UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
As of July 15, 2021, there were
Zynga Inc.
Form 10-Q Quarterly Report
TABLE OF CONTENTS
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Item 1. |
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Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 |
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Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 |
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
Unregistered Sales of Equity Securities and Issuer Purchases of Equity Purchases |
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Item 6. |
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68 |
Zynga, the Zynga logo and other trademarks or service marks of Zynga appearing in this report are the property of Zynga Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our growth strategies and intended product releases, the impact of the ongoing coronavirus (COVID-19) pandemic and our response to it, our ability to integrate and achieve the intended benefits of our recent and announced acquisitions, and may include certain assumptions that underlie the forward-looking statements. Forward-looking statements often include words such as “outlook,” “projected,” “intends,” “will,” “anticipate,” “believe,” “target,” “expect,” and statements in the future tense are generally forward-looking.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves significant risks, uncertainties and assumptions, including those described in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and industry. New risks may also emerge from time to time. It is not possible for our management to predict all of the risks related to our business and operations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur, and reported results should not be considered as an indication of future performance. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Except as required by law, we undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Zynga Inc.
Consolidated Balance Sheets
(In millions, except par value)
(Unaudited)
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June 30, |
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December 31, |
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2021 |
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2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable, net of allowance of $ and December 31, 2020, respectively |
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Restricted cash |
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— |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Long-term investments |
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— |
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Goodwill |
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Intangible assets, net |
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Property and equipment, net |
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Right-of-use assets |
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Restricted cash |
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— |
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Prepaid expenses |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Income tax payable |
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Deferred revenue |
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Operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Convertible senior notes, net |
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Deferred revenue |
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Deferred tax liabilities, net |
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Non-current operating lease liabilities |
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Other non-current liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Common stock, $ authorized shares: of June 30, 2021 and |
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Accumulated other comprehensive income (loss) |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
2
Zynga Inc.
Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenue: |
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Online game |
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$ |
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$ |
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$ |
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$ |
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Advertising and other |
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Total revenue |
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Costs and expenses: |
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Cost of revenue |
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Research and development |
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Sales and marketing |
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General and administrative |
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Total costs and expenses |
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Income (loss) from operations |
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( |
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Interest income |
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Interest expense |
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( |
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Other income (expense), net |
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( |
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( |
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( |
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Income (loss) before income taxes |
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( |
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Provision for (benefit from) income taxes |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
( |
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Net income (loss) per share attributable to common stockholders: |
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Basic |
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$ |
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$ |
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$ |
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$ |
( |
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Diluted |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Weighted-average common shares used to compute net income (loss) per share attributable to common stockholders: |
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Basic |
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Diluted |
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See accompanying notes to consolidated financial statements.
3
Zynga Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Other comprehensive income (loss): |
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Change in foreign currency translation adjustment |
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( |
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( |
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Net change in unrealized gains (losses) on available-for-sale marketable debt securities, net of tax |
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— |
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( |
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Other comprehensive income (loss), net of tax |
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( |
) |
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( |
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Comprehensive income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
( |
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See accompanying notes to consolidated financial statements.
4
Zynga Inc.
Consolidated Statements of Stockholders’ Equity
(In millions)
(Unaudited)
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Accumulated |
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Class A Common Stock |
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Additional Paid-In |
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Treasury |
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Other Comprehensive |
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Accumulated |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Stock |
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Income (Loss) |
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Deficit |
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Equity |
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Balances at December 31, 2020 |
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$ |
— |
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$ |
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$ |
— |
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$ |
( |
) |
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$ |
( |
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$ |
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Exercise of stock options and ESPP |
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— |
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— |
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— |
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— |
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Vesting of RSUs, net of tax withholdings |
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— |
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— |
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( |
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— |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Retirements of treasury stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balances at March 31, 2021 |
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$ |
— |
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$ |
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$ |
— |
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$ |
( |
) |
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$ |
( |
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$ |
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Exercise of stock options and ESPP |
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— |
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— |
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— |
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— |
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Vesting of RSUs, net of tax withholdings |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Retirements of treasury stock |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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— |
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Balances at June 30, 2021 |
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$ |
— |
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$ |
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$ |
— |
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$ |
( |
) |
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$ |
( |
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$ |
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Accumulated |
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Class A Common Stock |
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Additional Paid-In |
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Treasury |
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Other Comprehensive |
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Accumulated |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Stock |
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Income (Loss) |
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Deficit |
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Equity |
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Balances at December 31, 2019 |
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$ |
— |
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$ |
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$ |
— |
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$ |
( |
) |
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$ |
( |
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$ |
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Exercise of stock options and ESPP |
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— |
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— |
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— |
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— |
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Vesting of RSUs, net of tax withholdings |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Retirements of treasury stock |
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— |
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— |
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— |
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— |
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( |
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— |
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Adoption of ASU 2016-13 |
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— |
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— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balances at March 31, 2020 |
|
|
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Exercise of stock options and ESPP |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Vesting of RSUs, net of tax withholdings |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Retirements of treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Balances at June 30, 2020 |
|
|
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes to consolidated financial statements.
5
Zynga Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
(Gain) loss from sale of investments, foreign currency and sale of assets, net |
|
|
( |
) |
|
|
( |
) |
(Accretion) amortization on marketable debt securities, net |
|
|
— |
|
|
|
( |
) |
Noncash lease expense |
|
|
|
|
|
|
|
|
Noncash interest expense |
|
|
|
|
|
|
|
|
Change in deferred income taxes and other |
|
|
( |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
( |
) |
|
|
|
|
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
|
|
|
|
|
|
|
Income tax payable |
|
|
|
|
|
|
|
|
Operating lease and other liabilities |
|
|
( |
) |
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
( |
) |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
( |
) |
|
|
( |
) |
Maturities of investments |
|
|
|
|
|
|
|
|
Sales of investments |
|
|
— |
|
|
|
|
|
Acquisition of property and equipment |
|
|
( |
) |
|
|
( |
) |
Business combinations, net of cash acquired |
|
|
( |
) |
|
|
— |
|
Asset acquisitions of intangible assets |
|
|
( |
) |
|
|
— |
|
Other investing activities, net |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) investing activities |
|
|
( |
) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Debt issuance costs paid |
|
|
( |
) |
|
|
— |
|
Taxes paid related to net share settlement of stockholders' equity awards |
|
|
( |
) |
|
|
( |
) |
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration payments |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Noncash investing activity: |
|
|
|
|
|
|
|
|
Acquisition-related deferred purchase consideration |
|
$ |
|
|
|
$ |
— |
|
See accompanying notes to consolidated financial statements.
6
Zynga Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Overview and Summary of Significant Accounting Policies
Organization and Description of Business
Zynga Inc. (“Zynga,” “we” or the “Company”) is a leading provider of social game services. We develop, market and operate social games as live services played on mobile platforms (such as Apple’s iOS and Google’s Android), social networking platforms (such as Facebook and Snapchat), Personal Computers (PCs), consoles (such as Nintendo’s Switch) and other platforms. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items and advertising services. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S. as well as various international office locations in North America, Asia and Europe.
We completed our initial public offering in
Basis of Presentation and Consolidation
The accompanying interim consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The interim consolidated financial statements include the operations of the Company and its owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation.
The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of June 30, 2021, the interim consolidated statements of operations, statements of comprehensive income (loss) and statements of stockholders’ equity for the three and six months ended June 30, 2021 and 2020, statements of cash flows for the six months ended June 30, 2021 and 2020 and the notes to the interim consolidated financial statements are unaudited. In management’s opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any other future period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the interim consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated average playing period of payers that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, the fair value of assets and liabilities acquired through business combinations, contingent consideration obligations, the discount rate used in measuring our operating lease liabilities, the interest rate used in calculating the present value of the initial liability component of our convertible senior notes, stock-based compensation expense and evaluation of recoverability of goodwill, intangible assets and long-lived assets. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
Issued But Not Yet Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible instruments by reducing the number of accounting models and requiring that a convertible instrument be accounted for as a single liability measured at amortized cost. Further, the ASU amends the earnings per share guidance by requiring the diluted earnings per share calculation for convertible instruments to follow the if-converted method, with use of the treasury stock method no longer permitted. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, but no earlier than fiscal years beginning after December 15, 2020. The ASU allows either a modified retrospective method of transition or a fully retrospective method of transition, with any adjustments recognized as an adjustment to the opening balance of retained earnings. The Company is currently assessing this standard’s impact on its consolidated financial statements, but does anticipate a material adjustment to the carrying amount of the liability and equity components of our convertible senior notes upon adoption and the Company will not early adopt.
7
2. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table presents our revenue disaggregated by platform (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Online game: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Advertising and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and other total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
Includes web revenue for online game and web advertising revenue and other revenue for advertising and other |
The following table presents our revenue disaggregated based on the geographic location of our payers (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All other countries(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
No foreign country exceeded 10% of our total revenue for any periods presented. |
The estimated weighted average playing period of payers was
During the six months ended June 30, 2021, we recognized $
Contract Balances
We receive payments from our customers based on the payment terms established in our contracts. Payments for online game revenue are required at time of purchase, are non-refundable and relate to non-cancellable contracts that specify our performance obligations. Such payments are initially recorded to deferred revenue and are recognized into revenue as we satisfy our performance obligations. Further, payments made by our players are collected by payment processors and remitted to us generally within 45 days of invoicing. Our right to the payments collected on our behalf is unconditional and therefore recorded as accounts receivable, net of the associated payment processing fees.
Payments for advertising arrangements are due based on the contractually stated payment terms. The contract terms generally require payment within
During the three and six months ended June 30, 2021, we recognized $
The increase in accounts receivable, net during the six months ended June 30, 2021 was primarily driven by sales on account during the period exceeding cash collections of current period and previously due amounts. The increase in deferred revenue during the six months ended June 30, 2021 was primarily driven by the sale of virtual items during the period, exceeding revenue recognized from the satisfaction of our performance obligations.
8
Unsatisfied Performance Obligations
Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of
3. Marketable Securities
Debt Securities
The following tables summarize the amortized cost, gross unrealized gains and losses and fair value of our short-term and long-term debt securities as of June 30, 2021 and December 31, 2020 (in millions):
|
|
June 30, 2021 |
|
|||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
||||
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Short-term debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Foreign certificates of deposit and time deposits |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
December 31, 2020 |
|
|||||||||||||
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Aggregate |
|
||||
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Short-term debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
Foreign certificates of deposit and time deposits |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Total |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Equity Securities
We recognized a gain of $
We recognized a gain of $
9
4. Fair Value Measurements
The composition of our financial assets and liabilities as of June 30, 2021 and December 31, 2020 among the three levels of the fair value hierarchy are as follows (in millions):
|
|
June 30, 2021 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Foreign certificates of deposit and time deposits |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Foreign certificates of deposit and time deposits |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Mutual funds |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
|
December 31, 2020 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Foreign certificates of deposit and time deposits |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Foreign certificates of deposit and time deposits |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Mutual funds |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total financial assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
The following table presents the activity for the six months ended June 30, 2021 related to our Level 3 liabilities (in millions):
Level 3 Liabilities: |
Contingent Consideration |
|
|
Balance as of December 31, 2020 |
$ |
|
|
Additions |
|
— |
|
Fair value adjustments |
|
|
|
Payments |
|
( |
) |
Rollic contingency resolution |
|
( |
) |
Balance as of June 30, 2021 |
$ |
|
|
10
As of June 30, 2021, our contingent consideration obligations relate to the additional consideration payable in connection with our acquisitions of Gram Games in the second quarter of 2018, Small Giant in the first quarter of 2019 and Rollic in the fourth quarter of 2020. Under the original terms of the Gram Games and Small Giant acquisitions, contingent consideration may be payable based on the achievement of certain future profitability metrics during each annual period following the respective acquisition date for a total of
With respect to the remaining Rollic contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic in the second quarter of 2021 to accelerate the Company’s acquisition of the remaining
The estimated value of the Rollic contingent consideration obligation increased from $
With respect to the remaining Gram Games contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Gram Games in the fourth quarter of 2020 to set the final contingent consideration payment at $
The estimated value of the Gram Games contingent consideration obligation accreted up from $
With the respect to the remaining Small Giant contingent consideration obligation, we estimate the fair value at each subsequent reporting period using a Monte Carlo simulation.
|
Unobservable Inputs |
|
Annual bookings growth (decline) rate |
( |
|
Bookings volatility |
|
|
Asset volatility |
|
|
Net cash flow margin |
|
|
Discount rate |
|
|
Changes in the projected performance of the acquired businesses could result in a higher or lower contingent consideration obligation in the future.
In April 2021, the Company executed an amendment to the Share Purchase Agreement with the former owners of Small Giant to exclude the direct profitability (which includes marketing expenses) from Puzzle Combat, which launched globally in April 2021, from the remaining performance period.
The estimated fair value of the Small Giant contingent consideration obligation decreased from $
11
consolidated statement of operations. For the three months ended June 30, 2021, we recognized a $
5. Property and Equipment, Net
Property and equipment, net consist of the following (in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Computer equipment |
|
$ |
|
|
|
$ |
|
|
Software |
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
Total property and equipment, gross |
|
$ |
|
|
|
$ |
|
|
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Total property and equipment, net |
|
$ |
|
|
|
$ |
|
|
The following represents our property and equipment, net by location (in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
United States |
|
$ |
|
|
|
$ |
|
|
Turkey |
|
|
|
|
|
|
|
|
India |
|
|
|
|
|
|
|
|
All other countries(1) |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
|
|
|
$ |
|
|
(1)
6. Leases
In the second quarter of 2021, the Company executed a lease for office space of approximately
In August 2021, the Company’s Board of Directors approved a plan to sublease the Company’s current
As of June 30, 2021, future lease payments related to our operating leases were as follows (in millions):
Year ending December 31: |
|
Operating Leases |
|
|
Remaining 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
Total lease liability balance |
|
$ |
|
|
12
7. Acquisitions
Acquisition of Uncosoft Yazılım Anonim Şirketi (“Uncosoft”)
On
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Uncosoft (in millions):
|
|
Estimated Purchase Price Allocation |
|
|
Cash |
|
$ |
|
|
Intangible assets, net: |
|
|
|
|
Developed technology, useful life of |
|
|
|
|
Goodwill |
|
|
|
|
Total assets acquired |
|
|
|
|
Deferred tax liabilities |
|
|
( |
) |
Total liabilities |
|
|
( |
) |
Total cash consideration |
|
$ |
|
|
Goodwill, which is 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.
Acquisition of Echtra Games, Inc.
On
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Echtra (in millions):
|
|
Estimated Purchase Price Allocation |
|
|
Prepaid expenses |
|
$ |
|
|
Intangible assets, net: |
|
|
|
|
Developed technology, useful life of |
|
|
|
|
Goodwill |
|
|
|
|
Total assets acquired |
|
|
|
|
Total cash consideration, including Holdback Consideration |
|
$ |
|
|
The fair value of the developed technology intangible asset was determined using a cost to recreate approach. Goodwill, which is 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.
13
8. Goodwill and Intangible Assets, Net
The following table presents the changes to goodwill for the six months ended June 30, 2021 (in millions):
|
|
Goodwill |
|
|
Balance as of December 31, 2020(1) |
|
$ |
|
|
Additions |
|
|
|
|
Foreign currency translation adjustments(2) |
|
|
|
|
Balance as of June 30, 2021(1) |
|
$ |
|
|
|
(1) |
There are |
|
(2) |
The change is primarily related to translation adjustments on goodwill associated with the acquisitions of Small Giant and NaturalMotion, which have functional currencies denominated in the Euro and British Pound, respectively. |
The details of our acquisition-related intangible assets as of June 30, 2021 and December 31, 2020 are as follows (in millions):
|
|
June 30, 2021 |
|
|||||||||
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Developed technology |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Trademarks, branding and domain names |
|
|
|
|
|
|
( |
) |
|
|
|
|
Third-party developer relationships |
|
|
|
|
|
|
( |
) |
|
|
|
|
Total |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
December 31, 2020 |
|
|||||||||
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|||
Developed technology |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Trademarks, branding and domain names |
|
|
|
|
|
|
( |
) |
|
|
|
|
Third-party developer relationships |
|
|
|
|
|
|
( |
) |
|
|
|
|
Total |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Our trademarks, branding and domain names intangible assets include $
As of June 30, 2021, the weighted-average remaining useful lives of our acquired intangible assets were
As of June 30, 2021, future amortization expense related to our intangible assets is expected to be recognized as follows (in millions):
Year ending December 31: |
|
|
|
|
Remaining 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
14
9. Income Taxes
The provision for income taxes increased $
The provision for income taxes increased $
10. Debt
Convertible Senior Notes
On December 17, 2020, we issued $
On June 14, 2019, we issued $
The 2026 Notes and 2024 Notes are each governed by an indenture between us, as the issuer, and Wells Fargo Bank, National Association, as trustee. The 2026 Notes and 2024 Notes are senior unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to such notes; equal in right of payment to all of our existing and future liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our current or future subsidiaries (including trade payables). The indentures governing the 2026 Notes and 2024 Notes, as applicable, do not contain any financial covenants.
The 2026 Notes and 2024 Notes mature on
The 2026 Notes have an initial conversion rate of
15
Prior to the close of business on the business day immediately preceding September 15, 2026 with respect to the 2026 Notes and March 1, 2024 with respect to the 2024 Notes, the 2026 Notes and 2024 Notes will be convertible only under the following circumstances:
|
• |
during any calendar quarter, if the last reported sale price of our Class A common stock for at least |
|
• |
during the five business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of each applicable series of the 2026 Notes or 2024 Notes for such trading day was less than |
|
• |
if we call the 2026 Notes or 2024 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or |
|
• |
upon the occurrence of specified corporate events described in the respective indentures. |
On or after the dates specified above, holders of the 2026 Notes and 2024 Notes may convert all or any portion of their 2026 Notes and 2024 Notes regardless of the foregoing conditions. Upon any conversion, holders will receive cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
The Company may not redeem the 2026 Notes or 2024 Notes prior to
As of June 30, 2021, the conditions allowing holders of the 2026 Notes or 2024 Notes to convert their respective series of the 2026 Notes and 2024 Notes have not been met and therefore both the 2026 Notes and 2024 Notes are not yet convertible.
We separately accounted for the liability and equity components of the 2026 Notes and 2024 Notes. We determined the initial carrying amount of the $
The amount of the equity component, representing the conversion option, was $
We allocated transaction costs related to the issuance of the respective series of the 2026 Notes and 2024 Notes to the liability and equity components using the same proportions as the initial carrying value of the respective series of the 2026 Notes and 2024 Notes. The respective transaction costs are then amortized to interest expense using the effective interest method over the terms of the respective series of 2026 Notes and 2024 Notes. Transaction costs initially attributable to the liability component of the 2026 Notes and 2024 Notes were $
16
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of June 30, 2021 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 Notes |
|
|
2026 Notes |
|
|
Total |
|
|||
Liability component: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Unamortized debt discount |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Unamortized transaction costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity component, net of transaction costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of December 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 Notes |
|
|
2026 Notes |
|
|
Total |
|
|||
Liability component: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Unamortized debt discount |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Unamortized transaction costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity component, net of transaction costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest expense recognized related to the Notes was as follows (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Contractual interest expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Amortization of debt discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Based on the closing price of our Class A common stock of $
Capped Call Transactions
In connection with the offering of the 2026 Notes and 2024 Notes, the Company entered into privately negotiated capped call options with certain counterparties (the “2026 Capped Calls” and “2024 Capped Calls”, respectively). The 2026 Capped Calls have an initial strike price of approximately $
The 2024 Capped Calls have an initial strike price of approximately $
As both the 2026 Capped Calls and 2024 Capped Calls are considered indexed to our own stock and are equity classified, therefore they are recorded in stockholders’ equity and are not accounted for as derivatives.
17
Convertible Senior Notes and Capped Call Transactions – Impact on Earnings per Share
The Company computes the potentially dilutive impact of the shares of Class A common stock related to the 2026 Notes and 2024 Notes using the treasury stock method, as we intend and have the ability to settle the principal amount of the 2026 Notes and 2024 Notes in cash upon conversion. However, the
The 2026 Capped Calls and 2024 Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
Credit Facility
In December 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with certain financial institutions that provides for a
As of June 30, 2021, we had
11. Other Current and Non-Current Liabilities
Other current liabilities consist of the following (in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Contingent consideration payable |
|
$ |
|
|
|
$ |
|
|
Accrued payables from acquisitions |
|
|
|
|
|
|
— |
|
Accrued accounts payable |
|
|
|
|
|
|
|
|
Accrued compensation liability |
|
|
|
|
|
|
|
|
Value-added taxes payable |
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
|
|
|
$ |
|
|
Our accrued compensation liability represents employee bonus and other payroll withholding expenses, while other current liabilities include various expenses that we accrue for sales and other taxes, customer deposits, accrued vendor expenses and deferred consideration payable from acquisitions.
Other non-current liabilities consist of the following (in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Deferred consideration payable from acquisitions |
|
$ |
|
|
|
$ |
|
|
Uncertain tax positions, including interest and penalties |
|
|
|
|
|
|
|
|
Contingent consideration obligation |
|
|
— |
|
|
|
|
|
Accrued payables from acquisitions |
|
|
— |
|
|
|
|
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
$ |
|
|
|
$ |
|
|
18
12. Stockholders’ Equity
We recorded stock-based compensation expense related to grants of employee stock options, restricted stock units (“RSUs”) and performance and market-based awards in our consolidated statements of operations as follows (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Cost of revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Stock Option Activity
The following table shows stock option activity for the six months ended June 30, 2021 (in millions, except weighted-average exercise price and weighted-average contractual term):
|
|
Outstanding Options |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
Weighted- |
|
||
|
|
|
|
|
|
Weighted-Average |
|
|
Intrinsic Value of |
|
|
Average |
|
|||
|
|
|
|
|
|
Exercise Price |
|
|
Stock Options |
|
|
Contractual Term |
|
|||
|
|
Stock Options |
|
|
(per option) |
|
|
Outstanding |
|
|
(in years) |
|
||||
Balance as of December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited, expired and cancelled |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
RSU Activity
The following table shows a summary of RSU activity for the six months ended June 30, 2021, which includes performance and market-based awards (in millions, except weighted-average grant date fair value):
|
|
Outstanding RSUs |
|
|||||||||
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate |
|
||
|
|
|
|
|
|
Grant Date Fair Value |
|
|
Intrinsic Value of |
|
||
|
|
Shares |
|
|
(per share) |
|
|
Unvested RSUs |
|
|||
Unvested as of December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
Unvested as of June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
19
Performance-Based RSUs
On March 15, 2021, the Company granted performance-based awards to certain executives (the “2021 Performance RSUs”).
The Company recognizes stock-based compensation expense for the 2021 Performance RSUs using the accelerated attribution method over the requisite service period. The amount of stock-based compensation is determined based on the probability of achievement of the pre-established thresholds at each reporting period. If necessary, at each reporting period, the Company records a cumulative catch-up adjustment to reflect any revised estimates regarding the probability of achievement.
Stock Repurchases
In April 2018, a share repurchase program was authorized for up to $
All of our previous stock repurchases were made through open market purchases under Rule 10b5-1 plans and subsequently retired.
13. Accumulated Other Comprehensive Income (Loss)
The following table shows a summary of changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2021 (in millions):
|
|
Foreign Currency Translation |
|
|
Unrealized Gains (Losses) on Available-For- Sale Marketable Debt Securities |
|
|
Total |
|
|||
Balance as of December 31, 2020 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net other comprehensive income (loss), net of tax |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of June 30, 2021 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
14. Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive securities. In computing diluted net income (loss) per share, net income (loss) attributable to common shareholders is re-allocated to reflect the potential impact of dilutive securities, including stock options, unvested RSUs, unvested performance and market-based RSUs, ESPP withholdings and convertible debt instruments. For periods in which we have generated a net loss or there is no income attributable to common stockholders, we do not include dilutive securities in our calculation of diluted net income (loss) per share, as the impact of these awards is anti-dilutive.
20
The following tables set forth the computation of basic and diluted net income (loss) per share of common stock (in millions, except per share data):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
BASIC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
DILUTED: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders – basic |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Weighted-average common shares outstanding – basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and employee stock purchase plan |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
RSUs |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Convertible senior notes |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Weighted-average common shares outstanding – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders – diluted |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
The following weighted-average employee equity awards were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Stock options and employee stock purchase plan |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
RSUs (including performance and market- based awards) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Commitments and Contingencies
The amounts represented in the tables below reflect our minimum cash obligations for the respective calendar years based on contractual terms, but not necessarily the periods in which these costs will be expensed in the Company’s consolidated statement of operations.
Licensor and Marketing Commitments
We have entered into several contracts with licensors that contain minimum contractual and marketing commitments that may not be dependent on any deliverables. As of June 30, 2021, future minimum contractual royalty payments due to licensors and marketing commitments for the licensed products are as follows (in millions):
Year ending December 31: |
|
|
|
|
Remaining 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
21
Other Purchase Commitments
We have entered into several contracts primarily for hosting of data systems and other services. As of June 30, 2021, future minimum purchase commitments that have initial or remaining non-cancelable terms are as follows (in millions):
Year ending December 31: |
|
|
|
|
Remaining 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Excluded from tables above is our uncertain income tax position liability of $
In August 2021, the Company executed an agreement which commits it to purchase hosting services over three annual periods beginning August 1, 2021, in exchange for discounted pricing. The minimum commitments total $
Legal Matters
The Company is involved in legal and regulatory proceedings on an ongoing basis. Some of these proceedings are in early stages and may seek an indeterminate amount of damages. If the Company believes that a loss arising from such matters is probable and can be reasonably estimated, the Company accrues the estimated liability in its financial statements. If only a range of estimated losses can be determined, the Company accrues an amount within the range that, in its judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, the Company accrues the low end of the range. For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, the Company discloses such an estimate, if material. If such a loss or range of losses is not reasonably estimable, the Company discloses that fact. In assessing the materiality of a proceeding, the Company evaluates, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs that may require changes to business practices in a manner that could have a material adverse impact on the Company’s business. Legal expenses are recognized as incurred. Legal expenses are recognized as incurred.
On September 12, 2019, the Company announced that an incident had occurred that may have involved player data (the “Data Incident”). Upon our discovery of the Data Incident, an investigation immediately commenced and advisors and third-party forensics firms were retained to assist. The investigation revealed that, during the third quarter of 2019, outside hackers illegally accessed certain player account information and other Zynga information, and that no financial information was accessed. The Company has provided notifications to players, investors, regulators and other third parties, where we believe notice was required or appropriate. The Company has exchanged correspondence with certain regulators as a result of the incident. The Company has also received and has responded to data subject access requests from certain European Union players of Zynga’s games.
Since March 3, 2020, five consumer class action complaints have been filed in connection with the Data Incident in federal court. On March 3, 2020, two plaintiffs – minor “I.C.” (acting through his parent Nasim Chaudhri) and Amy Gitre – filed a class action complaint arising out of the Data Incident (the “Chaudhri complaint”), generally alleging that Zynga failed to reasonably safeguard certain player information, including names, email addresses, and passwords (among other items); failed to provide them with timely notification of the breach; and made misleading representations concerning the safety and security of plaintiffs’ personal information. Plaintiffs allege claims against Zynga under several state law theories, including negligence, intrusion upon seclusion, failure to comply with data breach notification statutes, and unjust enrichment, and they seek injunctive relief and damages. Zynga filed a motion to compel arbitration and arbitration-related discovery on May 8, 2020.
On March 23, 2020, plaintiffs Carol Johnson and Lisa Thomas filed a second class action complaint in the Northern District of California federal court (the “Johnson complaint”). Similar to the Chaudhri complaint, the Johnson plaintiffs – residents of Missouri and Wisconsin – assert Zynga failed to adequately protect certain player information, including names, email addresses, and passwords (among other items). Plaintiffs contend that, despite Zynga’s representations in its privacy policy that sensitive player information would be adequately protected, plaintiffs’ passwords were stored using inadequate hashing methods or in plain text. Plaintiffs allege that the lack of adequate security measures caused them harm as a result of the Data Incident, and they assert numerous various claims against Zynga, including claims for negligence, negligence per se, unjust enrichment, declaratory relief, breach of confidence, breach of contract and implied contract, violations of California’s Unfair Competition Law (“UCL”, CGL 17200, et seq.), and state-specific violations of Missouri’s Merchandising Practices Act and Wisconsin’s Deceptive Trade Practices
22
Act. Plaintiffs seek damages, as well as declaratory and injunctive relief. On May 26, 2020, Zynga filed a motion to compel arbitration and arbitration-related discovery.
On April 15, 2020, plaintiffs Joseph Martinez IV and Daniel Petro, residents of Colorado and Iowa, filed a third class action complaint in the Northern District of California (the “Martinez complaint”). Plaintiffs allege they are longtime Zynga players who were affected by the Data Incident. Similar to the Chaudhri and Johnson plaintiffs, the Martinez plaintiffs generally allege that Zynga failed to adequately store and protect or otherwise secure certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated and improper password encryption methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. Like the Johnson and Chaudhri plaintiffs, the Martinez plaintiffs assert claims for negligence, negligence per se, and unjust enrichment, as well as contractual claims, and claims for relief under multiple state consumer protection statutes. Additionally, the Martinez plaintiffs also assert misrepresentation and omission claims under California’s false advertising law and the California Consumer Legal Remedies Act. Plaintiffs seek injunctive and monetary relief on behalf of a nationwide class. Zynga responded to the Martinez complaint by filing a motion to compel arbitration on June 19, 2020.
On June 9, 2020 plaintiffs James Oeste and Marissa Oeste, both residents of Maryland, filed a fourth class action complaint in the Northern District of Maryland (the “Oeste complaint”). Plaintiffs allege they were Zynga players who were affected by the Data Incident. Similar to all the foregoing plaintiffs, the Oeste plaintiffs seek to represent a nationwide class and generally allege that Zynga failed to adequately or reasonably protect certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated or improper password hashing methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. The Oeste plaintiffs assert claims for contractual breach, negligence, negligence per se, invasion of privacy, and claims for relief under California consumer protection and unfair competition statutes. Zynga responded to the complaint on August 31, 2020, with a motion to transfer the action to the Northern District of California. On May 5, 2021, the court granted Zynga’s motion to transfer, and the case was transferred to the Northern District of California. The California district court has consolidated Oeste proceedings in connection with the other already pending cases before the court.
On August 13, 2020, plaintiff Christopher Rosiak filed a fifth class action in the Northern District of California (the “Rosiak complaint”). Plaintiff alleges similar and analogous claims to those in the Martinez (and others) actions pending in the Northern District, alleging that he suffered harm as a result of Zynga’s data breach. Plaintiff Rosiak alleges multiple state law claims, including contract-based claims, negligence, and violation of California’s unfair competition, false advertising, and consumer protection statutes.
On January 6, 2021, the Northern California district court issued an order in three of the above actions—Chaudhri, Johnson, and Martinez—denying Zynga’s motions to compel arbitration without prejudice, and granting an alternative request for preliminary arbitration-related discovery that Zynga had made in connection with its motions. Plaintiffs were ordered to provide Zynga with plaintiffs’ identifying information. Following a status hearing before the court as to all actions pending before it, plaintiffs filed an amended and consolidated complaint in connection with the Chaudhri, Johnson, and Martinez complaints, as well as in connection with the Rosiak complaint. The amended and consolidated complaint was filed in the Northern District of California on March 12, 2021.
In response to the amended and consolidated complaint, on April 21, 2021, the Company filed renewed motions to compel arbitration in connection with the claims alleged by three of the individual named plaintiffs in the Chaudhri, Johnson, and Martinez actions. On the same date, the Company also filed a motion to dismiss claims alleged by all remaining plaintiffs in those actions, and in the Rosiak action. Following oral argument held by the court on July 27, 2021, the court granted Zynga’s motion to compel arbitration and granted the motion to dismiss with leave to amend. Plaintiffs’ further amended complaint is due August 27, 2021. Zynga’s response to the amended complaint is due September 20, 2021.
On February 26, 2021, a class action lawsuit was filed in the United States District Court for the Northern District of California by named plaintiff Michael Owens (the “Owens complaint”), who purchased in-game currency in connection with his use of certain Zynga social slots games. The Zynga social slots games at issue include: Hit it Rich! Slots, Black Diamond Casino, Wizard of Oz Slots, Willy Wonka Slots, Game of Thrones™ Slots Casino, Spin it Rich!, Princess Bride Slots and Riches of Olympus. Plaintiff alleges that Zynga has unlawfully developed, owns, and operates games that qualify as unlawful slot machines under California Penal Code section 330b; and that Zynga “developed, owned, operated, and controlled” such in violation of California Penal Code sections 330, et seq., the Illegal Gambling Business Act (18 U.S.C. § 1955), and the Unlawful Internet Gambling Enforcement Act of 2006 (31 U.S.C. §§ 5361-5367). Plaintiff also alleges that Zynga unlawfully designs and markets its social slots games in order to target individuals with addictive tendencies; and that Zynga implements game features that violate state consumer protection laws. Plaintiff seeks money damages, restitution, disgorgement and other remedies, as well as injunctive relief. Plaintiff filed an amended complaint on March 29, 2021, including claims by additional named plaintiffs Jennie Plumley, Jon Schweitzer, Charlie Finlay, and Melissa Irelan. On May 4, 2021 the Company filed a motion to compel arbitration in response to the amended complaint. On June 21, 2021, all named plaintiffs filed a notice of voluntary dismissal, dismissing the complaint in its entirety, without prejudice.
23
On March 2, 2021, a class-action lawsuit (the “Bourgeois complaint”) was filed in the Superior Court of Quebec, in the province of Montreal, Canada. The lawsuit was filed by named plaintiff Gabriel Bourgeois, who purchased loot box items in connection with his use of the Marvel Strike Force and Pokemon Go! electronic and online games (plaintiff does not allege that he purchased a loot box in connection with any Zynga game). Plaintiff alleges that Zynga and multiple other gaming defendants have unlawfully developed, own, and operate an unlicensed gaming system, through the use of loot boxes in connection with their games. Plaintiff asserts that defendants have unlawfully offered loot boxes to the public in connection with their games; failed to properly disclose the odds of winning in connection with loot boxes; and failed to employ appropriate safeguards surrounding minors’ ability to purchase loot boxes. The specific Zynga games at issue—which plaintiff does not claim to have played—include CSR Racing 2, Empires & Puzzles, Farmville: Country Escape and Dawn of Titans. Plaintiff collectively asserts that by offering loot boxes, all defendants have violated the Criminal Code of Canada provisions that regulate gaming; the Competition Act of Canada; and various individual consumer protection laws of the individual Canadian provinces. Plaintiff seeks monetary damages in the form of compensatory and punitive damages, on his own behalf and that of a nationwide Canadian class. Zynga is reviewing plaintiff’s claims and intends to mount a vigorous defense.
On April 12, 2021, IGT and IGT Canada Solutions ULC (“IGT”) served Zynga with a lawsuit in the Western District of Texas federal court (the “IGT complaint”), accusing the Company of infringing United States Patent Nos. 8,708,791; 9,159,189; 7,168,089; 7,303,473; 8,795,064; and 8,266,212. The complaint alleges that the following games and certain features contained within them infringe on the IGT patents: Zynga Poker, Words With Friends, Farmville and Zynga social slots games, including specifically, Hit It Rich! Slots. Zynga is reviewing the complaint and intends to defend itself vigorously. On June 16, 2021, Zynga filed a partial motion to dismiss or strike plaintiff’s claims; and in the alternative, for a more definitive statement. IGT filed its opposition brief on June 30, 2021, and Zynga filed its reply on July 7, 2021. The parties are awaiting a hearing on the motion.
The Company intends to defend itself vigorously against all claims asserted. At this time, the Company is unable to reasonably estimate the loss or range of loss, if any, arising from any of the above-referenced matters.
The Company is, at various times, also party to various other legal proceedings, claims and/or regulatory inquiries not previously discussed which arise in the ordinary course of business. In addition, the Company may receive notifications alleging infringement of patent or other intellectual property rights. Adverse results in any such litigation, legal proceedings or claims may include awards of substantial monetary damages, expensive legal fees, costly royalty or licensing agreements, or orders preventing us from offering certain games, features, or services, and may also result in changes in the Company’s business practices, which could result in additional costs or a loss of revenue and could otherwise harm the Company’s business. Although the results of such litigation cannot be predicted with certainty, the Company believes that the amount or range of reasonably possible losses related to such pending or threatened litigation will not have a material adverse effect on its business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.
16. Subsequent Events
Acquisition of Chartboost, Inc. (“Chartboost”)
On
Acquisition of Beijing StarLark Technology Co., Ltd. (“StarLark”) and Lvy Technology Limited (“Lvy”)
On
The closing is expected to occur during the fourth quarter of 2021, subject to satisfaction or waiver of specified conditions, including required regulatory filings. Pursuant to the StarLark Agreement, the Company will acquire Lvy and StarLark, with StarLark becoming a direct, wholly-owned subsidiary of Lvy and Lvy becoming a direct, wholly-owned subsidiary of Zynga.
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.
COVID-19 Update
We continue to remain focused on monitoring and assessing the COVID-19 pandemic including prioritizing the interests of our employees and players. As it relates to our employees, in mid-March 2020, our global workforce transitioned to remote working as we closed our offices, without any material disruption to our day-to-day operations. Our global offices largely continue to remain closed, with our global studios predominately operating remotely while we continue to assess the impact of the COVID-19 pandemic on the health and safety of our employees.
As it relates to our user base, towards the end of the second quarter of 2021, we observed a decline in players from cohorts that began playing certain of our games during the pandemic, as communities started to reopen and reduce their COVID-19 restrictions. Moving forward, we continue to believe the effects of the COVID-19 pandemic on society and player behavior are highly uncertain.
While we believe that we have been able to observe certain trends, we may not be able to determine the quantifiable impact specifically attributable to the COVID-19 pandemic on our results of operations and financial performance for the three and six months ended June 30, 2021 and for future periods. See further discussion below in Part II, Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q of the possible impact of the COVID-19 pandemic on our business.
Overview
We are a leading provider of social game services with approximately 205 million average mobile monthly active users (“MAUs”) in the second quarter of 2021. We develop, market and operate social games as live services played on mobile platforms (such as Apple’s iOS and Google’s Android), social networking platforms (such as Facebook and Snapchat), Personal Computers (PCs), consoles (such as Nintendo’s Switch) and other platforms. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items (“online game revenue”) and advertising services (“advertising revenue”).
We are a pioneer and innovator of social games and a leader in making “play” a core activity primarily on mobile devices and social networking sites. Our objective is to become the worldwide leader in play by connecting the world through games.
Consistent with our free-to-play business model, a small portion of our players have historically been payers. For example, in the second quarter of 2021, our average mobile monthly unique payers (“MUPs”) represented approximately 4.0% of our average mobile monthly unique users (“MUUs”) – for more information about the uses, estimates and limitations of these and other operating metrics, please see “Key Operating Metrics” below. Because the opportunity for social interactions increases as the number of players increases, we believe that maintaining and growing our overall number of players, including the number of players who may not purchase virtual items, is important to the success of our business. As a result, we believe that the number of players who choose to purchase virtual items will continue to constitute a small portion of our overall players.
Our top three online game revenue-generating games historically have contributed to a significant portion of our revenue, though the games that represent our top three online game revenue-generating games vary over time. Our top three online game revenue-generating games accounted for 49%, 48% and 45% of our online game revenue in 2020, 2019 and 2018, respectively. With respect to advertising and other revenue, our Words With Friends games generated a substantial portion of our advertising and other revenue in 2020, 2019 and 2018.
Acquisition of Chartboost, Inc. (“Chartboost”)
On May 4, 2021, the Company executed a Merger Agreement (the “Chartboost Agreement”) with the securityholders of Chartboost, a Delaware corporation, to acquire 100% of all issued and outstanding share capital of Chartboost, and on August 4, 2021 the Company closed the acquisition of Chartboost for cash consideration of $250.4 million (the “Closing Cash Consideration”), of which $25.0 million was deposited into an escrow fund as security for certain indemnification obligations of the former Chartboost
25
securityholders. Further, the Company assumed unvested Chartboost options permitting the holders to purchase up to 1,012,388 shares of Zynga’s Class A common stock.
Chartboost is a mobile programmatic advertising and monetization platform, which includes both a demand side platform and supply side platform and mediation capabilities. The Company expects the acquisition to meaningfully enhance its competitive advantage through enhanced levels of audience scale and advanced machine learning and data science capabilities.
Acquisition of Beijing StarLark Technology Co., Ltd. (“StarLark”) and Lvy Technology Limited (“Lvy”)
On August 3, 2021, the Company executed a Master Business Transfer Agreement among Beijing Fotoable Technology Limited, Funjoy Technology Limited, Lvy, StarLark and certain other parties (the “StarkLark Agreement”), pursuant to which Zynga will acquire, at closing, the Beijing-based StarLark game studio, the Golf Rival mobile game franchise and related other games and certain other specified assets and liabilities in a series of related closings, in exchange for consideration of approximately $525.0 million of which (a) $315.0 million will be payable in cash, subject to adjustments as set forth in the StarLark Agreement and (b) the remaining $210.0 million will be satisfied by the issue of 20,009,528 shares of Class A common stock of Zynga, based on the average closing price of the Zynga Stock during a 30 trading day period preceding the date of the StarLark Agreement, subject to adjustments as set forth in the StarLark Agreement.
The closing is expected to occur during the fourth quarter of 2021, subject to satisfaction or waiver of specified conditions, including required regulatory filings. Pursuant to the StarLark Agreement, the Company will acquire StarLark and Lvy, with StarLark becoming a direct, wholly-owned subsidiary of Lvy and Lvy becoming a direct, wholly-owned subsidiary of Zynga.
How We Generate Revenue
We operate our social games as live services that allow players to play for free. We generate revenue primarily from the sale of in-game virtual items and advertising services. Revenue growth will continue to depend largely on our ability to attract and retain players and more effectively monetize our player base through the sale of in-game virtual items and advertising. We intend to do this through the launch of new games, enhancements to current games and expansion into new markets and distribution platforms.
Online game. We provide our players with the opportunity to purchase virtual items that enhance their game-playing experience. We believe players choose to pay for virtual items for the same reasons they are willing to pay for other forms of entertainment – they enjoy the additional playing time or added convenience, the ability to personalize their own game boards, the satisfaction of leveling up and the opportunity for sharing creative expressions. We believe players are more likely to purchase virtual items when they are connected to and playing with their family and friends, whether those individuals play for free or also purchase virtual items.
In 2021, our business continued generating a significant percentage of revenue and bookings through mobile platforms. In the six months ended June 30, 2021, we estimate that 51% and 45% of our revenue and bookings were generated on Apple and Google platforms, respectively, while in the same period of the prior year, we estimate that 48% and 46% of our revenue and 48% and 47% of our bookings were generated on Apple and Google platforms, respectively. This information is estimated because certain payment methods we accept and certain advertising networks do not allow us to determine the platform used.
Advertising and other. Advertising revenue primarily includes display advertisements, engagement advertisements and offers and branded virtual items and sponsorships. Other revenue primarily consists of royalties received from the licensing of our brands.
Key Metrics
We regularly review a number of metrics, including the following key financial and operating metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
26
Key Financial Metrics
Revenue and Bookings. Bookings is a non-GAAP financial measure that is equal to revenue recognized plus or minus the change in deferred revenue during the period. We record the sale of virtual items (i.e. online game bookings) as deferred revenue and then recognize those bookings ratably over the estimated average playing period of payers or as the virtual items are consumed. Advertising sales consisting of certain branded virtual items and sponsorships are also initially recorded to deferred revenue and then these advertising bookings are recognized ratably over the estimated life of the branded virtual item, similar to online game revenue, or over the term of the advertising arrangement, depending on the nature of the agreement. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long-term, the factors impacting our revenue and bookings are the same. However, in the short term, there are various factors that may cause revenue to exceed or be less than bookings in any period.
We use revenue and bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that bookings are useful in evaluating our business, this information should be considered as supplemental in nature and is not intended to be considered in isolation of, as a substitute for, or as superior to, revenue recognized in accordance with U.S. GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.
