		7,139		2,206		9,345
Total liabilities		33,388		2,680		36,068		33,631		2,206		35,837
Total liabilities and stockholders’ equity		72,275		2,680		74,955		82,804		2,206		85,010

The following tables summarize the impact of the restatements and revisions on each affected line of the Company’s Consolidated Statements of Operations for the years ended December 31, 2012, December 31, 2011 and December 31, 2010:


	Year Ended December 31, 2012						Year Ended December 31, 2011						Year Ended December 31, 2010
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Revised
Revenues	$	87,493	$	20,690	$	108,183	$	66,185	$	7,840	$	74,025	$	64,345	$	2,459	$	66,804
Cost of revenues:
Platform commissions, royalties and other		8,940		20,690		29,630		12,389		7,840		20,229		16,643		2,459		19,102
Impairment of prepaid royalties and guarantees		—		—		—		531		—		531		663		—		663
Amortization of intangible assets		3,783		—		3,783		5,447		—		5,447		4,226		—		4,226

Total cost of revenues		12,723		20,690		33,413		18,367		7,840		26,207		21,532		2,459		23,991

Gross profit	$	74,770	$	—	$	74,770	$	47,818	$	—	$	47,818	$	42,813	$	—	$	42,813

The following tables summarize the impact of the restatements and revisions on each affected line of the Company’s Consolidated Statements of Cash Flows for the years ended December 31, 2012, December 31, 2011 and December 31, 2010:


	Year Ended December 31, 2012									Year Ended December 31, 2011									Year Ended December 31, 2010
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated			As Reported			Adjustments			As Revised
Changes in operating assets and liabilities, net of effect of acquisitions:
Prepaid expenses and other assets	$	(368	)	$	(474	)	$	(842	)	$	2,073		$	(1,905	)	$	168		$	(113	)	$	(301	)	$	(414	)
Deferred revenues		206			474			680			6,198			1,905			8,103			(70	)		301			231
Net cash (used in)/provided by operating activities		(6,749	)		—			(6,749	)		(6,727	)		—			(6,727	)		2,249			—			2,249

Impact of restatement on quarterly results (unaudited)

The following tables summarize the impact of the restatements on each affected line of the Company’s Condensed Consolidated Balance Sheets as of March 31, June 30, and September 30, 2012, respectively:


	As of March 31, 2012 (unaudited)						As of June 30, 2012 (unaudited)						As of September 30, 2012 (unaudited)
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Prepaid expenses and other	$	1,828	$	2,529	$	4,357	$	2,107	$	2,474	$	4,581	$	2,972	$	2,444	$	5,416
Total assets		80,341		2,529		82,870		79,813		2,474		82,287		78,477		2,444		80,921
Deferred revenues		7,188		2,529		9,717		7,740		2,474		10,214		8,835		2,444		11,279
Total liabilities		35,719		2,529		38,248		37,280		2,474		39,754		33,548		2,444		35,992
Total liabilities and stockholders’ equity		80,341		2,529		82,870		79,813		2,474		82,287		78,477		2,444		80,921

The following tables summarize the impact of the restatements on each affected line of the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2012, the three and six months ended June 30, 2012 and the three and nine months ended September 30, 2012:


	Three Months Ended March 31, 2012						Three Months Ended June 30, 2012						Six Months Ended June 30, 2012						Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	(unaudited)						(unaudited)						(unaudited)						(unaudited)						(unaudited)
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Revenues	$	21,544	$	4,965	$	26,509	$	23,621	$	5,643	$	29,264	$	45,165	$	10,608	$	55,773	$	21,347	$	4,752	$	26,099	$	66,512	$	15,360	$	81,872
Cost of revenues:
Platform commissions, royalties and other		2,557		4,965		7,522		2,137		5,643		7,780		4,694		10,608		15,302		2,194		4,752		6,946		6,888		15,360		22,248
Amortization of intangible assets		753		—		753		932		—		932		1,685		—		1,685		1,025		—		1,025		2,710		—		2,710

Total cost of revenues		3,310		4,965		8,275		3,069		5,643		8,712		6,379		10,608		16,987		3,219		4,752		7,971		9,598		15,360		24,958

