znga-ex992_15.htm

The following unaudited pro forma condensed combined balance sheet as of September 30, 2018 and unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and the fiscal year ended December 31, 2017 are based on the historical financial statements of Zynga Inc. (“Zynga” or the “Company”) and Small Giant Games Oy (“Small Giant”), as adjusted to give effect to the following transaction (the “Transaction”):

On December 20, 2018, the Company executed a Share Sale and Purchase Agreement (the “Agreement”) with the shareholders and option holders of Small Giant, a Finnish company, pursuant to which, effective January 1, 2019, Zynga acquired 80% of all issued and outstanding share capital (including all rights to acquire share capital) of Small Giant in exchange for consideration of (a) $333.6 million in cash, (b) $30.0 million of cash that was deposited into an escrow account for a period of 18 months as security for general representations and warranties and (c) 63,794,746 shares of Zynga Class A common stock. Zynga will acquire the remaining 20% of Small Giant’s shares ratably for additional cash consideration during each of the three years following the closing (the “Step-In Period”), payable annually based upon the achievement of specified profitability metrics by Small Giant (the “Step-In Consideration”). Following the end of the Step-In Period, Small Giant will be a direct, wholly-owned subsidiary of Zynga. On January 2, 2019, the acquisition closed consistent with the terms noted above.

The unaudited pro forma condensed combined balance sheet gives effect to the Transaction as if it occurred on September 30, 2018 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to the Transaction as if it occurred on January 1, 2017.

The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and does not represent the consolidated results or financial position of Zynga had the Transaction been completed as of the dates indicated. Specifically, the unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies, revenue enhancements or restructuring costs that the combined company may achieve or incur as a result of the Transaction. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. The pro forma adjustments represent the Company’s best estimates and are based upon current available information and certain assumptions that the Company believes are reasonable under the circumstances.

The unaudited pro forma condensed combined financial information should be read in conjunction with:

	Historical Zynga			Historical Small Giant			Pro Forma Adjustments (Note 5)				Pro Forma Combined
Assets
Current assets:
Cash and cash equivalents	$	236,447		$	30,933		$	(179,716	)	5(a)	$	87,664
Short-term investments		183,834			—			(183,834	)	5(b)		—
Accounts receivable, net of allowance of $0		107,119			18,039			—				125,158
Restricted cash		10,006			—			—				10,006
Prepaid expenses		20,483			445			—				20,928
Other current assets		12,764			—			—				12,764
Total current assets		570,653			49,417			(363,550	)			256,520
Goodwill		947,730			—			543,754		5(k)		1,491,484
Intangible assets, net		127,851			—			187,000		5(f)		314,851
Property and equipment, net		266,085			112			—				266,197
Restricted cash		25,000			—			—				25,000
Prepaid expenses		35,851			—			—				35,851
Other non-current assets		46,257			81			—				46,338
Total assets	$	2,019,427		$	49,610		$	367,204			$	2,436,241
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	9,242		$	20,675		$	3,129		5(h)	$	33,046
Income tax payable		1,734			2,353			—				4,087
Deferred revenue		172,172			69,481			(69,481	)	5(g)		172,172
Current portion of long-term debt		—			983			—				983
Other current liabilities		119,782			2,592			5,305		5(j)		127,679
Total current liabilities		302,930			96,084			(61,047	)			337,967
Deferred revenue		2,135			—			—				2,135
Deferred tax liabilities, net		18,468			—			37,400		5(i)		55,868
Other non-current liabilities		79,456			—			98,000		5(c)		177,456
Total liabilities		402,989			96,084			74,353				573,426
Stockholders’ equity:												—
Common stock and additional paid-in capital		3,485,667			5,083			249,214		5(d), 5(e)		3,739,964
Convertible preferred stock		—			12,623			(12,623	)	5(d)		—
Accumulated other comprehensive loss		(103,210	)		(337	)		337		5(d)		(103,210	)
Accumulated deficit		(1,766,019	)		(63,843	)		55,923		5(d), 5(h), 5(j)		(1,773,939	)
Total stockholders’ equity (deficit)		1,616,438			(46,474	)		292,851				1,862,815
Total liabilities and stockholders’ equity (deficit)	$	2,019,427		$	49,610		$	367,204			$	2,436,241

See accompanying notes to unaudited pro forma condensed combined financial information.