The following table presents a reconciliation of total revenue to total bookings for each of the periods presented (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Reconciliation of Revenue to Bookings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
720.0 |
|
|
$ |
451.7 |
|
|
$ |
1,400.3 |
|
|
$ |
855.4 |
|
Change in deferred revenue |
|
|
(8.1 |
) |
|
|
66.4 |
|
|
|
31.1 |
|
|
|
87.6 |
|
Bookings |
|
$ |
711.9 |
|
|
$ |
518.1 |
|
|
$ |
1,431.4 |
|
|
$ |
943.0 |
|
The following table presents a reconciliation of mobile revenue to mobile bookings for each of the periods presented (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Reconciliation of Mobile Revenue to Mobile Bookings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile revenue |
|
$ |
699.2 |
|
|
$ |
432.6 |
|
|
$ |
1,359.9 |
|
|
$ |
819.6 |
|
Change in mobile deferred revenue |
|
|
(8.0 |
) |
|
|
65.6 |
|
|
|
30.9 |
|
|
|
87.2 |
|
Mobile bookings |
|
$ |
691.2 |
|
|
$ |
498.2 |
|
|
$ |
1,390.8 |
|
|
$ |
906.8 |
|
Limitations of Bookings
Key limitations of bookings are:
|
• |
bookings do not reflect that we defer and recognize online game revenue and revenue from certain advertising transactions over the estimated average playing period of payers, the average life of branded virtual items, the term of the advertising arrangement or as virtual items are consumed; and |
|
• |
other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces their usefulness as a comparative measure. |
Because of these limitations, you should consider bookings along with other financial performance measures, including revenue, net income (loss) and our other financial results presented in accordance with U.S. GAAP.
27
Key Operating Metrics
We manage our business by tracking several operating metrics: “Mobile DAUs,” which measure daily active users of our mobile games, “Mobile MAUs,” which measure monthly active users of our mobile games, “Mobile MUUs,” which measure monthly unique users of our mobile games, “Mobile MUPs,” which measure monthly unique payers in our mobile games, and “Mobile ABPU,” which measures our average daily mobile bookings per average Mobile DAUs, each of which is recorded and estimated by our internal analytics systems. We determine these operating metrics by using internal company data based on tracking of user account activity. We also use information provided by third parties, including third party network logins provided by platform providers, to help us track whether a player logged in under two or more different user accounts is the same individual. We believe that the amounts are reasonable estimates of our user base for the applicable period of measurement and that the methodologies we employ and update from time-to-time are reasonably based on our efforts to identify trends in player behavior; however, factors relating to user activity and systems and our ability to identify and detect attempts to replicate legitimate player activity may impact these numbers.
Mobile DAUs. We define Mobile DAUs as the number of individuals who played one of our mobile games during a particular day. Under this metric, an individual who plays two different mobile games on the same day is counted as two Mobile DAUs. We use information provided by third parties to help us identify individuals who play the same mobile game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile DAUs. Average Mobile DAUs for a particular period is the average of the Mobile DAUs for each day during that period. We use Mobile DAUs as a measure of mobile audience engagement.
Mobile MAUs. We define Mobile MAUs as the number of individuals who played one of our mobile games in the 30-day period ending with the measurement date. Under this metric, an individual who plays two different mobile games in the same 30-day period is counted as two Mobile MAUs. We use information provided by third parties to help us identify individuals who play the same mobile game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile MAUs. Average Mobile MAUs for a particular period is the average of the Mobile MAUs at each month-end during that period. We use Mobile MAUs as a measure of total mobile game audience size.
Mobile MUUs. We define Mobile MUUs as the number of individuals who played one or more of our mobile games, which we were able to verify were played by the same individual in the 30-day period ending with the measurement date. An individual who plays more than one of our mobile games in a given 30-day period would be counted as a single Mobile MUU to the extent we can verify that the mobile games were played by the same individual. However, because we do not always have the third party network login data necessary to link an individual who has played under multiple user accounts in a given 30-day period, an individual may be counted as multiple Mobile MUUs. Because many of our players play more than one mobile game in a given 30-day period, Mobile MUUs are always equal to or lower than Mobile MAUs in any given time period. Average Mobile MUUs for a particular period is the average of the Mobile MUUs at each month end during that period. We use Mobile MUUs as a measure of total audience reach across our network of mobile games.
Mobile MUPs. We define Mobile MUPs as the number of individuals who made a payment in a mobile game at least once during the applicable 30-day period through a payment method for which we can quantify the number of individuals. Mobile MUPs do not include individuals who use certain payment methods for which we cannot quantify the number of unique payers. However, because we do not always have the third party network login data necessary to link an individual who has paid under multiple user accounts in a 30-day period, a player who has paid using multiple user accounts may be counted as multiple Mobile MUPs. Mobile MUPs are presented as an average of the three months in the applicable quarter. We use Mobile MUPs as a measure of the number of individuals who made payments across our network of mobile games during a 30-day period.
Mobile ABPU. We define Mobile ABPU as our total mobile bookings in a given period, divided by the number of days in that period, divided by, the average Mobile DAUs during the period. We believe that Mobile ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as management. We use Mobile ABPU as a measure of overall monetization across all of our mobile players through the sale of virtual items and advertising.
Our business model around our social games is designed so that, as more players play our games, social interactions increase and the more valuable our games and our business become. All engaged players of our games help drive our bookings, online game revenue and advertising revenue. Virtual items are purchased by players who are socializing with, competing against or collaborating with other players, most of whom do not buy virtual items. Accordingly, we primarily focus on the aforementioned key operating metrics, which we believe collectively best reflect key audience metrics.
28
Consistent with our focus on mobile gaming platforms, we report these audience-related metrics based only on mobile platforms. We have ceased including our web-based games in these audience metrics as a result of their decreasing significance as part of our overall financial and operating results and the technical challenges resulting from increased volumes of apparent player activity that we are unable to reliably validate and de-duplicate, as these web-based games are generally more susceptible than mobile platforms to attempts to replicate legitimate player activity.
In order to provide our best estimates of actual player metrics, we continually evaluate our methodologies including estimating audience metrics by applying data science techniques to identify suspicious player behavior. While we devote significant time and effort to developing player metrics, our estimates may not accurately reflect the actual amount of players in a reported period and our methodologies do not consistently identify all invalid traffic in prior reporting periods.
The table below shows Average Mobile DAUs, Mobile MAUs, Mobile MUUs, Mobile MUPs and Mobile ABPU for the three and six months ended June 30, 2021 and 2020:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
(users and payers in millions) |
|
|||||||||||||
Average Mobile DAUs(1) |
|
|
41 |
|
|
|
22 |
|
|
|
40 |
|
|
|
21 |
|
Average Mobile MAUs(1) |
|
|
205 |
|
|
|
70 |
|
|
|
185 |
|
|
|
69 |
|
Average Mobile MUUs(2) |
|
|
33 |
|
|
|
47 |
|
|
|
35 |
|
|
|
45 |
|
Average Mobile MUPs(2) |
|
|
1.3 |
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
1.4 |
|
Mobile ABPU |
|
$ |
0.183 |
|
|
$ |
0.248 |
|
|
$ |
0.193 |
|
|
$ |
0.232 |
|
|
(1) |
We do not have the third party network login data to link an individual who has played under multiple user accounts for our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games, Puzzle Combat, Merge Magic! and games acquired from Gram Games, Small Giant and Peak and accordingly, actual Mobile DAU and Mobile MAU may be lower than reported due to the potential duplication of these individuals. |
|
(2) |
Excluded from Mobile MUUs and Mobile MUPs are players of our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games, Puzzle Combat, Merge Magic! and games acquired from Gram Games, Small Giant and Peak. These games are excluded to avoid potential double counting as our systems are unable to distinguish whether a player of these games is also a player of our other games during the applicable time periods. |
Average Mobile DAUs and MAUs increased in the three months ended June 30, 2021 when compared to the same period of the prior year, primarily driven by contributions from the games acquired from Peak in July 2020 and Rollic in October 2020.
Average Mobile MUUs decreased in the three months ended June 30, 2021 compared to the same period of the prior year, primarily driven by a decline in Average Mobile MAUs from our older mobile games, casual card games and Words With Friends, partially offset by an increase from Harry Potter™: Puzzles & Spells, which launched in September 2020. Average Mobile MUPs decreased primarily due to a decline in payers in our older mobile games, Zynga Poker and our casual card games, partially offset by an increase in payers in Harry Potter™: Puzzles & Spells. Finally, Mobile ABPU decreased due to a larger increase in average Mobile DAUs relative to the increase in mobile bookings, primarily reflecting the addition of Rollic’s hyper-casual games into our portfolio.
Other Metrics
Although our management primarily focuses on the operating metrics above, we also monitor periodic trends in paying players of our games. The table below shows average monthly unique mobile online game payer bookings, Average Mobile MUPs and average monthly unique mobile online game payer bookings per Average Mobile MUP:
|
|
Three Months Ended June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Average monthly unique mobile online game payer bookings (in millions)(1) |
|
$ |
73 |
|
|
$ |
66 |
|
Average Mobile MUPs (in millions)(2) |
|
|
1.3 |
|
|
|
1.5 |
|
Average monthly unique mobile online game payer bookings per Average Mobile MUP(3) |
|
$ |
55 |
|
|
$ |
46 |
|
|
(1) |
Average monthly unique mobile online game payer bookings represent the monthly average amount of mobile online game bookings for the applicable quarter that we received through payment methods for which we can quantify the number of unique payers. Accordingly, mobile online game bookings from our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games, Puzzle Combat, Merge Magic! and our games acquired from Gram Games, Small Giant and Peak are excluded. |
|
(2) |
Excluded from Average Mobile MUPs are players of our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games, Puzzle Combat, Merge Magic!, and games acquired from Gram Games, Small Giant and Peak. These games are excluded to avoid potential double counting as our systems are unable to distinguish whether a player of these games is also a player of our other games during the applicable time periods. |
|
(3) |
Average monthly unique mobile online game payer bookings per Average Mobile MUP is calculated by dividing average monthly unique mobile online game payer bookings by Average Mobile MUPs. |
29
Average monthly unique mobile online game payer bookings increased in the three months ended June 30, 2021 compared to the same period of the prior year, primarily due to contribution from Harry Potter™: Puzzles & Spells, partially offset by a decline from CSR Racing 2. Average monthly unique mobile online game payer bookings per Average Mobile MUP increased due to the increase in average monthly unique mobile online game payer bookings and decrease in Average Mobile MUPs.
Although we monitor our unique mobile payer metrics, we focus on monetization, including in-game advertising, of all of our players and not just those who are payers. Accordingly, we strive to enhance content and our players’ game experience to increase our bookings and Mobile ABPU, which is a measure of overall monetization across all of our players through the sale of virtual items and advertising. Future growth in audience and engagement will depend on our ability to retain current players, attract new players, launch new games, expand into new markets and distribution platforms, and the success of our network. Our operating metrics may not correlate directly to quarterly revenue or bookings trends.
Factors Affecting Our Performance
Platform agreements. Our games are primarily distributed, marketed and promoted through third parties, primarily Apple’s App Store and the Google Play Store. Virtual items for our games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our revenue, bookings and players through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for mobile devices. Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms’ terms of service and other policies with respect to us or other developers in their sole discretion, and those changes may be unfavorable to us. These platform fees are recorded as costs of revenue as incurred, while we recognize the majority of mobile online game revenue over the average playing period of payers, which generally results in costs of revenue exceeding revenue early in the life of a new or acquired game. Further, as a result of the platform fees associated with online game bookings, our mobile online game revenue generally generates lower gross margins than our advertising and other revenue. Accordingly, the overall mix between online game revenue and advertising and other revenue may impact our gross margins.
Launch of new games and release of enhancements. Our revenue and bookings results have been driven by the launch of new games and the release of fresh content and new features in existing games. Our future success depends on our ability to innovate and provide fresh content to keep our existing players engaged, while also engaging new and lapsed players, and launch and monetize new titles on various platforms. Although the amount of revenue and bookings we generate from an enhancement to an existing game or launch of a new game or can vary significantly, we expect our revenue and bookings to be correlated to our success in releasing engaging content and features for our existing games and the success and timely launch of our new games. Further, revenue and bookings from many of our games may decline over time after reaching a peak of popularity and player usage. As a result of this decline in the revenue and bookings of our games, our business depends on our ability to consistently release fresh content for our existing games and launch new games that achieve significant popularity and have the potential to become franchise games.
Game monetization. We generate most of our revenue and bookings from the sale of virtual items in our games. The degree to which our players choose to pay for virtual items in our games is driven by our ability to create content and virtual items that enhance the game-play experience. Our revenue, bookings and overall financial performance are affected by the number of players and the effectiveness of our monetization of players through the sale of virtual items and advertising. The percentage of paying players may increase or decrease based on a number of factors, including growth in mobile games as a percentage of total game audience, localization of content in international markets and the availability of payment options.
Investment in game development. In order to develop new games and enhance the content and features in our existing games, we must continue to invest in a significant amount of engineering and creative resources. These expenditures generally occur in advance of the launch of a new game or the release of new content, and the resulting revenue may not equal or exceed our development costs, or the game or feature may be abandoned in its entirety. In addition, we recognize the majority of online game revenue over the average playing period of payers, which generally results in expenses exceeding revenue early in the life of a new or acquired game.
Player acquisition costs. We utilize advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation. Over time, these acquisition and retention-related programs may become either less effective or costlier, negatively impacting our operating results.
Licensed branding. In addition to player acquisition costs, we utilize licensed intellectual property to grow and retain our player audience. We incur licensing fees related to the use of intellectual property within our games, and our gross margins can be affected by the mix of player purchases from games in which we own the intellectual property as compared to games in which we license certain intellectual properties. For example, we use licensed intellectual property as creative assets in games such as Game of Thrones™ Slots Casino, Harry Potter: Puzzles & Spells, Hit It Rich! Slots, Wizard of Oz Slots and Wonka’s World of Candy, and we are developing new games using licensed intellectual property for Star Wars™. While overall bookings within these games will benefit our revenue, a shift in the mix of our revenue towards such games using licensed intellectual property could decrease our gross margins.
New market development. We are investing in new distribution channels, cross-platform play and international markets to expand our reach and grow our business. For example, we continue to expand our game publishing internationally, including the
30
release of Harry Potter: Puzzles & Spells in Asia during 2020. Our ability to be successful will depend on our ability to develop a successful mobile network, obtain new players and retain existing players on new and existing social networks and attract advertisers.
As we expand into new markets and distribution channels, we expect to incur headcount, marketing and other operating costs in advance of the associated revenue and bookings. Our financial performance will be impacted by our investment in these initiatives and their success.
Hiring and retaining key personnel. Our ability to compete depends in large part on our ability to hire and retain key talent and match that key talent to our current business needs. We are continually reviewing our hiring, learning and development and total rewards programs against best practices, with the goal of building and retaining world class teams. For further discussion on our human capital, refer to Part I, Item I “Business” included in our previously-filed Annual Report on Form 10-K for the year ended December 31, 2020.
Results of Operations
In April 2021, Apple released a version update of iOS 14.5 that requires its users (and presumably users of future iOS versions), on an app-by-app basis, to explicitly opt-in to the use of identifier-for-advertising, a device identifier assigned by Apple to each of its devices and used by advertisers to attribute app installs to advertising campaigns, target users through user acquisition and deliver targeted ads. While we believe that we have been able to observe certain trends, including a meaningful increase in the adoption of iOS 14.5 by users, we may not be able to determine the quantifiable impact specifically attributable to the Apple version update on our results of operations and financial performance for the three and six months ended June 30, 2021 and for future periods, although we continue to expect short-term impact on advertising yields as a result of its release.
Revenue
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Online game: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile |
|
$ |
567.6 |
|
|
$ |
370.2 |
|
|
|
53 |
% |
|
$ |
1,106.3 |
|
|
$ |
698.9 |
|
|
|
58 |
% |
Other(1) |
|
|
19.4 |
|
|
|
18.0 |
|
|
|
8 |
% |
|
|
37.7 |
|
|
|
33.6 |
|
|
|
12 |
% |
Online game total |
|
$ |
587.0 |
|
|
$ |
388.2 |
|
|
|
51 |
% |
|
$ |
1,144.0 |
|
|
$ |
732.5 |
|
|
|
56 |
% |
Advertising and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile |
|
$ |
131.6 |
|
|
$ |
62.4 |
|
|
|
111 |
% |
|
$ |
253.6 |
|
|
$ |
120.7 |
|
|
|
110 |
% |
Other(1) |
|
|
1.4 |
|
|
|
1.1 |
|
|
|
36 |
% |
|
|
2.7 |
|
|
|
2.2 |
|
|
|
23 |
% |
Advertising and other total |
|
$ |
133.0 |
|
|
$ |
63.5 |
|
|
|
109 |
% |
|
$ |
256.3 |
|
|
$ |
122.9 |
|
|
|
109 |
% |
Total revenue |
|
$ |
720.0 |
|
|
$ |
451.7 |
|
|
|
59 |
% |
|
$ |
1,400.3 |
|
|
$ |
855.4 |
|
|
|
64 |
% |
|
(1) |
Includes web for online game and web advertising revenue and other revenue for advertising and other. |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Total revenue increased $268.3 million in the three months ended June 30, 2021 as compared to the same period of the prior year, while bookings increased $193.8 million over the same period.
Mobile online game revenue and other online game revenue increased $197.4 million and $1.4 million, respectively, in the three months ended June 30, 2021 as compared to the same period of the prior year, resulting in a total online game revenue increase of $198.8 million.
The increase in mobile online game revenue of $197.4 million was primarily attributable to the addition of mobile revenue from Toon Blast and Toy Blast, in the amounts of $105.0 million and $54.2 million, respectively, as these games were acquired in July 2020, and the addition of mobile revenue from Harry Potter™: Puzzles & Spells in the amount of $28.7 million as the game was launched in September 2020. The increase was also attributable to increases in mobile revenue from Empires & Puzzles, our casual card games, and Words With Friends in the amounts of $15.5 million, $3.2 million and $2.7 million, respectively, due to higher amortization of prior period deferred revenue. The increase is further supplemented by increases in revenue from Hit It Rich! Slots and Game of Thrones™ Slots Casino in the amounts of $5.9 million and $2.4 million, respectively, due to the overall increase in bookings in these games. The overall increase is offset by a decrease in revenue from Merge Dragons! and Merge Magic!, in the amounts of $10.3 million and $9.1 million, respectively, due to the overall decrease in bookings and audience metrics in the games.
31
The increase in other online game revenue of $1.4 million was primarily attributable to an increase in web revenue from Hit It Rich! Slots of $1.2 million due to the overall increase in bookings in the game.
In the three months ended June 30, 2021, Empires & Puzzles, Toon Blast and Merge Dragons! were our top online revenue-generating games and comprised 19%, 18% and 10%, respectively, of our online game revenue for the period. In the three months ended June 30, 2020, Empires & Puzzles and Merge Dragons! were our top online revenue-generating games and comprised 25% and 18% respectively, of our online game revenue for the period. No other game generated more than 10% of online game revenue during either of these periods.
The estimated weighted average playing period of payers was ten months for the three months ended June 30, 2021 and 2020.
Mobile advertising revenue and other advertising and other revenue increased $69.2 million and $0.3 million, respectively, in the three months ended June 30, 2021 as compared to the same period of the prior year, resulting in a total advertising and other increase of $69.5 million.
The increase in mobile advertising revenue of $69.2 million was primarily due a $41.9 million increase in mobile in-game display advertising revenue and a $27.3 million increase in revenue from mobile in-game offers, engagement advertisements and other revenue, both of which were primarily driven by the Rollic acquisition in October 2020, further supplemented by advertising price optimizations in our Words with Friends games.
International revenue as a percentage of total revenue was 39% in the three months ended June 30, 2021 and 2020.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Total revenue increased $544.9 million in the six months ended June 30, 2021 as compared to the same period of the prior year, while bookings increased $488.4 million in the six months ended June 30, 2021 as compared to the same period of the prior year.
Mobile online game and other online game revenue increased $407.4 million and $4.1 million, respectively, in the six months ended June 30, 2021 as compared to the same period of the prior year, resulting in a total online game revenue increase of $411.5 million.
The increase in mobile online game revenue of $407.4 million was primarily attributable to increases in mobile revenue from Toon Blast and Toy Blast, in the amounts of $194.4 million and $98.8 million, respectively, and the addition of mobile revenue from Harry Potter™: Puzzles & Spells in the amount of $46.0 million. The increase is further supplemented by increases in revenue from Empires & Puzzles, our social slots games, our casual card games, Words With Friends and Zynga Poker, in the amounts of $47.4 million, $24.3 million, $7.5 million, $6.5 million and $6.3 million, respectively, due to the overall increase in bookings in these games. The overall increase is offset by a decrease in revenue from Merge Dragons! in the amount of $24.8 million due to the overall decrease in bookings and audience metrics in the game.
The increase in other online game revenue of $4.1 million was primarily attributable to increases in web revenue from Hit It Rich! Slots and Game of Thrones™ Slots Casino in the amounts of $3.1 million and $2.0 million, respectively, due to the overall increase in bookings in these games.
During the six months ended June 30, 2021, we recognized $1.4 million of online game revenue from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods. These changes in estimates did not impact our reported earnings per share in the six months ended June 30, 2021. During the six months ended June 30, 2020, there was no significant impact from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods.
In the six months ended June 30, 2021, Empires & Puzzles, Toon Blast and Merge Dragons! were our top online revenue-generating games and comprised 20%, 17% and 10%, respectively, of our online game revenue for the period. In the six months ended June 30, 2020, Empires & Puzzles and Merge Dragons! were our top online revenue-generating games and comprised 25% and 20% respectively, of our online game revenue for the period. No other game generated more than 10% of online game revenue during either of these periods.
The estimated weighted average playing period of payers was ten months for the six months ended June 30, 2021 and 2020.
32
Mobile advertising revenue and other advertising and other revenue increased $132.9 million and $0.5 million, respectively, in the six months ended June 30, 2021 as compared to the same period of the prior year, resulting in a total advertising and other increase of $133.4 million.
The increase in mobile advertising revenue of $132.9 million was primarily due a $81.9 million increase in mobile in-game display advertising revenue and a $51.1 million increase in revenue from mobile in-game offers, engagement advertisements and other revenue, both of which were primarily driven by the Rollic acquisition in October 2020, further supplemented by advertising price optimizations in our Words with Friends games.
International revenue as a percentage of total revenue was 39% in the six months ended June 30, 2021 and 2020.
Cost of revenue
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Cost of revenue |
|
$ |
253.3 |
|
|
$ |
179.2 |
|
|
|
41 |
% |
|
$ |
514.0 |
|
|
$ |
325.4 |
|
|
|
58 |
% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Cost of revenue increased $74.1 million in the three months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to increases of $37.7 million in payment processing fees from increased bookings generated from mobile payment processors, which was predominately driven by the games acquired from Peak and the launch of Harry Potter™: Puzzles & Spells during the third quarter of 2020, and $35.7 million from the amortization of intangible assets, which was largely driven by our acquisitions of Peak and Rollic in the third and fourth quarters of 2020, respectively.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Cost of revenue increased $188.6 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to increases of $107.3 million in payment processing fees from increased bookings generated from mobile payment processors, which was predominately driven by the games acquired from Peak and the launch of Harry Potter™: Puzzles & Spells, $72.2 million from the amortization of intangible assets, which was largely driven by our acquisitions of Peak and Rollic, $4.9 million in royalty expense and $2.9 million in hosting costs.
Research and development
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Research and development |
|
$ |
109.8 |
|
|
$ |
227.9 |
|
|
|
(52 |
)% |
|
$ |
250.5 |
|
|
$ |
425.8 |
|
|
|
(41 |
)% |
Three Months Ended June 30, 2021 Compared to Three Months June 30, 2020
Research and development expenses decreased $118.1 million in the three months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a $152.7 million net decrease in collective expense related to fair value adjustments associated with our Small Giant, Gram Games and Rollic contingent consideration obligations. The decrease was partially offset by increases of $16.2 million in stock-based compensation expense and $12.0 million in headcount-related expenses, both of which were primarily driven by our Peak and Rollic acquisitions, $3.2 million related to outside services and $2.1 million in overhead allocations.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Research and development expenses decreased $175.3 million in the six months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a $239.4 million net decrease in collective expense related to fair value adjustments associated with our Small Giant, Gram Games and Rollic contingent consideration obligations. The decrease was partially offset by increases of $29.8 million in stock-based compensation expense and $25.0 million in headcount-related expenses – both of which were primarily driven by our Peak and Rollic acquisitions, $6.2 million related to outside services and $1.4 million in overhead allocations.
33
Sales and marketing
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Sales and marketing |
|
$ |
244.2 |
|
|
$ |
134.7 |
|
|
|
81 |
% |
|
$ |
492.9 |
|
|
$ |
257.8 |
|
|
|
91 |
% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Sales and marketing expenses increased $109.5 million in the three months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to an increase of $105.0 million in player acquisition costs, primarily related to the games acquired from Peak and Rollic, as well as the launch of Harry Potter™: Puzzles & Spells. The increase was further supplemented by increases of $2.0 million in other marketing costs and $1.4 million headcount-related expenses.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Sales and marketing expenses increased $235.1 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to an increase of $226.2 million in player acquisition costs, primarily related to the games acquired from Peak and Rollic, as well as the launch of Harry Potter™: Puzzles & Spells. The increase was further supplemented by increases of $4.5 million in other marketing costs, $2.7 million headcount-related expenses and $1.6 million in stock-based compensation expense.
General and administrative
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
General and administrative |
|
$ |
37.9 |
|
|
$ |
39.2 |
|
|
|
(3 |
)% |
|
$ |
73.6 |
|
|
$ |
67.4 |
|
|
|
9 |
% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
General and administrative expenses decreased $1.3 million in the three months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a decrease of $2.3 million in acquisition-related transaction costs.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
General and administrative expenses increased $6.2 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to increases of $2.6 million in stock-based compensation, $1.9 million in headcount-related expenses, $1.5 million in legal expenses, $1.5 million in information technology-related expenses and $1.4 million in depreciation, partially offset by a decrease of $1.6 million in acquisition-related transaction costs.
Interest income
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Interest income |
|
$ |
1.7 |
|
|
$ |
3.6 |
|
|
|
(53 |
)% |
|
$ |
3.4 |
|
|
$ |
9.1 |
|
|
|
(63 |
)% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Interest income decreased $1.9 million in the three months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a lower average amount invested in short and long-term investments when compared to the prior period.
34
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Interest income decreased $5.7 million in the six months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a lower average amount invested in short and long-term investments when compared to the prior period.
Interest expense
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Interest expense |
|
$ |
14.7 |
|
|
$ |
7.0 |
|
|
|
110 |
% |
|
$ |
29.4 |
|
|
$ |
13.9 |
|
|
|
112 |
% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Interest expense increased $7.7 million in the three months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to an increase of $7.2 million in non-cash interest related to the convertible notes due 2026 and 2024.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Interest expense increased $15.5 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to increases of $14.2 million in non-cash interest related to the convertible notes due 2026 and 2024 and $0.7 million in interest expense related to fees associated with our revolving credit facility.
Other income (expense), net
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
2021 |
|
|
2020 |
|
|
% Change |
||||
|
|
(dollars in millions) |
|
|
|
|
(dollars in millions) |
|
|
|
||||||||||
Other income (expense), net |
|
$ |
(9.1 |
) |
|
$ |
0.6 |
|
|
NM |
|
$ |
(0.2 |
) |
|
$ |
(1.7 |
) |
|
(88)% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Other income (expense), net decreased $9.7 million in the three months ended June 30, 2021 compared to the same period of the prior year. The decrease was primarily attributable to a net $9.0 million increase in net foreign exchange transaction losses, primarily associated with foreign currency fluctuations and the remeasurement of intercompany loans with the Company’s foreign subsidiaries.
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
Other income (expense), net increased $1.5 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily attributable to a net $1.0 million decrease in net foreign exchange transaction losses, primarily associated with remeasurement of intercompany loans with the Company’s foreign subsidiaries and partially offset by other foreign currency fluctuations.
Provision for (benefit from) income taxes
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
|
(dollars in millions) |
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
||||||||||
Provision for (benefit from) income taxes |
|
$ |
24.9 |
|
|
$ |
18.2 |
|
|
|
37 |
% |
|
$ |
38.3 |
|
|
$ |
26.7 |
|
|
|
43 |
% |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
The provision for (benefit from) income taxes increased $6.7 million during the three months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily driven by statutory income of Peak and Rollic and higher profit of Small Giant, partially offset by the prior period income tax expense of $9.4 million related to Zynga’s revision of its prior tax position of not
35
including stock-based compensation expenses in its cost share with its affiliates, based on the U.S. Supreme Court’s June 2020 denial to hear a petition regarding a lower court ruling in Altera Corp v. Commissioner (the “Altera matter”).
Six Months Ended June 30, 2021 Compared to Six Months June 30, 2020
The provision for (benefit from) income taxes increased $11.6 million in the six months ended June 30, 2021 compared to the same period of the prior year. The increase was primarily driven by statutory income of Peak and Rollic and higher profit of Small Giant, partially offset by the prior period income tax expense of $9.4 million related to the Altera matter.
Liquidity and Capital Resources
|
|
Six Months Ended June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
|
(in millions) |
|
|||||
Consolidated Statements of Cash Flows Data: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
$ |
(4.3 |
) |
|
$ |
(11.5 |
) |
Depreciation and amortization |
|
|
112.6 |
|
|
|
37.9 |
|
Cash flows provided by (used in) operating activities |
|
|
(2.7 |
) |
|
|
110.0 |
|
Cash flows provided by (used in) investing activities |
|
|
(273.5 |
) |
|
|
872.6 |
|
Cash flows provided by (used in) financing activities |
|
|
(27.8 |
) |
|
|
(66.5 |
) |
Our principal liquidity requirements are our lease commitments, licensing and marketing commitments, hosting commitments, capital expenditure needs, including strategic purchases and acquisitions, contingent consideration payments, interest payments and principal repayments of our convertible notes and any share repurchase activity we choose to effect. We expect to finance our operations primarily through cash provided by operating activities and cash on hand. However, we cannot be certain that these sources will be sufficient to finance our operations, future growth through acquisitions or share repurchase activity, thus we may seek additional financing in the future.
As of June 30, 2021 and December 31, 2020, we had cash, cash equivalents and short and long-term investments of $1.5 billion and $1.6 billion, respectively, which generally consisted of cash, money market funds, corporate debt securities, mutual funds and foreign certificates of deposit and time deposits.
Hedging Instruments
In July 2021, we executed two forward contract derivatives designed to mitigate foreign currency exposures associated with two intercompany loans. Following their execution, we expect the derivatives to offset future foreign exchange transaction gains (losses) related to these intercompany loans. Also, in July 2021, we executed a forward contract derivative designed to mitigate foreign exchange exposure associated with the invested capital of one of our foreign subsidiaries. Following its execution, we expect the derivative to offset future foreign exchange exposure in our net investment in the foreign subsidiary. The Company expects to apply hedge accounting on the net investment forward contract.
Convertible Senior Notes and Capped Call Transactions
In December 2020, we issued $874.5 million aggregate principal amount of 0% convertible senior notes due 2026, with an initial conversion rate of 76.5404 shares of our Class A common stock (equal to an initial conversion price of approximately $13.07 per share), subject to adjustment if certain events occur (the “2026 Notes”). In June 2019, we issued $690.0 million aggregate principal amount of 0.25% convertible senior notes due 2024, with an initial conversion rate of 120.3695 shares of our Class A common stock (equal to an initial conversion price of approximately $8.31 per share), subject to adjustment if certain events occur (the “2024 Notes”).
The 2026 Notes and 2024 Notes are senior unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to such notes; equal in right of payment to all of our existing and future liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our current or future subsidiaries (including trade payables). The indentures governing the 2026 Notes and 2024 Notes, as applicable, do not contain any financial covenants.
The 2026 Notes mature on December 15, 2026 and the 2024 Notes mature on June 1, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms respectively prior to the maturity date. The 2026 Notes do not bear regular interest, and the principal amount does not accrete. Interest is payable semiannually on the 2024 Notes in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Company may not redeem the 2026 Notes or 2024 Notes prior to December 20, 2023 and June 5, 2022, respectively.
36
On or after those respective dates, the Company may redeem for cash all or any portion of the applicable series of the 2026 Notes or 2024 Notes, at its option, if the last reported sale price of our Class A common stock has been at least 130% of the conversion price of the applicable series of the 2026 Notes or 2024 Notes for at least 20 trading days during any 30 consecutive trading-day period ending on and including the trading day immediately preceding the date when the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the applicable series of the 2026 Notes or 2024 Notes to be redeemed, plus any accrued and unpaid interest or special interest, as applicable.
As of June 30, 2021, the conditions allowing holders of the 2026 Notes or 2024 Notes to convert their respective series of the 2026 Notes and 2024 Notes have not been met and therefore both the 2026 Notes and 2024 Notes are not yet convertible.
In connection with the offering of the 2026 Notes and 2024 Notes, the Company also entered into privately negotiated capped call options with certain counterparties (the “2026 Capped Calls” and “2024 Capped Calls”, respectively). The 2026 Capped Calls have an initial strike price of approximately $13.07 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes and an initial cap price of $17.42 per share, subject to certain adjustments. The 2026 Capped Calls are intended to reduce the potential economic dilution of approximately 66.9 million shares to our Class A common stock upon any conversion of the 2026 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price.
The 2024 Capped Calls have an initial strike price of approximately $8.31 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes and an initial cap price of $12.54 per share, subject to certain adjustments. The 2024 Capped Calls are intended to reduce the potential economic dilution of approximately 83.1 million shares to our Class A common stock upon any conversion of the 2024 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price.
Credit Facility and Covenant Discussion
In December 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with certain financial institutions that provides for a three-year revolving credit facility in an aggregate principal amount of up to $425.0 million and is secured by a blanket lien on the Company’s assets. The Company may borrow, repay and re-borrow funds under the 2020 Credit Agreement until December 31, 2023, at which time the 2020 Credit Agreement will terminate, and all outstanding revolving loans, together with all accrued and unpaid interest, must be repaid. The Company may use the proceeds of future borrowings under the 2020 Credit Agreement for general corporate purposes.
Under the 2020 Credit Agreement, at the Company’s option, revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.50% to 1.00%, determined based on the Company’s consolidated leverage ratio for the four most recent fiscal quarters (the “Consolidated Leverage Ratio”) or (ii) the LIBOR rate (for interest periods of one, two, three or six months) plus a margin ranging from 1.50% to 2.00%, determined based on the Company’s Consolidated Leverage Ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Bank of America, N.A.’s prime rate and (iii) the LIBOR rate for a one-month interest period plus 1.00%. The Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate ranging from 0.25% to 0.35%, determined based on the Company’s Consolidated Leverage Ratio.
As of June 30, 2021, we had no amounts outstanding under the 2020 Credit Agreement.
The 2020 Credit Agreement also requires compliance with certain covenants, all of which the Company was in compliance with as of June 30, 2021. Specifically, we are subject to the following financial covenants (certain terms used and described below are as defined and described in the 2020 Credit Agreement):
|
• |
Consolidated Interest Coverage Ratio: The Company is obligated to maintain a minimum consolidated interest coverage ratio of 4.00 to 1.00 as of the end of each fiscal quarter. The consolidated interest coverage ratio is measured by dividing (a) our consolidated EBITDA for the applicable measurement period by (b) the cash portion of our consolidated interest charges for the applicable measurement period. |
|
• |
Consolidated Leverage Ratio: The Company is obligated to maintain a consolidated leverage ratio of up to an amount ranging from 4.25 to 1.00 to 3.50 to 1.00 as of the end of each fiscal quarter, in amounts decreasing through the term of the 2020 Credit Agreement. The consolidated leverage ratio is measured by dividing (a) our consolidated funded indebtedness as of the end of the applicable measurement period by (b) our consolidated EBITDA for the applicable measurement period. |
Share Repurchases
In April 2018, we authorized the 2018 Share Repurchase Program for up to $200.0 million of our outstanding Class A common stock. During the three and six months ended June 30, 2021, no share repurchases were made and as of June 30, 2021, we had $173.8 million remaining under the 2018 Share Repurchase Program. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022.
37
Operating Activities
After our net income of $4.8 million is adjusted to exclude certain non-cash items, operating activities used $2.7 million of cash, cash equivalents and restricted cash during the six months ended June 30, 2021. Significant non-cash, cash equivalent or restricted cash items included depreciation and amortization of $112.6 million and stock-based compensation expense of $80.4 million. Further, the non-cash expense associated with the increase in the Small Giant, Rollic and Gram Games contingent consideration obligations drove a $29.5 million increase in our operating liabilities during the six months ended June 30, 2021.
The change in our operating assets and liabilities during the six months ended June 30, 2021 – excluding the impact from the aforementioned increase in our contingent consideration obligations – resulted in a $229.0 million outflow of cash, cash equivalents and restricted cash, primarily due to the portion of the total acquisition-related contingent consideration payment to the former owners of Small Giant included in operating activities in the amount of $214.5 million. The outflow was further supplemented by an outflow from accounts receivable, net of $43.7 million, which was primarily driven by the timing of cash receipts from one of our largest payment processors, as well as an outflow from the first quarter 2021 payment of bonuses related to 2020 company performance. These outflows were offset by inflows from income taxes payable of $38.0 million and deferred revenue of $32.4 million.
Investing Activities
Investing activities used $273.5 million of cash, cash equivalents and restricted cash during the six months ended June 30, 2021. The primary outflow of cash, cash equivalents and restricted cash associated with investing activities was $235.0 million of investment purchases, net of maturities. The outflow of cash, cash equivalents and restricted cash associated with investing activities was further supplemented by outflows of $30.0 million associated with our Echtra and Uncosoft acquisitions and $4.3 million of capital expenditures, primarily related to leasehold improvements.
Financing Activities
Financing activities used $27.8 million of cash, cash equivalents and restricted cash during the six months ended June 30, 2021. The primary outflow of cash, cash equivalents and restricted cash associated with financing activities relates to the portion of the total acquisition-related contingent consideration payment to the former owners of Small Giant included in financing activities in the amount of $25.1 million. The outflow of cash, cash equivalents and restricted cash was further supplemented by taxes paid on behalf of employees related to the net settlement of equity awards in the amount of $12.2 million, partially offset by proceeds from the issuance of common stock in the amount of $10.7 million.
Off-Balance Sheet Arrangements
We did not have any significant off-balance sheet arrangements during the three and six months ended June 30, 2021.
Contractual Obligations (1)
|
|
Operating Leases |
|
|
Licensor and Marketing |
|
|
Other |
|
|
Total |
|
||||
Year ending December 31: |
|
(in millions) |
|
|||||||||||||
Remaining 2021 |
|
$ |
12.4 |
|
|
$ |
15.8 |
|
|
$ |
11.5 |
|
|
$ |
39.7 |
|
2022 |
|
|
13.5 |
|
|
|
7.1 |
|
|
|
13.5 |
|
|
|
34.1 |
|
2023 |
|
|
23.0 |
|
|
|
10.4 |
|
|
|
3.8 |
|
|
|
37.2 |
|
2024 |
|
|
21.0 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
31.3 |
|
2025 |
|
|
17.4 |
|
|
|
10.0 |
|
|
|
— |
|
|
|
17.4 |
|
2026 |
|
|
17.6 |
|
|
|
— |
|
|
|
— |
|
|
|
17.6 |
|
Thereafter |
|
|
89.7 |
|
|
|
— |
|
|
|
— |
|
|
|
89.7 |
|
Total |
|
$ |
194.6 |
|
|
$ |
43.3 |
|
|
$ |
29.1 |
|
|
$ |
267.0 |
|
|
(1) |
The amounts represented in the table reflect our minimum cash obligations for the respective calendar years based on contractual terms, but not necessarily the periods in which they will be expensed in our consolidated statement of operations. |
Lease Commitments
Our lease commitments primarily consist of operating leases for our office facilities. We do not have any finance lease obligations, and all of our property and equipment has been purchased with cash.
In the second quarter of 2021, the Company executed a lease for office space of approximately 62,000 square feet in San Mateo, California (the “San Mateo Office Building”) over an approximate 11-year lease term (the “Office Lease Agreement”), with annual lease expense of approximately $3.0 million beginning in June 2021. The Office Lease Agreement provides the Company two
38
separate options to extend the lease for five years each (for a total of an additional 10 years). At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. The Company anticipates being able to occupy the San Mateo Office Building beginning in the second quarter of 2022, following the completion of its planned tenant improvements. Based on information and estimates as of the date of this filing, the Company anticipates total capital expenditures of approximately $20.0 million for its tenant improvements related to the San Mateo Office Building, of which $7.8 million will be reimbursable by the landlord. The landlord’s tenant improvement allowance is considered a lease incentive, and will be recognized as a reduction of lease expense ratably over the term of the lease.
In August 2021, the Company’s Board of Directors approved a plan to sublease the Company’s current 185,000 square foot San Francisco office space (the “San Francisco Office Building”), as the Company transitions to a hybrid in-office and remote employee work model. Based on information and estimates as of the date of this filing, the Company expects to recognize an impairment expense related to the San Francisco Office Building right-of-use asset and other related leasehold assets in the third quarter of 2021, which the Company estimates could range up to $80.0 million.
Licensor and Marketing Commitments
Licensor commitments include minimum guarantee royalty payments due to licensors for use of their brands, properties and other licensed content in our games, as well as marketing commitments for specified spend related to our marketing products.
Other Commitments
Other commitments primarily include costs for hosting of data systems and other services. Excluded from other commitments is our uncertain income tax position liability of $24.9 million, which includes interest and penalties, as the Company cannot make a reasonably reliable estimate of the period of cash settlement.
In August 2021, the Company executed an agreement to purchase hosting services over three annual periods beginning August 1, 2021, in exchange for discounted pricing. The minimum commitments total $90.0 million over the term of the agreement, with annual minimum commitments ranging from $28.0 million to $32.0 million.
Contingent Consideration Obligations
Under the original terms of the Small Giant, Gram Games and Rollic acquisitions, contingent consideration may be payable based on the achievement of certain future performance targets – and in the case of Rollic, bookings targets as well – during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. During the first quarter of 2021, we paid $239.6 million to the former owners of Small Giant for its performance during the second annual contingent consideration period.
With respect to the Rollic contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic in the second quarter of 2021 to accelerate the Company’s acquisition of the remaining 20% ownership in Rollic and to set the total contingent consideration payment at $60.0 million (the “Rollic Amendment”). In July 2021, the Company acquired the remaining 20% ownership and paid $20.0 million, with the remaining $40.0 million to be paid in first quarter of 2022. At the date of the Rollic Amendment, the Company measured the remaining final obligation by calculating the present value of the final payments using a discount rate of 1.3%, commensurate with the remaining term. As of June 30, 2021, the estimated current liability was $59.6 million.
With respect to the remaining Gram Games contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Gram Games in the fourth quarter of 2020 to set the final contingent consideration payment at $75.0 million. In July 2021, the Company paid $75.0 million to settle the final contingent consideration obligation.
With respect the remaining Small Giant contingent consideration obligation, as of June 30, 2021, the estimated fair value of the remaining liability was a $192.6 million current liability.
39
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 1 to our consolidated financial statements included in our previously-filed Annual Report on Form 10-K for the year ended December 31, 2020. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. These estimates and judgments have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to fully understand and evaluate our reported financial results include the following:
|
• |
Revenue recognition |
|
• |
Income taxes |
|
• |
Business combinations, including subsequent remeasurement of contingent consideration obligations |
|
• |
Licenses and royalties |
Please refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020 for a more complete discussion of our critical accounting policies and estimates.
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the six months ended June 30, 2021, there were no significant changes to our quantitative and qualitative disclosures about market risk. However, should financial market conditions worsen in the future, including any potential impacts of the COVID-19 pandemic, investments in some financial instruments may pose risks arising from market liquidity and credit concerns, although we continue to believe that our current investment strategy has a low risk of future material impairment.
Please refer to Part II, Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020 for a more complete discussion on the market risks we encounter, as well as Part II, Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the effects of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see the section titled “Legal Matters” included in Note 15 —“Commitments and Contingencies” in Part I, Item I “Notes to Consolidated Financial Statements” of this Quarterly Report on Form 10-Q which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations or reputation. The risks described below are not the only risks we face. Additional risks not presently known to us or that we currently believe are not material may also significantly affect our business, financial condition, results of operations or reputation. Our business could be harmed by any of these risks. The trading price of our Class A common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes.
We have marked with an asterisk (*) those risks described below that reflect changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year-ended December 31, 2020.