Gross profit	$	18,234	$	—	$	18,234	$	20,552	$	—	$	20,552	$	38,786	$	—	$	38,786	$	18,128	$	—	$	18,128	$	56,914	$	—	$	56,914

The following tables summarize the impact of the restatements on each affected line of the Company’s Condensed Consolidated Statements of Cash Flows for the three, six, and nine months ended March 31, June 30, and September 30, 2012, respectively:


	Three Months Ended March 31, 2012									Six Months Ended June 30, 2012									Nine Months Ended September 30, 2012
	(unaudited)									(unaudited)									(unaudited)
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
Changes in operating assets and liabilities, net of effect of acquisitions:
Prepaid expenses and other assets	$	55		$	(323	)	$	(268	)	$	(433	)	$	(268	)	$	(701	)	$	(1,247	)	$	(238	)	$	(1,485	)
Deferred revenues		47			323			370			599			268			867			10			238			248
Net cash used in operating activities		(4,144	)		—			(4,144	)		(2,572	)		—			(2,572	)		(5,128	)		—			(5,128	)


	As of March 31, 2011 (unaudited)						As of June 30, 2011 (unaudited)						As of September 30, 2011 (unaudited)
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Prepaid expenses and other	$	1,687	$	243	$	1,930	$	2,450	$	426	$	2,876	$	4,027	$	713	$	4,740
Total assets		55,207		243		55,450		57,552		426		57,978		90,057		713		90,770
Deferred revenues		1,577		243		1,820		1,811		426		2,237		2,393		713		3,106
Total liabilities		27,335		243		27,578		27,660		426		28,086		31,889		713		32,602
Total liabilities and stockholders’ equity		55,207		243		55,450		57,552		426		57,978		90,057		713		90,770

The following tables summarize the impact of the restatements on each affected line of the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2011, the three and six months ended June 30, 2011 and the three and nine months ended September 30, 2011:


	Three Months Ended March 31, 2011						Three Months Ended June 30, 2011						Six Months Ended June 30, 2011						Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	(unaudited)						(unaudited)						(unaudited)						(unaudited)						(unaudited)
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Revenues	$	16,426	$	1,186	$	17,612	$	17,680	$	1,756	$	19,436	$	34,106	$	2,942	$	37,048	$	16,905	$	2,348	$	19,253	$	51,011	$	5,290	$	56,301
Cost of revenues:
Platform commissions, royalties and other		3,469		1,186		4,655		3,121		1,756		4,877		6,590		2,942		9,532		3,223		2,348		5,571		9,813		5,290		15,103
Impairment of prepaid royalties and guarantees		371		—		371		—		—		—		371		—		371		160		—		160		531		—		531
Amortization of intangible assets		817		—		817		703		—		703		1,520		—		1,520		2,375		—		2,375		3,895		—		3,895

Total cost of revenues		4,657		1,186		5,843		3,824		1,756		5,580		8,481		2,942		11,423		5,758		2,348		8,106		14,239		5,290		19,529

Gross profit	$	11,769	$	—	$	11,769	$	13,856	$	—	$	13,856	$	25,625	$	—	$	25,625	$	11,147	$	—	$	11,147	$	36,772	$	—	$	36,772

The following tables summarize the impact of the restatements on each affected line of the Company’s Condensed Consolidated Statements of Cash Flows for the three, six and nine months ended March 31, June 30, and September 30, 2011, respectively:


	Three Months Ended March 31, 2011									Six Months Ended June 30, 2011									Nine Months Ended September 30, 2011
	(unaudited)									(unaudited)									(unaudited)
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
Changes in operating assets and liabilities, net of effect of acquisitions:
Prepaid expenses and other assets	$	886		$	58		$	944		$	275		$	(125	)	$	150		$	(107	)	$	(412	)	$	(519	)
Deferred revenues		735			(58	)		677			969			125			1,094			1,451			412			1,863
Net cash used in operating activities		(2,121	)		—			(2,121	)		(2,578	)		—			(2,578	)		(2,470	)		—			(2,470	)