	Historical Zynga		Historical Small Giant			Pro Forma Adjustments (Note 6)				Pro Forma Combined
Revenue:
Online game	$	665,593	$	8,504		$	—			$	674,097
Advertising and other		195,797		1,605			—				197,402
Total revenue		861,390		10,109			—				871,499
Costs and expenses:
Cost of revenue		258,971		9,266			35,571		6(a)		303,808
Research and development		256,012		2,051			—				258,063
Sales and marketing		212,030		24,253			—				236,283
General and administrative		108,653		1,032			—				109,685
Total costs and expenses		835,666		36,602			35,571				907,839
Income (loss) from operations		25,724		(26,493	)		(35,571	)			(36,340	)
Interest income (expense)		5,309		(21	)		—				5,288
Other income, net		6,550		322			—				6,872
Income (loss) before income taxes		37,583		(26,192	)		(35,571	)			(24,180	)
Provision for (benefit from) income taxes		10,944		15			(11,766	)	6(b)		(807	)
Net income (loss)	$	26,639	$	(26,207	)	$	(23,805	)		$	(23,373	)

Net income (loss) per share attributable to common stockholders:
Basic	$	0.03								$	(0.03	)
Diluted	$	0.03								$	(0.03	)

Weighted average common shares used to compute net income (loss) per share attributable to common stockholders:
Basic		869,067					63,795		6(c)		932,862
Diluted		897,165					35,697		6(c)		932,862

See accompanying notes to unaudited pro forma condensed combined financial information.

	Historical Zynga		Historical Small Giant			Pro Forma Adjustments (Note 6)				Pro Forma Combined
Revenue:
Online game	$	493,949	$	62,335		$	—			$	556,284
Advertising and other		164,571		4,295			—				168,866
Total revenue		658,520		66,630			—				725,150
Costs and expenses:
Cost of revenue		221,816		34,687			26,679		6(a)		283,182
Research and development		199,340		3,249			—				202,589
Sales and marketing		159,346		57,749			—				217,095
General and administrative		71,977		1,073			—				73,050
Total costs and expenses		652,479		96,758			26,679				775,916
Income (loss) from operations		6,041		(30,128	)		(26,679	)			(50,766	)
Interest income (expense)		5,031		(95	)		—				4,936
Other income, net		10,020		256			—				10,276
Income (loss) before income taxes		21,092		(29,967	)		(26,679	)			(35,554	)
Provision for (benefit from) income taxes		6,194		2,573			(13,706	)	6(b)		(4,939	)
Net income (loss)	$	14,898	$	(32,540	)	$	(12,973	)		$	(30,615	)

Net income (loss) per share attributable to common stockholders:
Basic	$	0.02								$	(0.03	)
Diluted	$	0.02								$	(0.03	)

Weighted average common shares used to compute net income (loss) per share attributable to common stockholders:
Basic		863,062					63,795		6(c)		926,857
Diluted		890,146					36,711		6(c)		926,857

See accompanying notes to unaudited pro forma condensed combined financial information.

The unaudited pro forma condensed combined financial information has been prepared using the historical financial information of Zynga and Small Giant and presents the pro forma effects of the Transaction and certain adjustments described herein in accordance with Article 11 of Regulation S-X. The historical financial information of Zynga and Small Giant has been prepared in accordance with accounting principles generally accepted in the United States.

The unaudited pro forma condensed combined balance sheet gives effect to the Transaction as if it occurred on September 30, 2018 and combines the unaudited consolidated balance sheet of Zynga as of September 30, 2018 with Small Giant’s unaudited balance sheet as of September 30, 2018.

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to the Transaction as if it occurred on January 1, 2017. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2018 combines the unaudited consolidated statement of operations of Zynga for the nine months ended September 30, 2018 with Small Giant’s unaudited statement of operations for the nine months ended September 30, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 combines the audited consolidated statement of operations of Zynga for the year ended December 31, 2017 with Small Giant’s audited statement of operations for the year ended December 31, 2017.

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), with Zynga deemed as the accounting acquirer. The unaudited pro forma condensed combined financial information may differ from the final purchase accounting for a number of reasons, including the fact that the estimates of fair values of assets acquired and liabilities assumed are preliminary and subject to change when the formal valuation and other analyses are finalized. The differences between the preliminary estimates and the final purchase accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial information.

The historical financial information has been adjusted to give effect to matters that are (i) directly attributable to the Transaction, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the operating results of the combined company. The unaudited pro forma condensed combined statements of operations excludes non-recurring items directly related to the Transaction.