Summary of Risk Factors
Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, those relating to:
Risks Related to our Business and Industry
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managing the risks related to the continuously evolving COVID-19 pandemic; |
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our ability to entertain our players, develop new games, improve the experience of our existing games and successfully monetize our games; |
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an industry that is intensely competitive and subject to rapid changes; |
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our operating results, which are volatile and difficult to predict; |
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our ability to successfully acquire or integrate acquired companies into our business or manage the growth associated with multiple acquisitions; |
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our ability to continue to launch, innovate and enhance games that players like and attract and retain a significant number of players; |
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our ability to grow our player base, or if player engagement declines, revenue, bookings and operating results will be harmed; |
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our ability to manage our game economies properly; |
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the proliferation of “cheating” programs and scam offers that seek to exploit our games and players; |
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fraudulent or unauthorized sales or purchases of virtual items used in our games through third-party websites; |
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maintaining awareness of our brand and games; |
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our ability to develop new games and features that achieve success; |
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our history of net losses and the possibility that our revenue, bookings and operating margins may decline; |
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our reliance on assumptions and estimates to calculate certain of our key metrics; |
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our core values of focusing on our players and acting for the long-term may conflict with the short-term expectations of analysts; |
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our ability to attract, retain and motivate key personnel; |
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the decline or stagnation of mobile devices as game platforms or mobile devices generally; |
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our international operations, which are subject to increased challenges and risks; |
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Risks Related to Our Dependence on Third Parties
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maintaining a good relationship with our third-party platform providers, such as the Apple App Store and the Google Play Store; |
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our reliance on third-party hosting and cloud computing providers, such as Amazon Web Services; |
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competing for advertisements and offers that are incorporated into our free-to-play games and maintaining and improving our relationships with advertisers; |
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managing companies and governmental agencies that may restrict access to platforms, our website, mobile applications or the Internet generally; |
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our ability to acquire and maintain licenses to intellectual property; |
Risks Related to Legal and Regulatory Compliance
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cybersecurity attacks, including breaches, computer viruses and computer hacking attacks; |
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compliance with evolving laws and regulations, including those related to privacy, information security, data protection, tax, consumer protection and protection of minors; |
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legal proceedings that may result in adverse outcomes; |
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compliance with a variety of U.S. and foreign laws, many of which are unsettled and still developing; |
Risks Related to Our Intellectual Property
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failure to efficiently protect or enforce our intellectual property rights or manage intellectual property disputes; |
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current and future intellectual property disputes; |
Risks Related to Our Indebtedness
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limitations imposed by and risks related to the Indenture for Notes (as defined below) and the capped call transactions; |
Risks Related to Our Class A Common Stock
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the price of our common stock, which may be volatile and could fluctuate substantially; |
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provisions in our charter documents and under Delaware law that could limit certain stockholder actions; |
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our ability to implement and maintain effective internal control over financial reporting; and |
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our intention to not pay dividends for the foreseeable future. |
Risks Related to Our Business and Industry
The COVID-19 pandemic and containment efforts across the globe have materially altered how individuals interact with each other and have materially affected how we and our business partners are operating, and the extent to which this situation will impact our future results of operations and overall financial performance remains uncertain.
The ongoing COVID-19 pandemic and resulting social distancing and shelter-in-place orders put in place around the world have caused widespread disruption in global economies, productivity and financial markets and have materially altered the way in which we conduct our day-to-day business.
As a result of the COVID-19 pandemic, we have temporarily closed Zynga offices around the world (including our corporate headquarters in San Francisco, California) and implemented travel restrictions. Towards the end of the first quarter of 2020, we implemented a remote working program across our global studios and supporting locations, and we engaged with significant vendors (such as Amazon), platform providers (such as Apple and Google), advertising partners (such as Facebook and Google) and other business partners to understand their operating conditions and continue to evaluate our business continuity plans. The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the COVID-19 pandemic, including any potential future waves of the COVID-19 pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the COVID-19 pandemic; the availability and cost to access the capital markets; the
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effect on our players and their willingness and ability to pay for our games and services; disruptions or restrictions on our employees’ ability to work and travel; and interruptions related to our cloud networking and gaming infrastructure and partners, including impacts on Amazon Web Services, mobile application platform providers, advertising partners and customer service and support providers. During the COVID-19 pandemic, we may not be able to provide the same level of product features and customer support that our players expect from us, which could negatively impact our business and operations. While substantially all of our business operations can be performed remotely, many of our employees are juggling additional work-related and personal challenges, including preparing for a prolonged duration of remote working environments, adjusting communication and work practices to collaborate remotely with work colleagues and business partners, managing technical and communication challenges of working from home on a daily basis, looking after children as a result of remote-learning and school closures, making plans for childcare, and caring for themselves, family members or other dependents who are or may become ill. If we seek to access the capital markets or increase our borrowing, there can be no assurance that financing and credit may be available on attractive terms, if at all. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, including as may be required by federal, state, local or foreign authorities or that we determine are in the best interests of our employees, players, partners and stockholders.
The COVID-19 pandemic and resulting social distancing, shelter-in-place and similar restrictions led to increased player engagement from current, lapsed and new players in our games relative to our quarterly forecast and historic trends. These increases in player activity may not be indicative of our financial and operating results in future periods. The effects of the COVID-19 pandemic on society and player behavior are highly uncertain. For example, primarily during the second quarter of 2020, we saw increased player engagement from current, lapsed and new players in our games relative to our quarterly forecast and historic trends. Since then, audience levels have started to return to levels more consistent with prior periods, while player engagement and monetization remain strong. These changes in player activity may not be indicative of our financial and operating results in future periods. Furthermore, there is no assurance that player behavior will not further decrease, including below historic levels, as the full impacts of the pandemic on society and the global economy become more clear. In 2021, we have seen the return of shelter-in-place and curfew mandates in certain geographies and other efforts to combat the ongoing pandemic, and there is no certainty how these developments may affect our operations and player behavior.
In addition to the potential direct impacts to our business, the global economy has experienced significant volatility as a result of the actions taken in response to COVID‐19, and future government intervention remains uncertain. An uncertain or weakened global economy may impact our players and their purchasing decisions within our games, consumers’ buying decisions across the globe and their impact on the allocation of advertising investments and the ability of our business partners to navigate this complex social health and economic environment, any of which could result in disruption to our business and results of our operations. We have experienced heightened levels of variability in the pricing of advertising both in terms of user acquisition and as it relates to our advertising revenues. If additional volatility or unexpected trends resulting in decreased pricing of advertising emerge, the revenue we make from advertisers paying to display ads in our games may be negatively impacted, particularly if the levels of player engagement in our games are not sufficient to offset these declines, and we may experience increased pressure on our overall margins, as our revenue may consist of higher contributions of sales of in‐game virtual items.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus and its variants, the existence of any additional waves of the COVID-19 pandemic, the extent and effectiveness of containment actions, continued progress towards widespread rapid testing and effective treatment alternatives and vaccinations, and the impact of these and other factors on our employees, players and business partners. If we are not able to respond to and manage the impact of such events effectively, our business may be harmed.
Our business will suffer if we are unable to entertain our players, develop new games, improve the experience of our existing games and successfully monetize our games.
Our business depends on developing, publishing and continuing to service “free-to-play” games that consumers will download and spend time and money playing. We are primarily focused on mobile gaming, offering our games on mobile devices, including smartphones and tablets on Apple’s iOS and Google’s Android operating systems, and on social networking platforms such as Facebook and Snapchat. We have devoted and we expect to continue to devote substantial resources to the research, development, analytics and marketing of our games. Our development and marketing efforts are focused on improving the experience of our existing games (frequently through new content and feature releases for our live services), developing new games and successfully monetizing our games. We generate revenue primarily through the sale of in-game virtual items and advertising. For games distributed through third-party platforms, we are required to share a portion of the proceeds from in-game sales with the platform providers. Due to our focus on mobile gaming, these costs are expected to remain a significant operating expense. In order to be profitable, we need to generate sufficient revenue and bookings from our existing and new game offerings to offset our ongoing development, marketing and operating costs.
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Successfully monetizing “free-to-play” games is difficult and requires that we deliver valuable and entertaining player experiences that a sufficient number of players will pay for or that we are able to otherwise sufficiently monetize our games (for example, by serving in-game advertising). The success of our games depends, in part, on unpredictable and volatile factors beyond our control including consumer preferences, competing games, new mobile platforms and the availability of other entertainment experiences. If our games do not meet consumer expectations, or if they are not brought to market in a timely and effective manner, our revenue and financial performance will be negatively affected.
We focus our efforts on four categories: Action Strategy, Casual, Invest Express and Social Casino. In addition to the market factors noted above, our ability to successfully develop games for mobile platforms and their ability to achieve commercial success will depend on our ability to:
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effectively market our games to existing and new players; |
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achieve benefits from our player acquisition costs; |
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achieve viral organic growth and gain customer interest in our games through free or more efficient channels; |
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adapt to changing player preferences; |
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adapt to new technologies and feature sets for mobile and other devices; |
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expand and enhance games after their initial release; |
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attract, retain and motivate talented and experienced game designers, product managers and engineers; |
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partner with mobile platforms and obtain featuring opportunities; |
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continue to adapt game feature sets for an increasingly diverse set of mobile devices, including various operating systems and specifications, limited bandwidth and varying processing power and screen sizes; |
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minimize launch delays and cost overruns on the development of new games and features; |
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achieve and maintain successful customer engagement and effectively monetize our games; |
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maintain a quality social game experience and retain our players; |
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develop games that can build upon or become franchise games; |
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compete successfully against a large and growing number of existing market participants; |
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accurately forecast the timing and expense of our operations, including game and feature development, marketing and customer acquisition, customer adoption and success of bookings growth; |
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minimize and quickly resolve bugs or outages; and |
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acquire and successfully integrate high quality mobile game assets, personnel or companies. |
These and other uncertainties make it difficult to know whether we will succeed in continuing to develop successful live service games and launch new games and features in accordance with our operating plan. If we do not succeed in doing so, our business, financial condition, results of operations and reputation will suffer.
(*) Our industry is intensely competitive and subject to rapid changes. If consumers prefer our competitors’ products or services over our own, our operating results could suffer.
Competition in the entertainment industry, especially the mobile gaming segment, is intense and subject to rapid changes, including changes from evolving consumer preferences and emerging technologies. Many new games are introduced in each major industry segment (mobile, PC and console), but only a relatively small number of titles account for a significant portion of total revenue in each segment. Our competitors that develop mobile games vary in size and include companies such as Activision Blizzard, AppLovin, Aristocrat, DoubleU, Electronic Arts, Epic Games, ironSource, Moon Active, NetEase, Netmarble, Niantic, Nintendo, Playrix, Playtika, SciPlay, Scopely, Take-Two Interactive Software, Tencent, Ubisoft, Voodoo SAS and others. As we expand our global operations and gaming offerings, we increasingly face competition from online game developers and distributors who have primarily focused on specific international markets, such as NetEase, Netmarble and Tencent in Asia, and high-profile companies with significant online presences with new and expanded gaming offerings, such as Apple, Google, Microsoft and Snap. In addition, other large companies that to date have not actively focused on mobile and social games, such as Amazon and Facebook, may decide to develop mobile and social games or partner with other developers. Some of these current 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, 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 our industry. Furthermore, with our acquisition of Chartboost, Inc., our competitors also include mobile monetization and advertising platforms.
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As there are relatively low barriers to entry to develop a mobile or online 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 devices and platforms using relatively limited resources and with relatively limited start-up time or expertise. The proliferation of titles in these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for players without substantially increasing our marketing expenses and development costs. As an entertainment company, we also face competition for the leisure time, attention and discretionary spending of our players from other non-gaming activities, such as social media and messaging applications, PC and console games, video streaming services, television, movies, sports, reading, audiobooks and the Internet. Increasing competition could result in loss of players, increasing player acquisition and retention costs, and loss of talent, all of which could harm our business, financial condition or results of operations.
Our operating results are volatile and difficult to predict, and our stock price may decline if we fail to meet the expectations of securities analysts or investors.
Our bookings, revenue, player metrics and operating results have fluctuated in the past and could vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance or the expectations of securities analysts or investors because of a variety of factors, some of which are outside of our control. Factors that may contribute to the variability of our operating results include the risk factors listed in these “Risk Factors” and the factors discussed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Performance.”
In particular, it is difficult to predict if, when or how quickly bookings from one of our games may begin to decline. This difficulty may be exacerbated in the short- to intermediate-term by increased uncertainty about player behavior related to the COVID-19 pandemic. These levels of player activity may not sustain over the short-term or longer-term, and there is no assurance that player behavior will not decrease, including below historic levels, as the full impacts of the COVID-19 pandemic on society and the global economy become clearer. In general, the success of our business depends on our ability to consistently and timely launch new games and features that achieve significant popularity and have the potential to become franchise games as bookings from our older games decline. It is difficult for us to predict with certainty when we will launch a new game as games may require longer development schedules or soft launch periods to meet our quality standards and our players’ expectations. If declines are higher than expected in a particular quarterly period, we experience delays in the launch of new games or features and/or new games do not monetize well, we may not meet our expectations or the expectations of securities analysts or investors.
In addition, we recognize revenue from the sale of our virtual items in accordance with U.S. GAAP, which is complex and based on our assumptions and historical data with respect to the sale and use of various types of virtual items. In the event of changes in our assumptions or new trends in the mix of virtual items sold, the amount of revenue that we recognize in any particular period may fluctuate significantly. In addition, changes in the policies of Apple, Google or other third party platforms or accounting policies promulgated by the SEC and national accounting standards bodies affecting software and virtual items revenue recognition could further significantly affect the way we report revenue related to our products. Such changes could have an adverse effect on our reported revenue, net income and earnings per share under U.S. GAAP. For example, recurring activity such as new game launches, our acquisition of games from a third party or periods of significant increased bookings can also result in increases in deferred revenue while we initially defer bookings over the estimated average playing period of payers. For further information regarding our revenue recognition policy, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Revenue Recognition”.
Given the rapidly evolving social game industry in which we operate, our historical operating results may not be useful in predicting our future operating results. In addition, metrics we have developed or those available from third parties regarding our industry and the performance of our games, including Mobile DAUs, Mobile MAUs, Mobile MUUs, Mobile MUPs and Mobile ABPU, may not be indicative of our future financial performance.
(*) Our business will suffer if we are unable to successfully acquire or integrate acquired companies into our business or otherwise manage the growth associated with multiple acquisitions.
We have acquired games, businesses, personnel and technologies in the past, and we intend to continue to evaluate and pursue acquisitions and strategic investments. For example, in the second quarter of 2018, we acquired Gram Games Teknoloji A.S. (“Gram Games”), in early 2019, we acquired Small Giant Games Oy (“Small Giant”), in July 2020, we acquired Peak Oyun Yazılım ve Pazarlama Anonim Şirketi (“Peak”) after having purchased its casual card game division in the fourth quarter of 2017, in October 2020 we acquired Rollic Games Oyun Yazılım ve Pazarlama Anonim Şirketi (“Rollic”), in August 2021 we acquired Chartboost, Inc. and in August 2021 we announced the proposed acquisition of Beijing StarLark Technology Co., Ltd. Each of these acquisitions requires unique approaches to integration due to, among other reasons, the structure of the acquisitions, their locations and cultural differences among their teams and ours, and has required, and will continue to require, attention from our management team. If we are unable to obtain the anticipated benefits from these acquisitions and strategic investments, or we encounter difficulties in integrating their operations with ours, our financial condition and results of operations could be materially harmed.
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Challenges and risks from such investments and acquisitions include:
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negative effects on products and product pipeline from the changes and potential disruption that may follow the acquisition; |
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diversion of our management’s attention; |
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declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future prospects; |
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the need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise in connection with integration; |
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the difficulty in determining the appropriate purchase price of acquired companies may lead to the overpayment of certain acquisitions and the potential impairment of intangible assets and goodwill acquired in the acquisitions; |
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the difficulty in successfully evaluating and utilizing the acquired products, technology or personnel, including performing adequate due diligence while pandemic-related travel restrictions and social distancing requirements prevent in-office and in-person meetings and collaboration; |
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the potential incurrence of debt, contingent liabilities, amortization expenses or restructuring charges in connection with any acquisition; |
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the need to implement controls, procedures and policies appropriate for a larger, U.S.-based public company at companies that prior to acquisition may not have as robust controls, procedures and policies, particularly, with respect to the effectiveness of cyber and information security practices and incident response plans, compliance with data privacy and protection and other laws and regulations protecting the rights of players and customers, and compliance with U.S.-based economic policies and sanctions which may not have previously been applicable to the acquired company’s operations; |
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the difficulty in accurately forecasting and accounting for the financial impact of an acquisition transaction, including accounting charges and integrating and reporting results for acquired companies that have not historically followed U.S. GAAP; |
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the fact that we may be required to pay contingent consideration in excess of the initial fair value, and contingent consideration may become payable at a time when we do not have sufficient cash available to pay such consideration; |
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under purchase accounting, we may be required to write off deferred revenue which may impair our ability to recognize revenue that would have otherwise been recognizable which may impact our financial performance or that of the acquired company; |
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risks associated with our expansion into new international markets and doing business internationally, including those described under the risk factor caption “Our international operations are subject to increased challenges and risks”; |
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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; |
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the need to transition operations and players onto our existing or new platforms and the potential loss of, or harm to, our relationships with employees, players and other suppliers as a result of integration of new businesses; |
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the implications of our management team balancing levels of oversight over acquired businesses which continue their operations under contingent consideration provisions in acquisition agreements; |
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our dependence on the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, when conducting due diligence and evaluating the results of such due diligence; and |
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liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, cyber and information security vulnerabilities, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities. |
The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits, which could adversely affect our business, financial condition or results of operations. Our ability to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. In addition, depending upon the duration and extent of shelter-in-place, travel and other business restrictions adopted by us and imposed by various governments in response to the COVID-19 pandemic, we have and will continue to encounter new challenges in evaluating future acquisitions and integrating personnel, business practices and company cultures. Acquisitions could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities or amortization expenses related to intangible assets or write-offs of goodwill and/or intangible assets, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. For more information, see Note 8 – “Goodwill and Intangible Assets, Net” in the notes to the consolidated financial statements included herein.
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A small number of games have generated a majority of our revenue, and we must continue to launch, innovate and enhance games that players like and attract and retain a significant number of players in order to grow our revenue and sustain our competitive position.
Historically, we have depended on a small number of games for a majority of our revenue and we expect that this dependency will continue for the foreseeable future. Revenue and bookings from many of our games may decline over time after reaching a peak of popularity and player usage. As a result, our business depends on our ability to engage with players by consistently and timely launching new games and enhancing existing games with new content, features and events. We believe that certain games have the potential to become franchises that we plan to invest in and support with new games releases and introduction of new features to existing games. Constant game enhancement requires the investment of significant resources, particularly with older games, and such costs on average have increased.
It is difficult to consistently anticipate player demand on a large scale, particularly in relation to evolving player behavior and preferences in response to the COVID-19 pandemic and as we develop games in new categories or new markets, including international markets. If we do not successfully launch games that attract and retain a significant number of players and extend the life of our existing games, our market share, brand and financial results will be harmed.
We rely on a small portion of our total players for a substantial amount of our revenue and if we fail to grow our player base, or if player engagement declines, revenue, bookings and operating results will be harmed.
Compared to all players who play our games in any period, only a small portion are paying players. For the second quarter of 2021, we had approximately 1.3 million average Mobile MUPs (excluding payers of our Facebook Instant Games, Snapchat Games and games acquired as part of our Gram Games, Small Giant, Peak and Rollic acquisitions), who represented approximately 4.0% of our average Mobile MUUs. In order to sustain and grow our revenue levels, we must attract, retain and increase the number of paying players or more effectively monetize our players through advertising and other strategies. To retain players, we must devote significant resources so that the games they play retain their interest and attract them to our other games. We might not succeed in our efforts to increase the monetization rates of our users, particularly if we are unable to retain our paying players. If we fail to grow or sustain the number of our paying players, if the rates at which we attract and retain paying players declines, (whether due to financial hardship as a result of an economic downturn, such as the disruption caused by the COVID-19 pandemic, or for any other reason), or if the average amount our players pay declines, our business may not grow and our financial results will suffer.
The value of our virtual items is highly dependent on how we manage the economies in our games. If we fail to manage our game economies properly, our business may suffer.
Paying players make purchases in our games because of the perceived value of these virtual items, which is dependent on the relative ease of obtaining an equivalent good by playing our game. The perceived value of these virtual items can be impacted by various actions that we take in the games including offering discounts for virtual items, giving away virtual items in promotions or providing easier non-paid means to secure these goods. Managing game economies is difficult, and relies on our assumptions and judgement. If we fail to manage our virtual economies properly or fail to promptly and successfully respond to any such disruption, our reputation may suffer and our players may be less likely to play our games and to purchase virtual items from us in the future, which would cause our business, financial condition and results of operations to suffer.
Our revenue may be harmed by the proliferation of “cheating” programs and scam offers that seek to exploit our games and players, which may negatively affect game-playing experience and our ability to reliably validate our audience metric reporting and may lead players to stop playing our games.
Unrelated third parties have developed, and may continue to develop, “cheating” programs that enable players to exploit vulnerabilities in our games, play them in an automated way, collude to alter the intended game play or obtain unfair advantages over other players who do play fairly. These programs harm the experience of players who play fairly, may disrupt the virtual economies of our games and reduce the demand for virtual items, disrupting our in-game economy. In addition, unrelated third parties have attempted to scam our players with fake offers for virtual items or other game benefits. We devote significant resources to discover, discourage and disable these cheating and scam programs and activities. If we are unable to do so quickly, our operations may be disrupted, our reputation may be damaged, players may stop playing our games and our ability to reliably validate our audience metrics may be negatively affected. These cheating programs and scam offers result in lost revenue from paying players, disrupt our in-game economies, divert time from our personnel, increase costs of developing technological measures to combat these programs and activities, increase our customer service costs needed to respond to dissatisfied players, and may lead to legal claims.
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Some of our players may make sales or purchases of virtual items used in our games through unauthorized or fraudulent third-party websites, which may reduce our revenue.
Virtual items in our games have no monetary value outside of our games. Nonetheless, some of our players may make sales and/or purchases of our virtual items, such as virtual coins for our Social Slots franchise games or Zynga Poker virtual poker chips, through unauthorized third-party sellers in exchange for real currency. These unauthorized or fraudulent transactions are usually arranged on third-party websites and the virtual items offered may have been obtained through unauthorized means such as exploiting vulnerabilities in our games, from scamming our players with fake offers for virtual items or other game benefits, or from credit card fraud. We do not generate any revenue from these transactions. These unauthorized purchases and sales from third-party sellers have in the past and could in the future impede our revenue and profit growth by, among other things:
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decreasing revenue from authorized transactions; |
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creating downward pressure on the prices we charge players for our virtual items; |
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increasing chargebacks from unauthorized credit card transactions; |
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causing us to lose revenue from dissatisfied players who stop playing a particular game; |
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causing us to lose revenue from players who we take disciplinary action against, including banning certain players who may have previously made purchases within our games; |
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increasing costs we incur to develop technological measures to curtail unauthorized transactions; |
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resulting in negative publicity or harm our reputation with players and partners; and |
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increasing customer support costs to respond to dissatisfied players. |
To discourage unauthorized purchases and sales of our virtual items, we state in our terms of service that the buying or selling of virtual items from unauthorized third party sellers may result in bans from our games or legal action. With a community of players in the millions, we periodically encounter such issues and expect to continue to do so. We have banned players as a result of such activities. We have also filed lawsuits against third parties attempting to “sell” virtual items from our games, particularly poker chips from Zynga Poker, outside of our games. We have also employed technological measures to help detect unauthorized transactions and continue to develop additional methods and processes by which we can identify unauthorized transactions and block such transactions. However, there can be no assurance that our efforts to detect, prevent or minimize these unauthorized or fraudulent transactions will be successful and that these actions will not increase over time.
If we do not successfully invest in, establish and maintain awareness of our brand and games, if we incur excessive expenses promoting and maintaining our brand or our games, or if our games contain defects or objectionable content, our business, financial condition, results of operations or reputation could be harmed.
We believe that establishing and maintaining our brand is critical to maintaining and creating favorable relationships with players, platform providers, advertisers and content licensors, as well as competing for key talent. Increasing awareness of our brand and recognition of our games is particularly important in connection with our strategic focus on developing games based on our own intellectual property and successfully cross-promoting our games. In addition, globalizing and extending our brand and recognition of our games requires significant investment and extensive management time to execute successfully. Although we make significant sales and marketing expenditures in connection with the launch of our games, these efforts may not succeed in increasing awareness of our brand or the new games. If we fail to increase and maintain brand awareness and consumer recognition of our games, our potential revenues could be limited, our costs could increase and our business, financial condition, results of operations or reputation could suffer.
In addition, if a game contains objectionable content or the messaging functionality of our games is abused, we could experience damage to our reputation and brand. Despite reasonable precautions, some consumers may be offended by certain game content, the third-party advertisements displayed in our games, or by treatment of other users. If consumers believe that a game we published or third-party advertisement displayed in a game contains objectionable content, it could harm our brand and consumers could refuse to play it and could pressure the platform providers to remove the game from their platforms. For example, we rely on third-party advertising partners to display advertisements within our games, we have experienced (and may experience in the future) instances where offensive or objectionable content has been displayed in our games through our advertising partners. While this may violate the terms of our agreements with these advertising partners, our reputation and player experience may suffer. Furthermore, steps that we may take in response to such instances, such as temporarily or permanently shutting off access of such advertising partner to our network, may negatively impact our revenue in such period.
Similarly, our games may contain errors, bugs, flaws, corrupted data, defects and other vulnerabilities, some of which may only become apparent after their launch, particularly as we launch new games and rapidly release new features to existing games. Any such errors, flaws, defects and vulnerabilities may be exploited by cheating programs and other forms of misappropriation, disrupt our operations, adversely affect the game experience of our players, harm our reputation, cause our players to stop playing our games, divert our resources and delay market acceptance of our games, any of which could result in legal liability to us or harm our business, financial condition or results of operations.
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If we are able to develop new games and features that achieve success, it is possible that these games and features could divert players of our other games without growing our overall user base, which could harm operating results.
Although it is important to our future success that we develop new games and features that are popular with players, it is possible that new games and features may reduce the amount of time players spend with our other games. In particular, we plan to continue leveraging our existing games to cross-promote new games and features, which may encourage players of existing games to divert some of their playing time and discretionary spending away from our existing games. If new games and game features do not grow our player base, increase the overall amount of time our players spend with our games, or generate sufficient new bookings to offset any declines from our other games, our revenue and bookings could be adversely affected.
We have a history of net losses and our revenue, bookings and operating margins may decline. We also may incur substantial net losses in the future and may not sustain profitability.
The industry in which we operate is highly competitive and rapidly changing, and relies heavily on successful new product launches and continually introducing compelling content, products and services. As such, if we fail to deliver such content, products and services, do not execute our strategy successfully or if our new content launches are delayed, our revenue, bookings and audience numbers may decline, and our operating results will suffer. As of June 30, 2021, we had an accumulated deficit of $2.3 billion.
In addition, our operating margin may experience downward pressure as a result of increasing competition and the other risks discussed in this report. We expect to continue to expend substantial financial and other resources on game development, our technology stack, game engines, game technology and tools, the expansion of our network, international expansion and marketing. Our operating costs will increase and our operating margins may decline if we do not effectively manage costs, launch new products on schedule that monetize successfully and enhance our franchise games so that these games continue to monetize successfully. In addition, weak economic conditions or other factors could cause our business to further contract, requiring us to implement significant additional cost cutting measures, including a decrease in research and development and sales and marketing, which could harm our long-term prospects.
If our revenues do not increase to offset any additional expenses, if we fail to manage or experience unexpected increases in operating expenses or if we are required to take additional charges related to impairments or restructurings, our financial results and results of operations may suffer.
We rely on assumptions and estimates to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Certain of our key metrics, including Mobile DAUs, Mobile MAUs, Mobile MUUs, Mobile MUPs, and Mobile ABPU are calculated using data tracked by our internal analytics systems based on tracking activity of user accounts. The analytics systems and the resulting data have not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our user base and our recently acquired operations, and factors relating to user activity and systems may impact these numbers. The calculation of our key metrics and examples of how user activity and our systems may impact the calculation of these metrics is described in detail under the heading titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures and Metrics.”
Our accuracy in calculating these metrics is further challenged by our focus on mobile gaming. As described under the heading titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures and Metrics,” we rely on the accuracy and transparency of data provided by individuals and reported by third parties to calculate our metrics and eliminate duplication of data. For purposes of calculating Mobile MUUs and Mobile MUPs, for certain periods, we are unable to distinguish whether players of certain games are also players of our other games. As a result, we exclude players of these games from our calculation of Mobile MUUs and Mobile MUPs for those periods to avoid potential double counting.
Our advertisers and investors rely on our key metrics as a representation of our performance. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. If we determine that we can no longer calculate any of our key metrics with a sufficient degree of accuracy, and we cannot find an adequate replacement for the metric, our business, financial condition or results of operations may be harmed. In addition, if advertisers, platform partners or investors do not perceive our user metrics to be accurate representations of our user base or user engagement, or if we discover material inaccuracies in our user metrics, our reputation may be harmed and advertisers and platform partners may be less willing to allocate their budgets or resources to our products and services, which could negatively affect our business, financial condition or results of operations.
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Our business and growth may suffer if we fail to attract, retain and motivate key personnel.
Our ability to compete and grow depends in large part on the efforts and talents of our employees and executives. Our success depends in a large part upon the continued service of our senior management team, who are critical to our vision, strategic direction, culture, products and technology, and the continued retention of our entire senior management team is important to the success of our operating plan. We do not have employment agreements, other than offer letters, with our senior management team, and we do not maintain key-man insurance for members of our senior management team. The loss of any member of our senior management team could cause disruption and harm our business, financial condition, results of operations or reputation.
In addition, our ability to execute our strategy depends on our continued ability to identify, hire, develop, motivate and retain highly skilled employees, particularly in the competitive fields of game design, product management, engineering and data science. These employees are in high demand, and we devote significant resources to identifying, recruiting, hiring, training, successfully integrating and retaining them. Interviewing, hiring and integrating new employees while working remotely presents our teams with new challenges. We have continued to experience significant turnover in our headcount, which has placed and will continue to place significant demands on our management and our operational, financial and technological infrastructure. As of June 30, 2021, approximately 27% of our employees had been with us for less than one year and approximately 45% for less than two years. As part of our global remote working plans, throughout the duration of the COVID-19 pandemic, we have devoted, and will continue to devote, increased efforts to maintaining the collaborative culture of Zynga, including through the use of videoconferencing and other online communication and sharing tools, and each of our global studios and to monitoring the health, safety, morale and productivity of our employees, including new employees, as we evaluate the impacts of this changing situation on our business and employees. As we evaluate options for the post-pandemic re-opening of our offices, we face uncertainty as to what our future workplace will look like and our ability to hire, motivate and retain our employees, as we strive to balance the health and safety of our employees with our employees’ preferences for collaboration and flexible work arrangements, while also maintaining efficient work streams, employee morale, and company culture.
We believe that two critical components of our success and our ability to retain our best people are our culture and our competitive compensation practices. Any volatility in our operating results and the trading price of our Class A common stock may cause our employee base to be more vulnerable to be targeted for recruitment by competitors. While we believe we compete favorably, competition for highly skilled employees is intense, particularly in the San Francisco Bay Area, where our headquarters is located. If we are unable to identify, hire and retain our senior management team and our key employees, our business, financial condition or results of operations could be harmed. Moreover, if our team fails to work together effectively to execute our plans and strategies on a timely basis, our business, financial condition or results of operations could be harmed.
We have historically hired a number of key personnel through acquisitions, and as competition with other game companies for attractive target companies with a skilled employee base persists and increases, we may incur significant expenses and difficulty in continuing this practice. The loss of talented employees with experience in the assets we acquire could result in significant disruptions to our business and the integration of acquired assets and businesses. If we do not succeed in recruiting, retaining, and motivating these key employees, we may not achieve the anticipated results of acquisitions.
Our core values of focusing on our players and acting for the long-term may conflict with the short-term expectations of analysts.
We believe surprising and delighting our players is essential to our success and serves the best, long-term interests of Zynga and our stockholders. Therefore, we have made in the past and we may make in the future, significant investments or changes in strategy that we think will benefit us in the long-term, even if our decision has the potential to negatively impact our operating results in the short term. In addition, our decisions may not result in the long-term benefits that we expect, in which case the success of our games, business, financial condition or results of operations could be harmed.
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.
The number of people using mobile Internet-enabled devices has increased dramatically over time and we expect that this trend will continue. However, the mobile market, particularly the market for mobile games, may not grow in the way we anticipate. Our future success is substantially dependent upon the continued growth of the market for mobile games. In addition, we do not currently offer our games on all mobile devices. If the mobile devices on which our games are available decline in popularity or become obsolete faster than anticipated, we could experience a decline in revenue and bookings and may not achieve the anticipated return on our development efforts. Any such declines in the growth of the mobile market or in the use of mobile devices for games could harm our business, financial condition or results of operations.
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Our international operations are subject to increased challenges and risks.
Continuing to expand our business to attract players in countries other than the U.S. is a critical element of our business strategy. An important part of targeting international markets is developing offerings that are localized and customized for the players in those markets. We expect to continue to expand our international operations in the future by opening new international studio locations and expanding our offerings in additional countries and languages. Our ability to expand our business and to attract talented employees and players in an increasing number of international markets will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. We have experienced difficulties in the past and have not been successful in all the countries we have entered. Expanding our international focus may subject us to risks that we have not faced before or increase risks that we currently face, including risks associated with:
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inability to offer certain games in certain foreign countries; |
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recruiting and retaining talented and capable management and employees in foreign countries; |
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challenges caused by distance, language and cultural differences; |
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developing and customizing games and other offerings that appeal to the tastes and preferences of players in international markets; |
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competition from local game makers with intellectual property rights and significant market share in those markets and with a better understanding of player preferences; |
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compliance with applicable foreign laws and regulations, including privacy laws (for example, the European Union’s General Data Protection Regulation and the California Consumer Privacy Act of 2018) and laws relating to content and consumer protection (for example, the United Kingdom’s Office of Fair Trading’s 2014 principles relating to in-app purchases in free-to-play games that are directed toward children 16 and under); |
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utilizing, protecting, defending and enforcing our intellectual property rights; |
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negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights; |
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the inability to extend proprietary rights in our brand, content or technology into new jurisdictions; |
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implementing alternative payment methods for virtual items in a manner that complies with local laws and practices and protects us from fraud; |
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compliance with anti-bribery laws, including the Foreign Corrupt Practices Act; |
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credit risk and higher levels of payment fraud; |
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currency exchange rate fluctuations; |
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protectionist laws and business practices that favor local businesses in some countries; |
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double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the U.S. or the foreign jurisdictions in which we operate; |
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political, economic and social instability; |
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public health crises, such as the COVID-19 pandemic, which can result in varying impacts to our employees, players, vendors and commercial partners internationally; |
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higher costs associated with doing business internationally; |
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export or import regulations; and |
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trade and tariff restrictions. |
If we are unable to manage the complexity of our global operations successfully, our business, financial condition and operating results could be adversely affected. Additionally, our ability to successfully gain market acceptance in any particular market is uncertain, and the distraction of our senior management team could harm our business, financial condition or results of operations.
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Any restructuring actions and cost reduction initiatives that we undertake may not deliver the expected results and these actions may adversely affect our business.
We have implemented a number of restructurings in the past in which we implemented certain restructuring actions and cost reduction initiatives to streamline operations and improve cost efficiencies to better align our operating expenses with our revenue, including reducing our headcount, rationalizing our product pipeline, reducing marketing and technology expenditures and consolidating and closing certain facilities. We plan to continue to manage costs to better and more efficiently manage our business. Our restructuring plans and other such efforts could result in disruptions to our operations and adversely affect our business, financial condition or results of operations.
We actively monitor our costs, however, if we do not fully realize or maintain the anticipated benefits of any restructuring actions and cost reduction initiatives, our business, financial condition or results of operations could be adversely affected, and additional restructuring initiatives may be necessary. In addition, we cannot be sure that the cost reduction initiatives will be as successful in reducing our overall expenses as expected or that additional costs will not offset any such reductions. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our operating results will suffer.
In addition, our cost-cutting measures could negatively impact our business, financial condition or results of operations including but not limited to, delaying the introduction of new games, features or events, interrupting live services, impairing our control environment, delaying introduction of new technology, impacting our ability to react nimbly to game or technology issues, or impacting employee retention and morale.
Our investment portfolio may become impaired by deterioration of the financial markets.
Our cash equivalent and investment portfolio is invested with a goal of preserving our access to capital, and generally consists money market funds, corporate debt securities, U.S. government and government agency debt securities, mutual funds, certificates of deposit and time deposits. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards, permissible allocations of certain sectors and limits our exposure to specific investment types. Volatility in the global financial markets can negatively impact the value of our investments. If financial markets experience volatility, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any disruption of the capital markets could cause our other income and expense to vary from expectations. Although we believe our current investment portfolio has a low risk of material impairment, we cannot predict future market conditions, market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
The occurrence of an earthquake, other natural disaster or other significant business interruption at or near any of our facilities could cause damage to our facilities and equipment and interfere with our operations.
Our principal offices are located in the San Francisco Bay Area, an area known for earthquakes, and are thus vulnerable to damage. All of our facilities are also vulnerable to damage from natural or manmade disasters, including power loss, fire, explosions, floods, communications failures, terrorist attacks, contagious disease outbreak (such as the COVID-19 pandemic) and similar events. If any disaster were to occur, our ability to operate our business at our facilities could be impaired and we could incur significant losses, recovery from which may require substantial time and expense.
Risks Related to Our Dependence on Third Parties
We rely on third-party platforms such as the Apple App Store and the Google Play Store 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 loses market share or falls out of favor or is unavailable for a prolonged period of time, our business will suffer.
We derive a significant portion of our bookings from distribution of our games on the Apple App Store and the Google Play Store, and the virtual items we sell in our games are purchased using the payment processing systems of these platform providers. In 2020, we derived 49% of our revenue and 50% of our bookings on Apple platforms and 46% of our revenue and 46% of our bookings on Google platforms. In response to the ongoing COVID-19 pandemic, we have engaged with our partners at Apple, Google and other platform providers to understand their operations and have evaluated our business disruption plans. While we do not anticipate any interruption in their distribution platforms or ability to accept customer payments, any such disruptions, even temporary, may have material impacts on our business and operations.
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We are subject to the standard policies and terms of service of third-party platforms, which govern the promotion, distribution, content and operation generally of games on the platform. Each platform provider has broad discretion to change and interpret its terms of service and other policies with respect to us and other developers, and those changes may be unfavorable to us. A platform provider may also change its fee structure, add fees associated with access to and use of its platform, alter how we are able to advertise on the platform, change how the personal information of its users is made available to application developers on the platform, limit the use of personal information for advertising purposes, or restrict how players can share information with their friends on the platform or across platforms. For example, in December 2017, Apple revised its App Store Guidelines to require the disclosure of the odds of receiving certain types of virtual items from “loot boxes” (or similar mechanisms that offer a paid license to randomized virtual items) before customers purchase a license for the virtual items, and in May 2019 Google revised its Play Store policies to require similar disclosures. As another example, in April 2021, Apple released iOS version 14.5 which requires its users (and presumably users of future iOS versions), on an app-by-app basis, to explicitly opt-in to the use of identifier-for-advertising, a device identifier assigned by Apple to each of its devices and used by advertisers to attribute app installs to advertising campaigns, target users through user acquisition, and deliver targeted ads. We are continuing to evaluate how these rules or changes may affect our business, operations and financial results.
Furthermore, our social casino games have been noted in purported class-action complaints against our third-party platform providers where we are not the named defendants. For example, in February 2021, plaintiffs filed a purported class-action lawsuit in a California federal court against Apple alleging that Apple violated several states’ gambling laws by allowing the plaintiffs to download and play our social casino games. Similar allegations have been made in suits filed by plaintiffs in several U.S. states against Apple and/or Google in connection with their distribution of social casino games, some of which include a reference to Zynga or its social casino games. These lawsuits, or similar suits in the future, could cause Google, Apple, or other third-party platform providers to deny our social casino games access to their platforms, or the platforms could seek to pass on liability, including defense costs, for these suits to us under the indemnity provisions in our agreements with such platforms, which could have a material adverse effect on our results of operations, cash flows, or financial condition.
In addition, third-party platforms also impose certain file size limitations, which may limit the ability of players to download some of our larger games in over-the-air updates. Aside from these over-the-air file size limitations, a larger game file size could cause players to delete our games once the file size grows beyond the capacity of their devices’ storage limitations or could reduce the number of downloads of these games.
Such terms of use changes may decrease the visibility or availability of our games, limit our distribution capabilities, prevent access to our existing games, reduce the amount of revenue and bookings we may recognize from in-game purchases, increase our costs to operate on these platforms or result in the exclusion or limitation of our games on such platforms. Any such changes could adversely affect our business, financial condition or results of operations.
If we violate, or a platform provider believes we have violated, its terms of service (or if there is any change or deterioration in our relationship with these platform providers), that platform provider could limit or discontinue our access to the platform. A platform provider could also limit or discontinue our access to the platform if it establishes more favorable relationships with one or more of our competitors or it determines that we are a competitor. Any limit or discontinuation of our access to any platform could adversely affect our business, financial condition or results of operations.
We also rely on the continued popularity, customer adoption, and functionality of third-party platforms. 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 access our games, access social features or purchase a license to virtual items, our business, financial condition, results of operations or reputation may be harmed.
We rely on third-party hosting and cloud computing providers, like Amazon Web Services (“AWS”), to operate certain aspects of our business. A significant portion of our game traffic is hosted by a single vendor, and any failure, disruption or significant interruption in our network or hosting and cloud services could adversely impact our operations and harm our business.
Our technology infrastructure is critical to the performance of our games and to player satisfaction, as well as our corporate functions. Our games and company systems run on a complex distributed system, or what is commonly known as cloud computing. We own, operate and maintain elements of this system, but significant elements of this system are operated by third-parties that we do not control and which would require significant time and expense to replace. We expect this dependence on third-parties to continue. We have suffered interruptions in service in the past, including when releasing new software versions or bug fixes, and if any such interruption were significant and/or prolonged it could adversely affect our business, financial condition, results of operations or reputation.
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In particular, a significant portion, if not almost all, of our game traffic, data storage, data processing and other computing services and systems is hosted by AWS. AWS provides us with computing and storage capacity pursuant to an agreement that continues until terminated by either party. The agreement requires AWS to provide us their standard computing and storage capacity and related support in exchange for timely payment by us. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. 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.
Any failure, disruption or interference with our use of hosted cloud computing services and systems provided by third-parties, like AWS, could adversely impact our business, financial condition or results of operations. In response to the ongoing COVID-19 pandemic, we have engaged with our partners at AWS to understand their operations and have evaluated our business disruption plans. In addition, since many of the technical specialists responsible for managing disruptions to our technology infrastructure are working from home in accordance with shelter-in-place orders issued due to the COVID-19 pandemic, the time required to remedy any interruption may increase. To the extent we do not effectively respond to any such interruptions, upgrade our systems as needed and continually develop our technology and network architecture to accommodate traffic, our business, financial condition or results of operations could be adversely affected. In addition, we do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. Furthermore, our disaster recovery systems and those of third-parties with which we do business may not function as intended or may fail to adequately protect our critical business information in the event of a significant business interruption, which may cause interruption in service of our games, security breaches or the loss of data or functionality, leading to a negative effect on our business, financial condition or results of operations.
(*) We derive a significant portion of our revenues from advertisements and offers that are incorporated into our free-to-play games through relationships with third parties. If we are unable to continue to compete for these advertisements and offers, or if any events occur that negatively impact our relationships with advertisers, our advertising revenues and operating results would be negatively impacted.
We derive a significant portion of our revenues though advertisements and offers we serve to players. We need to maintain good relationships with advertisers to provide us with a sufficient inventory of advertisements and offers. Online advertising, including through mobile games and other mobile applications, is an intensely competitive industry. Many large companies, such as Amazon, Facebook and Google, invest significantly in data analytics to make their websites and platforms more attractive to advertisers. In order for our advertising business to continue to succeed, we need to continue to demonstrate the reach of our player network and success of our advertising partners. If our relationship with any advertising partners terminates for any reason, or if the commercial terms of our relationships are changed or do not continue to be renewed on favorable terms, we would need to qualify new advertising partners, which could negatively impact our revenues, at least in the short term.
In addition, internet-connected devices and operating systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the delivery of advertising on their devices. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For example, when Apple announced that UDID, a standard device identifier used in some applications, was being superseded and would no longer be supported, application developers were required to update their apps to utilize alternative device identifiers such as universally unique identifier, or, more recently, identifier-for-advertising, which simplifies the process for Apple users to opt out of behavioral targeting. In June 2020, Apple announced further changes, requiring its users with iOS 14 (and presumably future iOS versions) to request a user’s permission to tract them or to access their mobile device’s identifier for advertising (IDFA). Those changes, known as Apple’s AppTracking Transparency framework, went into effect in late April 2021, with the release of iOS 14.5. If users do not elect participate in functionality that supports the delivery of targeted advertising on their devices, our ability to deliver effective advertising campaigns on behalf of our advertisers could suffer, which could cause our business, financial condition, or results of operations to suffer.
Finally, the revenues that we derive from advertisements and offers is subject both to seasonality, as companies’ advertising budgets are generally highest during the fourth quarter and decline significantly in the first quarter of the following year, which negatively impacts our revenues in the first quarter, and to the financial health of advertisers, who, as they experience downturns or uncertainty in their own business operations for various reasons, such as the economic effects resulting from the COVID-19 pandemic, may decrease their advertising spending.
Our ability to acquire and maintain licenses to intellectual property may affect our revenue and profitability. Competition for these licenses may make them more expensive and increase our costs.
While most of the intellectual property we use in our games is created by us, we also acquire rights to third-party intellectual property. For example, we use licensed intellectual property as creative assets in games such as Game of Thrones™ Slots Casino, Harry Potter™: Puzzles & Spells, Hit It Rich! Slots, Wizard of Oz Slots and Wonka’s World of Candy, and we are developing new games using licensed intellectual property such as Star Wars™.
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Proprietary licenses typically limit our use of intellectual property to specific uses and for specific time periods, require time and attention of licensors in providing guidance and related approvals, and include other contractual obligations with which we must comply. We have and may continue to experience delays in working with licensors and their proprietary content as we partner with them to develop new games and features. While these delays have not been material to date, it is possible that the COVID-19 pandemic may divert executive attention and other resources from us or our licensing partners and presents other business challenges, such as dependence on the need for resources only available in physical office locations. Competition for these licenses is intense, and often results in increased advances, minimum payment guarantees and royalties that we must pay to the licensor. If we are unable to obtain and remain in compliance with the terms of these licenses or obtain additional licenses on reasonable economic terms, our revenue and profitability may be adversely impacted. In addition, use of these intellectual properties generally requires that we pay a royalty to the licensor, which decreases our profitability. If the mix of player purchases shifts towards games in which we use licensed intellectual properties increases, our overall margins may be reduced.
In addition, many of our games are built on proprietary source code of third parties, such as Unity and Epic Games. If we are unable to renew licenses to proprietary source code underlying our games, or the terms and conditions of these licenses change at the time of renewal our business, financial condition or results of operations could be negatively impacted. We rely on third parties, including Unity and Epic Games, to maintain versions of their proprietary engines that allow us to ship our games on multiple platforms. If a third party from whom we license source code discontinues support for one or more of these platforms, our business, financial condition or results of operations could be negatively impacted.
Companies and governmental agencies may restrict access to platforms, our website, mobile applications or the Internet generally, which could lead to the loss or slower growth of our player base.
Our players generally need to access the Internet and in particular platforms such as the Apple App Store, the Google Play Store, Facebook, Snapchat or our website to play our games. Companies and governmental agencies could block access to any platform, our website, mobile applications or the Internet generally for a number of reasons such as security or confidentiality concerns or regulatory reasons, or they may adopt policies that prohibit employees from accessing Apple, Google, Facebook and our website or any social platform. If companies or governmental entities block or limit such or otherwise adopt policies restricting players from playing our games, our business could be negatively impacted and could lead to the loss or slower growth of our player base.
We are subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions entered into in connection with the offering of the Notes (as defined below) are financial institutions, and we will be subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. Our exposure to the credit risk of the counterparties will not be secured by any collateral. Global economic conditions have in the past resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a counterparty to one or more capped call transactions becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transactions. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our Class A common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a counterparty, the counterparty may fail to deliver the shares of our Class A common stock required to be delivered to us under the capped call transactions and we may suffer adverse tax consequences or experience more dilution than we currently anticipate with respect to our Class A common stock. We can provide no assurances as to the financial stability or viability of the counterparties.
Risks Related to Legal or Regulatory Compliance
Cybersecurity attacks, including breaches, computer viruses and computer hacking attacks could harm our business, financial condition, results of operations or reputation.
Cybersecurity attacks, including breaches, computer malware, computer hacking and insider threats have become more prevalent in our industry, and experts have warned that the global disruption related to the COVID-19 pandemic and remote working conditions have resulted in increased threats and malicious activity. Any cybersecurity breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, or the inadvertent transmission of computer viruses could adversely affect our business, financial condition, results of operations or reputation. We have experienced and will continue to experience hacking attacks of varying degrees from time to time. Because of our prominence in the social game industry, we believe we are a particularly attractive target for hackers. Additionally, rapidly evolving technology and capabilities, evolving changes in the sources, capabilities and targets for cybersecurity attacks, as well as the increasing sophistication of cyber criminals increase the risk of material data compromise or business disruption. As cybersecurity threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. The inability to implement, maintain and upgrade adequate safeguards could have a material adverse effect on our business.
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In addition, we store sensitive information, including personal information about our employees, and our games involve the storage and transmission of players’ personal information on equipment, networks and corporate systems run by us or managed by third-parties including Amazon, Apple, Facebook, Google and Microsoft. We are subject to a number of laws, rules and regulations requiring us to provide notification to players, investors, regulators and other affected parties in the event of a security breach of certain personal data, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws, including, among others, the European Union’s General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 (“CCPA”), have increased and may increase in the future. Our corporate systems, third-party systems and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to, or compromise the integrity of, our data, our employees’ data, our players’ data or any third-party data we may possess. Any such security breach could require us to comply with various breach notification laws, may affect our ability to operate and may expose us to litigation, remediation and investigation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability, each of which could be material.
In September 2019, we announced that an incident had occurred that involved player data (the “Data Incident”). Upon our discovery of the Data Incident, an investigation was immediately commenced and leading advisors and third-party forensics firms were retained to assist. The investigation revealed that, during the third quarter of 2019, outside hackers illegally accessed certain player account information and other Zynga information, and that no financial information was accessed. We provided notifications to players, investors, regulators and other third parties, where we believed notice was required or appropriate. We may continue to experience increased costs related to our response to the Data Incident and our efforts to further enhance our security measures. In addition, it is possible that the Data Incident may result in loss of players and partners, harm to our reputation, increased costs to maintain insurance coverage, devotion of substantial management time, litigation or regulatory enforcement, claims for indemnification obligations, future cybersecurity attacks and other potential liabilities. We are currently subject to consumer class action complaints filed in connection with the Data Incident, as further described in the section titled “Legal Matters” included in Note 15 —“Commitments and Contingencies” in the notes to the consolidated financial statements included herein. While we intend to defend ourselves vigorously against the claims asserted, we cannot anticipate the potential outcomes, costs and expenses associated with these and any future lawsuits. Although we maintain insurance, the amount of our insurance may not cover the costs associated with such consumer class actions.
(*) We are subject to laws and regulations concerning privacy, information security, data protection, consumer protection and protection of minors, and these laws and regulations are continually evolving. Our actual or perceived failure to comply with these laws and regulations could harm our business.
We receive, store and process personal information and other player data, and we enable our players to share their personal information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the collection, storing, sharing, use, processing, disclosure, deletion and protection of personal information and other player data on the Internet and mobile platforms, and with our acquisition of Chartboost, Inc., we are subject to additional laws and contractual obligations relating to its advertising operations. The scope of these laws are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules.
Various government and consumer agencies have called for new regulation and changes in industry practices and are continuing to review the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. For example, the GDPR, which became effective in May 2018, created new individual privacy rights and imposed worldwide obligations on companies processing personal data of European Union users, which has created a greater compliance burden for us and other companies with European users, and subjects violators to substantial monetary penalties. Another example is the State of California’s passage of the CCPA, which went into effect on January 1, 2020 and created new privacy rights for consumers residing in the state. On November 3, 2020, California voters approved an initiative that will modify the CCPA significantly when it goes into effect in 2022, resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply.
There is also increased attention being given to the collection of data from minors. For instance, the Children’s Online Privacy Protection Act (“COPPA”) requires companies to obtain parental consent before collecting personal information from children under the age of 13. Compliance with GDPR, CCPA, COPPA and similar legal requirements has required us to devote significant operational resources and incur significant expenses.
All of our games are subject to our privacy policy and our terms of service located in application storefronts, within our games and on our corporate website. We generally comply with industry standards and are subject to the terms of our privacy-related obligations to players and third parties. We strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It is also possible that new laws, policies, legal obligations or industry codes of conduct may be passed, or existing laws, policies, legal obligations or industry codes of conduct may be interpreted in such a way that could prevent us from being able to offer services to citizens of a certain jurisdiction or may make it costlier or more difficult for us to do so. For example, in
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July 2020, Apple began removing games from its China App Store in order to comply with Chinese gaming regulations first introduced in 2016, requiring developers to obtain licenses from Chinese authorities prior to launching games that are paid for or have in-app purchases. Accordingly, the Zynga games which were previously available in the China App Store have been removed by Apple. While we are assessing options to bring Zynga games to China in the future, we note that Zynga’s revenue and bookings from Apple’s China App Store have not historically been significant.
We are also subject to evolving laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate. For example, in July 2020, the European Union-U.S. Privacy Shield, on which we historically relied for the transfer of certain data from the European Union to the U.S., was invalidated by the Court of Justice of the European Union (CJEU). In addition, other bases upon which Zynga relies to legitimize the transfer of such data, such as Standard Contractual Clauses (SCCs), have been subjected to regulatory and judicial scrutiny. The CJEU upheld the validity of SCCs in July 2020 subject to certain conditions, and the European Commission issued new SCCs on June 4, 2021, which will result in changes to our use of SCCs. Further regulatory guidance could result in additional changes over time. If one or more of the legal bases for transferring data from Europe to the United States is invalidated or the transfer frameworks are amended, if we are unable to transfer data between and among countries and regions in which we operate, or if we are restricted from sharing data among our products and services, it could affect the manner in which we operate and require us to change our data processing policies and measures, which may be burdensome and difficult to undertake successfully, and could adversely affect our financial results. Any failure or perceived failure by us to comply with our privacy policy and terms of service, our privacy-related obligations to players or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other data of players and other individuals, may result in governmental investigations and enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our players to lose trust in us and other harm to our reputation, which could have an adverse effect on our business, financial condition or results of operations. Additionally, if third parties we work with, such as players, vendors or developers violate applicable laws or our policies, such violations may also put our players’ information at risk and could in turn have an adverse effect on our business, financial condition or results of operations.
We are involved in legal proceedings that may result in adverse outcomes.
We are involved in claims, suits, government investigations, and proceedings arising in the ordinary course of our business, including actions with respect to intellectual property claims, securities claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, consumer protection claims, competition-related claims, commercial and indemnification claims, acquisition-related claims and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of their outcomes, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, financial condition or results of operations. See the section titled “Legal Matters” included in Note 15 – “Commitments and Contingencies” in the notes to the consolidated financial statements included herein.
Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the U.S. and abroad that affect our business, including state and federal laws regarding consumer protection, electronic marketing, protection of minors, data protection and privacy, competition, taxation, intellectual property, export and national security, 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 U.S. There is a risk that existing or future laws may be interpreted in a manner that is not consistent with our current practices and could have an adverse effect on our business. 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 or other jurisdictions may claim that we are required to comply with their laws and regulations.
We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. In addition, there are ongoing academic, political and regulatory discussions in the U.S., Europe, Australia, Brazil and other jurisdictions regarding whether certain game genres, such as social casino, or certain game mechanics, such as “loot boxes”, should be subject to a higher level or different type of regulation than other game genres or mechanics to protect consumers, in particular minors and persons susceptible to addiction, and, if so, what such regulation should include. For example, in 2018 a court determined that a class-action plaintiff was able to state a claim that an online social casino game operated by Big Fish Games, Inc. violated a specific anti-gambling law in Washington State. Subsequent to this ruling, additional purported class-action suits were filed against other social casino gaming companies for alleged violations of Washington State’s gambling and consumer protection laws, and some of the defendant companies have entered into settlement agreements to settle their respective lawsuits. In late 2020 and throughout 2021, several class action suits have been filed in multiple states in the
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U.S. against platforms and publishers alleging online social casino games violate various anti-gambling laws, including a February 2021 federal class action suit filed against Zynga in California alleging that our social slots games violate certain state anti-gambling and consumer protection laws. In Australia, a member of federal parliament introduced a bill in June 2020 seeking to ban social casino games in the country because, in part, his belief that such games groom children and young adults for real-money gambling later in life. If new social casino regulations are imposed, or other regulations are interpreted to apply to our social casino games, certain, or all, of our casino-themed games may become subject to such rules and regulations and expose us to civil and criminal penalties if we do not comply. Additionally, loot box game mechanics have been the subject of increased public discussion – for example, Belgium and the Netherlands have recommended enforcement actions against certain companies, the U.S. Federal Trade Commission (“FTC”) held a public workshop on loot boxes in August 2019, at least one bill has been introduced in the U.S. Senate that would regulate loot boxes in games marketed toward players under the age of 18, the United Kingdom’s Department for Digital, Culture, Media and Sport in September 2020 launched a call for evidence into the impact of loot boxes on in-game spending and gambling-like behavior, several class action suits have been filed in Brazil and in Canada against various companies for offering loot boxes in their games or platforms based in part on claims connecting or equating loot boxes to gambling (with Zynga being one of numerous defendants in a Canadian class action suit), and politicians have cited loot boxes as an example of recent technology innovation where government regulation is needed. In some of our games, such as Empires & Puzzles, CSR Racing 2, Harry Potter: Puzzles & Spells, Merge Dragons!, Merge Magic! and Zynga Poker, certain mechanics may be deemed as “loot boxes”. New regulation by the FTC, U.S. states or other international jurisdictions, which may vary significantly across jurisdictions and which we may be required to comply with, could require that these game mechanics be modified or removed from games, increase the costs of operating our games, impact player engagement and monetization or otherwise harm our business performance. It is difficult to predict how existing or new laws may be applied to these or similar game mechanics. 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, financial condition or results of operations.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the U.S. and elsewhere that could restrict the online and mobile industries, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual items may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. 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 marketing of in-app purchases, labeling of free-to-play games, or regulation of currency, banking institutions, unclaimed property, or money transmission may be interpreted to cover our games and the virtual currency, goods or payments that we receive. If that were to occur we may 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, 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 U.S. or elsewhere regarding these activities may lessen the growth of social game services and impair our business, financial condition or results of operations.
The exit by the United Kingdom from the European Union could harm our business, financial condition or results of operations.
The United Kingdom left the European Union in 2020 (commonly referred to as “Brexit”). The effects of Brexit will depend on agreements, if any, the United Kingdom makes to retain access to European Union. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate.
The announcement of Brexit caused (and the post-transition period relationship between the United Kingdom and the European Union is expected to cause future) significant volatility in global stock markets, which could cause our stock price to be subject to wide fluctuations, and significant fluctuations in foreign currency exchange rates, which will affect our financial results as we report in U.S. dollars and may affect our ability to attract and retain employees in the United Kingdom. The announcement of Brexit also created (and the post-transition period relationship between the United Kingdom and the European Union may create future) global economic uncertainty, which may cause our players to reduce the amount of money they spend on our games. The post-transition period relationship between the United Kingdom and the European Union could cause disruptions to and create uncertainty surrounding our business, including affecting our United Kingdom operations and relationships with existing and future players, suppliers and employees. Any of these effects of Brexit, and others we cannot anticipate, could harm our business, financial condition or results of operations.
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Changes in tax laws or tax rulings could materially affect our effective tax rates, financial position, results of operations and cash flows.
The tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws (including in response to the COVID-19 pandemic) or tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income and non-income based taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which in turn could materially affect our financial position and results of operations. For example, in December 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate, implementing a partially territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings. Another example is the June 7, 2019 opinion issued in Altera Corp v. Commissioner by a three judge panel from the Ninth Circuit, reversing a 2015 U.S. Tax Court decision. The Ninth Circuit ruled in favor of the Commissioner, validating U.S. Treasury regulations that require parties to a qualified cost-sharing arrangement to include stock-based compensation in the cost pool. The taxpayer subsequently petitioned the Ninth Circuit for a rehearing en banc, and, on November 12, 2019, the Ninth Circuit denied such petition. On February 10, 2020, the taxpayer requested the U.S. Supreme Court to review the Ninth Circuit’s decision, and, on June 22, 2020, the U.S. Supreme Court denied request for review. As a result of the Ninth Circuit’s opinion being upheld, our ability to offset 2019 taxable income with net operating losses was reduced. For more information, see Note 9 – “Income Taxes” in the notes to the consolidated financial statements included herein.
In addition, the United States and many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations. These proposals include changes to the existing framework to calculate income tax as well as proposals to change or impose new types of non-income taxes, including taxes based on a percentage of gross receipts such as digital service taxes.
Any significant changes to the taxation of our activities discussed above could increase our future worldwide effective tax rate or non-income taxes that may result in a material adverse effect on our business, financial condition, results of operations, or cash flows. Such changes may also apply retroactively to our historical operations and result in taxes greater than the amounts estimated and recorded in our financial statements.
We may have exposure to greater than anticipated tax liabilities.
Our tax obligations, including income and non-income taxes, are based in part on our corporate operating structure and intercompany arrangements, including the manner in which we develop, value, manage, protect and use our intellectual property and the valuation of our intercompany transactions. The tax laws applicable to our business, including the laws of the U.S. and other jurisdictions, are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional tax revenue. In the third quarter of 2020, we made changes to our international structure including migrating certain intellectual property back to the United States in order to align the global economic ownership of the intellectual property with our current and future business operations. Our current and historical corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws. However, the taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could impact our worldwide effective tax rate and harm our financial position and results of operations. In addition, future changes to our corporate structure and intercompany agreements, including through acquisitions, could impact our worldwide effective tax rate and harm our financial position and results of operations.
Risks Related to Our Intellectual Property
Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business, financial condition or results of operations.
We regard the protection of our trade secrets, copyrights, trademarks, service marks, trade dress, domain names, patents, and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions and business practices. 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 limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and business practices may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We pursue the registration of our copyrights, trademarks, service marks, domain names, and patents in the U.S. and in certain locations outside the U.S. This process can be expensive and time-consuming, may not always be successful depending on local laws or other circumstances, and we also may choose not to pursue registrations in every location depending on the nature of the project to which the intellectual property rights pertain. We may, over time, increase our investments in protecting our creative works.
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Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. For example, we have brought actions to protect our “Zynga Poker,” “Ville,” and “With Friends” franchises against third-party uses of those intellectual property assets and brands. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity, and diversion of management and technical resources, any of which could adversely affect our business, financial condition or results of operations. If we fail to maintain, protect and enhance our intellectual property rights, our business, financial condition or results of operations may be harmed.
We are, and may in the future be, subject to intellectual property disputes, which are costly to defend and could require us to pay significant damages and could limit our ability to use certain technologies in the future.
From time to time, we have faced, and we may face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors, non-practicing entities and former employers of our personnel. Intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement, we may be obligated to cancel the launch of a new game, stop offering a game or certain features of a game in a particular geographic region or worldwide, pay royalties or significant settlement costs, purchase licenses or modify our games and features, or develop substitutes.
In addition, we use open source software in our game development and expect to continue to use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our games, any of which would have a negative effect on our business, financial condition or results of operations. See the section titled “Legal Matters” included in Note 15 – “Commitments and Contingencies” in the notes to the consolidated financial statements included herein.
Risks Related to Our Indebtedness
We may require additional capital to meet our financial obligations and support business growth, and this capital might not be available on acceptable terms or at all.
We intend to continue to make significant investments to support our business growth and invest in strategic initiatives, and may require additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the future could involve offering additional security interests and undertaking restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In December 2020, we entered into a credit agreement with a syndicate of lenders for a three-year revolving credit facility, and we must adhere to financial covenants therein. We may not be able to obtain additional financing on terms favorable to us, if at all. Additionally, the COVID-19 pandemic has caused disruption in capital markets, and if we seek to access additional capital or increase our borrowing, there can be no assurance that financing and credit may be available on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business, financial condition or results of operations may be harmed.
In addition, in June 2019, we issued $690.0 million aggregate principal amount of 0.25% Convertible Senior Notes due 2024 (the “2024 Notes”) and in December 2020, we issued $874.5 million aggregate principal amount of 0.00% Convertible Senior Notes due 2026 (the “2026 Notes” and together with the 2024 Notes, the “Notes”). We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash, to repurchase the Notes upon a fundamental change or to repay the Notes in cash at their maturity (if not earlier converted, redeemed or repurchased), and our future debt may contain limitations on our ability to pay cash upon conversions of the Notes or at their maturity or to repurchase the Notes. Holders of the Notes may require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (as defined in the indenture under which the Notes were issued) before the maturity date at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. Moreover, we will be required to repay the Notes in cash at their maturity unless earlier converted, redeemed or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted or at their maturity.
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In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes or at their maturity may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture or to pay cash upon conversions of the Notes or to repay the Notes at their maturity as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing and future indebtedness. Moreover, the occurrence of a fundamental change under the indenture could constitute an event of default under any such agreement. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and repurchase the Notes or pay cash with respect to notes being converted or at maturity of the Notes.
Provisions in the Indenture for the Notes may deter or prevent a business combination that may be favorable to you.
If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a make-whole fundamental change occurs prior to the maturity date of the Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change in the manner specified in the Indenture. Furthermore, the Indenture will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to you.
Risks Related to Our Class A Common Stock
Our share price has been and will likely continue to be volatile.
The trading price of our Class A common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Between June 30, 2020 and June 30, 2021, the trading price of our Class A common stock ranged from a low of $7.77 per share to a high of $12.32 per share. In addition to the factors discussed in these “Risk Factors” and elsewhere in this filing, factors that may cause volatility in our share price include:
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changes in projected operational and financial results; |
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issuance of new or updated research or reports by securities analysts; |
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market rumors or press reports; |
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announcements related to our share repurchase program; |
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our announcement of significant transactions; |
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actions instituted by activist shareholders or others; |
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the use by investors or analysts of third-party data (such as App Annie, comScore, and Sensor Tower) regarding our business and operating metrics which may not reflect our actual performance or financial results; |
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fluctuations in the valuation of companies perceived by investors to be comparable to us; |
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the activities, public announcements and financial performance of our commercial partners, such as Apple, Amazon, Facebook and Google; |
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fluctuations in the trading volume of our shares, or the size of our public float relative to the total number of shares of our Class A common stock that are issued and outstanding; |
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and |
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general economic and market conditions. |
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies including in response to the COVID-19 pandemic, continuing containment efforts and initiatives taken to support global economies and workers. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been the target of this type of litigation in the past. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
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In addition, in April 2018, our Board of Directors authorized the 2018 Share Repurchase Program allowing us to repurchase up to an additional $200.0 million of our outstanding shares of Class A common stock. The timing and amount of any stock repurchases will be determined based on market conditions, share price and other factors. The 2018 Share Repurchase Program, which will expire in April 2022, does not require us to repurchase any specific number of shares of our Class A common stock, and may be modified, suspended or terminated at any time without notice. The 2018 Share Repurchase Program will be funded from existing cash on hand or other sources of financing as the Company may determine to be appropriate. Share repurchases under these authorizations may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 plans or by any combination of such methods. Repurchases of our Class A common stock in the open market could result in increased volatility in our stock price. There is no guarantee that we will make any share repurchases under the 2018 Share Repurchase Program or otherwise in the future.
The capped call transactions may affect the price our Class A common stock.
In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain financial institutions as counterparties. The capped call transactions initially cover, subject to customary adjustments, the number of shares of our Class A common stock initially underlying the Notes. The capped call transactions are expected to offset the potential dilution and/or offset any cash payments we make in excess of the aggregate principal amount of converted Notes, as the case may be, as a result of conversion of the Notes.
From time to time, the counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of the Notes). This activity could also cause or prevent an increase or a decrease in the market price of our Class A common stock.
Certain provisions in our charter documents and under Delaware law could limit attempts by our stockholders to replace or remove our Board of Directors or current management and limit the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing changes in our Board of Directors or management. Our certificate of incorporation and bylaws include provisions that:
|
• |
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; |
|
• |
prohibit cumulative voting in the election of directors; |
|
• |
authorize “blank check” preferred stock that our Board of Directors could issue; and |
|
• |
limit the ability of stockholders to call a special stockholder meeting and to act by written consent. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
Our Class A common stock price may be volatile due to third-party data regarding our games.
Third parties, such as App Annie, comScore, and Sensor Tower publish daily data about us and other social game companies with respect to downloads, DAUs and MAUs, monthly revenue, top game charts, time spent per user and other information concerning social game usage. These metrics can be volatile, particularly for specific games, and in many cases do not accurately reflect the actual levels of usage of our games across all platforms and may not correlate to our bookings or revenue from the sale of virtual items. There is a possibility that third parties could change their methodologies for calculating these metrics in the future. To the extent that securities analysts or investors base their views of our business or prospects on such third-party data, the price of our Class A common stock may be volatile and may not reflect the performance of our business.
63
If securities or industry analysts do not publish research about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our Class A common stock, to some extent, depends on the research and reports that securities or industry analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or lower their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
While we have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic, if we are unable to maintain adequate internal controls for financial reporting in the future due to the COVID-19 pandemic or any other reason, or if our auditors are unable to express an opinion as to the effectiveness of our internal controls as required pursuant to the Sarbanes-Oxley Act of 2002, investor confidence in the accuracy of our financial reports may be impacted or the market price of our Class A common stock could be negatively impacted.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified Board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform Act and Consumer Protection Act of 2010, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.
As a result of disclosure of information in our public filings with the SEC as required of a public company, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition or results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and our Board members and harm our business, financial condition or results of operations.
We have no plans to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not have any plans to pay cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND ISSUER PURCHASES OF EQUITY SECURITIES
Unregistered Sales of Equity Securities
None
Issuer Purchases of Equity Securities
The following table represents our stock repurchase activity during the second quarter of 2021:
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs(1) |
|
|
Maximum Dollar Value That May Yet Be Purchased Under the Program(1) |
|
||||
April 1 - April 30, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
173,847,972 |
|
May 1 - May 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
173,847,972 |
|
June 1 - June 30, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
173,847,972 |
|
Total |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
(1) |
In April 2018, our Board of Directors authorized the 2018 Share Repurchase Program, which authorizes us to repurchase up to $200 million of our outstanding Class A common stock. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022. |
64
ITEM 5. OTHER INFORMATION
Appointment of Chief Accounting Officer
Effective as of August 2, 2021, the Company appointed Amy M. Rawlings as Chief Accounting Officer and principal accounting officer of the Company.
There are no arrangements or understandings between Ms. Rawlings and any other persons pursuant to which she was selected as Chief Accounting Officer. There are also no family relationships between Ms. Rawlings and any director or executive officer of the Company, and she has no direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
Biography. Ms. Rawlings has served as the Company’s interim Chief Accounting Officer since September 2020, and has spent more than eleven years at the Company in various roles across our accounting and finance organization. Prior to her appointment as Chief Accounting Officer, Ms. Rawlings served as Vice President – Controller and Senior Director – Assistant Controller, where she helped lead U.S. and international accounting and operations teams. Before that, Ms. Rawlings managed the SEC Reporting and Revenue Accounting teams, assisting with various accounting standard adoption efforts, IPO readiness, SOX implementation and the financial statement preparation process. Prior to joining the Company, Ms. Rawlings worked at Ernst & Young from 2006 to 2010.
Ms. Rawlings received a B.A. in Business Economics with an emphasis in Accounting from the University of California, Santa Barbara, and is a Certified Public Accountant in the state of California.
Appointment Letter. In connection with the appointment of Ms. Rawlings to serve as the Company’s Chief Accounting Officer and principal accounting officer, the Company entered into an appointment letter with Ms. Rawlings (the “Appointment Letter”). The following description of the Appointment Letter is qualified in its entirety by reference to the full text of the Appointment Letter, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated by reference herein.
Employment Term. Ms. Rawlings’s employment is on an at-will basis and is not for a specified term.
Base Salary and Bonus. Ms. Rawlings will receive an annual base salary of $270,000. In addition, Ms. Rawlings will be eligible to participate in the Company’s performance bonus plan for similarly situated executive officers. For 2021, Ms. Rawlings’s target bonus is 35% of her annual base salary.
Current Equity Awards. Ms. Rawlings’s outstanding equity grants as of the date hereof are as follows:
Grant Date |
|
RSUs |
|
RSUs |
|
Vesting Schedule |
03/15/2021 |
|
22,851 |
|
22,851 |
|
Vests 25% after 1 year, then quarterly in equal installments over next 3 years |
11/15/2020 |
|
38,419 |
|
38,419 |
|
Vests 25% after 1 year, then quarterly in equal installments over next 3 years |
03/15/2020 |
|
22,255 |
|
15,300 |
|
Vests 25% after 1 year, then quarterly in equal installments over next 3 years |
04/15/2019 |
|
19,920 |
|
8,715 |
|
Vests 25% after 1 year, then quarterly in equal installments over next 3 years |
04/15/2018 |
|
60,000 |
|
11,250 |
|
Vests 25% after 1 year, then quarterly in equal installments over next 3 years |
Other Benefits. Ms. Rawlings will be eligible to participate in the health insurance and benefit programs generally available to the Company’s employees. Ms. Rawlings’s bonuses and equity grants will be subject to the Company’s executive compensation recoupment policies as in effect from time to time.
Indemnification Agreement. In accordance with the Company’s customary practice, the Company will enter into an indemnification agreement with Ms. Rawlings, which requires the Company to indemnify her against certain liabilities that may arise in connection with her status or service as an officer. The foregoing description is qualified in its entirety by the full text of the form of indemnification agreement, which was filed with the SEC as Exhibit 10.6 to the Company’s Registration Statement on Form S-1 filed on November 17, 2011, and is incorporated herein by reference.
Effective upon Ms. Rawlings’s appointment as the Chief Accounting Officer and principal accounting officer of the Company, Mr. James Gerard Griffin will no longer be the principal accounting officer of the Company and will remain serving as the Company’s Chief Financial Officer and principal financial officer.
Impairment of San Francisco Office Building
For information on an anticipated impairment expense related to the San Francisco Office Building right-of-use asset and related leasehold assets, see Note 6 – “Leases” in the notes to the consolidated financial statements included herein and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations – Lease Commitments.
65
ITEM 6. EXHIBITS
|
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Incorporated by Reference |
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Exhibit No. |
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Description of Exhibit |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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Filed or Furnished Herewith |
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|
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2.1 |
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X |
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2.2 |
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10-Q |
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001-35375 |
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2.2 |
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May 6, 2021 |
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2.3 |
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10-Q |
|
001-35375 |
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2.1 |
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May 6, 2021 |
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2.4 |
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|
8-K |
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001-35375 |
|
2.1 |
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May 6, 2021 |
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10.1 |
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X |
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10.2+ |
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X |
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31.1 |
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X |
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31.2 |
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X |
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32.1• |
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X |
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101.INS |
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Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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66
+ |
Indicates management contract or compensatory plan. |
• |
The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or any other filing under the Exchange Act, except as expressly set forth by specific reference in such a filing. |
67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Francisco, State of California, on August 6, 2021.
ZYNGA INC. |
|
|
By: /s/ Frank Gibeau |
Frank Gibeau |
Chief Executive Officer |
(On behalf of Registrant) |
|
By: /s/ James Gerard Griffin |
James Gerard Griffin |
Chief Financial Officer |
(On behalf of Registrant) |
|
By: /s/ Amy M. Rawlings |
Amy M. Rawlings |
Chief Accounting Officer |
(On behalf of Registrant) |
68
Exhibit 2.1
Certain portions of this document have been omitted pursuant to Items 601(a)(5) and 601(b)(2) of Regulation S‑K and, where applicable, have been marked with “[***]” to indicate where omissions have been made. A copy of any omitted portion will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however, that Zynga may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.
Dated 30 June 2021
Amendment and Restatement Agreement
between
Zynga Inc.
as Purchaser
The Persons set out in Schedule 1
as the Sellers
White & Case llp
5 Old Broad Street
London EC2N 1DW
Table of Contents
|
Page |
|||
1. |
- |
Interpretation |
|
1 |
2. |
- |
Amendment and Restatement of the Contract |
|
1 |
3. |
- |
Further Assurance |
|
1 |
4. |
- |
Entire Agreement |
|
2 |
5. |
- |
Severance and Validity |
|
2 |
6. |
- |
Variations and Waivers |
|
2 |
7. |
- |
No Rights under Contracts (Rights of Third Parties) Act 1999 |
|
2 |
8. |
- |
Counterparts |
|
2 |
9. |
- |
Miscellaneous |
|
2 |
Schedule |
- 1 |
|
5 |
|
Schedule |
- 2 The Amended and Restated Contract |
|
6 |
(i)
This Agreement is made on 30 June 2021
Between:
(1) |
Zynga Inc. a company incorporated in Delaware with registered number 4446916 and whose registered office is at 699 8th Street, San Francisco, California 94103 (“Purchaser”); and |
(2) |
The Persons set out in Schedule 1 hereto (the “Sellers”). |
Whereas:
(A) |
The Purchaser and the Sellers’ Representative have previously entered into an agreement dated 4 August 2020 as later amended on 1 October 2020 in relation to the sale and purchase of the entire issued share capital of Rollic Games Oyun Yazılım ve Pazarlama Anonim Şirketi (the “Contract”). |
(B) |
The Parties now wish to amend and restate the Contract pursuant to the terms and conditions set out herein. |
(C) |
Clause 25 (Variations) of the Contract provide that any provision of the Contract may be amended if such amendment is in writing and the amendment is signed by the parties to the Contract. |
It is agreed:
1.1 |
In this Agreement: |
“Effective Date” means the date of this Agreement; and
“Party” means a party to this Agreement, and “Parties” shall mean the parties to this Agreement.
2.2 |
The amendment and restatement of the Contract pursuant to this Agreement shall constitute a variation of the Contract in accordance with Clause 25 (Variations) of the Contract. |
2.3 |
Save as amended and restated in accordance with Clause 2.1 above, the Contract shall continue in full force and effect. |
2.4 |
With effect from the Effective Date, any reference to the “Contract” shall be read and construed as references to the Contract as amended and restated by this Agreement. |
Each of the Parties shall from time to time and at their own cost do, execute and deliver or procure to be done, executed and delivered all such further acts, documents and things required by law or as may be necessary or desirable to give full effect to this Agreement and the rights, powers and remedies conferred under this Agreement.
4.1 |
This Agreement, together with any other documents referred to in this Agreement and all documents entered into pursuant to this Agreement, constitutes the whole agreement between the Parties and supersedes any previous arrangements or agreements between them relating to the subject matter of this Agreement. |
4.2 |
The Parties confirm that they have not entered into this Agreement on the basis of any representation, warranty, undertaking or any other statement whatsoever not expressly incorporated into this Agreement. |
4.3 |
The Parties agree, to the extent permitted by law, that the only right or remedy in relation to breach of this Agreement shall be for contractual damages. |
4.4 |
Nothing in this Clause 4 shall operate to limit or exclude any liability for fraud. |
If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, such provision shall be deemed to be severed from this Agreement. The remaining provisions will remain in full force in that jurisdiction and all provisions will continue in full force in any other jurisdiction.
No variation or waiver of this Agreement shall be effective unless in writing and signed by or on behalf of the Parties. No single or partial exercise of, or failure or delay in exercising, any right or remedy provided by law or under this Agreement shall constitute a waiver, or preclude any other nor restrict any further exercise, of that or any other right or remedy.
A person who is not a party to this Agreement or the Contract shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any of their terms.
This Agreement may be executed in counterparts and shall be effective when each Party has executed and delivered a counterpart. Each counterpart shall constitute an original of this Agreement, but all the counterparts shall together constitute one and the same instrument.
Clause 35 (Governing Law and Jurisdiction) and Clause 36 (Agent for Service of Process) in the Contract shall apply mutatis mutandis to this Agreement.
2
This Agreement has been entered into by the Parties on the date first above written.
Purchaser
Signed for and on behalf |
/s/ Frank Gibeau |
|
|
/s/ James Gerard Griffin |
Sellers
Signed by Mehmet Can Yavuz |
/s/ Mehmet Can Yavuz |
Signed by Deniz Başaran |
/s/ Deniz Başaran |
Signed by Burak Vardal |
/s/ Burak Vardal |
Signed by Volkan Bicer |
/s/ Volkan Bicer |
Signed by Mehmet Ayan |
/s/ Mehmet Ayan |
Signed by Yunus Emre Gönül |
/s/ Yunus Emre Gönül |
Mehmet Can Yavuz
Deniz Başaran
Burak Vardal
Volkan Biçer
Mehmet Ayan
Yunus Emre Gönül
The Amended and Restated Contract
Dated 30 June 2021
Share Sale and Purchase Agreement
relating to the sale and purchase of the entire issued share capital of Rollic Games Oyun Yazılım ve Pazarlama Anonim Şirketi
between
Those persons listed in Schedule 1
as Sellers
Zynga Inc.
as Purchaser
as amended by an Amendment and Restatement Agreement dated 30 June 2021
White & Case llp
5 Old Broad Street
London EC2N 1DW
|
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|
Page |
1. |
|
Interpretation |
1 |
2. |
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Sale and Purchase |
17 |
3. |
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Conditions |
18 |
4. |
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Consideration |
19 |
5. |
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Escrow |
19 |
6. |
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Pre-Closing Obligations |
20 |
7. |
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Closing |
23 |
8. |
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Step-In Closing |
24 |
9. |
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Post-Closing Stock Awards |
25 |
10. |
|
Post-Closing Undertakings |
26 |
11. |
|
Purchasers’ Warranties |
26 |
12. |
|
Sellers’ Warranties |
26 |
13. |
|
Sellers’ Limitations on Liability |
27 |
14. |
|
Specific Indemnities |
28 |
15. |
|
Restrictions on the Employee Sellers |
28 |
16. |
|
Business Information |
28 |
17. |
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Termination |
29 |
18. |
|
Confidentiality |
29 |
19. |
|
Announcements |
30 |
20. |
|
No Assignment |
30 |
21. |
|
Further Assurance |
31 |
22. |
|
Entire Agreement |
31 |
23. |
|
Severance and Validity |
31 |
24. |
|
Variations |
32 |
25. |
|
Remedies and Waivers |
32 |
26. |
|
Effect of Closing |
32 |
27. |
|
Third Party Rights |
32 |
28. |
|
Payments |
32 |
29. |
|
Costs and Expenses |
33 |
30. |
|
Taxes |
33 |
31. |
|
Default Interest |
34 |
32. |
|
Notices |
34 |
33. |
|
Counterparts |
35 |
34. |
|
Governing Law and Jurisdiction |
35 |
35. |
|
Agent for Service of Process |
35 |
36. |
|
Seller’s Representative |
35 |
(i)
|
|
|
Page |
Schedule 1 -The Sellers |
37 |
||
Schedule 2 -The Company |
39 |
||
Schedule 3 -Closing Arrangements |
40 |
||
Part 1 |
|
Sellers’ Closing Obligations |
40 |
Part 2 |
|
Purchaser’s Closing Obligations |
42 |
Part 3 |
|
Sellers’ and Purchaser’s Joint Closing Obligations |
43 |
Part 4 |
|
Employee Sellers’ Step-In Closing Obligations |
44 |
Part 5 |
|
Purchaser’s Step-In Closing Obligations |
45 |
Schedule 4 -Warranties |
46 |
||
Part 1 |
|
Fundamental Warranties |
46 |
Part 2 |
|
Operational Warranties |
47 |
Schedule 5 -Sellers’ Limitations on Liability |
74 |
||
Schedule 6 -Closing Accounts |
78 |
||
Part 1 |
|
Rules for preparation of Closing Accounts |
78 |
Part 2 |
|
Specific Accounting Treatments |
79 |
Part 3 |
|
Preparation Delivery and Agreement |
80 |
Schedule 7 -Post Closing Financial Adjustments |
82 |
||
Part 1 |
|
Adjustments |
82 |
Part 2 |
|
Settlement of Adjustments |
82 |
Schedule 8 -Escrow Account |
83 |
||
Part 1 |
|
General |
83 |
Part 2 |
|
Payments from the Escrow Account |
83 |
Schedule 9 – Tax Covenant |
85 |
||
1. |
|
Definitions and interpretation |
85 |
2. |
|
Covenant |
86 |
3. |
|
Exclusions And Limitations On Liability |
87 |
4. |
|
Corresponding Relief |
88 |
5. |
|
Recovery From Third Parties |
89 |
6. |
|
Conduct Of Pre-Closing Tax Affairs |
90 |
7. |
|
Conduct Of Tax Authority Claims |
90 |
8. |
|
Payment Of Claims |
93 |
(ii)
The Agreement dated 4 August 2020 as later amended by an amendment agreement dated 1 October 2020, and as further amended by an amendment agreement dated as of 20 April 2021, and as further amended by an Amendment and Restatement Agreement dated 30 June 2021 (the “Agreement”) is made:
Between:
(2) |
Zynga Inc., a company incorporated in Delaware with registered number 4446916 and whose registered office is at 699 8th Street, San Francisco, California 94103 (the “Purchaser”). |
Whereas:
(A) |
Each of the Sellers is, at the date of this Agreement, the beneficial owner and registered holder of that number of Company Shares as set out opposite its name in Schedule 1. |
It is agreed:
“Accounts Date” means 30 June 2020;
“Actual Cash” means the Cash held by the Company at 9am CET on the Closing Date, as calculated and determined in accordance with Schedule 6 (Closing Accounts);
“Actual Debt” means the Debt owed by the Company as at 9am CET on the Closing Date, as calculated and determined in accordance with Schedule 6 (Closing Accounts);
“Actual Working Capital” means the Working Capital of the Company as at 9am CET on the Closing Date, as calculated and determined in accordance with Schedule 6 (Closing Accounts);
“Agents” means, in relation to a person, that person’s directors, officers, employees, advisers, agents and representatives;
“Amendment and Restatement Agreement” means the amendment and restatement agreement between the Sellers and the Purchaser dated 30 June 2021;
“Annex” means the list of disputes agreed by the Parties and annexed to this Agreement on the date hereof;
“Anti‑Bribery Laws” means, in each case to the extent that they have been applicable to the Company at any time prior to the date of this Agreement: (i) the UK Bribery Act 2010; (ii) the U.S. Foreign Corrupt Practices Act of 1977 (as amended); (iii) any applicable law, rule, or regulation promulgated to implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed on 17 December 1997; and (iv) any other applicable law, rule or regulation of similar purpose and scope in any jurisdiction, including books and records of offences relating directly or indirectly to a bribe;
“Anti-Money Laundering Law” means all laws relating to money laundering or the proceeds of criminal activity including, without limitation: (i) European Union Money Laundering Directives and member states’ implementing legislation; (ii) the UK Proceeds of Crime Act 2002; (iii) the U.S. Bank Secrecy Act, the U.S. Patriot Act and other U.S. legislation relating to money laundering, (iv) Federal Law of the Russian Federation No. 115-FZ “On Countering the
Legalization of Illegal Earnings (Money Laundering) and the Financing of Terrorism” dated 7 August 2001 (as amended) and (v) Law on the Prevention of Laundering the Income Generated from Criminal Activities (Suç Gelirlerinin Aklanmasının Önlenmesi Hakkında Kanun) numbered 5549 and published in the Official Gazette dated October 18, 2006 and numbered 26323;
“Antitrust Law” means: (i) Articles 101 and 102 of the Treaty on the Functioning of the European Union and the provisions of national Laws in the European Economic Area member states that are substantially similar thereto; (ii) Sections 1 and 2 of the U.S. Sherman Act; and (iii) any other Law of any jurisdiction, including but not limited to Law on Protection of Competition (Rekabetin Korunması Hakkında Kanun) numbered 4054 published in the Official Gazette dated December 13, 1994 and numbered 22140, intended to prohibit or regulate agreements, understandings, practices or behavior that could restrict competition or could lead to anti-competitive effects, through the merger or combination by any other means of independent businesses, or otherwise if and as applicable to the Company and/or the Seller;
“Applicable Accounting Standards” means International Financial Reporting Standards (IFRSs), International Accounting Standards and Interpretations of those standards issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee and their predecessors and the requirements of all relevant laws.