On December 20, 2018, the Company executed the Agreement with the shareholders and option holders of Small Giant, pursuant to which, effective January 1, 2019, Zynga acquired 80% of all issued and outstanding share capital (including all rights to acquire share capital) of Small Giant in exchange for consideration of (a) $333.6 million in cash, (b) $30.0 million of cash that was deposited into an escrow account for a period of 18 months as security for general representations and warranties and (c) 63,794,746 shares of Zynga Class A common stock. Zynga will acquire the remaining 20% of Small Giant’s shares ratably for additional cash consideration during the Step-In Period, payable annually based upon the achievement of specified profitability metrics by Small Giant. Following the end of the Step-In Period, Small Giant will be a direct, wholly-owned subsidiary of Zynga.

On January 2, 2019, the acquisition closed consistent with the terms noted above.

The total estimated preliminary purchase consideration as of January 2, 2019 is as follows (in thousands):

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Small Giant are recorded at their acquisition date fair values. The determination of fair value used in the pro forma adjustments herein are preliminary and based on management’s best estimates of the fair values and useful lives of the assets acquired and liabilities assumed – which consider currently available information and certain assumptions that the Company believes are reasonable under the circumstances – and have been prepared to illustrate the estimated effect of the Transaction. Specifically, the primary preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities assumed, identifiable intangible assets, income and non-income based taxes and residual goodwill. The allocation is dependent upon certain valuation and other analyses that have not yet been finalized.

The following table sets forth the preliminary allocation of the estimated purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Small Giant as of the Transaction closing date (in thousands):

The preliminary fair value of the intangible assets acquired was determined using a risk-adjusted, discounted cash flow model.

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

(a) To record the following adjustments to cash and cash equivalents (in thousands):

(b) Reflects the liquidation of Zynga’s short-term investments to partially fund the Transaction, limited to the total balance of short-term investments as of September 30, 2018.

(c) Reflects the preliminary fair value of the total Step-In Consideration liability of $98.0 million. The preliminary fair value of the Step-In Consideration was estimated using a Monte Carlo simulation. The significant unobservable inputs used in the fair value measurement of the contingent consideration obligation were Small Giants’ projected performance as of the acquisition date, a risk-adjusted discount rate and performance volatility similar to industry peers. The Step-In Consideration will be remeasured to fair value at each reporting date through the completion of the Step-In Period.

(d) Reflects the elimination of Small Giant’s historical stockholders’ equity, including the acceleration of Small Giant stock options and awards upon the change in control, as well as the $0.9 million of estimated transaction costs discussed in note (h) below.

(e) Reflects the recognition of the $253.9 million of Zynga Stock Consideration issued as part of the Transaction.

(f) Reflects the preliminary fair value of the intangible assets acquired by the Company. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets and liabilities, and the related amount of amortization, may differ materially from this preliminary allocation.

(g) Reflects the preliminary fair value adjustment to and full reduction of the carrying value of Small Giant’s deferred revenue.

(h) Reflects the $2.2 million and $0.9 million of estimated transaction costs not yet accrued on the balance sheet of Zynga and Small Giant, respectively.

(i) Reflects the establishment of a deferred tax liability related to the preliminary fair value of the intangible assets acquired by the Company as discussed in (f) above.

(j) Reflects the transfer taxes payable upon the transfer of Small Giant share capital to Zynga.

(a) Reflects the incremental amortization expense associated with the preliminary fair value of definite lived intangible assets. Amortization expense is based on the preliminary fair value of intangible assets and estimated useful lives of the assets.

(b) Reflects the recognition of tax benefits primarily related to the amortization of the intangible asset deferred tax liability.

(c) Reflects the increase in the weighted-average shares outstanding from the issuance of the Zynga Stock Consideration as part of the Transaction. Further, the weighted-average shares outstanding – diluted are reduced by the impact of anti-dilutive shares resulting from the pro forma combined net loss.

	Estimated Amount
Closing cash consideration	$	363,550
Fair value of Zynga Stock Consideration⁽¹⁾		253,903
Fair value of Step-In Consideration		98,000
Total estimated preliminary purchase consideration	$	715,453

	Estimated Amount
Tangible current assets acquired	$	59,783
Goodwill		529,874
Intangible assets acquired:
Developed technology, useful life of 5 years		155,000
Trade names, useful life of 7 years		32,000
Tangible non-current assets acquired		300
Tangible current liabilities assumed		(24,104	)
Deferred tax liabilities, net		(37,400	)
Net assets acquired	$	715,453

	Estimated Amount
Closing cash consideration	$	363,550
Sale of short-term investments (see note 5(b) below)		(183,834	)
Total adjustment to cash and cash equivalents		179,716