“Auditors” means PwC YMM A.Ş.;
“Authority” means a supra-national, national or sub-national authority, commission, department, agency, regulator or regulatory body with jurisdiction in any jurisdiction whose Laws are applicable to the Company;
“Board” means the board of directors of the Company;
“Business” means the business of the Company comprising the development, marketing and publishing of games on mobile and online platforms and display, distribution and publication of paid-advertisements on mobile and online platforms, as conducted by it on the date of this Agreement and from time to time thereafter;
“Business Data” means all data and information that is created or used by the Company, or is processed by or stored on any Company IT Asset;
“Business Day” means a day (other than a Saturday or Sunday or a public holiday) when commercial banks are open for ordinary banking business in London, United Kingdom, Istanbul, Turkey, and San Francisco, California;
“Business Domain Name” means any domain name which the Company has or purports to have, control of or an ownership interest of any nature in (whether exclusively, jointly with another person, or otherwise) or that is used or held for use by the Company;
“Business Information” means drawings, formulae, test results, reports, project reports and testing, operation and manufacturing procedures, shop practices, instruction and training manuals, tables of operating conditions, market forecasts, specifications, data, quotations, tables, lists and particulars of customers and suppliers, marketing methods and procedures, technical literature and brochures and any other technical, industrial and commercial information and techniques in any tangible form (including paper, electronically stored data, magnetic media, microfiche, film and microfilm);
“Business IP” means any Intellectual Property Right in which the Company has or purports to have an ownership interest of any nature (whether exclusively, jointly with another person, or otherwise) or that is used, or held for use, by the Company;
2
“Business Materials” means all:
|
(b) |
Business Information and other documents, designs, drawings, methodologies, or materials that are material to the operation of the Business; |
“Business Plan” means the business plan and operating budget [***] in the agreed terms to be adopted by the Company on Closing;
“Business Owned IP” means all:
|
(d) |
other Business IP in which the Company has or purports to have an ownership interest of any nature (whether exclusively, jointly with another person, or otherwise); |
“Business Owned Software” means any and all Business Software in which the Company has or purports to have an ownership interest of any nature (whether exclusively, jointly with another person, or otherwise);
“Business Product” means all products, games or other offerings:
“Business Social Media Account” means any online social media or customer outreach services maintained by the Company;
“Business Software” means all Software that is:
|
(c) |
used in the design, development, distribution, publication, testing, maintenance, or support of, any Business Product, |
in each case by or on behalf of the Company at any time, but excluding any third-party Software that is generally available on standard commercial terms and is licensed to the Company solely for internal use, in object code form, and on a non-exclusive basis;
“Business Third Party Software” means any and all Business Software in which a third party has an ownership interest of any nature (whether exclusively, jointly with another person, or otherwise);
“Cash” means, in relation to the Company, the aggregate of its unrestricted cash, cash equivalents and marketable securities held or credited to any account with any banking, financial, acceptance credit, lending or other similar institution or organisation (and any accrued and outstanding interest thereon) as determined in accordance with Applicable Accounting Standards, less
3
|
|
(b) |
the aggregate cash value of any declared but unpaid dividends and other distributions attributable to the Shares; |
“Cause Event” means any event, act or omission that entitles the Company that employs the relevant Employee Seller to terminate the employment of such Employee Seller due to (i) a material breach by such Employee Seller of this Agreement or Employee Seller Employment Agreement, as applicable, or (ii) reasons as specified under Article 25 of the Turkish Labor Law or (iii) due to the Employee Seller’s misbehavior or poor performance as specified under Article 18 of the Turkish Labor Law or personal misconduct which may not be qualified as one of the reasons as specified under Article 25 of the Turkish Labor Law, however it may be considered reasonably material by the Company to terminate employment for cause provided, that in each case under clause (i) and (iii), the Company provides the relevant Employee Seller (as applicable) with written notice of the facts related to such claimed reason, and if such claimed reason is not cured (if capable of being curable) within 30 days after the receipt of such written notice by the relevant Employee Seller (such 30-day period the “Company Management Cure Period”), and the Company actually terminates, or serves notice to terminate, employment for cause within 10 days after the expiration of the Company Management Cure Period (as applicable);
“Cessation Date” means the earlier of (i) the date on which notice of termination of employment is given or received by the Employee Seller and (ii) the date on which the Employee Seller actually ceases to be an employee of the Purchaser or the Company;
“Change of Control Payments” means any compensation, bonuses, profit sharing, severance or other termination payments or benefits, retention payments, ‘phantom stock agreements’, stock-based or phantom equity compensation items, and other similar payments or benefits owed to the Workers, Key Employees and Employee Sellers, former employees, shareholders, formers shareholders or contractors of the Company that are triggered in connection with the Transaction following the Closing Date and the employer portion of any Taxes resulting from such payments or benefits;
“Claim” means any Warranty Claim or Indemnity Claim;
“Closing” means closing of the sale and purchase of the Closing Shares under this Agreement;
“Closing Accounts” means the accounts prepared in accordance with Part 1 of Schedule 6 (Rules for Preparation of Closing Accounts);
“Closing Accounts Adjusting Payment” means any amount owed by the Sellers to the Purchaser pursuant to Clause 4.2(b) and Schedule 7 (Post Closing Financial Adjustments);
“Closing Date” means the latest to occur of (i) the fifth (5th) Business Day after (and excluding) the day on which the last of the Conditions has been satisfied or waived in accordance with this Agreement, (ii) October 1, 2020 or (iii) such other date as the Parties agree in writing;
“Closing Shares” means the aggregate number of Company Shares sold on Closing and set out in column 3 of Schedule 1;
“Code” means the United States Internal Revenue Code of 1986, as amended;
“Company” means Rollic Games Oyun Yazılım ve Pazarlama Anonim Şirketi, further details of which are set out in Schedule 2;
“Company Bookings” means the Company’s revenue calculated on the basis of the Purchaser’s accounting policies and principles consistent with the principles applied by the Purchaser prior
4
to the Closing Date to determine the Company’s revenue, excluding the impact of the change in the Company’s deferred revenue;
“Company EBITDA” means the EBITDA of the Company prepared in accordance with the Applicable Accounting Standards, specifically including amounts attributable to the operations of the Company (consisting of Company Bookings, cost of sales and operating expenses (which shall include all legal expenses, settlements and judgements actually incurred by or on behalf of the Company) but excluding the impact of the change in the Company’s deferred revenue and non-recurring and one time expenses);
“Company EBITDA Margin” means the amount equal to the Company EBITDA divided by the Company Bookings;
“Company IT Assets” means all Software, databases, systems, servers, computers, Hardware, firmware, middleware, networks, data communications lines, routers, hubs, switches and other information technology or communication equipment used in the operation of the business of the Company;
“Company Shares” means all the issued and outstanding shares of the Company as at the date of this Agreement, together with all issued and allocated option rights (whether vested or unvested), convertible securities or any other rights to acquire shares (or interests in shares) in the Company;
“Conditions” means the conditions referred to in Clause 3 (Conditions);
“Connected Person” means, in relation to an Undertaking:
|
(c) |
any trust established by or for the benefit of a Controlling Person or a member of a Controlling Person’s Family; |
|
(f) |
any Undertaking (other than the Company) of which a Controlling Person or a member of a Controlling Person’s Family is a director or equivalent officer; and |
any nominee, trustee or agent or any other person acting on behalf of any person referred to in in this definition;
“Continuing Provisions” means Clause 1 (Interpretation), Clause 12 (Sellers’ Warranties), Clause 13 and Schedule 5 (Sellers’ Limitations on Liability), Clause 18 (Confidentiality), Clause 19 (Announcements), Clause 20 (No Assignment), Clause 22 (Entire Agreement),
5
Clause 23 (Severance and Validity), Clause 24 (Variations), Clause 25 (Remedies and Waivers), Clause 27 (Third Party Rights), Clause 28 (Payments), Clause 29 (Costs and Expenses), Clause 31 (Default Interest), Clause 32 (Notices), Clause 34 (Governing Law and Jurisdiction), Clause 35 (Agent for Service of Process) and Clause 36 (Sellers’ Representative), all of which shall continue to apply after the termination of this Agreement pursuant to Clause 3.6 (Conditions), Clause 7.5(c) (Closing) and 7.6(c) (Closing) or Clause 12.11 (Sellers’ Warranties) without limit in time;
“Control” means, in relation to a person, any person who:
|
(a) |
holds or controls, directly or indirectly, a majority of the voting rights exercisable at shareholder meetings (or the equivalent) of that person; or |
|
(c) |
has, directly or indirectly, the ability to direct or procure the direction of the management and policies of that person, whether through the ownership of shares, by contract or otherwise; or |
|
(d) |
has the ability, directly or indirectly, whether alone or together with another, to ensure that the affairs of that person are conducted in accordance with his or its wishes, |
and the terms “Controlling” and “Controlled” shall be construed accordingly and any two or more persons acting together to secure or exercise Control of another person shall be viewed as Controlling that other person;
“Controller” means any entity that, alone or jointly with others, determines the purposes for which, and means by which, Personal Data are Processed;
“Data Protection Laws” means: (a) all laws applicable to the Processing of Personal Data, including, but not limited to, Regulation (EU) 2016/679, EU Directives 95/46/EC, 2002/58/EC and 2009/136/EC (each as implemented into the national laws of EU Member States and the UK), Turkish Personal Data Protection Law numbered 6698 and its secondary legislation, Federal Trade Commission Act of 1914, Children’s Online Privacy Protection Act of 1998, and California Consumer Privacy Act of 2018; and (b) all formal guidance and codes issued by any EU or UK Data Protection Authority (including guidance and codes issued by the Article 29 Working Party, the European Data Protection Board and the European Data Protection Supervisor), all formal guidance issued by Turkish Personal Data Protection Authority, all guidance and regulations issued by applicable United States federal Authorities (including, but not limited to, the Federal Trade Commission) and applicable state Authorities (including, but not limited to, any state attorney general), each to the extent in force, implemented, and applicable, and each as amended, consolidated or replaced from time to time;
“Data Room” means the electronic file hosting facility operated by [***] and comprising the actual copies of documents and other information relating to the Business and the Company made available to the Purchaser’s Group and its advisers, as recorded in a set of two (2) non-rewritable USBs delivered on the date hereof to the Purchaser’s Lawyers;
“Data Subject” means an individual who is the subject of the relevant Personal Data;
“Debt” means the aggregate of:
6
|
commercial paper, finance leases or similar) owed to any banking, financial, acceptance credit, lending or other similar institution or organisation; |
|
(b) |
all indebtedness of the Company for unsatisfied deferred purchase consideration in respect of shares, assets or businesses owed to any person that is not a member of the Company; and |
“Designated Bank Account” means the relevant bank account details notified by the relevant Seller to the Purchaser in writing by no later than three (3) Business Days before the Closing Date and the Step-In Closing (to the extent the existing details have changed);
“Disclosed” means fairly disclosed with sufficient particularity in such a manner and in such detail as to enable the Buyer to make a reasonably informed identification of the nature and scope of the fact, matter or circumstance concerned and specifically disclosed in the Disclosure Letter and the Disclosure Letter Update;
“Disclosure Letter” means the letter of today’s date from the Sellers to the Purchaser in the agreed terms and delivered to the Purchaser containing disclosures against the Operational Warranties;
“Draft Disclosure Letter Update” means the draft letter from the Sellers delivered to the Purchaser no later than 7 (seven) days prior to the Closing Date of any action, situation, circumstance or event occurring between the date hereof and Closing and which is a draft update to the matters previously Disclosed in the Disclosure Letter;
“Disclosure Letter Update” means the letter from the Sellers delivered to the Purchaser on the Closing Date in the same form and similar content of the Draft Disclosure Letter Update;
“Draft Closing Accounts” has the meaning given in paragraph 1.1, Part 3 of Schedule 6 (Preparation, Delivery and Agreement);
“EBITDA” means with respect to the Company, the earnings before interest, corporate income taxes, depreciation and amortisation of intangible assets (excluding any amortisation of prepaid developer costs) excluding (i) extraordinary items as defined by Purchaser’s accounting policies under U.S. generally accepted accounting principles; and (ii) all gains and losses due to exchange rate movements; all of which determined in accordance with the Applicable Accounting Standards, for the avoidance of doubt, sales tax, employer payroll taxes and other corporate non-income taxes are to be included as operating expenses or deducted from Company Bookings for purposes of computing EBITDA;
“Economic Sanctions Law” means economic or financial sanctions, restrictive measures, trade embargoes or export control laws imposed, administered or enforced from time to time by any Sanctions Authority;
“Employee Sellers” means the Sellers who are employed by the Company on the Closing Date;
“Employee Seller Employment Agreements” means the employment agreement amendments, which include a minimum employment term of five (5) years from the Closing Date and such other terms as agreed by the Purchaser with the Employee Sellers, in the agreed terms to be entered into on Closing between the Company and each of the Employee Sellers;
“Encumbrance” means any pledge, charge, lien, mortgage, debenture, hypothecation, security interest, pre‑emption right, option, claim, equitable right, power of sale, pledge, retention of title, right of first refusal or other third party right or security interest of any kind or an agreement, arrangement or obligation to create any of the above;
7
“Environment” means all or any of the following media (alone or in combination): air (including the air within buildings and the air within other natural or man‑made structures whether above or below ground); water (including water under or within land or in drains or sewers); soil and land and any ecological systems and living organisms supported by these media;
“Environmental Authority” means any legal person or body of persons (including any government department or government agency or court or tribunal) having jurisdiction to determine any matter arising under Environmental Law and/or relating to the Environment;
“Environmental Law” means all applicable laws, statutes, regulations, statutory guidance notes and final and binding court and other tribunal decisions of any relevant jurisdiction whose purpose is to protect, or prevent pollution of, the Environment or to regulate emissions, discharges or releases of Hazardous Substances into the Environment, or to regulate the use, treatment, storage, burial, disposal, transport or handling of Hazardous Substances, and all by‑laws, codes, regulations with any of therein, decrees or orders issued or promulgated or approved under or in connection with any of them;
“Environmental Permit” means any licence, approval, authorisation, permission, notification, waiver, order or exemption, which is issued, granted or required under Environmental Law, which is required for the operation of the business of the Company as it has been operated in the five (5) years before the date of this Agreement;
“Escrow Account” means the interest bearing deposit account to be opened in the name of the Escrow Agent and operated in accordance with the Escrow Agreement;
“Escrow Agreement” means the escrow agreement to be entered into on or around the date of this Agreement between the Escrow Agent, the Purchaser and the Sellers;
“Escrow Amount” means the amount of US$16,000,000 (sixteen million) and all interest accrued on such amount in the Escrow Account;
“Estimated Debt” means (i) the aggregate Debt estimated by the Sellers in good faith to be owed by the Company as at 9am CET on the Closing Date; (ii) all Change of Control Payments; and (iii) all Transaction Expenses, as notified to the Purchaser in writing not less than (ten) 10 Business Days prior to Closing, supported by such evidence (provided to the Purchaser in writing together with the notification) as is necessary to enable the Purchaser to understand and assess the reasonableness of the estimated Debt figure;
“Estimated Working Capital” means the Working Capital estimated by the Sellers in good faith to be held by the Company as at 9am CET on the Closing Date, as notified to the Purchaser in writing not less than (ten) 10 Business Days prior to the Closing, supported by such evidence (provided to the Purchaser in writing together with the notification) as is necessary to enable the Purchaser to understand and assess the reasonableness of the estimated Working Capital figure;
“Existing Employee Seller Employment Agreements” means the existing employment agreements entered into between the Company and each of the Employee Sellers;
“Existing Shareholders’ Agreement” means the shareholders’ agreement relating to the Company, dated December 13, 2018;
“Expert” has the meaning given in paragraph 2.1, Part 3 of Schedule 6 (Preparation, Delivery and Agreement);
“Finance Director” means [***], or his successor;
“Fundamental Warranties” means the Warranties set out in Part 1 of Schedule 4 (Warranties);
8
“Fundamental Warranty Claim” means any claim for breach of a Fundamental Warranty;
“Good Leaver” means any Employee Seller who becomes a Leaver by reason of: (i) his or her termination of employment by the Company other than as a result of a Cause Event; or (ii) his or her resignation for a Good Reason;
“Good Reason” means any of the following actions without the relevant Employee Seller’s prior written consent (as applicable): (a) the Company requiring the relevant Employee Seller (as applicable) to relocate to a facility or location more than 50 kilometres from the location at which he or she was primarily located immediately prior to such requirement; or (b) any significant reduction in the relevant Employee Seller (as applicable) base salary or target bonus or benefits (other than a reduction consented to by such Employee Seller) (for the avoidance of doubt, this excludes equity-based awards granted by the Purchaser or one-time payments or awards paid or granted in connection with the Transaction); or (c) the assignment of any duties materially inconsistent in any respect with the relevant Employee Seller (as applicable) role and responsibilities or any other action by the Company resulting in a material detriment to the participant’s position, authority, duties or responsibilities; or (d) any other circumstances constituting “haksız fesih” in Turkey of the relevant Employee Seller which shall be a termination which violates Article 18 or Article 25 of the Turkish Labor Law; or (e) any dissolution or liquidation of the Company; or (f) any material breach by the Purchaser of this Agreement or any material breach by the Purchaser or the Company of the Employee Seller Employment Agreement, provided, in each case, that the relevant Employee Seller provides the Company with written notice of the existence of the change, breach or condition described above within 30 days of the relevant Employee Seller becoming aware of its occurrence, and the change, breach or condition is not cured (if curable) within 30 days after the Purchaser’s receipt of such written notice (such 30-day period the “Company Cure Period”), and the relevant Employee Seller ethics(as applicable) actually terminates, or serves notice to terminate, employment for Good Reason within 10 days after the expiration of the Company Cure Period (as applicable);
“Governmental Authority” means any federal, national, supranational, state, provincial, local or similar government, governmental, regulatory or administrative authority, branch, agency or commission or any court, tribunal, or arbitral or judicial body;
“Harmful Code” means “back door,” “drop dead device,” “time bomb,” “Trojan horse,” “virus,” or “worm” (as such terms are commonly understood in the software industry) or any similar mechanism or device, or any other code designed or intended to have, or intended to be capable of performing, any of the following functions: (a) disrupting, disabling, harming, or otherwise impeding in any manner the operation of, or providing unauthorised access to, a computer system or network or other device on which such code is stored or installed; or (b) damaging or destroying any data or file, in each case, without the user’s consent;
“Hazardous Substances” means any wastes, pollutants, contaminants and any other natural or artificial substance (whether in the form of a solid, liquid, gas or vapour) which is capable of causing harm or damage to the Environment or a nuisance to any person;
“Indemnities” means the indemnities given by the Sellers in Clause 14 (Specific Indemnities);
“Indemnity Claim” means any claim under the Indemnities or the Tax Covenant;
9
“Initial Consideration” has the meaning given to it in Clause 4.1;
“Intellectual Property Right” means (i) patents, all reissues, divisions, renewals, extensions, continuations and continuations in part thereof, rights in inventions and invention disclosures and utility models, (ii) trade marks, service marks, trade and business names, trade dress, rights in get-up, goodwill, any right to sue for passing-off, rights in and to domain names, (iii) registered designs, design rights, (iv) copyright and neighbouring rights, rights in Software, works of authorship (whether copyrightable or not) and mask works, (v) database rights, (vi) rights in Business Information, trade secrets, know-how and confidential information of all kinds and (vii) any other intellectual property rights or industrial property rights or proprietary rights which may subsist now or in the future, in each case of (i) through (vii) in any part of the world and whether or not registered, issued or granted, or subject to a pending application for registration, issuance or grant, and including, any registration of and application (and rights to apply) for, registration, issuance or grant, or renewals or extensions of, and all rights to claim priority from, any of the foregoing;
“Interest Rate” means interest at the rate of two per cent. (2%) per annum above the LIBOR, calculated and compounded quarterly, provided if the LIBOR is negative then it should be considered as zero for the purposes of calculation of the Interest Rate;
“IT Contracts” means all written and oral agreements and arrangements relating to any of the Company IT Assets or under which any third party provides or is obliged to provide any element of, or services relating to, any of the Company IT Assets;
“Key Employee” means each of [***];
“Key Employee Employment Agreements” means the employment agreements or employment agreement amendments, which include post termination non-competition and non-solicitation restrictive covenants, in the agreed terms to be entered into on Closing between the Company and each of the Key Employees;
“Knowledge” means (i) with respect to the Employee Sellers, such Employee Seller’s knowledge and the knowledge that such Employee Seller would reasonably be expected to have obtained if such Employee Seller had made all reasonable enquiries of the Key Employees, (ii) with respect to the other Sellers, such Seller’s knowledge, and (iii) with respect to all Sellers, including any knowledge such Seller has obtained (including through the Connected Person of such Seller) as a result of having served as or appointed a director to the Board (if applicable);
“Leased Properties” means the leased land and premises currently owned, used or occupied by the Company;
“Leaver” means an Employee Seller in relation to whom a Cessation Date has occurred;
“LIBOR” means the London Inter-Bank Offered Rate administered by ICE Benchmark Administration Limited (or any other person who takes over the administration of that rate) giving an average rate at which a leading bank can obtain unsecured funding for a given period in a given currency in the London market displayed on pages LIBOR01 or LIBOR 02 of the Thomson Reuters screen (or on the appropriate page of such other information service which publishes that rate from time to time in place of Thomson Reuters);
“Long Stop Date” means October 31, 2020 or such other date as the Parties may agree in writing;
“Loss” or “Losses” means any and all, direct or indirect or consequential (in each case only to the extent reasonably foreseeable) losses, liabilities (including Tax), actions and claims, including charges, costs, damages, fines, penalties, interest and all legal and other professional fees and expenses (as long as reasonable and documented) including, in each case, all related Taxes, but in each case excluding any punitive, exemplary or special damages;
10
“Management Accounts” means (i) the unaudited balance sheet of the Company as of 31 December 2019 and the unaudited profit and loss account of the Company for the period ended on 31 December 2019, (ii) the income statement for the 12 months prior ended on 31 December 2019, (iii) the balance sheet as of 30 June 2020 and the income statement for the six months period ended on 30 June 2020, each as prepared in accordance with the Applicable Accounting Standards;
“Material Contract” means the agreements set out in paragraph 4.2 of Schedule 4 (Warranties);
“Materiality Threshold” means [***];
“Non‑Acceptance Notice” has the meaning given in paragraph 1.2(b), Part 3 of Schedule 6 (Preparation, Delivery and Agreement);
“Non-Exclusive Software Licences” means non-exclusive licences to third-party software that:
|
(a) |
is not incorporated into, or used in the development, testing, distribution, maintenance, or support of, any Business Product and that is not otherwise material to the Business; |
|
(b) |
is licensed solely in executable or object code form, in non-customized form, and solely for the Company’s internal use; and |
“Open Source Code” (a) means any software (including libraries) that (i) consists of, contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software or open source software or (ii) requires as a condition of its use, modification or distribution that it, or other software incorporated into it, linked with it, distributed with it, or derived from it, be disclosed or distributed in source code form or made available at no charge; and (b) includes any and all software (including libraries) licensed under the GNU General Public License (GPL), the GNU Lesser/Library GPL, the Mozilla Public License, or any other licence listed at www.opensource.org;
“Operational Warranties” means the Warranties set out in Part 2 of Schedule 4 (Warranties);
“Operational Warranty Claim” means any claim for breach of an Operational Warranty;
“Parent Undertaking” means an Undertaking which, in relation to another Undertaking, a “Subsidiary Undertaking”:
|
(b) |
is a member of the Undertaking and has the right to appoint or remove a majority of its board of directors; or |
|
(c) |
has the right to exercise a dominant influence over the Undertaking, by virtue of provisions contained in its constitutional documents or elsewhere; or |
|
(d) |
is a member of the Undertaking and controls alone, pursuant to an agreement with the other shareholders or members, a majority of the voting rights in the Undertaking, |
and an Undertaking shall be treated as the Parent Undertaking of any Undertaking in relation to which any of its Subsidiary Undertakings is, or is to be treated as, the Parent Undertaking, and “Subsidiary Undertaking” shall be construed accordingly;
“Party” means a party to this Agreement and “Parties” shall mean the parties to this Agreement;
“Personal Data” means any information relating to an identified or identifiable natural person;
11
“Personal Data Breach” means a breach of security leading to the accidental or unlawful destruction, loss, alteration, unauthorised disclosure of, or access to, Personal Data transmitted, stored or otherwise Processed;
“Privacy and Data Security Policies” means: (1) all of the privacy policies and procedures of the Company; and (2) all of the policies and procedures of the Company relating to data security; that have been adopted and implemented at any time, whether such policies or procedures are formal or informal or written or unwritten;
“Processing” means any operation or set of operations which is performed upon Personal Data, whether or not by automatic means, including but not limited to: collection, recording, organization, storage, adaptation or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, blocking, erasure or destruction;
“Processor” means any person or entity that Processes Personal Data on behalf of a Controller (other than an employee of the Controller);
“Prohibited Person” means any person, organisation or vessel: (i) listed on, or owned or controlled (as such terms, including any applicable ownership and control requirements, are defined and construed in the applicable Economic Sanctions Law or in any related official guidance) by a person or organisation listed on, a Sanctions List; (ii) a government of a Sanctioned Territory; (iii) an agency or instrumentality of, or an entity directly or indirectly owned or controlled by, a government of a Sanctioned Territory; (iv) resident or located in, operating from, or incorporated under the laws of, a Sanctioned Territory; or (v) otherwise a target of any Economic Sanctions Law, or is acting on behalf of any of the persons listed in paragraphs (i) to (v) above, for the purpose of evading or avoiding, or having the intended effect of or intending to evade or avoid, or facilitating the evasion or avoidance of any Economic Sanctions Law;
“Properties” means the Leased Properties;
“Pro Rata Portion” means, in relation to a Seller, the percentage figure specified opposite that Seller’s name in column 4 of Schedule 1 (The Sellers);
“Purchaser’s Common Stock” means the Class A common stock, par value US$0.00000625 per share of the Purchaser;
“Purchaser’s Common Stock Price” means the volume-weighted average closing price per share rounded to four decimal places of the Purchaser’s Common Stock as reported on The NASDAQ Global Select Market during the thirty (30) consecutive trading day period immediately prior to the determination of the Closing Accounts in accordance with Schedule 6 (Closing Accounts) and in respect of the Closing;
“Purchaser’s Group” means the Purchaser, its Subsidiary Undertakings, any Parent Undertaking of the Purchaser and all other Subsidiary Undertakings of any such Parent Undertaking as the case may be from time to time (and including, after Closing, the Company);
“Purchaser’s Lawyers” means White & Case LLP of 5 Old Broad Street, London EC2N 1DW and GKC Partners of Ferko Signature, Büyükdere Caddesi No: 175 Kat: 10, 34394 Levent, İstanbul;
“Registered Business IP Right” means any Intellectual Property Right that is the subject matter of a grant, issuance or registration, or of an application for any of the foregoing, and in which the Company has or purports to have an ownership interest of any nature (whether exclusively, jointly with another person, or otherwise);
“Regulation” means Council Regulation (EC) 139/2004;
12
“Related Persons” has the meaning given in Clause 22.4;
“Relevant Party’s Group” means: in relation to the Purchaser, the Purchaser’s Group; in relation to a Seller, the Sellers and their Related Persons;
“Relief” means any relief, loss, allowance, credit, deduction, exemption or set off for the purposes of Tax or any right to repayment of Tax, and:
|
(a) |
any reference to the use or set off of a Relief shall be construed accordingly and shall include the use of set-off in part; and |
|
(b) |
any reference to the loss of a Relief shall include the absence, non-existence or cancellation of any such Relief, or to such Relief being available only in a reduced amount; |
“RSUs” has the meaning given in Clause 9.1;
“Sanctioned Territory” means any country or other territory subject to a general export, import, financial or investment embargo under any Economic Sanctions Law, which, as of the date of this Agreement, include Crimea, Cuba, Iran, North Korea, Sudan and Syria;
“Sanctions” means any laws or regulations relating to economic or financial sanctions or trade embargoes or related restrictive measures imposed, administered or enforced from time to time by a Sanctions Authority;
“Sanctions Authority” means: (i) the United States; (ii) the United Nations Security Council; (iii) the European Union or any member state thereof; (iv) the United Kingdom; or (v) the respective governmental institutions of any of the foregoing including, without limitation, OFAC, the U.S. Department of Commerce, the U.S. Department of State, any other agency of the U.S. government, and Her Majesty’s Treasury;
“Sanctions List” means any of the lists of designated or sanctioned individuals or entities (or equivalent) issued by any Sanctions Authority, each as amended, supplemented or substituted from time to time, including, without limitation, the List of Specially Designated Nationals and Blocked Persons, Foreign Sanctions Evaders List, Sectoral Sanctions Identifications List, and List of Persons Identified as Blocked Solely Pursuant to Executive Order 13599, each administered by OFAC; the Consolidated List of Persons, Groups and Entities Subject to EU Financial Sanctions; and the Consolidated List of Financial Sanctions Targets in the UK, each administered by Her Majesty’s Treasury;
“Sellers’ Lawyers” means Çalışkan Okkan Toker of Krizantem Sokak No. 52, 34330, Levent Beşiktaş, İstanbul;
“Sellers’ Representative” means the person designated by each of the Sellers to serve as its representative in accordance with Clause 36 (Sellers’ Representative);
“Software” means any and all (i) computer code and computer programs, including all application programming interfaces (APIs), whether in Source Code, object code or other form, (ii) electronic databases and other electronic compilations and collections of data and information, and all data and information included in any of the foregoing, (iii) screens and user interfaces; (iv) descriptions, flow-charts, diagrams, user requirements, specifications, algorithms and other materials used to design, plan, organize and develop any of the foregoing, and (v) source code annotations and other documentation (including user, installation and other manuals) relating to any of the foregoing;
“Source Code” means software programming code (including flash .swf source code, C++ server source code and JAVA source code) expressed in human readable language;
13
“Statutory Books” means all statutory books and records of the Company, including, (i) for the Company: journal (yevmiye defteri), book of final entry (defter-i kebir), inventory book (envanter defteri), fixsed asset ledger (amortisman defteri), general assembly resolution book (genel kurul karar defteri), board of directors resolution book (yönetim kurulu karar defteri), share book (pay defteri); and (ii) for the Subsidiary: shareholders’ register, special register, board of directors and shareholders’ resolutions, annual reports, and financials;
“Step-In Closing” means the closing of the sale and purchase of the Step-In Closing Shares;
“Step-In Closing Date” means 9 July 2021, or such later date as agreed between the Purchaser and the Employee Sellers;
“Step-In Closing Shares” means, in relation to a Seller, those Company Shares set out beside that Seller’s name in Column 5 of Schedule 1 (The Sellers);
“Step-In Consideration” means US$60,000,000 (sixty million) paid in accordance with Clauses 4.5 and 4.6 (Consideration);
“Step-In Deferred Payment Date” means 28 February 2022, or such later date as agreed between the Purchaser and the Employee Sellers;
“Step-In Deliverables” has the meaning given to it in Clause 8.4;
“Subsidiary Undertaking” means any Undertaking in relation to which another Undertaking is its Parent Undertaking;
“Target Working Capital” means [***];
“Tax” or “Taxation” means: (i) any form of tax, levy, impost, or duty, including net income, alternative or add-on minimum, gross income, estimated, gross receipts, sales, use, ad valorem, VAT, digital, advertising, entertainment, transfer, franchise, fringe benefit, capital stock, profits, license, registration, resource utilization support fund, special consumption, special transaction, banking and insurance transaction, recycling contribution fee, withholding, payroll, social security, employment, unemployment, disability, excise, severance, stamp, occupation, premium, property (real, tangible, or intangible), environmental or windfall profit tax, custom duty or other tax, governmental fee or other similar assessment or charge, together with any interest or any penalty, addition to tax, or additional amount (whether disputed or not) imposed, collected or assessed by, or payable to, a Tax Authority; (ii) any liability for the payment of any amounts of the type described in clause (i) of this sentence as a result of being a member of an affiliated, consolidated, combined, unitary or aggregate group for any period; and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) of this sentence as a result of being a transferee of or successor to any person or as a result of any contract (other than an ordinary commercial agreement);
“Tax Authority” means any government, federal, state, local, or foreign tax service, agency, municipality, customs office, competition authority, social security institution, office, commission, department, bureau, court or similar organization with authority to assess, assert, or otherwise impose Tax or collect unpaid Taxes of any Party;
“Tax Claim” means any Tax Covenant Claim or Tax Warranty Claim;
“Tax Covenant” means the tax covenant set out in Schedule 9;
“Tax Covenant Claim” means any claim by the Purchaser under the Tax Covenant;
“Tax Return” means any return, declaration, report, claim for refund, information return or other document (including any related or supporting schedule, statement or information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes
14
or the administration of any laws or administrative requirements relating to any Taxes, and including any amendment thereof;
“Tax Warranties” means the Warranties set out in paragraph 23 of Schedule 4 (Warranties);
“Tax Warranty Claim” means any claim for breach of a Tax Warranty;
“TCC” means the Turkish Commercial Code No. 6102 (Türk Ticaret Kanunu) published in the Official Gazette dated February 14, 2011 and numbered 27846;
“Termination Agreement” means the termination agreement to be entered into among each of the Sellers at the Closing pursuant to which the Existing Shareholders' Agreement shall be terminated;
“Total Purchase Consideration” means the aggregate of the Initial Consideration and the Step-In Consideration;
“Transaction” has the meaning given to it in Recital (B);
“Transaction Documents” means this Agreement, the Disclosure Letter, the Escrow Agreement and the Disclosure Letter Update;
“Transaction Expenses” means any fees, costs and expenses incurred or agreed to be incurred by the Company, including: (i) all termination, balloon or similar payments resulting from early termination of contracts or outstanding debt as a result of or in connection with the Transaction; (ii) all payments required to obtain consents, waivers, terminations or amendments under any agreement of the Company as a result of or in connection with the Transaction; (iii) the employer portion of any taxes and any withholding taxes resulting from the cash out of share options and other compensatory payments in connection with the Transaction; (iv) all premiums and other amounts payable to obtain tail coverage under the Company’s existing D&O insurance policy; (v) any other similar expenses that remain unpaid as a result of the transactions contemplated by this Agreement; and (vi) any and all costs, Taxes that the Company will pay in connection with the Transaction, including but not limited to payables to advisors and/or bonus payments to the Workers, Key Employees and the Employee Sellers and/or any other employees of the Company;
“Transfer Taxes” means all transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees (including any penalties and interest);
“Undertaking” means a body corporate or partnership or an unincorporated association carrying on trade or business;
“VAT” means any Tax levied by reference to added value or any sales or turnover tax of a similar nature;
“Warranties” means the representations and warranties referred to in Clause 12.1 (Sellers’ Warranties) and set out in Schedule 4 (Warranties);
“Warranty Claim” means any claim for breach of Warranty;
“Workers” means current or former employees, directors, officers, workers, consultants and self-employed contractors of the Company; and
“Working Capital” means the aggregate working capital of the Company, being the aggregate of the Company’s Cash, current accounts receivables, advances paid, pre-paid VAT and current liabilities (including any pre-Closing taxes and accounts payable but excluding any Debt).
15
1.4 |
Any reference to “writing” or “written” means any method of reproducing words in a legible and non‑transitory form (excluding, for the avoidance of doubt, email). |
1.6 |
References to a “company” include any company, corporation or other body corporate wherever and however incorporated or established. |
1.8 |
The table of contents and headings are inserted for convenience only and do not affect the construction of this Agreement. |
1.9 |
Unless the context otherwise requires, words in the singular include the plural and vice versa and a reference to any gender includes all other genders. |
1.10 |
References to Clauses, paragraphs and Schedules are to clauses and paragraphs of, and schedules to, this Agreement. The Schedules form part of this Agreement. |
1.13 |
If any liability of a Seller is, or becomes illegal, invalid or unenforceable in any respect this shall not affect or impair the liability of the other Sellers under this Agreement. |
1.15 |
In relation to a Claim, the date of such conversion shall be the date of receipt of notice of that Claim in accordance with Schedule 4. |
1.17 |
This Agreement shall be binding on and be for the benefit of the successors and permitted assignees of the Parties. |
16
that the indemnified party or recipient of the Payment (as applicable) reasonably determines, acting in good faith, the Payment, or matter or thing giving rise to the Payment Obligation, is reasonably expected to give rise to at any time up to the twenty four (24) months after the end of the accounting period in which the matter or thing giving rise to the Payment Obligation arose. |
2.2 |
At the Step-In Closing, the Purchaser shall purchase the Step-In Closing Shares with all rights attaching to them as at the Step-In Closing Date and each of the Employee Sellers shall transfer full legal and beneficial title to its Step-In Closing Shares to the Purchaser free from all Encumbrances on the terms of this Agreement. |
2.3 |
Each of the Sellers hereby waives and shall procure the waiver of any rights which have been conferred on it as may affect the transactions contemplated by this Agreement (other than its rights pursuant to this Agreement) including, without limitation: |
|
(a) |
any rights of redemption, pre-emption, first offer, first refusal, drag-along, tag-along or transfer, pursuant to the Existing Shareholders’ Agreement, it may have with respect to the Company Shares; and |
|
(b) |
any rights to acquire any Company Shares, |
in each case at Closing.
Each of the Employee Sellers hereby waives and shall procure the waiver of any rights which have been conferred on it as may affect the transactions contemplated by this Agreement (other than its rights pursuant to this Agreement) including, without limitation:
|
(c) |
any rights of redemption, pre-emption, first offer, first refusal, drag-along, tag-along or transfer it may have with respect to the Company Shares; and |
|
(d) |
any rights to acquire any Company Shares, |
at the Step-In Closing.
|
(a) |
Closing Shares unless the purchase of all of the Closing Shares is completed simultaneously at Closing; |
|
(b) |
Step-In Closing Shares unless the purchase of all of the Step-In Closing Shares is completed simultaneously on the Step-In Closing, |
in each case in accordance with the terms of this Agreement.
2.5 |
The Purchaser hereby acknowledges and undertakes to pursue the Transaction and continue to uphold the terms of this Agreement (including the payment obligations under Clause 4 (Consideration) in the event of a change of Control of the Purchaser arising on or after the date hereof. |
17
3.1 |
The obligations of the Purchaser and the Sellers to complete the sale and purchase of the Closing Shares are in all respects conditional on the satisfaction (or waiver, as the case may be) of: |
3.2 |
The Purchaser may waive in whole or in part the Conditions set out at Clause 3.1(a) and (b) by notice in writing to the Sellers. |
3.7 |
For the avoidance of doubt, the Step-In Closing is not subject to any conditions. |
|
(b) |
less the aggregate of (i) the Actual Debt; (ii) all Change of Control Payments; and (iii) all Transaction Expenses; |
|
(c) |
plus the amount by which the Actual Working Capital exceeds the Target Working Capital or less the amount by which the Actual Working Capital is less than the Target Working Capital, |
18
|
(together, the “Initial Consideration”).
4.3 |
Payments from the Escrow Account shall be determined in accordance with the provisions of 10 (Escrow Account). |
4.5 |
For the sale of the Step-In Closing Shares, at the Step-In Closing Date, the Purchaser shall pay to the Employee Sellers US$20 million (twenty million) in cash and on the Step-In Deferred Payment Date, the Purchaser shall pay the remaining portion of the Step-In Consideration, being US$40 million (forty million), in cash. |
4.6 |
For the avoidance of doubt, the payment of the Step-In Consideration to the Employee Sellers shall not be conditional or dependent upon whether any Employee Seller continues or ceases to be employed by the Company or the Purchaser following Closing. |
19
|
(c) |
creating, issuing, redeeming or granting any option or right to subscribe in respect of any share or loan capital or other securities; |
|
(d) |
entering into, modifying or terminating any Material Contract unless otherwise required by applicable law or otherwise than in the ordinary course of business; |
|
(h) |
making any material change in the nature, organisation or geographic scope of how and where its Business if conducted; |
|
(i) |
discontinuing or ceasing to operate any part of its business; |
|
(j) |
making any variation to the terms and conditions of employment of an Employee Seller, a Key Employee or of any employee earning US$[***] per annum, including any change in salary, benefits, job title or responsibilities or reportings, and granting or amending any existing rights to severance benefits, stay pay or termination pay; |
|
(m) |
dismissing an Employee Seller or a Key Employee; |
|
(n) |
dismissing any other employee earning US$[***] per annum or more otherwise than in the ordinary course of business; |
|
(o) |
borrowing money or incurring any indebtedness otherwise than in the ordinary course of business (and within limits subsisting at the date of this Agreement); |
|
(p) |
granting any loan, advance or capital contribution to any other person other than those to be granted to the current employees not exceeding in aggregate US$[***]; |
20
|
|
(r) |
acquiring any share or other interest in any person or other venture or acquiring any business carried on by any person; |
|
(t) |
creating any Encumbrance or redeeming or releasing any Encumbrance or giving any guarantees or indemnities; |
|
(x) |
settling or compromising any Tax Claims, liabilities, disputes, investigations or audits with a Tax Authority; |
|
(z) |
taking any steps of other action which could result in either a change to its residence for Tax purposes and/or in establishing a taxable presence in any jurisdiction outside of its jurisdiction of incorporation; |
|
(aa) |
taking any steps or other action which could reduce or otherwise adversely impact the availability, utility or quantum of any Relief; |
|
(bb) |
take any step or other action (including making any admission to a Tax Authority) which is inconsistent with past practice which could increase any liability to Tax; |
|
(cc) |
take any step or other action (including making any admission to a Tax Authority) which could result in any liability to Tax arising (or being deemed to arise) in the post-Closing period rather than the pre-Closing period; |
|
(ff) |
consenting to an extension or waiver of the limitations period applicable to any Tax Claim or assessment; |
21
|
provided that the prior written consent of the Purchaser shall be deemed obtained if the Purchaser does not respond to the Sellers’ request for consent within seven (7) Business Days of receipt in accordance with Clause 32. For the purposes of this Clause, each of the Purchaser’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Legal Officer, Chief Accounting Officer, Chief People Officer or President of Publishing or such other person notified by the Purchaser to the Sellers (or the Sellers’s Representative) in accordance with Clause 32 shall have the authority to act on behalf of the Purchaser.
|
(a) |
maintaining the assets and the properties of the Company in good operating condition and repair and continue normal maintenance; |
|
(d) |
maintaining all registrations of each of the Company’s Intellectual Property Rights and any applications thereof; and |
6.3 |
(a)Subject to Clause 6.3(b), from the date of this Agreement until Closing the Sellers shall procure that the Purchaser and its Agents shall be allowed: |
|
(i) |
reasonable access to, and to take copies of (at the Purchaser’s sole expense), the books, records and documents of or relating in whole or in part to the Company; |
|
(i) |
on reasonable prior written notice (where an e-mail would be sufficient) having been provided to the Sellers; |
|
(ii) |
to the extent reasonably required by the Purchaser to plan for the integration of the Company into the Purchaser’s Group; and |
22
|
|
(b) |
any matter expressly permitted by, or necessary for performance of, this Agreement or the Transaction Documents or necessary for Closing; |
|
(d) |
providing information to any regulatory body or government agency or commissioning body in the ordinary course of business; and |
7.2 |
On Closing, the Sellers shall undertake those actions listed in Part 1 and Part 3 of Schedule 3 (Closing Arrangements). |
7.3 |
On Closing, the Purchaser shall undertake those actions listed in Part 2 and Part 3 of Schedule 3 (Closing Arrangements). |
|
(b) |
proceed to Closing as far as practicable (without limiting its rights and remedies under this Agreement); or |
|
(c) |
treat this Agreement as terminated for breach of condition subject to, and on the basis set out in, Clause 17 (Termination). |
|
(a) |
defer Closing (with the provisions of this Clause 7 applying to Closing as so deferred); or |
23
|
(b) |
proceed to Closing as far as practicable (without limiting its rights and remedies under this Agreement); or |
|
(c) |
treat this Agreement as terminated for breach of condition subject to, and on the basis set out in, Clause 17 (Termination). |
7.7 |
The payment of the amounts set out in Clause 4.2 in accordance with paragraph 1, Part 2 and Part 3 of Schedule 3 (Closing Arrangements) shall discharge the obligations of the Purchaser under Clauses 2 (Sale and Purchase) and 4 (Consideration), in each case pertaining to the payment of the Initial Consideration for the Closing Shares, and the Purchaser shall not be concerned with the application of such sum by the Sellers. |
8.2 |
At the Step-In Closing, the Employee Sellers shall undertake those actions listed in Part 4 (Employee Sellers’ Step-In Closing Obligations) of Schedule 3 (Closing Arrangements). |
8.3 |
At the Step-In Closing, the Purchaser shall undertake those actions listed in Part 5 (Purchaser’ Step-In Closing Obligations) of Schedule 3 (Closing Arrangements). |
|
(a) |
defer the Step-In Closing (with the provisions of this Clause 8 (Step-In Closings) applying to the Step-In Closing as so deferred); or |
|
(b) |
proceed to the Step-In Closing as far as practicable (without limiting its rights and remedies under this Agreement). |
8.6 |
If there is a material breach of Clause 8.2 and Part 5 (Purchaser’s Step-In Closing Obligations) of Schedule 3 (Closing Arrangements) on the Step-In Closing (as applicable) the Employee Sellers shall not be obliged to complete the Step-In Closing and may: |
|
(a) |
defer the Step-In Closing (with the provisions of this Clause 8 (Step-In Closings) applying to Closing as so deferred); or |
|
(b) |
proceed to the Step-In Closing as far as practicable (without limiting its rights and remedies under this Agreement). |
8.7 |
The payment of the Step-In Consideration in accordance with Schedule 3 (Closing Arrangements) shall discharge the obligations of the Purchaser under Clauses 2 (Sale and Purchase) and Clause 4 (Consideration), in each case pertaining to the payment of the Step-In Consideration for the Step-In Closing Shares and the Purchaser shall not be required to concern itself with any subsequent allocation of such amounts between the Sellers. |
24
|
(a) |
any such RSU awards will be granted in accordance with the Purchaser’s standard practices; |
|
(b) |
any such RSU awards shall begin vesting on the 15th day of the following month immediately following Closing; |
|
(c) |
any such RSU awards shall vest [***]; and |
provided that any unvested RSU awards granted to any Employee Seller in connection with the transactions contemplated by this Agreement shall accelerate in full upon a person becoming a Good Leaver.
25
|
|
(d) |
the Purchaser has, and will have at the time of payment, immediately available on an unconditional basis (subject only to Closing) the necessary cash resources to pay the Initial Consideration. |
11.2 |
If a material breach of a Purchaser’s warranty occurs prior to Closing, the Sellers shall be entitled to treat this Agreement as terminated subject to, and on the basis set out in, Clause 17 (Termination). |
11.3 |
Where the context so requires, references in Clause 11.1 are repeated in respect of the Step-In Closing. |
12.1 |
Each of the Sellers warrants, on a several basis and in respect of itself only, to the Purchaser that: |
|
(a) |
each of the Fundamental Warranties is true and accurate on the date hereof and will continue to be true and accurate in all material respects on Closing; and |
|
(b) |
each of the Operational Warranties is true and accurate on the date hereof and will continue to be true and accurate in all material respects on Closing. |
12.5 |
No Disclosure relating to any possible violation of any agreement or Applicable Law shall be construed as an admission that any such violation exists or has actually occurred. |
26
12.6 |
The Purchaser shall be entitled to postpone the Closing Date for assessment of the content of the Disclosure Letter Update by a number of days that is equal to the number of days that have lapsed between the Draft Disclosure Letter Update and the Disclosure Letter Update. |
12.7 |
The Sellers shall not and shall procure that the Company shall not do or omit to do anything which would result in any of the Warranties being breached or misleading at any time up to and including Closing. |
12.10 |
Each of the Warranties shall be separate and independent and (unless expressly provided otherwise) shall not be limited by reference to any other Warranty or by anything in this Agreement. |
The liability of the Sellers in respect of a claim under the Warranties shall be limited as provided in Schedule 5 (Sellers’ Limitations on Liability).
|
(a) |
a breach of any of the Warranties, save for a breach of the warranty set out in paragraph 4.1(b) in Schedule 4 (Warranties) on Closing pursuant to the terms of this Agreement; |
|
(b) |
any claims arising out of the disputes as specified in the Annex; and |
|
(c) |
any matter arising out of fraud, intentional misrepresentation or wilful breach of the relevant Seller. |
14.2 |
The Purchaser retains the right to unilaterally deduct from the Escrow Account in accordance with Schedule 8 (Escrow Account) such amounts equal to any payments under Clause 14.1. |
27
following the Closing Date: |
the rights and obligations of the Parties under this Agreement shall cease immediately, save in respect of antecedent breaches and under the Continuing Provisions.
28
17.4 |
If this Agreement is terminated by the Sellers in accordance with Clause 7.6(c) (Closing), the rights and obligations of the Parties under this Agreement shall cease immediately, save in respect of antecedent breaches and under the Continuing Provisions. |
17.5 |
In addition to the circumstances provided in Clause 17.4, the Sellers shall be entitled to terminate this Agreement at any time before Closing by notice in writing to the Purchaser if: |
|
(a) |
in accordance with Clause 11.1 (Purchaser’s Warranties), a material breach of a Warranty occurs prior to Closing; or |
|
(b) |
the Purchaser commits a material breach of any of their other obligations under this Agreement, |
whereupon the rights and obligations of the Parties under this Agreement shall cease immediately, save in respect of antecedent breaches and under the Continuing Provisions.
17.6 |
The Purchaser undertakes to disclose promptly to the Sellers in writing any breach, matter, event, condition, circumstance, fact or omission of which any Purchaser or Related Persons is or becomes aware that may reasonably give rise to a termination right under this Agreement. |
17.7 |
For the avoidance of doubt, to the extent that a breach by any Party of any of its obligations under this Agreement does not limit, restrict, hinder or otherwise obstruct the sale and purchase of the Shares, the other Party shall not be entitled to terminate the Agreement pursuant to Clause 17.2 or 17.5(b). |
18.3 |
A Party may disclose, or permit the disclosure of, information which would otherwise be confidential if and to the extent that it: |
|
(c) |
is required by law or any securities exchange, regulatory or governmental body or Tax Authority; |
|
(d) |
is required in order to manage the Tax Affairs of that Party or other members of the Relevant Party’s Group; |
29
|
|
(e) |
was already in the lawful possession of that Party or its Agents without any obligation of confidentiality (as evidenced by written records); or |
|
(f) |
is in the public domain at the date of this Agreement or comes into the public domain other than as a result of a breach by a Party of this Clause 18, |
provided that prior written notice of any confidential information to be disclosed pursuant to Clause 18.3(b) shall be given to the other Party and their reasonable comments taken into account.
20.2 |
The Purchaser shall be free to assign its rights and obligations under this Agreement to a third party without having to obtain the consent of the Employee Sellers, provided that (i) any assignee agrees to be bound to the terms and conditions of this Agreement (as may be amended from time to time); and (ii) if the Purchaser proposes to assign its obligations this Agreement (including, for the avoidance of doubt, Clause 10 (Post-Closing Undertakings)) as amended from time to time), it shall, prior to such assignment, enter into a guarantee with and in favour of the Employee Sellers, in a form satisfactory to the Employee Sellers (acting reasonably and in good faith, having regard to the relevant circumstances, the identity of the assignee and customary market practice), pursuant to which, amongst other things, the Purchaser will, as principal obligor (A) guarantee to the Employee Sellers the due, punctual and full performance by the assignee of all of the Purchaser’s obligations under this Agreement (including the payment, when due, of any amount payable to the Employee Sellers); (B) in the event of default by the assignee, perform immediately on demand such obligations (including paying any amount which has become due to the Employee Sellers); and (C) indemnify the Employee Sellers, on or after Tax basis, in respect of any failure or delay by the assignee in complying with or discharging any of the obligations under this Agreement assigned to it by the Purchaser. The Purchaser’s guarantee will remain in full force and effect until all of the assigned obligations have been discharged in full and will remain in full force and effect notwithstanding any waiver, amendment or variation to the Agreement. The Parties agree and acknowledge that a change of control of the Purchaser shall not constitute an assignment of the Purchaser’s rights and obligations under this Agreement. |
30
The Parties shall from time to time and at their own cost do, execute and deliver or procure to be done, executed and delivered all such further acts, documents and things necessary in order to give full effect to this Agreement and its rights, powers and remedies under this Agreement.
22.4 |
In this Clause 22, “Related Persons” means, in relation to a Party, members of the Relevant Party’s Group and the Agents of that Party and of members of the Relevant Party’s Group. |
If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, it shall be deemed to be severed from this Agreement and the Parties shall use all reasonable endeavours to replace such provision with one having an effect as close as possible to the deficient provision. The remaining provisions will remain in full force in that jurisdiction and all provisions will continue in full force in any other jurisdiction.
No variation of this Agreement shall be effective unless in writing and signed by or on behalf of the Parties.
25.2 |
No delay or omission by any Party in exercising any right or remedy provided by law or under this Agreement shall constitute a waiver of such right or remedy. |
25.3 |
The single or partial exercise of a right or remedy under this Agreement shall not preclude any other nor restrict any further exercise of any such right or remedy. |
25.4 |
The rights and remedies provided in this Agreement are cumulative and do not exclude any rights or remedies provided by law. |
31
The provisions of this Agreement and of the other Transaction Documents which remain to be performed following Closing shall continue in full force and effect notwithstanding Closing.
27.2 |
The Parties may amend or vary this Agreement in accordance with its terms without the consent of any other person. |
28.4 |
If immediately prior to or on the Step-In Closing or on the Step-In Deferred Payment Date (as applicable), a claim has been made against an Employee Seller by the Purchaser for an amount in respect of a breach of any of the Warranties or to satisfy any claims under the Tax Covenant or any claim pursuant to Clause 14 (Specific Indemnities), but that claim has not become a determined claim (an “unresolved claim”), the Purchaser shall be entitled to withhold from the Relevant Employee Seller Step-In Consideration the sum which the Purchaser has been advised in writing by the legal advisers engaged in pursuing the claim to be the maximum amount reasonably likely to be awarded to the Purchaser in respect of the unresolved claim (which may be the full amount of the unresolved claim if so advised in writing) (the “withheld sum”). If, when the unresolved claim becomes a determined claim, an amount is owed by the Employee Seller to the Purchaser in respect of such determined claim, such amount will be satisfied by set off against the withheld sum in accordance with Clause 28.3 and any balance of the withheld sum in excess of such amount shall be dealt with as if it had become payable as part of the Relevant Employee Seller Step-In Consideration. |
32
28.7 |
If any amount payable by the Sellers to the Purchaser under this Agreement is subject to Tax in the hands of the Purchaser, that amount shall be increased so as to ensure that the net amount retained by the Purchaser after taking the Tax into account is equal to the full amount which would have been retained by the payee but for the Tax. |
of any such Turkish Transfer Taxes which arise as a result of or in connection with the transfer of the Company Shares.
30.2 |
The Seller will procure that the necessary conditions will be satisfied to apply for VAT exemption on the transfer of the Company Shares as per article 17 of Turkish VAT Law numbered 3065. |
30.3 |
The Sellers shall bear the entire cost of any non-Turkish Transfer Taxes which arise as a result of or in connection with the transfer of the Company Shares, including the payment of the income taxes, if any, arising from the same. |
30.4 |
Schedule 9 (Tax Covenant) shall apply with effect from the date of this Agreement. |
Any and all amounts which are due and payable by one Party to another under this Agreement shall be paid in US$ and shall carry interest at the Interest Rate from the due date for payment up to and including the date of actual payment (both before and after any judgment). In the case of a Claim, the due date for payment shall be treated as being the date of receipt of notice of that Claim in accordance with Schedule 5 (Sellers’ Limitations on Liability).
33
|
(c) |
two (2) Business Days after the time and date of posting if sent by pre‑paid recorded delivery; or |
provided that if deemed receipt of any Notice occurs after 6:00 pm or is not on a Business Day, deemed receipt of the Notice shall be 9:00 am on the next Business Day. References to time in this Clause 32 are to local time in the country of the addressee.
Sellers’: to the addresses set out under their names in Schedule 1.
Purchaser:
Name:Zynga Inc.
Address: 699 8th Street, San Francisco, California 94103
For the attention of:Chief Legal Officer
Email address:legalnotices@zynga.com
This Agreement may be executed in counterparts and shall be effective when each Party has executed and delivered a counterpart. Each counterpart shall constitute an original of this Agreement, but all the counterparts shall together constitute one and the same instrument.
34.1 |
This Agreement, including any non‑contractual obligations arising out of or in connection with this Agreement, is governed by and shall be construed in accordance with English law. |
34.2 |
The Parties agree that any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement (including a claim, dispute or difference regarding its |
34
existence, termination or validity or any non-contractual obligations arising out of or in connection with this Agreement) (a “Dispute”), shall be referred to and finally settled by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”) (the “Rules”) as in force at the date of this Agreement and as modified by this clause, which Rules shall be deemed incorporated into this clause. The number of arbitrators shall be one to be jointly nominated by the claimant(s) and by the respondent(s) following the request in writing from the claimant(s) to the respondent(s) (the “Request for Joint Appointment”), provided that if such arbitrator has not been nominated within thirty (30) days of the Request for Joint Appointment, such arbitrator shall be appointed by the ICC Court. The seat of arbitration shall be London, England and the language of arbitration shall be English. |
36.5 |
The Sellers shall, on the signing of this Agreement, execute and provide to the Purchaser a certified copy of a power of attorney granted by each Seller in favour of the Sellers’ |
35
Representative in the agreed terms, and shall promptly notify the Purchaser of any revocation of modification of such powers of attorney. |
In Witness Whereof each Party has executed and delivered this Agreement as a deed on the date which first appears above.
36
Number of Closing Shares (3) |
Step-In Closing Shares (5) |
||||
Mehmet Can Yavuz Address: [***]
|
16,667 |
5,212 |
9.7% |
11,455
|
1,552,000
|
Deniz Başaran Address: [***]
Email: [***] |
16,667
|
5,212 |
9.7% |
11,455
|
1,552,000
|
Burak Vardal Address: [***]
Email: [***] |
16,667
|
5,212 |
9.7% |
11,455
|
1,552,000
|
Volkan Biçer Address: [***] Email: [***] |
68,386 |
68,386
|
39.8% |
- |
6,368,000
|
Mehmet Ayan Address: [***]
Email: [***]
|
35,052
|
35,052
|
20.4% |
- |
3,264,000
|
37
Number of Closing Shares (3) |
Step-In Closing Shares (5) |
||||
Yunus Emre Gönül Address: [***] Email: [***] |
18,385
|
18,385
|
10.7%
|
- |
1,712,000
|
Total |
171,824 |
137,459 |
34,365 |
16,000,000 |
38
: |
||
: |
169468-5 |
|
Date and place of incorporation |
: |
December 14, 2018; İstanbul |
Registered address |
: |
Hacımimi Mahallesi Hocaali Sokak No.14/2 Beyoğlu, İstanbul/Turkey |
Issued share capital |
: |
171,824 shares of TL 1.00 each |
Shareholders |
: |
Mehmet Can Yavuz Deniz Başaran Burak Vardal Volkan Biçer Mehmet Ayan Yunus Emre Gönül |
Directors |
: |
Volkan Biçer (Chairperson of the Board) Mehmet Ayan (Vice-Chairperson) |
Auditors |
: |
PwC YMM A.Ş. |
Accounting reference date |
: |
31 December |
: |
Turkey |
39
Schedule 3Closing Arrangements
Part 1
Sellers’ Closing Obligations
The Sellers shall on Closing:
(b) |
the registration of the Purchaser as the owners of the Closing Shares in the share ledger of the Company be approved; |
(d) |
the general assembly meeting of the Company shall be convened to resolve on (i) the amendment to the articles of association of the Company; (ii) appointment of the members of the board of directors nominated by the Purchaser and the Employee Sellers; and (iii) releasing the incumbent members of the board of directors for their actions until immediately prior to Closing which shall in no case give detriment to the indemnification obligations of the Purchaser (“Closing General Assembly”); |
2. |
or, if the ordinary general assembly meeting of the Company for the financial year 2019 (“Ordinary General Assembly”) has not been convened before the Closing, the Closing General Assembly shall be convened as the Ordinary General Assembly to resolve on, inter alia, approving the balance sheet, and profit and loss statement of 2019; |
4. |
Execute and deliver to the Purchaser the Updated Disclosure Letter, if any; |
(a) |
all necessary documents, duly executed, to enable title to the Closing Shares to pass fully and effectively in the name of the Purchaser or such other person as the Purchaser may nominate; |
(b) |
a certified copy of the Board resolution of the Company at which the entry into the Transaction Documents and the Transaction are approved; |
(c) |
the duly endorsed share certificates (in paper form) for the Closing Shares together with printed copies (in paper form) of the share certificates for the Closing Shares; |
(d) |
completed relevant IRS Forms (including W-8 forms) from the Sellers in order for the Purchaser to pay the Escrow Amount in the Escrow Account; |
(e) |
a certified copy of each power of attorney, as the case may be, under which any document to be delivered to the Purchaser has been executed; |
(f) |
a certified copy of the minutes of the meetings of the Board and Closing General Assembly referred to in Part 1, paragraph 1 and Part 3, paragraph 3; and |
(g) |
subject to Disclosure Letter Update, a certificate signed by the Sellers confirming that the Operational Warranties are true and accurate in all material respects as of the Closing Date, and |
40
that the Company has performed and complied with each of the covenants and obligations under this Agreement required to be performed and complied with by it as of the Closing Date. |
(c) |
statements from the banks at which each the Company maintain an account giving the balance as at the close of business on the last Business Day prior to the Closing; |
(d) |
the cash book balances each of the Company with statements reconciling the cash book balances with the bank statements in paragraph 4.3 above; |
(e) |
evidence as to the repayment of any existing loans, advances or capital contributions granted by the Company to Employee Sellers, if any; and |
(f) |
copies of written agreements replacing any verbal arrangements entered into by the Company and continuing to exist immediately prior to Closing in relation to game production and collaboration agreements with respect to the current games. |
41
Part 2
Purchaser’s Closing Obligations
On Closing the Purchaser shall:
42
Part 3
Sellers’ and Purchaser’s Joint Closing Obligations
On Closing the Purchaser and Sellers shall:
1. |
procure that the Board resolves on: |
(a) |
the Business Plan; |
(b) |
the authority distribution among the board members; and |
(c) |
the cancellation of the signature authorities of the Company and appointment of the new signature authorities in line with this Agreement, and notification to İstanbul Trade Registry of the fact that the Buyer has become a shareholder of the Company in accordance with the Article 198 of the TCC; |
2. |
hold the Closing General Assembly and resolve on the agenda as agreed in paragraph 1(d) of Part 1 of this Schedule; and |
3. |
have the Company apply to the İstanbul Trade Registry for the registration of the resolutions in paragraph 1 of this Schedule 3. |
43
Part 4
Employee Sellers’ Step-In Closing Obligations
At the Step-In Closing the Employee Sellers shall deliver to the Purchaser or the Purchaser’s Lawyers:
1. |
all necessary documents, duly executed, to enable title to the Step-In Closing Shares to pass fully and effectively in the name of the Purchaser or such other person as the Purchaser may nominate; |
2. |
the duly endorsed share certificates (in paper form) for the Step-In Closing Shares; and |
3. |
such waivers, consents and other documents in the relevant jurisdiction as the Purchaser may require, to enable the Purchaser, or such other person as the Purchaser may nominate, to be registered as holder of the Step-In Closing Shares in accordance with the provisions of Clause 2 (Sale and Purchase). |
44
Part 5
Purchaser’s Step-In Closing Obligations
1. |
At the Step-In Closing the Purchaser shall procure that the amounts due to the Employee Sellers pursuant to Clause 4.5 shall be transferred to each such Employee Seller’s Designated Bank Account as by electronic transfer in immediately available cleared funds (save for the amounts due to the Employee Sellers on the Step-In Deferred Payment Date which shall be due on the Step-In Deferred Payment Date). |
45
2.3 |
The Company Shares constitute the entire allotted and issued share capital of the Company and are fully paid up. |
2.4 |
The Company does not have any Subsidiary Undertakings. |
46
2.6 |
There are no agreements or commitments outstanding which give to any person the right to call for the issue, transfer or purchase of any shares, debentures or other securities of the Company. |
2.8 |
The articles of association, by-laws or equivalent constitutional documents of the Company are complete and accurate. |
2.9 |
The Company does not have any branch or agency in any jurisdiction, other than Rollic Games Oyun Yazılım ve Pazarlama A.Ş. Ankara Şubesi. |
2.10 |
The Company does not own any legal or beneficial interest in any shares, securities or participation interests of any kind in any undertaking. |
1.2 |
The particulars of the Company set out in Schedule 2 (The Company) are complete, accurate and up to date in all respects. |
1.3 |
The information contained in this Agreement is complete and accurate in all material respects and not misleading. |
1.4 |
The information made available to the Purchaser in the Data Room was and remains complete and accurate in all material respects and not misleading. |
2.1 |
The Management Accounts have been prepared in accordance with the Applicable Accounting Standards. |
2.2 |
The Management Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company at the Accounts Date and in the financial periods to which they relate. |
47
2.5 |
The Management Accounts are not affected by any unusual or non‑recurring item or by any other factor that makes the Management Accounts unusual or misleading in any respect. |
3. |
Events Since the Accounts Date |
|
(b) |
there has been no material adverse change in the financial or trading position or prospects of the Company; |
|
(f) |
no dividend or other distribution has been, or has agreed to be, declared, made or paid by the Company; |
|
(g) |
the Company has not made any investment in or loan any other person; |
|
(h) |
The Company has not made advance payment to any other person other than ordinary course of business; |
|
(j) |
the Company has not issued or agreed to issue any share or loan capital or other similar interest. |
3.3 |
There are no debts of the Company which have been outstanding for a period in excess of one hundred and eighty (180) days as at the date of this Agreement. |
48
Complete and accurate copies (including of any amendment, variation or extension of any such contract) are contained in Data Room folder Project Rock - Zynga / Due Diligence List / 14. Material Agreements and 2. Facilities, Properties, and Leases and item 2, 3, 4, 5, 6, 7 and 8 of the Disclosure Letter of any contract to which the Company is a party which:
|
(a) |
involves revenue or expenditure in excess of five thousand (US$ 5,000) per annum (including pursuant to the terms of such contract or the course of dealing in the prior twelve (12) months; |
|
(f) |
involves publishing of advertisements, insertion orders, user acquisition campaigns and/or other marketing arrangements; |
|
(a) |
is of an unusual or exceptional nature or is not in the ordinary course of business; |
|
(c) |
restricts the Company’s ability to carry on the whole or any part of its business in any part of the world or to use or exploit any of its material assets; |
|
(d) |
is an agency, distribution, franchise, licensing, management, joint venture, consortium, partnership, association (other than a bona fide trade association) or shareholders’ agreement or a sale and purchase agreement relating to shares, a business or any material asset; |
|
(h) |
is a collective bargaining agreement, works council agreement or similar agreement with any Employee Representatives; or |
|
(i) |
is an agreement which provides for Change of Control Payments; or |
|
(j) |
is a sale or purchase or option or similar arrangement affecting an asset owned, occupied, possessed or used by the Company; or |
49
|
|
(k) |
is a bid or offer which, if accepted, would give rise to a contract falling within paragraphs 4.2(a) to (k) above. |
4.3 |
Each of the contracts to which the Company is a party is in full force and effect. No party is in breach of any such contract nor has any allegation of any breach or invalidity been made or received by any Seller or the Company. No notice of termination of any such contract has been served or received by any Seller or the Company, to the knowledge of the Sellers, there are no grounds for the termination, rescission, avoidance or repudiation of any such contract and there has been no allegation in writing of any such grounds. |
4.4 |
Save for those listed in item 8 of the Disclosure Letter, each of the contracts to which the Company is a party is in writing. |
4.5 |
The Company is not, or since its incorporation has not been, a party to a contract which is, or was, not entirely of an arm’s length nature and the Company has not transferred or has agreed to transfer any assets except at market value. |
4.6 |
The Company is not a party to or has any liability (actual or contingent) under any guarantee, indemnity or letter of credit, or any leasing, rental, hire purchase or credit sale agreement. |
4.7 |
No person is entitled to receive from the Company any finder’s fee, brokerage or commission in connection with any of the transactions contemplated by this Agreement. |
6.2 |
None of the Sellers has breached its obligations under the Existing Shareholders’ Agreement and the articles of association of the Company that may have an adverse impact on the Company. |
7.1 |
The Company has carried out its business and dealt with its assets in accordance with all applicable laws and regulations in any relevant jurisdictions in all material respects. |
50
Trade Control Law. The Company has never been subject to any inquiries and investigations with respect to Trade Control Laws. |
8.1 |
The Company complies and has at all times complied with all applicable Anti-Bribery Law, Anti-Money Laundering Law, Antitrust Law and Economic Sanctions Law. |
|
(b) |
to or for the benefit of any Government Official for the purposes of influencing any official act or decision; |
|
(d) |
and in relation to (a) through (c) above, with the intention of winning or retaining business or a business advantage for the Company or any of its affiliates. |
51
9.2 |
The direct or indirect change of control of the Company pursuant to the sale and purchase of the Company Shares will not result in the suspension, cancellation, variation, revocation, termination or non-renewal of any Licence or give rise to a right to suspend, cancel, vary, revoke, terminate or not renew any Licence. |
11.2 |
The Company does not have any overdraft facilities and there is no any agreements or arrangements in respect of or providing for monies borrowed by the Company. |
52
occurred or been alleged which is, or which may become or result in, an event of default, an early repayment or a breach of the terms of or under any borrowing or financial facility of the Company and no change in the direct or indirect control of the Company will or may result in such an event of default, early repayment or breach. |
11.5 |
No indebtedness (actual or contingent) and no contract or arrangement is outstanding between the Company or any Connected Persons of such a member. |
The Company has not applied for or received any grant, subsidy or allowance from any governmental or other body save for those as listed in item 11 of the Disclosure Letter and Data Room folder Project Rock – Zynga/ Due Diligence List / PWC Tax DD/ Addition 2.7.2020/32.
The Company has not given any power of attorney or other authority (express, implied or ostensible) which is still in force to any person to enter into any contract or commitment on its behalf save for those as listed in item 12 of the Disclosure Letter and Data Room folder Project Rock – Zynga/ Due Diligence List / 11. Corporate Records and Organizational Information/ Power of Attorney.
14.1 |
A complete and accurate list of all insurance policies maintained by or covering the Company is listed in Data Room folder Project Rock – Zynga/ Due Diligence List / 3. Insurance. |
14.3 |
Neither the Company nor any Seller has any individual insurance claims outstanding, under any of the policies. |
53
Registered Business IP Rights and Business Domain Names
16.1 |
Items listed in 13, 14 and 15 of the Disclosure Letter and Data Room folder Project Rock – Zynga/ Due Diligence List / 12. Intellectual Property and Related Matters accurately identify: |
|
(a) |
each Business Domain Name, and each Registered Business IP Right and each Business Social Media Account; |
|
(b) |
the jurisdiction in which each Registered Business IP Right has been granted, issued, registered or filed for, and the applicable application, registration or serial number; |
16.2 |
The Sellers have provided to the Purchaser, complete and accurate copies of all applications, and other material documents related to each Business Domain Name and Registered Business IP Right. |
Business Software
54
Software List contains a complete and accurate list (by name and version number) of all Business Owned Software. |
16.10 |
Data Room folder Project Rock – Zynga/ Due Diligence List / 12. Intellectual Property and Related Matters/q/Open Sources Tool List accurately identifies and describes: |
|
(c) |
the Business Product(s) or Business Owned Software to which each such item of Open Source Code relates; and |
16.11 |
The Company has complied with all of the terms and conditions of the license for each such item of Open Source Code, including all requirements pertaining to attribution and copyright notices. |
|
(b) |
otherwise impose or could impose any other limitation, restriction or condition on the right or ability of the Company to use or distribute any Business Product or Business Owned Software. |
55
|
Business IP
56
|
name owned, used, or applied for by any other person. No event or circumstance (including a failure to exercise adequate quality controls and an assignment in gross without the accompanying goodwill) has occurred or exists that has resulted in, or could reasonably be expected to result in, the abandonment of any trade mark (whether registered or unregistered) owned, used, or applied for by the Company. None of the goodwill associated with or inherent in any trade mark (whether registered or unregistered) in which the Company have or purports to have an ownership interest has been impaired. |
16.21 |
Data Room folder Project Rock-Zynga/Due Diligence List/14. Material Agreements/Studio Contracts accurately identifies: |
57
(“Outbound IP Contracts”). Save for those contracts Disclosed in Data Room folder Project Rock-Zynga/Due Diligence List/14. Material Agreements/Studio Contracts, the Company is not bound by, and none of the Business IP is subject to, any contract containing any covenant or other provision that: |
|
(a) |
limits or restricts the ability of the Company to use, exploit, assert or enforce any Business IP anywhere in the world in any manner; or |
16.23 |
The Sellers have provided to the Purchaser complete and accurate copies of all Inbound IP Contracts and all Outbound IP Contracts (together, the “IP Contracts”). |
16.26 |
The Sellers have provided to the Purchaser a complete and accurate copy of each form used by the Company at any time, of: |
|
(a) |
employee agreement containing any assignment or license of Intellectual Property Rights or any confidentiality provision; |
|
(b) |
professional services, outsourced development, consulting or independent contractor agreement containing any assignment or licence of Intellectual Property Rights or any confidentiality provision |
|
(e) |
developer agreement (including the game production cooperation agreement and the software launching service agreement); and |
58
or otherwise violating, any Business IP. Data Room folder Project Rock-Zynga/Due Diligence List/13. Litigation accurately identifies (and the Sellers have provided to the Purchaser a complete and accurate copy of) each letter or other written or electronic communication or correspondence that has been sent or otherwise delivered by or to any of the Sellers or the Company regarding any actual, alleged, or suspected infringement, misappropriation or violation of any Business IP, and provides a brief description of the current status of the matter referred to in such letter, communication, or correspondence. |
59
any other person of any licence or other right or interest under, to, or in any Business IP or Intellectual Property Rights of the Purchaser or any Subsidiary Undertaking. |
|
(a) |
are in good working condition and are functioning properly and in accordance with their specifications and all applicable service levels set forth in the relevant IT Contracts; and |
|
(b) |
are fit for the purpose of effectively performing all information technology operations necessary to conduct the Business; and |
60
reasonably result in a material adverse effect. No notice of termination of any IT Contract has been served or received by any Seller or the Company, there are no grounds for the termination, rescission or repudiation of any IT Contract, and no allegation of any such grounds have been made or received by any Seller or the Company. |
|
(a) |
complying with all data protection principles and legal requirements established under any Data Protection Laws; |
|
(b) |
honouring requests from Data Subjects to exercise their legal rights as required by Data Protection Laws; and |
|
(c) |
complying with all applicable requirements to notify, or register with, the relevant Authorities in relation to the Processing of Personal Data. |
18.2 |
At no point since its incorporation has the Company engaged in any unauthorised or unlawful Processing of any Personal Data. |
|
(e) |
any notice of any actual or suspected Personal Data Breach regarding any Personal Data Processed by, or on behalf of, the Company, |
and to the Knowledge of the Sellers, the Company has no reason to believe that any such notice or complaint is likely to be received.
61
18.4 |
In each instance in which the Company has engaged a Processor to Process Personal Data for the Company: |
|
(a) |
the Company has initiated necessary proceedings to ensure that such Processor has provided sufficient written guarantees confirming that: |
|
(i) |
such Processor has only Processed the relevant Personal Data in accordance with the documented instructions of the Company; |
|
(i) |
carried out appropriate due diligence to confirm such Processor’s compliance with the guarantees described in Clause 18.1(a) above; and |
|
(ii) |
initiated necessary proceedings to have an appropriate and enforceable written contract with the Processor, in accordance with the requirements of applicable Data Protection Laws. |
18.8 |
The Company has in place, and has at all times since its incorporation maintained in all material respects: |
|
(a) |
appropriate Privacy and Data Security Policies governing the lawful Processing of Personal Data by the Company and its Processors; and |
|
(b) |
appropriate, and regularly refreshed, training for all relevant employees and other personnel, contractors or Processors who Process Personal Data for or on behalf of the Company. |
62
|
|
(a) |
all current registrations or notifications materially required in respect of the Company under any Data Protection Laws; |
|
(b) |
all Privacy and Data Security Policies currently in force, or in force at any point since the Company’s incorporation; |
|
(c) |
all documentation required materially under Data Protection Laws, including any records of processing, data protection impact assessments and records of consent; |
|
(d) |
all contracts or agreements between the Company and any Processor and/or Controller, including without limitation contracts for data sharing, data storage, servers, and analytics services; and |
Business Products
18.13 |
Save for those as listed in item 17 of the Disclosure Letter, there are no publishing or distribution rights in respect of any of the Business Products that are solely owned by the Company. |
63
all sales and licenses, through the date of the most recent balance sheet and (ii) any advances against royalties made or guarantees owed, with respect to such Business Product. |
18.15 |
No external developer of any Business Products which account for five per cent. (5%) or more by value of the Company’s annual sales, as the case may be, has during the twelve (12) months immediately preceding the date of this Agreement ceased, reduced or indicated an intention to cease or reduce, or changed the terms of or indicated an intention to change the terms of, its relationship with the Company. |
18.16 |
There are no notices, disputes, complaints, liabilities, claims or demands relating to or in respect of the use, enjoyment or otherwise of any Business Products by any person under the age of 18. |
18.17 |
There is and has been no claim, enquiry, investigation, action, suit or proceeding pending or threatened by or against the Company before any court, arbitrator, regulator (e.g. the Federal Trade Commission, the Children’s Advertising Review Unit or otherwise) or other governmental body, in connection with the use, enjoyment or otherwise of any Business Products by any person under the age of 18 (the “Minors”). |
18.18 |
The Group does not advertise the Business Products on any websites, applications or other media directed towards Minors or which could be reasonably regarded as addressed to Minors. |
18.19 |
The Company does not produce, develop or incorporate in any Business Products any features, applications or otherwise, directed to, or for the purposes of attracting the attention of, Minors (e.g. a “kid’s club” or otherwise). |
19.2 |
The information listed in Data Room Folder Data Room Folder Project Rock – Zynga/ Due Diligence List / 2. Facilities, Properties, and Leases sets forth a true and complete list of each lease or other Contract under which of the Company is the lessee of, or holds or operates, any Properties owned by a third Person, including, in each case, the expiration date thereof and a brief description of the property covered. |
64
19.10 |
None of the leases or occupation agreements relating to the Properties can be terminated or amended upon a change in the direct or indirect ownership or control of the Company. |
19.11 |
No rent reviews and/or rent adjustments under any leases of the Properties are currently outstanding or in process. |
65
66
20.17 |
Neither the Employee Sellers nor the Key Employees are bound by any non‑compete agreements with third parties that may affect their working conditions or the business of the Company. |
20.19 |
To the Knowledge of the Sellers, there are no indemnities in place by the Company for the benefit of the Company’s directors in respect of third party proceedings. |
67
20.29 |
The Company has not within the eighteen (18) months preceding the date hereof entered into any agreement which involved or may involve the automatic transfer of staff by operation of law. |
21. |
Pensions |
For the purposes of this paragraph 21, the following expressions shall have the following meanings:
“Defined Contribution Plan” means a plan that provides for an individual account for each participant and for Pension Benefits based solely on the amount contributed to the participant’s account and any income, expenses, gains and losses and any forfeitures of accounts of other participants which may be allocated to such participant’s account;
“Pension Benefits” means any pension, lump sum or other benefit payable on, in anticipation of, or following retirement, death, reaching a particular age, illness or disability, or in similar circumstances; and
“Worker” means a current or former employee or a current or former director or other officer of the Company.
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21.2 |
Only eighteen (18) employees of the Company are included in the compulsory individual pension plan by the Company. |
21.3 |
There are not outstanding contributions, costs (including levies) or expenses payable by the Company in respect of any Plans and the Company has no monetary obligations (including actuarial, consultancy, legal or other fees) to or in respect of any Plans. |
|
(a) |
is or was in breach of any competition or similar legislation in any jurisdiction in which the Business is or has been carried on; |
69
23.3 |
No Tax Authority has agreed to operate a special arrangement (being an arrangement not based on a strict application of the relevant legislation) in relation to the Tax affairs of the Company. |
23.5 |
Proper records have been maintained, and all applicable regulations have been complied with, in relation to all deductions and withholdings in respect of Tax. |
70
23.16 |
The Company has not at any time entered into or been engaged in or been a party to or promoter of any scheme, transaction or arrangement which was required by any applicable law to be specifically disclosed to a Tax Authority or a main or dominant purpose or object of which was the avoidance or deferral of or the obtaining of a reduction in or other advantage in respect of a liability to Tax. |
23.19 |
The Company is resident for Taxation purposes solely in the jurisdiction in which it is incorporated and the Company is not nor has ever been liable for Tax in any other jurisdiction. |
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23.30 |
All personal income tax obligations and social security contributions relating to employee benefits have been calculated, filed and paid in accordance with Turkish Law in relation to Tax. |
23.32 |
The Company has not filed an entity classification election under Treasury Regulation Section 301.7701-3(c). |
72
23.35 |
The Company is not nor has been engaged in the conduct of a “trade or business within the United States” within the meaning of sections 864(b) or 882(a) of the Code. |
23.36 |
The Company does not own any “United States real property interest” within the meaning of section 897(c) of the Code nor has filed an election under section 897(i) of the Code. |
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Schedule 5
Sellers’ Limitations on Liability
For the purposes of this paragraph (b), the term “Claims” shall mean Claims in respect of which liability is admitted by the Sellers or which have been decided upon by a Court of competent jurisdiction with all rights of appeal having been exhausted.
1.3 |
To the extent that the Purchaser shall be entitled to recover an amount greater than the Escrow Amount in respect of such a claim, or the Escrow Amount is insufficient to cover the Losses of the Purchaser in respect of such a claim, the Purchaser shall be entitled in accordance with Clause 28 (Payments) to claim and deduct the amount of such claim (or the outstanding amount of such claim, as applicable) from the respective Seller directly, including by setting-off or deferring any payments due to the Sellers on the Step-In Closing and on the Step-In Deferred Payment Date under this Agreement against the Step-In Consideration. |
The Sellers shall not be liable in respect of any Warranty Claim (other than a Tax Warranty Claim) unless written notice of the matter giving rise to the Claim setting out reasonable details of the Claim and so far as then known to the Purchaser is given by or on behalf of the Purchaser to the Sellers or the Sellers’ Representative:
2.1 |
in the case of a Fundamental Warranty Claim by no later than three (3) years from the Closing Date; |
2.2 |
in the case of an Operational Warranty Claim by no later than twenty four (24) months from the Closing Date; and |
provided that any such Claim (other than a Tax Claim) shall (if not previously satisfied, settled
74
or withdrawn) be deemed to have been withdrawn unless legal proceedings in respect of it have been commenced within twelve (12) months of such written notice being given to the Sellers or to the Sellers’ Representative, except that the Seller shall not be liable for any Claim based upon a liability which is contingent unless and until such contingent liability becomes an actual liability, save that the fact that the liability may not become an actual liability by the relevant date in this paragraph 2 of this Schedule 5 shall not exonerate or release any of the Sellers from liability in respect of any Claim properly notified before that date.
|
(b) |
make no admission of liability or settle or compromise the Third Party Claim without prior consultation with the Sellers’ Representative; and |
|
(d) |
subject to maintaining legal privilege and any applicable confidentiality restrictions, allow the Sellers’ Representative and its advisers and agents to investigate the Third Party Claim (including whether and to what extent any amount is payable in respect thereof); |
|
(e) |
consult in good faith with the Sellers’ Representative as to any ways in which the Third Party Claim might be avoided, disputed, resisted, mitigated, settled, compromised, defended or appealed; |
The Purchaser shall be entitled to bring more than one Claim arising out of the same subject matter, fact, event or circumstance but shall not be entitled to recover damages or obtain payment, reimbursement, restitution or indemnity more than once in respect of any one shortfall, damage or deficiency, irrespective of whether it gives rise to more than one Claim.
75
Nothing in this Schedule 5 applies to a Claim that arises or is delayed as a result of fraud, intentional misrepresentation or wilful breach by any of the Sellers or any of their respective Agents, in which case the liability of the Sellers is uncapped.
6. |
Changes on and/or after Closing |
The Sellers shall not be liable for any Claim (other than a Tax Claim) if it arises, or if and to the extent it is increased or extended by:
|
(a) |
any change to legislation, any increase in rates of Taxation or any change in the published practice of a revenue authority, in each case made on and/or after Completion with retrospective effect; |
|
(b) |
any change in the accounting reference date of the Purchaser or the Company made on and/or after Closing; or |
|
(c) |
any change in any accounting policy or practice of the Company made on and/or after Closing, save where such change is required to conform such policy or practice with law or generally accepted United Kingdom or Turkish accounting policies, principles, practices and conventions or where such change is necessary to correct an improper policy or practice.. |
The Sellers shall not be liable for any Claim (other than a Tax Claim) if and to the extent that the fact, matter, event or circumstance giving rise to such Claim is remediable and is remedied by, or at the sole expense of the Sellers within 20 days of the date on which written notice of such Claim is given to the Sellers.
The Sellers shall not be liable for any Claim (other than a Tax Claim) which arises by reason of a liability which, at the time when written notice of the Claim is given to the Sellers, is contingent only or is otherwise not capable of being quantified and the Sellers shall not be liable to make any payment in respect of such Claim unless and until the liability becomes an actual liability or (as the case may be) becomes capable of being quantified.
9. |
Reimbursement of Claims |
If, after any Sellers has made any payment in respect of a Claim (other than a Tax Claim), the Purchaser recovers from a third party a cash sum which is referable to that payment (the "Recovery Amount"), then the Purchaser shall forthwith repay (or procure the repayment of) to the relevant Sellers so much of the Recovery Amount less all costs, charges and expenses incurred in making such recovery.
Any amount paid by the Sellers in respect of any Claim or Tax Claim or under Clauses 12, 13 and 14 of this Agreement shall (so far as it is lawful so to do) be treated as a reduction in the consideration paid to the Sellers under this Agreement.
11. |
Other Limitations |
|
(a) |
Without prejudice to the limitations set out in this Schedule, each Seller’s liability in relation to a Claim shall be limited to the Seller’s Pro Rata Portion of the total value of such Claim and the Purchaser shall be entitled to recover from any of the Sellers such |
76
|
Seller’s Pro Rata Portion of the total value of such Claim without imposing any obligation or responsibility on the Purchaser to recover against all Sellers. |
|
(b) |
The Purchaser shall not and shall cause the Company not to initiate (save in respect of fraud, dishonesty or criminal matters) any claim, action or proceedings against the members of the board with respect to any action taken by the board or matter occurring on or before Closing in their capacity as representatives of the board (but excluding any other capacity, including, for the avoidance of doubt but not limited to, employees). For the avoidance of doubt this provision shall give no detriment to the indemnification rights of the Purchaser against the Sellers. |
|
(c) |
Without prejudice to the limits set out in this Schedule 5, the liability of each Seller under this Agreement shall not in any circumstance exceed the amount of the Total Purchase Consideration actually received by such Seller under the Transaction Documents at the time that the Purchaser makes the Claim. |
|
(d) |
For the avoidance of doubt, when suffered by the Company, the calculation of the Loss shall be computed without regard to any valuation parameter or multiple of valuation factor that may have been used in determining the consideration for the sale and transfer of the Closing Shares and Step-In Closing Shares. |
77
|
(iii) |
in accordance with this Part 1 (Rules for Preparation of Closing Accounts) of this Schedule 6; |
|
(i) |
by applying the specific accounting treatments set out in Part 2 (Specific Accounting Treatments) of this Schedule 6; |
78
|
(c) |
so as to exclude the costs incurred in relation to this Agreement (including the costs of the preparation, delivery, review and resolution of the Closing Accounts); |
(b) |
In determining the Actual Debt, Change of Control Payments, Transaction Expenses and Actual Working Capital, no amount shall be double counted. |
79
1.2 |
Within ten (10) Business Days of receipt from the Purchaser of the Draft Closing Accounts, the Sellers’ Representative shall either: |
80
|
|
(ii) |
subject to paragraph 2.2(c)(i) above, such terms of reference as are submitted jointly to it by the Parties in writing any time prior to its final decision in relation to the dispute; and |
|
(iii) |
subject to paragraphs 2.2(c)(i) and (ii) above, such terms of reference as it deems reasonably appropriate; |
|
(d) |
in giving its determination, the Expert shall state what adjustments (if any) are necessary to the draft Closing Accounts in relation to the disputed matters for the purposes of this Agreement; |
3.1 |
Each Party shall bear its own costs in connection with the Closing Accounts, save that the fees and costs of any Expert shall be borne equally by the Purchaser and the Sellers’ Representative. |
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Schedule 7
Post-Closing Financial Adjustments
Debt
(a) |
is less than the Estimated Debt, then the Purchaser shall pay an amount equal to the difference to the Sellers; or |
(b) |
is greater than the Estimated Debt, then the Sellers shall pay an amount equal to the difference to the Purchaser. |
Working Capital
(a) |
is greater than the Estimated Working Capital, then the Purchaser shall pay an amount equal to the difference to the Sellers; or |
(b) |
is less than the Estimated Working Capital, then the Sellers shall pay an amount equal to the difference to the Purchaser. |
The Purchaser and the Sellers agree that the sums that each is respectively obliged to pay pursuant to Part 1 (Adjustments) of this Schedule 7 shall be aggregated and set off against each other. Whichever of the Purchaser or the Sellers is then left with any payment obligation thereunder shall make such aggregated payment to the other Party within ten (10) Business Days of the date on which the Closing Accounts are agreed or determined pursuant to Schedule 6 (Closing Accounts) and in accordance with Clause 28 (Payments). For the avoidance of doubt, when the Purchaser is due to make an adjusting payment to the Sellers pursuant to this Schedule, such payment shall be made pro rata to the portion of Initial Consideration paid to each Seller pursuant to this Agreement.
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2. |
No amount shall be released from the Escrow Account except in accordance with the provisions of this Schedule 8 and the Escrow Agreement. |
5. |
The Parties agree that the Sellers will, and will be treated as, and will be reported for US federal tax purposes as, the beneficial owners of the Escrow Account. |
and the Escrow Period shall be deemed to be extended pending settlement of all such Escrow Claims.
83
|
(i) |
at the request of either party, the determination of the Estimated Liability shall be referred to a barrister of not less than 10 years standing, having experience in claims similar to a relevant Escrow Claim, as agreed by the Sellers’ Representative and the Purchaser, or failing such agreement, as appointed by the President for the time being of the Law Society in England and Wales on the application of either party ("Counsel"); |
|
(ii) |
Counsel shall be requested to provide his determination of the Estimated Liability within 15 Business Days of accepting his appointment (or such other period as the Purchaser and the Sellers’ Representative may otherwise agree with Counsel); |
|
(iii) |
Counsel shall act as an expert and not as arbitrator and his determination regarding the amount of the Estimated Liability shall, in the absence of manifest error, be final and binding on all the parties; and |
|
(iv) |
Counsel's fees in making his determination of the Estimated Liability shall be borne by the Purchaser on the one hand and the Sellers on the other equally. |
and the balance of the Escrow Amount, if any, shall be retained in the Escrow Account pending settlement of the remaining Escrow Claims, if any. Following payment of the final outstanding Escrow Claim in accordance with this paragraph 5, the balance of the Escrow Account, if any, shall be released to the Sellers and the Escrow Agreement shall terminate.
|
(b) |
when an order or judgment of a court of competent jurisdiction has been given in respect of it with all rights of appeal having been exhausted; or |
|
(c) |
when such amount is unconditionally withdrawn by the Purchaser in writing. |
8. |
Payment of any amount in accordance with this Schedule 8 to settle an Escrow Claim shall, so far as possible, be deemed to be a reduction of the Initial Consideration. |
9. |
The Sellers’ Representative and the Purchaser undertake to issue instructions for payment from the Escrow Account of the amounts due under the above clauses without delay. |
84
1.1 |
In this Schedule, unless the context requires otherwise: |
“Accounts Relief” means a Relief which has been treated as an asset in the Closing Accounts or which has been taken into account in computing (and reducing) any provision for Tax (including deferred Tax) which appears in the Closing Accounts or which has resulted in no provision for Tax (including deferred tax) being made in the Closing Accounts;
“Actual Tax Liability” means any liability of the Company to make an actual payment of or in respect of, or on account of, Tax, whether or not the same is primarily payable by the Company and whether or not the Company has or may have any right of reimbursement against any other person, in which case the amount of the Actual Tax Liability will be the amount of the actual payment;
“Deemed Tax Liability” means:
|
a) |
where the Accounts Relief lost, reduced or unavailable was a right to repayment of Tax, the amount of the repayment which would otherwise have been obtained; |
|
c) |
in the case of the set-off of an Accounts Relief against Income, Profits or Gains or against Actual Tax Liabilities, the amount of Tax saved in consequence of such set-off, and |
“Event” means an event, transaction, action or omission whatsoever whether alone or in conjunction with any other transaction, action or omission and includes further (without limitation) the death of any person, becoming, being or ceasing to be a member of a group of companies (however defined) for the purposes of any Tax;
“Income”, “Profits” or “Gains” means revenue profits, chargeable gains and any other similar measure by reference to which Tax is chargeable or assessed;
“Loss” or “Losses” means any and all direct or indirect or consequential losses, liabilities (including Tax), actions and claims, including charges, costs, damages, fines, penalties, interest and all legal and other professional fees and expenses (as long as reasonable and documented) including, in each case, all related Taxes;
85
“Purchaser’s Relief” means:
|
i. |
an Accounts Relief; |
|
ii. |
any Relief arising to the Company to the extent that it arises in respect of either an Event occurring or a period after the Closing Date; and |
|
iii. |
any Relief arising to any member of the Purchaser’s Group (other than the Company); |
“Tax Authority Claim” means the issue of any notice, demand, assessment or letter by a Tax Authority post-Closing; and
“Tax Liability” means an Actual Tax Liability or a Deemed Tax Liability.
1.2 |
In this Schedule: |
|
(a) |
the obligations and liabilities of the Sellers under this Schedule are assumed jointly and severally; |
|
(b) |
references to paragraphs are to paragraphs of this Schedule; |
|
(c) |
references to any “Income”, “Profits” or “Gains” earned, accrued or received shall include income, profits and gains which are deemed to have been earned, accrued or received for Tax purposes; |
|
(d) |
references to any “Income”, “Profits” or “Gains” earned, accrued or received before a particular date or in respect of a particular period include income, profits or gains which are deemed for the purposes of any Tax to have been earned, accrued or received at or before the date or in respect of that period; |
|
(e) |
references to an Event occurring on or before a particular date or time shall include the case where such Event is deemed or treated for Tax purposes as having occurred on or before that date; and |
|
(f) |
references to any pre-Closing Date period or pre-Closing period in this Schedule shall include any period (or part period) ending on or before the relevant date. |
1.3 |
Each of the covenants contained in paragraph 2.1 shall be construed as a separate and independent covenant and shall not be limited or restricted by reference to or inference from any other covenant contained in paragraph 2.1. |
The Sellers covenant to pay to the Purchaser (as far as possible, as an adjustment to the consideration for the sale of the Closing Shares), subject to the other provisions of this Schedule, an amount equal to:
|
(a) |
any Event which occurred on or before Closing; or |
|
(b) |
in respect of any Income, Profits or Gains which were earned, accrued or received on or before Closing; |
2.2 |
any Deemed Tax Liability; |
86
2.3 |
any Actual Tax Liability which is primarily the liability of another person (the “Primary Person”) for which the Company is liable in consequence of: |
|
(a) |
the Primary Person failing to discharge such Tax Liability; |
|
(b) |
the Company at any time before Closing: |
|
(i) |
being a member of the same group of companies as the Primary Person; or |
|
(ii) |
having control of, having been controlled by, or otherwise being connected with, the Primary Person or being controlled by the same persons as the Primary Person for any Tax purpose; and |
3.1 |
The covenant at paragraph 2 does not apply in respect of any Tax Liability of the Company to the extent that: |
|
(a) |
specific provision or reserve in respect of that Tax Liability was made in the Closing Accounts; |
|
(b) |
the Tax Liability arises or is increased as a result of: |
|
(i) |
a change in Tax rates or in legislation made after Closing; or |
|
(ii) |
a change or withdrawal after Closing of any previously published practice, concession or interpretation of any Tax Authority; |
in each case announced and occurring after Closing with retrospective effect;
|
(c) |
the Tax Liability arises as a result of a change after Closing in the length of any accounting period for Tax purposes of the Company; |
|
(d) |
such Tax Liability has been discharged without cost to the Purchaser, the Company and/or any member of the Purchaser’s Group; |
|
(f) |
the Tax Liability would not have arisen but for: |
87
3.2 |
The Sellers shall not be liable in respect of any Tax Claim unless notice of such Tax Claim has been provided to the Sellers’ Representative within 66 (sixty six) months from the date of Closing. |
3.3 |
The provisions of paragraph 3.1 shall also apply to limit or reduce the liability of the Sellers in respect of any Tax Warranty Claim. |
4.2 |
Subject to the remainder of this paragraph, if such auditors determine that a Corresponding Relief has arisen and that the Company in question has utilised such Corresponding Relief to give rise to a cash Tax saving (the “Tax Saving Amount”) for the Company, then an amount equal to the lesser of: |
|
(a) |
the Tax Saving Amount (less any Losses incurred in establishing, obtaining or and/or utilising the relevant Corresponding Relief); and |
|
(b) |
the amount already paid by the Sellers in respect of the relevant Tax Liability (and not previously refunded), |
shall be accounted for under paragraph 4.3.
4.3 |
Subject to the remainder of this paragraph, any amount required to be accounted for under this paragraph 4.3: |
|
(a) |
shall, for eighteen (18) months after the Closing Date, be credited to the Escrow Account to the extent the amount in the Escrow Account falls short of the Escrow Amount; |
|
(b) |
to the extent there is any excess after sub-paragraph (a) directly above, such excess shall be set off against any payment then due from the Sellers to the Purchaser under this Schedule; and |
|
(c) |
to the extent there is any excess after sub-paragraph (b) directly above, such excess shall be set against any payment(s) already made or subsequently due under this Schedule in chronological order until exhausted. |
88
4.4 |
The Purchaser shall only be required to account to the Sellers in accordance with paragraph 4.3 to the extent that the Purchaser is satisfied that such accounting will not: |
|
(a) |
prejudice any of the entitlement of the Company to the Corresponding Relief; nor |
|
(b) |
result in the loss, reduction or non-availability of the Tax saving obtained by the Company from the utilisation of such Corresponding Relief. |
|
(ii) |
the amount already paid by the Sellers in respect of the relevant Tax Liability (and not previously refunded under this Schedule). |
|
(a) |
shall, for eighteen (18) months after the Closing Date, be credited to the Escrow Account to the extent the amount in the Escrow Account falls short of the Escrow Amount; |
|
(b) |
to the extent there is any excess after sub-paragraph (a) directly above, such excess shall be set off against any payment then due from the Sellers to the Purchaser under this Schedule; and |
89
|
|
(c) |
to the extent there is any excess after sub-paragraph (b) directly above, such excess shall be set against any payment(s) already made or subsequently due under this Schedule in chronological order until exhausted. |
The Sellers (at their expense) are to provide the Purchaser and the Company with all reasonable assistance, co-operation and information as the Purchaser may request in respect of the pre-Closing Tax affairs of the Company, including (but not limited to) information and co-operation requested in connection with Tax computations and returns outstanding at Closing and in connection with all negotiations, correspondence and agreements in respect of the Company’s Tax liabilities.
7.4 |
Subject to this paragraph 7, if the Sellers’ Representative takes control of any proceedings pursuant to paragraph 7.3, the Sellers’ Representative shall (in each case at the Sellers expense): |
90
|
(a) |
keep the Purchaser informed of all actual or proposed material developments known to any Seller; |
|
(b) |
promptly notify the Purchaser of any intended material oral communication or any meeting with a relevant Tax Authority in relation to the relevant proceedings, including details of the proposed agenda (and a summary of the position proposed to be taken in relation to the points on such agenda) and allow the Purchaser (and its advisers or representatives) to fully participate in any such oral communication or meeting (or such part thereof as relates to the relevant proceedings); |
|
(c) |
promptly provide the Purchaser with copies of or extracts from all material documents (including copies of any notes relating to any oral communication or meeting in paragraph (b) above) and material correspondence insofar as they relate to the relevant proceedings; |
|
(d) |
at least 10 Business Days prior to the date of any intended submission, provide to the Purchaser for prior review any material document or correspondence related to the relevant proceedings which is to be submitted to the relevant Tax Authority and make such amendments to such documents or correspondence as the Purchaser may require; and |
|
(e) |
subject to prior approval by the Purchaser, be entitled to appoint (having particular regard to any regulatory and/or reporting requirements to the Company and/or other member of the Purchaser Group may be subject) such tax counsel (of at least ten (10) years’ experience) to deal directly with the relevant Tax Authority. |
7.5 |
In circumstances where the Sellers’ Representative has exercised his rights under paragraph 7.3 and, in accordance with the provisions of this paragraph 7, the Company is contesting any Tax Authority Claim before any court or other appellate body: |
|
(a) |
subject to the prior approval by the Purchaser, the Sellers’ Representative shall be entitled to appoint (at the Sellers’ expense and having particular regard to any regulatory and/or reporting requirements to which the Company and/or other member of the Purchaser Group may be subject) such tax counsel (of at least ten years' experience) as the Sellers’ Representative shall decide to conduct such contest before the court or other appellate body; |
|
(b) |
the Sellers’ Representative shall provide the Purchaser and the Company with a reasonable opportunity to review any draft instructions to tax counsel, any submissions or other documents to be filed with the court or other appellate body and shall make such amendments to such instructions, submissions or other documents as the Purchaser may request; |
|
(c) |
the Sellers’ Representative shall promptly notify the Purchaser and the Company of any intended material oral communication or any meeting with the tax counsel and shall allow the Purchaser or its representatives to participate in any such communication or meeting; |
|
(d) |
the Sellers’ Representative shall promptly provide the Purchaser and the Company with copies of: (i) any advice received from tax counsel; and (ii) any correspondence with, or documentation from, the relevant court or appellate body; and |
|
(e) |
if the relevant court or appellate body is sitting in private, the Sellers’ Representative shall allow the Purchaser and/or its representatives to attend such court or appellate proceedings. |
91
7.6 |
In the case of a Tax Authority Claim relating to any taxable period that commences on or prior to, but ends after, the date of Closing, the Purchaser shall have the right to control any proceedings (including without limitation the right to deal directly with the relevant Tax Authority) taken in connection with such action. If the Sellers could be required to make a payment under this Schedule in respect of all or a portion of such Tax Authority Claim: |
|
(a) |
the Sellers’ Representative (or his representatives) shall be permitted to listen to any material oral communication and attend any meeting with a relevant Tax Authority in relation to the relevant proceedings (insofar as they relate to the relevant proceedings); |
|
(b) |
the Sellers’ Representative shall in any event be kept informed of all actual or proposed material developments relating to the relevant proceedings, and shall be provided with copies of all material correspondence and material documentation (insofar as they relate to the relevant proceedings) and be provided with notice of any intended material oral communication or any meeting with a relevant Tax Authority in relation to the relevant proceedings; and |
|
(c) |
the Purchaser shall, at least 10 Business Days prior to the date of any intended submission, provide to the Sellers’ Representative for prior review any material document or correspondence (in so far as such document or correspondence relates to the relevant proceedings) which is to be submitted to the relevant Tax Authority and shall take into account in settling such documents or correspondence any reasonable comments made by the Sellers’ Representative. |
7.7 |
Nothing in this paragraph 7 shall require the Purchaser to, or procure that the Company shall, and no Seller shall, in connection with any Tax Claim: |
|
(a) |
do anything which is not true and accurate in all material respects; and/or |
|
(b) |
do anything which could reasonably be expected to either give rise to or increase a liability to Tax or result in a loss, reduction, non-availability or deferral of any Purchaser’s Relief for or by any member of the Purchaser’s Group; and/or |
|
(c) |
do anything which could reasonably be expected to have the effect that a Tax Liability arises: (i) in a post-Closing period rather than a pre-Closing period; or (ii) in a post-Closing Date period rather than a pre-Closing Date period; and/or |
|
(d) |
take any action to the extent that it could reasonably be expected to involve the Company contesting any Tax Authority Claim before any court or other appellate body (excluding the Tax Authority which has made the Tax Authority Claim) unless tax counsel (of at least ten years' experience) appointed by agreement between the Sellers’ Representative and the Purchaser and instructed by the Purchaser opines, in writing, that such appeal is more likely to succeed than not. The fees of such tax counsel shall be paid by the Sellers. |
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5.9 |
The Sellers shall be bound to accept for the purposes of any Tax Claim which could result in a liability for any Seller under this Schedule any admission, compromise, settlement or discharge of any such Tax Claim and the outcome of any proceedings relating thereto made or arrived at in accordance with the provisions of this Schedule. |
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8.2 |
After the period of eighteen (18) months described in paragraph 8.1 above or in the event amounts in the Escrow Account have been exhausted, any sums required to be paid by the Sellers pursuant to a Tax Claim shall be paid (in cleared funds): |
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(b) |
in respect of a Deemed Tax Liability, on the later of: |
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(i) |
the date five Business Days after the date on which the Sellers receive written details of the amount of the Tax Liability from the Purchaser; |
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(c) |
for anything else, on the date five Business Days following the date on which notice giving written details of the amount due is received by the Sellers’ Representative from the Purchaser. |
8.3 |
Nothing in this paragraph 8 applies to a Tax Claim that arises or is delayed as a result of fraud, or fraudulent misrepresentation by any of the Sellers or any of their respective Agents, in which case any sums payable pursuant to such Tax Claim shall be paid directly by the relevant Seller who committed the fraud or fraudulent misrepresentation to the Purchaser within five (5) Business Days following a final and binding decision by a court of competent jurisdiction regarding the occurrence of an instance of fraud, or fraudulent misrepresentation (with all rights of appeal having been exhausted). |
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Exhibit 10.1
FIRST AMENDMENT
This FIRST AMENDMENT (this “Amendment”) dated as of May 28, 2021 to the Credit Agreement referenced below is by and among Zynga Inc., a Delaware corporation (the “Borrower”), the Guarantors identified on the signature pages hereto, the Lenders identified on the signature pages hereto and Bank of America, N.A., in its capacity as Administrative Agent (in such capacity, the “Administrative Agent”).
W I T N E S S E T H
WHEREAS, a revolving credit facility has been extended to the Borrower pursuant to the Credit Agreement (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”) dated as of December 11, 2020 among the Borrower, the Guarantors identified therein, the Lenders identified therein and the Administrative Agent; and
WHEREAS, the Borrower has requested certain modifications to the Credit Agreement and the Required Lender have agreed to the requested modifications to the Credit Agreement on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.Defined Terms. Capitalized terms used herein but not otherwise defined herein shall have the meanings provided to such terms in the Credit Agreement (as amended hereby).
2.Amendment.
(a)The following definitions are hereby added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order to read as follows:
“Electronic Record” has the meaning assigned specified in Section 11.18.
“Electronic Signature” has the meaning assigned specified in Section 11.18.
“Rescindable Amount” has the meaning specified in Section 2.12(b)(ii).
(b)The definition of “Transformative Acquisition” is hereby deleted from Section 1.01 of the Credit Agreement.
(c)In Section 1.01 of the Credit Agreement, clause (e) of the definition of “Permitted Acquisition” is hereby amended to read as follows:
(e)[reserved]; and
(d)In Section 1.01 of the Credit Agreement, clause (f) of the definition of “Permitted Acquisition” is hereby amended to read as follows:
(f)[reserved].
(e)In Section 2.12 of the Credit Agreement, clause (b)(ii) is hereby amended to read as follows:
(ii)Payments by Borrower; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the L/C Issuer hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the L/C Issuer, as the case may be, the amount due.
With respect to any payment that the Administrative Agent makes for the account of the Lenders or the L/C Issuer hereunder as to which the Administrative Agent determines (which determination shall be conclusive absent manifest error) that any of the following applies (such payment referred to as the “Rescindable Amount”): (1) the Borrower has not in fact made such payment; (2) the Administrative Agent has made a payment in excess of the amount so paid by the Borrower (whether or not then owed); or (3) the Administrative agent has for any reason otherwise erroneously made such payment; then each of the Lenders or the L/C Issuer, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the Rescindable Amount so distributed to such Lender or the L/C Issuer, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this clause (b) shall be conclusive, absent manifest error.
(f)In Section 7.03 of the Credit Agreement, clause (i) is hereby amended to read as follows:
(i)Investments to the extent that payment for such Investments is made with Equity Interests of the Borrower or with net proceeds of any substantially contemporaneous issuance of Equity Interests of the Borrower;
(g)In Article IX of the Credit Agreement, a new Section 9.13 is hereby added immediately following the end of Section 9.12 of the Credit Agreement (with a corresponding addition to the Table of Contents of the Credit Agreement) to read as follows:
9.13Recovery of Erroneous Payments.
Without limitation of any other provision in this Agreement, if at any time the Administrative Agent makes a payment hereunder in error to any Lender or the L/C Issuer (the “Credit Party”), whether or not in respect of any of the Secured Obligations due and owing by the Borrower at such time, where such payment is a Rescindable Amount, then in any such event, each Credit Party receiving a Rescindable Amount severally agrees to repay to the Administrative
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Agent forthwith on demand the Rescindable Amount received by such Credit Party in immediately available funds in the currency so received, with interest thereon, for each day from and including the date such Rescindable Amount is received by it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. Each Credit Party irrevocably waives any and all defenses, including any “discharge for value” (under which a creditor might otherwise claim a right to retain funds mistakenly paid by a third party in respect of a debt owed by another) or similar defense to its obligation to return any Rescindable Amount. The Administrative Agent shall inform each Credit Party promptly upon determining that any payment made to such Credit Party comprised, in whole or in part, a Rescindable Amount.
(h)In Section 11.04 of the Credit Agreement, clause (b)(i) is hereby amended to read as follows:
(i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby (including, without limitation, the Indemnitee’s reliance on any Communication executed using an Electronic Signature, or in the form of an Electronic Record), the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents (including in respect of any matters addressed in Section 3.01),
(i)Section 11.18 of the Credit Agreement is hereby amended to read as follows:
11.18 Electronic Execution; Electronic Records; Counterparts.
This Agreement and any document, amendment, approval, consent, information, notice, certificate, request, statement, disclosure or authorization related to this Agreement (each a “Communication”), including Communications required to be in writing, may be in the form of an Electronic Record and may be executed using Electronic Signatures. The Administrative Agent, each Lender and each of the Loan Parties (collectively, each a “Party”) agrees that any Electronic Signature on or associated with any Communication shall be valid and binding on such Person to the same extent as a manual, original signature, and that any Communication entered into by Electronic Signature, will constitute the legal, valid and binding obligation of such Person enforceable against such Person in accordance with the terms thereof to the same extent as if a manually executed original signature was delivered. Any Communication may be executed in as many counterparts as necessary or convenient, including both paper and electronic counterparts, but all such counterparts are one and the same Communication. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Administrative Agent and each of the Secured Parties of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format), or an electronically signed Communication converted into another format, for transmission, delivery and/or retention. The Administrative
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Agent and each of the Secured Parties may, at its option, create one or more copies of any Communication in the form of an imaged Electronic Record (“Electronic Copy”), which shall be deemed created in the ordinary course of such Person’s business, and destroy the original paper document. All Communications in the form of an Electronic Record, including an Electronic Copy, shall be considered an original for all purposes, and shall have the same legal effect, validity and enforceability as a paper record. Notwithstanding anything contained herein to the contrary, the Administrative Agent is under no obligation to accept an Electronic Signature in any form or in any format unless expressly agreed to by the Administrative Agent pursuant to procedures approved by it; provided, further, without limiting the foregoing, (a) to the extent the Administrative Agent has agreed to accept such Electronic Signature, the Administrative Agent and each of the Secured Parties shall be entitled to rely on any such Electronic Signature purportedly given by or on behalf of any Loan Party and/or any other Party without further verification and (b) upon the request of the Administrative Agent or any Party, any Electronic Signature shall be promptly followed by such manually executed counterpart. For purposes hereof, “Electronic Record” and “Electronic Signature” shall have the meanings assigned to them, respectively, by 15 USC §7006, as it may be amended from time to time. The Borrower hereby acknowledges the receipt of a copy of this Agreement and all other Loan Documents.
3.Conditions Precedent. This Amendment shall become effective as of the date hereof upon receipt by the Administrative Agent of counterparts of this Amendment duly executed by a Responsible Officer of each Loan Party and by the Required Lenders.
4.Amendment is a Loan Document. This Amendment is a Loan Document and all references to a “Loan Document” in the Credit Agreement and the other Loan Documents (including, without limitation, all such references in the representations and warranties in the Credit Agreement and the other Loan Documents) shall be deemed to include this Amendment.
5.Representations and Warranties. Each Loan Party represents and warrants to the Administrative Agent and each Lender that after giving effect to this Amendment (a) the representations and warranties of each Loan Party contained in Article V of the Credit Agreement (as amended hereby) or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, are (i) with respect to representations and warranties that contain a materiality qualification, true and correct on and as of the date hereof and (ii) with respect to representations and warranties that do not contain a materiality qualification, true and correct in all material respects on and as of the date hereof, except that for purposes of this Section 5(a), the representations and warranties contained in Sections 5.05(a) and (b) of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to Sections 6.01(a) and (b) of the Credit Agreement, respectively and (b) no Default exists.
6.Reaffirmation of Obligations. Each Loan Party (a) acknowledges and consents to all of the terms and conditions of this Amendment and all transactions contemplated hereby, (b) affirms all of its obligations under the Credit Agreement (as amended hereby) and the other Loan Documents and (c) agrees that this Amendment and all documents executed in connection herewith do not operate to reduce or discharge such Loan Party’s obligations under the Loan Documents.
7.Reaffirmation of Security Interests and Guarantees. Each Loan Party (a) agrees that, notwithstanding the effectiveness of this Amendment, the Security Agreement and each of the other
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Collateral Documents continue to be in full force and effect and are not impaired or adversely affected in any manner whatsoever, (b) confirms its guaranty of the Guaranteed Obligations and its grant of a security interest pursuant to the Collateral Documents in its assets that constitute Collateral as collateral therefor, all as provided in the Loan Documents as originally executed and (c) acknowledges that such guaranty and grant continues in full force and effect in respect of, and to secure, the Secured Obligations under the Credit Agreement and the other Loan Documents.
8.No Other Changes. Except as modified hereby, all of the terms and provisions of the Loan Documents shall remain in full force and effect.
9.Counterparts; Delivery. This Amendment may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of this Amendment by facsimile or other electronic imaging means shall be effective as an original.
10.Governing Law. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of New York.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.
BORROWER: |
ZYNGA INC., |
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a Delaware corporation |
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By: |
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/s/James Gerard Griffin |
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Name: |
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James Gerard Griffin |
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Title: |
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Chief Financial Officer |
FIRST AMENDMENT
ZYNGA INC.
ADMINISTRATIVE AGENT: |
BANK OF AMERICA, N.A., |
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as Administrative Agent |
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By: |
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/s/ Joan Mok |
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Name: |
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Joan Mok |
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Title: |
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Vice President |
FIRST AMENDMENT
ZYNGA INC.
LENDERS: |
BANK OF AMERICA, N.A., |
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as a Lender, L/C Issuer and Swingline Lender |
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By: |
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/s/ Jason Auguste |
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Name: |
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Jason Auguste |
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Title: |
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Vice President |
FIRST AMENDMENT
ZYNGA INC.
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JPMORGAN CHASE BANK, N.A., |
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as a Lender |
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By: |
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/s/ Bruce S. Borden |
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Name: |
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Bruce S. Borden |
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Title: |
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Executive Director |
FIRST AMENDMENT
ZYNGA INC.
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MORGAN STANLEY SENIOR FUNDING, INC., |
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as a Lender |
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By: |
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/s/ Gilroy D’Souza |
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Name: |
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Gilroy D’Souza |
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Title: |
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Vice President |
FIRST AMENDMENT
ZYNGA INC.
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GOLDMAN SACHS BANK USA, |
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as a Lender |
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By: |
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/s/ Dan Martis |
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Name: |
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Dan Martis |
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Title: |
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Authorized Signatory |
FIRST AMENDMENT
ZYNGA INC.
Exhibit 10.2
Amy Rawlings
c/o Zynga Inc.
Re: Appointment to S16 Officer
Dear Amy,
Zynga Inc. (the “Company”) is pleased to confirm your appointment by the Board of Directors as a Section 16 reporting officer, serving as Chief Accounting Officer and principal accounting officer of the Company. This letter details your position with the Company and renews our commitment to you as a highly-valued employee. Congratulations! Here are the details:
(1)
Effective August 2, 2021, you will be appointed as Zynga’s Chief Accounting Officer (principal accounting officer).
(2)
Your annual base salary is $270,000, less all applicable taxes and deductions required by law. Your salary will be subject to periodic review and adjustment in accordance with the Company’s then-current policies.
(3)
Annual Company Bonus. You will be eligible to participate in the Company’s annual bonus program, subject to the terms, conditions, and eligibility requirements of that program. Your target bonus is equal to 35% of your annual base salary. Whether you receive an annual bonus for any given bonus period, and the amount of any such bonus, will be determined by the Company in its sole discretion based upon the terms and conditions set forth in the applicable bonus program.
(4)
Zynga Stock Units. Subject the terms and conditions of the Company’s applicable equity incentive plan in effect at the time of grant (the “Plan”), you will be eligible to receive future Zynga restricted stock units (“RSUs”) awards.
(5)
All other terms and conditions of your employment with the Company, including those contained in your initial Offer Letter and Employee Invention Assignment and Confidentiality Agreement, which you signed, will remain unchanged.
This is an excellent opportunity for you to continue your contribution to the Company and remain a vital part of our future.
Very truly yours,
ZYNGA INC.
/s/ Jeff Ryan
Jeff Ryan
Chief People Officer
By accepting this appointment letter from Zynga Inc., I agree to abide by the terms and conditions set out in the above letter, my original offer letter, and any and all policies and regulations of the Company as may be amended from time to time.
Nothing in this letter alters the other terms and conditions of my employment with Zynga and nothing alters the at-will nature of my employment relationship. This means that both I and Zynga have the right to terminate my employment for any reason, at any time, with or without notice, and with or without cause.
/s/ Amy Rawlings |
July 30, 2021 |
Amy Rawlings |
Date |
Exhibit 31.1
CERTIFICATIONS
I, Frank Gibeau, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Zynga Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 6, 2021 |
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By: |
/s/ Frank Gibeau |
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Frank Gibeau |
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Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, James Gerard Griffin, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Zynga Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 6, 2021 |
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By: |
/s/ James Gerard Griffin |
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James Gerard Griffin |
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Chief Financial Officer |
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(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Frank Gibeau, Chief Executive Officer of Zynga Inc. (the “Company”), and James Gerard Griffin, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
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1. |
The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and |
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2. |
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
In Witness Whereof, the undersigned have set their hands hereto as of the 6th day of August, 2021.
/s/ Frank Gibeau |
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/s/ James Gerard Griffin |
Frank Gibeau |
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James Gerard Griffin |
Chief Executive Officer |
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Chief Financial Officer |
“This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Zynga Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.”
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Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Statement Of Financial Position [Abstract] | ||
Accounts receivable, allowance | $ 0.5 | $ 0.5 |
Common stock, par value | $ 0.00000625 | $ 0.00000625 |
Common stock, shares authorized | 2,020,500,000 | 2,020,500,000 |
Common stock, shares outstanding | 1,092,000,000.0 | 1,081,600,000 |
Consolidated Statements of Operations (Unaudited) - USD ($) shares in Millions, $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Revenue: | ||||
Total revenue | $ 720.0 | $ 451.7 | $ 1,400.3 | $ 855.4 |
Costs and expenses: | ||||
Cost of revenue | 253.3 | 179.2 | 514.0 | 325.4 |
Research and development | 109.8 | 227.9 | 250.5 | 425.8 |
Sales and marketing | 244.2 | 134.7 | 492.9 | 257.8 |
General and administrative | 37.9 | 39.2 | 73.6 | 67.4 |
Total costs and expenses | 645.2 | 581.0 | 1,331.0 | 1,076.4 |
Income (loss) from operations | 74.8 | (129.3) | 69.3 | (221.0) |
Interest income | 1.7 | 3.6 | 3.4 | 9.1 |
Interest expense | (14.7) | (7.0) | (29.4) | (13.9) |
Other income (expense), net | (9.1) | 0.6 | (0.2) | (1.7) |
Income (loss) before income taxes | 52.7 | (132.1) | 43.1 | (227.5) |
Provision for (benefit from) income taxes | 24.9 | 18.2 | 38.3 | 26.7 |
Net income (loss) | $ 27.8 | $ (150.3) | $ 4.8 | $ (254.2) |
Net income (loss) per share attributable to common stockholders: | ||||
Basic | $ 0.03 | $ (0.16) | $ 0.00 | $ (0.27) |
Diluted | $ 0.02 | $ (0.16) | $ 0.00 | $ (0.27) |
Weighted-average common shares used to compute net income (loss) per share attributable to common stockholders: | ||||
Basic | 1,089.7 | 956.9 | 1,087.1 | 954.7 |
Diluted | 1,147.6 | 956.9 | 1,146.0 | 954.7 |
Online Game [Member] | ||||
Revenue: | ||||
Total revenue | $ 587.0 | $ 388.2 | $ 1,144.0 | $ 732.5 |
Advertising and Other [Member] | ||||
Revenue: | ||||
Total revenue | $ 133.0 | $ 63.5 | $ 256.3 | $ 122.9 |
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Statement Of Partners Capital [Abstract] | ||||
Net income (loss) | $ 27.8 | $ (150.3) | $ 4.8 | $ (254.2) |
Other comprehensive income (loss): | ||||
Change in foreign currency translation adjustment | 11.0 | 16.3 | (4.5) | (12.7) |
Net change in unrealized gains (losses) on available-for-sale marketable debt securities, net of tax | 1.4 | (0.1) | 0.4 | |
Other comprehensive income (loss), net of tax | 11.0 | 17.7 | (4.6) | (12.3) |
Comprehensive income (loss) | $ 38.8 | $ (132.6) | $ 0.2 | $ (266.5) |
Overview and Summary of Significant Accounting Policies |
6 Months Ended |
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Organization Consolidation And Presentation Of Financial Statements [Abstract] | |
Overview and Summary of Significant Accounting Policies |
1. Overview and Summary of Significant Accounting Policies Organization and Description of Business Zynga Inc. (“Zynga,” “we” or the “Company”) is a leading provider of social game services. We develop, market and operate social games as live services played on mobile platforms (such as Apple’s iOS and Google’s Android), social networking platforms (such as Facebook and Snapchat), Personal Computers (PCs), consoles (such as Nintendo’s Switch) and other platforms. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items and advertising services. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S. as well as various international office locations in North America, Asia and Europe. We completed our initial public offering in December 2011 and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ZNGA.” Basis of Presentation and Consolidation The accompanying interim consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The interim consolidated financial statements include the operations of the Company and its owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. Unaudited Interim Financial Information The accompanying interim consolidated balance sheet as of June 30, 2021, the interim consolidated statements of operations, statements of comprehensive income (loss) and statements of stockholders’ equity for the three and six months ended June 30, 2021 and 2020, statements of cash flows for the six months ended June 30, 2021 and 2020 and the notes to the interim consolidated financial statements are unaudited. In management’s opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any other future period. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the interim consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated average playing period of payers that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, the fair value of assets and liabilities acquired through business combinations, contingent consideration obligations, the discount rate used in measuring our operating lease liabilities, the interest rate used in calculating the present value of the initial liability component of our convertible senior notes, stock-based compensation expense and evaluation of recoverability of goodwill, intangible assets and long-lived assets. Actual results could differ materially from those estimates. Recent Accounting Pronouncements Issued But Not Yet Adopted In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible instruments by reducing the number of accounting models and requiring that a convertible instrument be accounted for as a single liability measured at amortized cost. Further, the ASU amends the earnings per share guidance by requiring the diluted earnings per share calculation for convertible instruments to follow the if-converted method, with use of the treasury stock method no longer permitted. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, but no earlier than fiscal years beginning after December 15, 2020. The ASU allows either a modified retrospective method of transition or a fully retrospective method of transition, with any adjustments recognized as an adjustment to the opening balance of retained earnings. The Company is currently assessing this standard’s impact on its consolidated financial statements, but does anticipate a material adjustment to the carrying amount of the liability and equity components of our convertible senior notes upon adoption and the Company will not early adopt. |
Revenue from Contracts with Customers |
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Revenue from Contracts with Customers |
2. Revenue from Contracts with Customers Disaggregation of Revenue The following table presents our revenue disaggregated by platform (in millions):
The following table presents our revenue disaggregated based on the geographic location of our payers (in millions):
The estimated weighted average playing period of payers was ten months for the three and six months ended June 30, 2021 and 2020. During the six months ended June 30, 2021, we recognized $1.4 million of online game revenue and income from operations from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods. This change in estimate did not impact our reported earnings per share in the six months ended June 30, 2021. During the three months ended June 30, 2021 and the three and six months ended June 30, 2020, there was no significant impact from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods Contract Balances We receive payments from our customers based on the payment terms established in our contracts. Payments for online game revenue are required at time of purchase, are non-refundable and relate to non-cancellable contracts that specify our performance obligations. Such payments are initially recorded to deferred revenue and are recognized into revenue as we satisfy our performance obligations. Further, payments made by our players are collected by payment processors and remitted to us generally within 45 days of invoicing. Our right to the payments collected on our behalf is unconditional and therefore recorded as accounts receivable, net of the associated payment processing fees. Payments for advertising arrangements are due based on the contractually stated payment terms. The contract terms generally require payment within 30 to 60 days subsequent to the end of the month. Our right to payment from the customer is unconditional and therefore recorded as accounts receivable. During the three and six months ended June 30, 2021, we recognized $240.9 million and $630.3 million, respectively, of revenue that was included in the current deferred revenue balance on December 31, 2020. The increase in accounts receivable, net during the six months ended June 30, 2021 was primarily driven by sales on account during the period exceeding cash collections of current period and previously due amounts. The increase in deferred revenue during the six months ended June 30, 2021 was primarily driven by the sale of virtual items during the period, exceeding revenue recognized from the satisfaction of our performance obligations. Unsatisfied Performance Obligations Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less. |
Marketable Securities |
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Marketable Securities |
3. Marketable Securities Debt Securities The following tables summarize the amortized cost, gross unrealized gains and losses and fair value of our short-term and long-term debt securities as of June 30, 2021 and December 31, 2020 (in millions):
Equity Securities We recognized a gain of $0.2 million and a loss of $0.7 million during the six months ended June 30, 2021 and 2020, respectively, as a component of other income (expense), net in our consolidated statement of operations associated with our mutual fund equity investments. We recognized a gain of $0.2 million during the three months ended June 30, 2020, as a component of other income (expense), net in our consolidated statement of operations associated with our mutual fund equity investments. |
Fair Value Measurements |
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Fair Value Measurements |
4. Fair Value Measurements The composition of our financial assets and liabilities as of June 30, 2021 and December 31, 2020 among the three levels of the fair value hierarchy are as follows (in millions):
The following table presents the activity for the six months ended June 30, 2021 related to our Level 3 liabilities (in millions):
As of June 30, 2021, our contingent consideration obligations relate to the additional consideration payable in connection with our acquisitions of Gram Games in the second quarter of 2018, Small Giant in the first quarter of 2019 and Rollic in the fourth quarter of 2020. Under the original terms of the Gram Games and Small Giant acquisitions, contingent consideration may be payable based on the achievement of certain future profitability metrics during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. Under the terms of the Rollic acquisition, contingent consideration may be payable based on the achievement of certain future bookings and profitability metrics during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. For all three acquisitions, we estimated the acquisition date fair value of the contingent consideration obligation using a Monte Carlo simulation. The significant unobservable inputs used in estimating these acquisition date fair value measurements were each entity’s projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers.
With respect to the remaining Rollic contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic in the second quarter of 2021 to accelerate the Company’s acquisition of the remaining 20% ownership in Rollic and to set the total contingent consideration payment at $60.0 million (the “Rollic Amendment”). In July 2021, the Company acquired the remaining 20% ownership and paid $20.0 million, with the remaining $40.0 million to be paid in first quarter of 2022. At the date of the Rollic Amendment, the Company measured the remaining final obligation by calculating the present value of the final payments using a discount rate of 1.3%, commensurate with the remaining term. The Company will accrete the obligation up to its final amount using the effective interest method.
The estimated value of the Rollic contingent consideration obligation increased from $53.8 million as of December 31, 2020 to $59.6 million as of June 30, 2021. For the three and six months ended June 30, 2021, we recognized $1.9 million and $5.8 million of expense, respectively, within research and development expenses in our consolidated statement of operations related to the Rollic contingent consideration.
With respect to the remaining Gram Games contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Gram Games in the fourth quarter of 2020 to set the final contingent consideration payment at $75.0 million (the “Gram Games Amendment”), to be paid in third quarter of 2021. At the date of the Gram Games Amendment, the Company measured the remaining final obligation by calculating the present value of the final payment using a discount rate of 2.1%, commensurate with the remaining term. Subsequently, the Company accretes the obligation up to its final amount using the effective interest method. The estimated value of the Gram Games contingent consideration obligation accreted up from $74.1 million as of December 31, 2020 to $74.9 million as of June 30, 2021. For the three and six months ended June 30, 2021, we recognized $0.4 million and $0.8 million of expense, respectively, within research and development expenses in our consolidated statement of operations related to the Gram Games contingent consideration. In July 2021, the Company paid $75.0 million to settle the final contingent consideration obligation. With the respect to the remaining Small Giant contingent consideration obligation, we estimate the fair value at each subsequent reporting period using a Monte Carlo simulation. The table below outlines the significant unobservable inputs used in estimating the fair value of the last remaining Small Giant contingent consideration liability as of June 30, 2021:
Changes in the projected performance of the acquired businesses could result in a higher or lower contingent consideration obligation in the future.
In April 2021, the Company executed an amendment to the Share Purchase Agreement with the former owners of Small Giant to exclude the direct profitability (which includes marketing expenses) from Puzzle Combat, which launched globally in April 2021, from the remaining performance period.
The estimated fair value of the Small Giant contingent consideration obligation decreased from $409.3 million as of December 31, 2020 to $192.6 million as of June 30, 2021. The decrease was driven by a $239.6 million payment in the first quarter of 2021 to the former owners of Small Giant for its performance during the second contingent consideration period, partially offset by stronger than expected performance and the increased probability of achievement during the remaining performance period. For the six months ended June 30, 2021, we recognized $22.9 million of expense within research and development expenses in our consolidated statement of operations. For the three months ended June 30, 2021, we recognized a $6.1 million benefit within research and development expenses in our consolidated statement of operations, driven by continued refinement of forecasted financial results.
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Property and Equipment, Net |
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Property and Equipment, Net |
5. Property and Equipment, Net Property and equipment, net consist of the following (in millions):
The following represents our property and equipment, net by location (in millions):
(1)No other foreign country exceeded 10% of our total property and equipment, net for any periods presented. |
Leases |
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Leases |
6. Leases
In the second quarter of 2021, the Company executed a lease for office space of approximately 62,000 square feet in San Mateo, California (the “San Mateo Office Building”) over an approximate 11-year lease term (the “Office Lease Agreement”), with annual lease expense of approximately $3.0 million beginning in June 2021. The Office Lease Agreement provides the Company two separate options to extend the lease for five years each (for a total of an additional 10 years). At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. In August 2021, the Company’s Board of Directors approved a plan to sublease the Company’s current 185,000 square foot San Francisco office space (the “San Francisco Office Building”), as the Company transitions to a hybrid in-office and remote employee work model. Based on information and estimates as of the date of this filing, the Company expects to recognize an impairment expense related to the San Francisco Office Building right-of-use asset and other related leasehold assets in the third quarter of 2021, which the Company estimates could range up to $80.0 million.
As of June 30, 2021, future lease payments related to our operating leases were as follows (in millions):
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Acquisitions |
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Acquisitions |
7. Acquisitions
Acquisition of Uncosoft Yazılım Anonim Şirketi (“Uncosoft”) On April 21, 2021, the Company’s subsidiary, Rollic, acquired 100% of all issued and outstanding share capital of Uncosoft, a Turkey joint stock company, in order to optimize its published game cost structure, for total purchase consideration of $10.5 million. On the acquisition date, Rollic paid a total of $12.5 million to the former owners of Uncosoft, of which $2.0 million settled a pre-acquisition contractual obligation for amounts owed to Uncosoft under Rollic and Uncosoft’s pre-existing profit sharing arrangement. The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Uncosoft (in millions):
Goodwill, which is 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.
Acquisition of Echtra Games, Inc. On March 2, 2021, the Company acquired 100% of all issued and outstanding share capital of Echtra Games, Inc. (“Echtra”), to expand our cross-platform game development tools, technologies and experience, for total purchase consideration of $21.1 million. The total purchase consideration included $19.6 million in cash and $1.5 million of unrestricted cash that was retained for a period of 12 months as security for general representations and warranties (the “Holdback Consideration”).
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Echtra (in millions):
The fair value of the developed technology intangible asset was determined using a cost to recreate approach. Goodwill, which is 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.
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Goodwill and Intangible Assets, Net |
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Goodwill And Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Intangible Assets, Net |
8. Goodwill and Intangible Assets, Net The following table presents the changes to goodwill for the six months ended June 30, 2021 (in millions):
The details of our acquisition-related intangible assets as of June 30, 2021 and December 31, 2020 are as follows (in millions):
Our trademarks, branding and domain names intangible assets include $6.1 million of indefinite-lived intangible assets as of June 30, 2021 and December 31, 2020. The remaining assets were, and continue to be, amortized on a straight-line basis. Amortization expense related to intangible assets was $52.1 million and $104.9 million for the three and six months ended June 30, 2021, respectively. Comparatively, amortization expense related to intangible assets was $16.3 million and $32.7 million for the three and six months ended June 30, 2020 respectively. As of June 30, 2021, the weighted-average remaining useful lives of our acquired intangible assets were 3.9 years for developed technology, 5.9 years for trademarks, branding and domain names, 3.3 years for third-party developer relationships and 4.2 years in total, for all acquired intangible assets. As of June 30, 2021, future amortization expense related to our intangible assets is expected to be recognized as follows (in millions):
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Income Taxes |
6 Months Ended |
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Jun. 30, 2021 | |
Income Tax Disclosure [Abstract] | |
Income Taxes |
9. Income Taxes The provision for income taxes increased $6.7 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was primarily driven by statutory income of Peak and Rollic and higher profit of Small Giant, partially offset by the prior period income tax expense of $9.4 million related to Zynga’s revision of its prior tax position of not including stock-based compensation expenses in its cost share with its affiliates, based on the U.S. Supreme Court’s June 2020 denial to hear a petition regarding a lower court ruling in Altera Corp v. Commissioner (the “Altera matter”). The provision for income taxes increased $11.6 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily driven by statutory income of Peak and Rollic and higher profit Small Giant, partially offset by the prior period income tax expense of $9.4 million related to the Altera matter. |
Debt |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt |
10. Debt Convertible Senior Notes
On December 17, 2020, we issued $874.5 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the “2026 Notes”) including the initial purchasers’ full exercise of their option to purchase an additional $112.5 million principal amount of the 2026 Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act of 1933. The net proceeds from the issuance of the 2026 Notes was $856.8 million after deducting transaction costs.
On June 14, 2019, we issued $690.0 million aggregate principal amount of 0.25% Convertible Senior Notes due 2024 (the “2024 Notes”), including the initial purchasers’ full exercise of their option to purchase an additional $90.0 million principal amount of the 2024 Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act of 1933. The net proceeds from the issuance of the 2024 Notes was $672.2 million after deducting transaction costs.
The 2026 Notes and 2024 Notes are each governed by an indenture between us, as the issuer, and Wells Fargo Bank, National Association, as trustee. The 2026 Notes and 2024 Notes are senior unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to such notes; equal in right of payment to all of our existing and future liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our current or future subsidiaries (including trade payables). The indentures governing the 2026 Notes and 2024 Notes, as applicable, do not contain any financial covenants.
The 2026 Notes and 2024 Notes mature on December 15, 2026 and June 1, 2024, respectively, unless earlier converted, redeemed or repurchased in accordance with their terms respectively prior to the maturity date. The 2026 Notes do not bear regular interest, and the principal amount does not accrete, while interest is payable semiannually on the 2024 Notes in arrears on June 1 and December 1 of each year. The 2026 Notes have an initial conversion rate of 76.5404 shares of our Class A common stock per $1,000 principal amount of 2026 Notes, which is equal to an initial conversion price of approximately $13.07 per share of our Class A common stock, subject to adjustment if certain events occur. The 2024 Notes have an initial conversion rate of 120.3695 shares of our Class A common stock per $1,000 principal amount of 2024 Notes, which is equal to an initial conversion price of approximately $8.31 per share of our Class A common stock, subject to adjustment if certain events occur. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert its 2026 Notes or 2024 Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the indentures, holders of the 2026 Notes and 2024 Notes may require us to repurchase for cash all or a portion of their respective 2026 Notes or 2024 Notes at a purchase price equal to 100% of the principal amount of the 2026 Notes and 2024 Notes plus accrued and unpaid interest.
Prior to the close of business on the business day immediately preceding September 15, 2026 with respect to the 2026 Notes and March 1, 2024 with respect to the 2024 Notes, the 2026 Notes and 2024 Notes will be convertible only under the following circumstances:
On or after the dates specified above, holders of the 2026 Notes and 2024 Notes may convert all or any portion of their 2026 Notes and 2024 Notes regardless of the foregoing conditions. Upon any conversion, holders will receive cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
The Company may not redeem the 2026 Notes or 2024 Notes prior to December 20, 2023 and June 5, 2022, respectively. On or after those respective dates, the Company may redeem for cash all or any portion of the applicable series of the 2026 Notes or 2024 Notes, at its option, if the last reported sale price of our Class A common stock has been at least 130% of the conversion price of the applicable series of the 2026 Notes or 2024 Notes for at least 20 trading days during any 30 consecutive trading-day period ending on and including the trading day immediately preceding the date when the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the applicable series of the 2026 Notes or 2024 Notes to be redeemed, plus any accrued and unpaid interest or special interest, as applicable.
As of June 30, 2021, the conditions allowing holders of the 2026 Notes or 2024 Notes to convert their respective series of the 2026 Notes and 2024 Notes have not been met and therefore both the 2026 Notes and 2024 Notes are not yet convertible.
We separately accounted for the liability and equity components of the 2026 Notes and 2024 Notes. We determined the initial carrying amount of the $707.4 million liability component of the 2026 Notes by calculating the present value of the cash flows using an effective interest rate of 3.5%. We determined the initial carrying amount of the $572.0 million liability component of the 2024 Notes by calculating the present value of the cash flows using an effective interest rate of 4.1%. The effective interest rates were determined based on non-convertible debt offerings, of similar sizes and terms, by companies with similar credit ratings and other observable market data (Level 2 inputs).
The amount of the equity component, representing the conversion option, was $167.1 million for the 2026 Notes and $118.0 million for the 2024 Notes and was calculated by deducting the initial carrying value of the liability component from the principal amount of the 2026 Notes and 2024 Notes, respectively. This difference represents a debt discount that is amortized to interest expense over the 6-year and 5-year contractual periods of the 2026 Notes and 2024 Notes, respectively, using the effective interest rate method. The equity components are not subsequently remeasured as long as they continue to meet the conditions for equity classification. We allocated transaction costs related to the issuance of the respective series of the 2026 Notes and 2024 Notes to the liability and equity components using the same proportions as the initial carrying value of the respective series of the 2026 Notes and 2024 Notes. The respective transaction costs are then amortized to interest expense using the effective interest method over the terms of the respective series of 2026 Notes and 2024 Notes. Transaction costs initially attributable to the liability component of the 2026 Notes and 2024 Notes were $14.3 million and $14.8 million, respectively, while transaction costs attributable to the equity component of the 2026 Notes and 2024 Notes were $3.4 million and $3.1 million, respectively. The transaction costs attributable to the equity component are accounted for consistently with the equity component of the 2026 Notes and 2024 Notes.
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of June 30, 2021 were as follows (in millions):
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of December 31, 2020 were as follows (in millions):
Interest expense recognized related to the Notes was as follows (in millions):
Based on the closing price of our Class A common stock of $10.63 on June 30, 2021, the if-converted value of the 2024 Notes of $882.9 million exceeded the principal amount of the 2024 Notes by $192.9 million. As of June 30, 2021, the estimated fair value of the 2026 Notes and 2024 Notes was $941.2 million and $954.1 million, respectively. We estimated the fair value based on the quoted market prices in an inactive market on the last trading day of the reporting period, which are considered Level 2 inputs.
Capped Call Transactions
In connection with the offering of the 2026 Notes and 2024 Notes, the Company entered into privately negotiated capped call options with certain counterparties (the “2026 Capped Calls” and “2024 Capped Calls”, respectively). The 2026 Capped Calls have an initial strike price of approximately $13.07 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes and an initial cap price of $17.42 per share, subject to certain adjustments. The 2026 Capped Calls are intended to reduce the potential economic dilution of approximately 66.9 million shares to our Class A common stock upon any conversion of the 2026 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price. The cost of $63.0 million incurred in connection with the 2026 Capped Calls was recorded as a reduction to additional paid-in capital.
The 2024 Capped Calls have an initial strike price of approximately $8.31 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes and an initial cap price of $12.54 per share, subject to certain adjustments. The 2024 Capped Calls are intended to reduce the potential economic dilution of approximately 83.1 million shares to our Class A common stock upon any conversion of the 2024 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price. The cost of $73.8 million incurred in connection with the 2024 Capped Calls was recorded as a reduction to additional paid-in capital.
As both the 2026 Capped Calls and 2024 Capped Calls are considered indexed to our own stock and are equity classified, therefore they are recorded in stockholders’ equity and are not accounted for as derivatives.
Convertible Senior Notes and Capped Call Transactions – Impact on Earnings per Share
The Company computes the potentially dilutive impact of the shares of Class A common stock related to the 2026 Notes and 2024 Notes using the treasury stock method, as we intend and have the ability to settle the principal amount of the 2026 Notes and 2024 Notes in cash upon conversion. However, the 66.9 million shares initially underlying the conversion option of the 2026 Notes and the 83.1 million shares initially underlying the conversion option of the 2024 Notes do not have an impact on our diluted earnings per share unless the average market price of our Class A common stock exceeds the respective conversion price of the 2026 Notes and 2024 Notes during a period of net income.
The 2026 Capped Calls and 2024 Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
Credit Facility In December 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with certain financial institutions that provides for a revolving credit facility in an aggregate principal amount of up to $425.0 million and is secured by a blanket lien on the Company’s assets. The Company may borrow, repay and re-borrow funds under the 2020 Credit Agreement until December 31, 2023, at which time the 2020 Credit Agreement will terminate, and all outstanding revolving loans, together with all accrued and unpaid interest, must be repaid. The Company may use the proceeds of future borrowings under the 2020 Credit Agreement for general corporate purposes.Under the 2020 Credit Agreement, at the Company’s option, revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.50% to 1.00%, determined based on the Company’s consolidated leverage ratio for the four most recent fiscal quarters (the “Consolidated Leverage Ratio”) or (ii) the LIBOR rate (for interest periods of one, two, three or six months) plus a margin ranging from 1.50% to 2.00%, determined based on the Company’s Consolidated Leverage Ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Bank of America, N.A.’s prime rate and (iii) the LIBOR rate for a one-month interest period plus 1.00%. The Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate ranging from 0.25% to 0.35%, determined based on the Company’s Consolidated Leverage Ratio. As of June 30, 2021, we had no amounts outstanding under the 2020 Credit Agreement. |
Other Current and Non-Current Liabilities |
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Other Liabilities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Current and Non-Current Liabilities |
11. Other Current and Non-Current Liabilities Other current liabilities consist of the following (in millions):
Our accrued compensation liability represents employee bonus and other payroll withholding expenses, while other current liabilities include various expenses that we accrue for sales and other taxes, customer deposits, accrued vendor expenses and deferred consideration payable from acquisitions. Other non-current liabilities consist of the following (in millions):
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Stockholders' Equity |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' Equity |
12. Stockholders’ Equity We recorded stock-based compensation expense related to grants of employee stock options, restricted stock units (“RSUs”) and performance and market-based awards in our consolidated statements of operations as follows (in millions):
Stock Option Activity
The following table shows stock option activity for the six months ended June 30, 2021 (in millions, except weighted-average exercise price and weighted-average contractual term):
RSU Activity
The following table shows a summary of RSU activity for the six months ended June 30, 2021, which includes performance and market-based awards (in millions, except weighted-average grant date fair value):
Performance-Based RSUs
On March 15, 2021, the Company granted performance-based awards to certain executives (the “2021 Performance RSUs”). The number of shares earned will range from 0% to 150% of the target number of shares granted, depending on an adjusted operating cash flow metric for the year ended December 31, 2021 relative to pre-established thresholds. Shares earned (if any) based on the level of achievement will vest over a period of four years following the grant date, with 25% vesting on the one year anniversary of the grant date and the remaining quarterly thereafter, subject to continued service by the employees. The target number of shares granted totaled 1.2 million.
The Company recognizes stock-based compensation expense for the 2021 Performance RSUs using the accelerated attribution method over the requisite service period. The amount of stock-based compensation is determined based on the probability of achievement of the pre-established thresholds at each reporting period. If necessary, at each reporting period, the Company records a cumulative catch-up adjustment to reflect any revised estimates regarding the probability of achievement. Stock Repurchases In April 2018, a share repurchase program was authorized for up to $200.0 million of our outstanding Class A common stock (the “2018 Share Repurchase Program”). The timing and amount of any stock repurchase will be determined based on market conditions, share price and other factors. The program does not require us to repurchase any specific number of shares of our Class A common stock and may be modified, suspended or terminated at any time without notice. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022 and will be funded from existing cash on hand or other sources of funding as the Company may determine to be appropriate. Share repurchases under these authorizations may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 plans or by any combination of such methods. During the three and six months ended June 30, 2021, no share repurchases were made under the 2018 Share Repurchase Program. As of June 30, 2021, we had $173.8 million remaining under the 2018 Share Repurchase Program. All of our previous stock repurchases were made through open market purchases under Rule 10b5-1 plans and subsequently retired. |
Accumulated Other Comprehensive Income (Loss) |
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Accumulated Other Comprehensive Income (Loss) |
13. Accumulated Other Comprehensive Income (Loss) The following table shows a summary of changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2021 (in millions):
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Net Income (Loss) Per Share of Common Stock |
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Net Income (Loss) Per Share of Common Stock |
14. Net Income (Loss) Per Share of Common Stock Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive securities. In computing diluted net income (loss) per share, net income (loss) attributable to common shareholders is re-allocated to reflect the potential impact of dilutive securities, including stock options, unvested RSUs, unvested performance and market-based RSUs, ESPP withholdings and convertible debt instruments. For periods in which we have generated a net loss or there is no income attributable to common stockholders, we do not include dilutive securities in our calculation of diluted net income (loss) per share, as the impact of these awards is anti-dilutive. The following tables set forth the computation of basic and diluted net income (loss) per share of common stock (in millions, except per share data):
The following weighted-average employee equity awards were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in millions):
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Commitments and Contingencies |
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Commitments And Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies |
15. Commitments and Contingencies The amounts represented in the tables below reflect our minimum cash obligations for the respective calendar years based on contractual terms, but not necessarily the periods in which these costs will be expensed in the Company’s consolidated statement of operations. Licensor and Marketing Commitments We have entered into several contracts with licensors that contain minimum contractual and marketing commitments that may not be dependent on any deliverables. As of June 30, 2021, future minimum contractual royalty payments due to licensors and marketing commitments for the licensed products are as follows (in millions):
Other Purchase Commitments We have entered into several contracts primarily for hosting of data systems and other services. As of June 30, 2021, future minimum purchase commitments that have initial or remaining non-cancelable terms are as follows (in millions):
Excluded from tables above is our uncertain income tax position liability of $24.9 million, which includes interest and penalties, as the Company cannot make a reasonably reliable estimate of the period of cash settlement.
In August 2021, the Company executed an agreement which commits it to purchase hosting services over three annual periods beginning August 1, 2021, in exchange for discounted pricing. The minimum commitments total $90.0 million over the term of the agreement, with annual minimum commitments ranging from $28.0 million to $32.0 million. Legal Matters The Company is involved in legal and regulatory proceedings on an ongoing basis. Some of these proceedings are in early stages and may seek an indeterminate amount of damages. If the Company believes that a loss arising from such matters is probable and can be reasonably estimated, the Company accrues the estimated liability in its financial statements. If only a range of estimated losses can be determined, the Company accrues an amount within the range that, in its judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, the Company accrues the low end of the range. For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, the Company discloses such an estimate, if material. If such a loss or range of losses is not reasonably estimable, the Company discloses that fact. In assessing the materiality of a proceeding, the Company evaluates, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs that may require changes to business practices in a manner that could have a material adverse impact on the Company’s business. Legal expenses are recognized as incurred. Legal expenses are recognized as incurred. On September 12, 2019, the Company announced that an incident had occurred that may have involved player data (the “Data Incident”). Upon our discovery of the Data Incident, an investigation immediately commenced and advisors and third-party forensics firms were retained to assist. The investigation revealed that, during the third quarter of 2019, outside hackers illegally accessed certain player account information and other Zynga information, and that no financial information was accessed. The Company has provided notifications to players, investors, regulators and other third parties, where we believe notice was required or appropriate. The Company has exchanged correspondence with certain regulators as a result of the incident. The Company has also received and has responded to data subject access requests from certain European Union players of Zynga’s games. Since March 3, 2020, five consumer class action complaints have been filed in connection with the Data Incident in federal court. On March 3, 2020, two plaintiffs – minor “I.C.” (acting through his parent Nasim Chaudhri) and Amy Gitre – filed a class action complaint arising out of the Data Incident (the “Chaudhri complaint”), generally alleging that Zynga failed to reasonably safeguard certain player information, including names, email addresses, and passwords (among other items); failed to provide them with timely notification of the breach; and made misleading representations concerning the safety and security of plaintiffs’ personal information. Plaintiffs allege claims against Zynga under several state law theories, including negligence, intrusion upon seclusion, failure to comply with data breach notification statutes, and unjust enrichment, and they seek injunctive relief and damages. Zynga filed a motion to compel arbitration and arbitration-related discovery on May 8, 2020. On March 23, 2020, plaintiffs Carol Johnson and Lisa Thomas filed a second class action complaint in the Northern District of California federal court (the “Johnson complaint”). Similar to the Chaudhri complaint, the Johnson plaintiffs – residents of Missouri and Wisconsin – assert Zynga failed to adequately protect certain player information, including names, email addresses, and passwords (among other items). Plaintiffs contend that, despite Zynga’s representations in its privacy policy that sensitive player information would be adequately protected, plaintiffs’ passwords were stored using inadequate hashing methods or in plain text. Plaintiffs allege that the lack of adequate security measures caused them harm as a result of the Data Incident, and they assert numerous various claims against Zynga, including claims for negligence, negligence per se, unjust enrichment, declaratory relief, breach of confidence, breach of contract and implied contract, violations of California’s Unfair Competition Law (“UCL”, CGL 17200, et seq.), and state-specific violations of Missouri’s Merchandising Practices Act and Wisconsin’s Deceptive Trade Practices Act. Plaintiffs seek damages, as well as declaratory and injunctive relief. On May 26, 2020, Zynga filed a motion to compel arbitration and arbitration-related discovery. On April 15, 2020, plaintiffs Joseph Martinez IV and Daniel Petro, residents of Colorado and Iowa, filed a third class action complaint in the Northern District of California (the “Martinez complaint”). Plaintiffs allege they are longtime Zynga players who were affected by the Data Incident. Similar to the Chaudhri and Johnson plaintiffs, the Martinez plaintiffs generally allege that Zynga failed to adequately store and protect or otherwise secure certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated and improper password encryption methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. Like the Johnson and Chaudhri plaintiffs, the Martinez plaintiffs assert claims for negligence, negligence per se, and unjust enrichment, as well as contractual claims, and claims for relief under multiple state consumer protection statutes. Additionally, the Martinez plaintiffs also assert misrepresentation and omission claims under California’s false advertising law and the California Consumer Legal Remedies Act. Plaintiffs seek injunctive and monetary relief on behalf of a nationwide class. Zynga responded to the Martinez complaint by filing a motion to compel arbitration on June 19, 2020. On June 9, 2020 plaintiffs James Oeste and Marissa Oeste, both residents of Maryland, filed a fourth class action complaint in the Northern District of Maryland (the “Oeste complaint”). Plaintiffs allege they were Zynga players who were affected by the Data Incident. Similar to all the foregoing plaintiffs, the Oeste plaintiffs seek to represent a nationwide class and generally allege that Zynga failed to adequately or reasonably protect certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated or improper password hashing methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. The Oeste plaintiffs assert claims for contractual breach, negligence, negligence per se, invasion of privacy, and claims for relief under California consumer protection and unfair competition statutes. Zynga responded to the complaint on August 31, 2020, with a motion to transfer the action to the Northern District of California. On May 5, 2021, the court granted Zynga’s motion to transfer, and the case was transferred to the Northern District of California. The California district court has consolidated Oeste proceedings in connection with the other already pending cases before the court. On August 13, 2020, plaintiff Christopher Rosiak filed a fifth class action in the Northern District of California (the “Rosiak complaint”). Plaintiff alleges similar and analogous claims to those in the Martinez (and others) actions pending in the Northern District, alleging that he suffered harm as a result of Zynga’s data breach. Plaintiff Rosiak alleges multiple state law claims, including contract-based claims, negligence, and violation of California’s unfair competition, false advertising, and consumer protection statutes.
On January 6, 2021, the Northern California district court issued an order in three of the above actions—Chaudhri, Johnson, and Martinez—denying Zynga’s motions to compel arbitration without prejudice, and granting an alternative request for preliminary arbitration-related discovery that Zynga had made in connection with its motions. Plaintiffs were ordered to provide Zynga with plaintiffs’ identifying information. Following a status hearing before the court as to all actions pending before it, plaintiffs filed an amended and consolidated complaint in connection with the Chaudhri, Johnson, and Martinez complaints, as well as in connection with the Rosiak complaint. The amended and consolidated complaint was filed in the Northern District of California on March 12, 2021.
In response to the amended and consolidated complaint, on April 21, 2021, the Company filed renewed motions to compel arbitration in connection with the claims alleged by three of the individual named plaintiffs in the Chaudhri, Johnson, and Martinez actions. On the same date, the Company also filed a motion to dismiss claims alleged by all remaining plaintiffs in those actions, and in the Rosiak action. Following oral argument held by the court on July 27, 2021, the court granted Zynga’s motion to compel arbitration and granted the motion to dismiss with leave to amend. Plaintiffs’ further amended complaint is due August 27, 2021. Zynga’s response to the amended complaint is due September 20, 2021.
On February 26, 2021, a class action lawsuit was filed in the United States District Court for the Northern District of California by named plaintiff Michael Owens (the “Owens complaint”), who purchased in-game currency in connection with his use of certain Zynga social slots games. The Zynga social slots games at issue include: Hit it Rich! Slots, Black Diamond Casino, Wizard of Oz Slots, Willy Wonka Slots, Game of Thrones™ Slots Casino, Spin it Rich!, Princess Bride Slots and Riches of Olympus. Plaintiff alleges that Zynga has unlawfully developed, owns, and operates games that qualify as unlawful slot machines under California Penal Code section 330b; and that Zynga “developed, owned, operated, and controlled” such in violation of California Penal Code sections 330, et seq., the Illegal Gambling Business Act (18 U.S.C. § 1955), and the Unlawful Internet Gambling Enforcement Act of 2006 (31 U.S.C. §§ 5361-5367). Plaintiff also alleges that Zynga unlawfully designs and markets its social slots games in order to target individuals with addictive tendencies; and that Zynga implements game features that violate state consumer protection laws. Plaintiff seeks money damages, restitution, disgorgement and other remedies, as well as injunctive relief. Plaintiff filed an amended complaint on March 29, 2021, including claims by additional named plaintiffs Jennie Plumley, Jon Schweitzer, Charlie Finlay, and Melissa Irelan. On May 4, 2021 the Company filed a motion to compel arbitration in response to the amended complaint. On June 21, 2021, all named plaintiffs filed a notice of voluntary dismissal, dismissing the complaint in its entirety, without prejudice.
On March 2, 2021, a class-action lawsuit (the “Bourgeois complaint”) was filed in the Superior Court of Quebec, in the province of Montreal, Canada. The lawsuit was filed by named plaintiff Gabriel Bourgeois, who purchased loot box items in connection with his use of the Marvel Strike Force and Pokemon Go! electronic and online games (plaintiff does not allege that he purchased a loot box in connection with any Zynga game). Plaintiff alleges that Zynga and multiple other gaming defendants have unlawfully developed, own, and operate an unlicensed gaming system, through the use of loot boxes in connection with their games. Plaintiff asserts that defendants have unlawfully offered loot boxes to the public in connection with their games; failed to properly disclose the odds of winning in connection with loot boxes; and failed to employ appropriate safeguards surrounding minors’ ability to purchase loot boxes. The specific Zynga games at issue—which plaintiff does not claim to have played—include CSR Racing 2, Empires & Puzzles, Farmville: Country Escape and Dawn of Titans. Plaintiff collectively asserts that by offering loot boxes, all defendants have violated the Criminal Code of Canada provisions that regulate gaming; the Competition Act of Canada; and various individual consumer protection laws of the individual Canadian provinces. Plaintiff seeks monetary damages in the form of compensatory and punitive damages, on his own behalf and that of a nationwide Canadian class. Zynga is reviewing plaintiff’s claims and intends to mount a vigorous defense.
On April 12, 2021, IGT and IGT Canada Solutions ULC (“IGT”) served Zynga with a lawsuit in the Western District of Texas federal court (the “IGT complaint”), accusing the Company of infringing United States Patent Nos. 8,708,791; 9,159,189; 7,168,089; 7,303,473; 8,795,064; and 8,266,212. The complaint alleges that the following games and certain features contained within them infringe on the IGT patents: Zynga Poker, Words With Friends, Farmville and Zynga social slots games, including specifically, Hit It Rich! Slots. Zynga is reviewing the complaint and intends to defend itself vigorously. On June 16, 2021, Zynga filed a partial motion to dismiss or strike plaintiff’s claims; and in the alternative, for a more definitive statement. IGT filed its opposition brief on June 30, 2021, and Zynga filed its reply on July 7, 2021. The parties are awaiting a hearing on the motion. The Company intends to defend itself vigorously against all claims asserted. At this time, the Company is unable to reasonably estimate the loss or range of loss, if any, arising from any of the above-referenced matters. The Company is, at various times, also party to various other legal proceedings, claims and/or regulatory inquiries not previously discussed which arise in the ordinary course of business. In addition, the Company may receive notifications alleging infringement of patent or other intellectual property rights. Adverse results in any such litigation, legal proceedings or claims may include awards of substantial monetary damages, expensive legal fees, costly royalty or licensing agreements, or orders preventing us from offering certain games, features, or services, and may also result in changes in the Company’s business practices, which could result in additional costs or a loss of revenue and could otherwise harm the Company’s business. Although the results of such litigation cannot be predicted with certainty, the Company believes that the amount or range of reasonably possible losses related to such pending or threatened litigation will not have a material adverse effect on its business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. |
Subsequent Events |
6 Months Ended |
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Subsequent Events [Abstract] | |
Subsequent Events |
16. Subsequent Events Acquisition of Chartboost, Inc. (“Chartboost”) On May 4, 2021, the Company executed a Merger Agreement (the “Chartboost Agreement”) with the securityholders of Chartboost, a Delaware corporation, to acquire 100% of all issued and outstanding share capital of Chartboost, and the acquisition closed according to the terms of the Chartboost Agreement on August 4, 2021 for cash consideration of $250.4 million (the “Closing Cash Consideration”), of which $25.0 million was deposited into an escrow fund as security for certain indemnification obligations of the former Chartboost securityholders. Further, the Company assumed unvested Chartboost options permitting the holders to purchase up to 1,012,388 shares of Zynga’s Class A common stock. Acquisition of Beijing StarLark Technology Co., Ltd. (“StarLark”) and Lvy Technology Limited (“Lvy”) On August 3, 2021, the Company executed a Master Business Transfer Agreement among Beijing Fotoable Technology Limited, Funjoy Technology Limited, Lvy, StarLark and certain other parties (the “StarkLark Agreement”), pursuant to which Zynga will acquire, at closing, the Beijing-based StarLark game studio, the Golf Rival mobile game franchise and related other games and certain other specified assets and liabilities in a series of related closings, in exchange for consideration of approximately $525.0 million of which (a) $315.0 million will be payable in cash, subject to adjustments as set forth in the StarLark Agreement and (b) the remaining $210.0 million will be satisfied by the issue of 20,009,528 shares of Class A common stock of Zynga, based on the average closing price of the Zynga Stock during a 30 trading day period preceding the date of the StarLark Agreement, subject to adjustments as set forth in the StarLark Agreement. The closing is expected to occur during the fourth quarter of 2021, subject to satisfaction or waiver of specified conditions, including required regulatory filings. Pursuant to the StarLark Agreement, the Company will acquire Lvy and StarLark, with StarLark becoming a direct, wholly-owned subsidiary of Lvy and Lvy becoming a direct, wholly-owned subsidiary of Zynga. |
Overview and Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | |
Basis of Presentation and Consolidation |
Basis of Presentation and Consolidation The accompanying interim consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The interim consolidated financial statements include the operations of the Company and its owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. |
Unaudited Interim Financial Information |
Unaudited Interim Financial Information The accompanying interim consolidated balance sheet as of June 30, 2021, the interim consolidated statements of operations, statements of comprehensive income (loss) and statements of stockholders’ equity for the three and six months ended June 30, 2021 and 2020, statements of cash flows for the six months ended June 30, 2021 and 2020 and the notes to the interim consolidated financial statements are unaudited. In management’s opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any other future period. |
Use of Estimates |
Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the interim consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated average playing period of payers that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, the fair value of assets and liabilities acquired through business combinations, contingent consideration obligations, the discount rate used in measuring our operating lease liabilities, the interest rate used in calculating the present value of the initial liability component of our convertible senior notes, stock-based compensation expense and evaluation of recoverability of goodwill, intangible assets and long-lived assets. Actual results could differ materially from those estimates. |
Recent Accounting Pronouncements |
Recent Accounting Pronouncements Issued But Not Yet Adopted In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible instruments by reducing the number of accounting models and requiring that a convertible instrument be accounted for as a single liability measured at amortized cost. Further, the ASU amends the earnings per share guidance by requiring the diluted earnings per share calculation for convertible instruments to follow the if-converted method, with use of the treasury stock method no longer permitted. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, but no earlier than fiscal years beginning after December 15, 2020. The ASU allows either a modified retrospective method of transition or a fully retrospective method of transition, with any adjustments recognized as an adjustment to the opening balance of retained earnings. The Company is currently assessing this standard’s impact on its consolidated financial statements, but does anticipate a material adjustment to the carrying amount of the liability and equity components of our convertible senior notes upon adoption and the Company will not early adopt. |
Debt |
We separately accounted for the liability and equity components of the 2026 Notes and 2024 Notes. We determined the initial carrying amount of the $707.4 million liability component of the 2026 Notes by calculating the present value of the cash flows using an effective interest rate of 3.5%. We determined the initial carrying amount of the $572.0 million liability component of the 2024 Notes by calculating the present value of the cash flows using an effective interest rate of 4.1%. The effective interest rates were determined based on non-convertible debt offerings, of similar sizes and terms, by companies with similar credit ratings and other observable market data (Level 2 inputs).
The amount of the equity component, representing the conversion option, was $167.1 million for the 2026 Notes and $118.0 million for the 2024 Notes and was calculated by deducting the initial carrying value of the liability component from the principal amount of the 2026 Notes and 2024 Notes, respectively. This difference represents a debt discount that is amortized to interest expense over the 6-year and 5-year contractual periods of the 2026 Notes and 2024 Notes, respectively, using the effective interest rate method. The equity components are not subsequently remeasured as long as they continue to meet the conditions for equity classification. We allocated transaction costs related to the issuance of the respective series of the 2026 Notes and 2024 Notes to the liability and equity components using the same proportions as the initial carrying value of the respective series of the 2026 Notes and 2024 Notes. The respective transaction costs are then amortized to interest expense using the effective interest method over the terms of the respective series of 2026 Notes and 2024 Notes. Transaction costs initially attributable to the liability component of the 2026 Notes and 2024 Notes were $14.3 million and $14.8 million, respectively, while transaction costs attributable to the equity component of the 2026 Notes and 2024 Notes were $3.4 million and $3.1 million, respectively. The transaction costs attributable to the equity component are accounted for consistently with the equity component of the 2026 Notes and 2024 Notes.
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Revenue from Contracts with Customers (Tables) |
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Revenue From Contract With Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Disaggregated Revenue |
The following table presents our revenue disaggregated by platform (in millions):
The following table presents our revenue disaggregated based on the geographic location of our payers (in millions):
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Marketable Securities (Tables) |
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Cash And Cash Equivalents [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Available-for-Sale Short-Term and Long-Term Investments |
Debt Securities The following tables summarize the amortized cost, gross unrealized gains and losses and fair value of our short-term and long-term debt securities as of June 30, 2021 and December 31, 2020 (in millions):
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Fair Value Measurements (Tables) |
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Assets and Liabilities Measured on Recurring Basis |
The composition of our financial assets and liabilities as of June 30, 2021 and December 31, 2020 among the three levels of the fair value hierarchy are as follows (in millions):
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Fair Value Liabilities Measured on Recurring Basis |
The following table presents the activity for the six months ended June 30, 2021 related to our Level 3 liabilities (in millions):
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Significant Unobservable Inputs Used in Measuring the Fair Value | The table below outlines the significant unobservable inputs used in estimating the fair value of the last remaining Small Giant contingent consideration liability as of June 30, 2021:
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Property and Equipment, Net (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property Plant And Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of Property and Equipment, Net |
Property and equipment, net consist of the following (in millions):
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Property and Equipment, Net |
The following represents our property and equipment, net by location (in millions):
(1)No other foreign country exceeded 10% of our total property and equipment, net for any periods presented. |
Leases (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Future Lease Payments Related to Our Operating Leases |
As of June 30, 2021, future lease payments related to our operating leases were as follows (in millions):
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Acquisitions (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Acquisition Price Allocation |
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Uncosoft (in millions):
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Echtra [Member] | ||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Acquisition Price Allocation |
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Echtra (in millions):
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Goodwill and Intangible Assets, Net (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill And Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Changes to Goodwill |
The following table presents the changes to goodwill for the six months ended June 30, 2021 (in millions):
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Acquisition-Related Intangible Assets |
The details of our acquisition-related intangible assets as of June 30, 2021 and December 31, 2020 are as follows (in millions):
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Schedule of Finite Lived Intangible Assets Future Amortization Expense |
As of June 30, 2021, future amortization expense related to our intangible assets is expected to be recognized as follows (in millions):
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Debt (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Carrying Amount of Liability and Equity Components of Notes |
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of June 30, 2021 were as follows (in millions):
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of December 31, 2020 were as follows (in millions):
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Schedule of Interest Expense Recognized Related to Notes |
Interest expense recognized related to the Notes was as follows (in millions):
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Other Current and Non-Current Liabilities (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Liabilities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Other Current Liabilities |
Other current liabilities consist of the following (in millions):
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Schedule of Other Non-Current Liabilities |
Other non-current liabilities consist of the following (in millions):
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Stockholders' Equity (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation Expense Related to Grants of Employee Stock Options, Restricted Stock Units (RSUs) and Performance and Market Based Awards |
We recorded stock-based compensation expense related to grants of employee stock options, restricted stock units (“RSUs”) and performance and market-based awards in our consolidated statements of operations as follows (in millions):
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Schedule of Share Based Compensation Stock Option Activity |
The following table shows stock option activity for the six months ended June 30, 2021 (in millions, except weighted-average exercise price and weighted-average contractual term):
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Schedule of Share Based Compensation Restricted Stock Units Award Activity |
The following table shows a summary of RSU activity for the six months ended June 30, 2021, which includes performance and market-based awards (in millions, except weighted-average grant date fair value):
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Accumulated Other Comprehensive Income (Loss) (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Accumulated Other Comprehensive Income (Loss) |
The following table shows a summary of changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2021 (in millions):
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Net Income (Loss) Per Share of Common Stock (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Computation of Basic and Diluted Net Income (Loss) Per Share of Common Stock |
The following tables set forth the computation of basic and diluted net income (loss) per share of common stock (in millions, except per share data):
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Shares Excluded from Calculation of Diluted Net Income (Loss) per Share |
The following weighted-average employee equity awards were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in millions):
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Commitments and Contingencies (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
Commitments And Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||
Schedule of Future Minimum Contractual Royalty Payments to Licensors and Marketing Commitments |
We have entered into several contracts with licensors that contain minimum contractual and marketing commitments that may not be dependent on any deliverables. As of June 30, 2021, future minimum contractual royalty payments due to licensors and marketing commitments for the licensed products are as follows (in millions):
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Schedule of Future Minimum Purchase Commitments |
We have entered into several contracts primarily for hosting of data systems and other services. As of June 30, 2021, future minimum purchase commitments that have initial or remaining non-cancelable terms are as follows (in millions):
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Overview and Summary of Significant Accounting Policies - Additional Information (Detail) |
6 Months Ended |
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Jun. 30, 2021 | |
Accounting Policies [Abstract] | |
Initial offering period | December 2011 |
Revenue from Contracts with Customers - Summary of Revenue Disaggregated by Platform (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | $ 720.0 | $ 451.7 | $ 1,400.3 | $ 855.4 |
Mobile Online Game [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 567.6 | 370.2 | 1,106.3 | 698.9 |
Other Online game [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 19.4 | 18.0 | 37.7 | 33.6 |
Online Game [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 587.0 | 388.2 | 1,144.0 | 732.5 |
Mobile Advertising and Other [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 131.6 | 62.4 | 253.6 | 120.7 |
Web Advertising and Other [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 1.4 | 1.1 | 2.7 | 2.2 |
Advertising and Other [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | $ 133.0 | $ 63.5 | $ 256.3 | $ 122.9 |
Revenue from Contracts with Customers - Summary of Revenue disaggregated Based on Geographic Location (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | $ 720.0 | $ 451.7 | $ 1,400.3 | $ 855.4 |
Total revenue | 720.0 | 451.7 | 1,400.3 | 855.4 |
United States [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 436.2 | 276.2 | 848.3 | 519.4 |
Total revenue | 436.2 | 276.2 | 848.3 | 519.4 |
All Other Countries [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Total revenue | 283.8 | 175.5 | 552.0 | 336.0 |
Total revenue | $ 283.8 | $ 175.5 | $ 552.0 | $ 336.0 |
Revenue from Contracts with Customers - Additional Information (Detail) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Disaggregation Of Revenue [Line Items] | ||||
Discontinued online game revenue and income from operations | $ 1,400,000 | |||
Discontinued game revenue from adjustments of prior period deferred revenue | 0 | $ 0 | $ 0 | |
Current deferred revenue recognized | $ 240,900,000 | $ 630,300,000 | ||
Minimum [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Contract payment term related to advertising arrangements | 30 days | |||
Maximum [Member] | ||||
Disaggregation Of Revenue [Line Items] | ||||
Contract payment term related to advertising arrangements | 60 days | |||
Durable Virtual Items | ||||
Disaggregation Of Revenue [Line Items] | ||||
Estimated weighted average life of product | 10 months | 10 months | 10 months | 10 months |
Revenue from Contracts with Customers - Additional Information (Detail1) |
Jun. 30, 2021 |
---|---|
Maximum [Member] | Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2021-07-01 | |
Disaggregation Of Revenue [Line Items] | |
Expected length of unsatisfaction of performance obligations | 1 year |
Marketable Securities - Additional Information (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Net Gain (Loss) [Member] | |||
Schedule of Available-for-sale Securities [Line Items] | |||
Gain (loss) recognized, mutual fund equity investment | $ 0.2 | $ 0.2 | $ 0.7 |
Fair Value Measurements - Fair Value Liabilities Measured on Recurring Basis (Detail) - Fair Value Measurements Recurring [Member] - Fair Value, Inputs, Level 3 [Member] |
6 Months Ended |
---|---|
Jun. 30, 2021
USD ($)
| |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |
Balance as of December 31, 2020 | $ 463,100,000 |
Fair value adjustments | 28,700 |
Payments | (239,600) |
Rollic contingency resolution | (59,600) |
Balance as of June 30, 2021 | $ 192,600,000 |
Property and Equipment, Net - Components of Property and Equipment, Net (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Property Plant And Equipment [Line Items] | ||
Total property and equipment, gross | $ 109.8 | $ 106.9 |
Less: Accumulated depreciation | (73.7) | (67.6) |
Total property and equipment, net | 36.1 | 39.3 |
Computer Equipment [Member] | ||
Property Plant And Equipment [Line Items] | ||
Total property and equipment, gross | 33.0 | 30.4 |
Software [Member] | ||
Property Plant And Equipment [Line Items] | ||
Total property and equipment, gross | 35.4 | 35.1 |
Furniture and Fixtures [Member] | ||
Property Plant And Equipment [Line Items] | ||
Total property and equipment, gross | 10.5 | 10.6 |
Leasehold Improvements [Member] | ||
Property Plant And Equipment [Line Items] | ||
Total property and equipment, gross | $ 30.9 | $ 30.8 |
Property and Equipment, Net - Property and Equipment, Net (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
||
---|---|---|---|---|
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Property and equipment, net | $ 36.1 | $ 39.3 | ||
United States [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Property and equipment, net | 20.3 | 23.4 | ||
Turkey [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Property and equipment, net | 8.1 | 7.7 | ||
India [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Property and equipment, net | 3.7 | 4.3 | ||
All Other Countries [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Property and equipment, net | [1] | $ 4.0 | $ 3.9 | |
|
Property and Equipment, Net - Property and Equipment, Net (Parenthetical) (Detail) |
6 Months Ended |
---|---|
Jun. 30, 2021 | |
Maximum [Member] | |
Revenues from External Customers and Long-Lived Assets [Line Items] | |
Maximum percentage limit for total property and equipment, net for foreign country | 10.00% |
Leases - Schedule of Future Lease Payments Related to Our Operating Leases (Detail) $ in Millions |
Jun. 30, 2021
USD ($)
|
---|---|
Leases [Abstract] | |
Remaining 2021 | $ 12.4 |
2022 | 13.5 |
2023 | 23.0 |
2024 | 21.0 |
2025 | 17.4 |
2026 | 17.6 |
Thereafter | 89.7 |
Total lease payments | 194.6 |
Less: Imputed interest | (36.5) |
Total lease liability balance | $ 158.1 |
Acquisitions - Additional Information (Detail) - USD ($) $ in Millions |
Apr. 21, 2021 |
Mar. 02, 2021 |
---|---|---|
Echtra [Member] | ||
Business Acquisition [Line Items] | ||
Business acquisition effective date of acquisition | Mar. 02, 2021 | |
Percentage of acquired equity interest | 100.00% | |
Business acquisition, cost of acquired entity | $ 21.1 | |
Business acquisition, cost of acquired entity upfront cash paid | 19.6 | |
Business acquisition, retained in unrestricted cash | $ 1.5 | |
Business acquisition, unrestricted cash period | 12 months | |
Uncosoft [Member] | Rollic | ||
Business Acquisition [Line Items] | ||
Business acquisition effective date of acquisition | Apr. 21, 2021 | |
Percentage of acquired equity interest | 100.00% | |
Business acquisition, cost of acquired entity | $ 10.5 | |
Business acquisition, cost of acquired entity upfront cash paid | 12.5 | |
Time sharing transactions, deferred profit | $ 2.0 |
Acquisitions - Schedule of Acquisition Price Allocation (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Apr. 21, 2021 |
Mar. 02, 2021 |
Dec. 31, 2020 |
---|---|---|---|---|
Intangible assets, net: | ||||
Goodwill | $ 3,181.2 | $ 3,160.8 | ||
Uncosoft [Member] | ||||
Business Acquisition [Line Items] | ||||
Cash | $ 0.1 | |||
Intangible assets, net: | ||||
Goodwill | 9.0 | |||
Total assets acquired | 10.9 | |||
Deferred tax liabilities | (0.4) | |||
Total liabilities | (0.4) | |||
Total cash consideration | 10.5 | |||
Uncosoft [Member] | Developed Technology Rights Useful Life Of One Years | ||||
Intangible assets, net: | ||||
Intangible assets, net: | $ 1.8 | |||
Echtra [Member] | ||||
Intangible assets, net: | ||||
Goodwill | $ 10.3 | |||
Total assets acquired | 21.1 | |||
Total cash consideration | 21.1 | |||
Prepaid expenses | 0.1 | |||
Echtra [Member] | Developed Technology, Useful Life of 10 Years [Member] | ||||
Intangible assets, net: | ||||
Intangible assets, net: | $ 10.7 |
Acquisitions - Schedule of Acquisition Price Allocation (Parenthetical) (Detail) |
Apr. 21, 2021 |
Mar. 02, 2021 |
---|---|---|
Uncosoft [Member] | Developed Technology Rights Useful Life Of One Years | ||
Business Acquisition [Line Items] | ||
Intangible assets, useful life | 1 year | |
Echtra [Member] | Developed Technology, Useful Life of 10 Years [Member] | ||
Business Acquisition [Line Items] | ||
Intangible assets, useful life | 10 years |
Goodwill and Intangible Assets, Net - Schedule of Changes to Goodwill (Detail) $ in Millions |
6 Months Ended |
---|---|
Jun. 30, 2021
USD ($)
| |
Goodwill Roll Forward | |
Goodwill, beginning balance | $ 3,160.8 |
Additions | 19.3 |
Foreign currency translation adjustments | 1.1 |
Goodwill, ending balance | $ 3,181.2 |
Goodwill and Intangible Assets, Net - Schedule of Changes to Goodwill (Parenthetical) (Detail) - USD ($) |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Goodwill Roll Forward | ||
Accumulated impairment losses | $ 0 | $ 0 |
Goodwill and Intangible Assets, Net - Acquisition-Related Intangible Assets (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Finite Lived Intangible Assets [Line Items] | ||
Gross Carrying Value | $ 1,235.9 | $ 1,222.7 |
Accumulated Amortization | (489.4) | (384.6) |
Net Book Value | 746.5 | 838.1 |
Developed Technology [Member] | ||
Finite Lived Intangible Assets [Line Items] | ||
Gross Carrying Value | 986.2 | 972.2 |
Accumulated Amortization | (432.7) | (346.5) |
Net Book Value | 553.5 | 625.7 |
Trademarks, Branding and Domain Names [Member] | ||
Finite Lived Intangible Assets [Line Items] | ||
Gross Carrying Value | 207.7 | 208.5 |
Accumulated Amortization | (48.8) | (35.5) |
Net Book Value | 158.9 | 173.0 |
Third Party Developer Relationships [Member] | ||
Finite Lived Intangible Assets [Line Items] | ||
Gross Carrying Value | 42.0 | 42.0 |
Accumulated Amortization | (7.9) | (2.6) |
Net Book Value | $ 34.1 | $ 39.4 |
Goodwill and Intangible Assets, Net - Schedule of Finite Lived Intangible Assets Future Amortization Expense (Detail) $ in Millions |
Jun. 30, 2021
USD ($)
|
---|---|
Finite Lived Intangible Assets Future Amortization Expense Current And Five Succeeding Fiscal Years [Abstract] | |
Remaining 2021 | $ 101.0 |
2022 | 193.0 |
2023 | 178.4 |
2024 | 139.8 |
2025 | 81.0 |
2026 | 25.9 |
Thereafter | 21.3 |
Total | $ 740.4 |
Income Taxes - Additional Information (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Income Tax Disclosure [Abstract] | ||||
Increase in income tax expense benefit | $ 6.7 | $ 11.6 | ||
Additional current federal and state tax expense | $ 9.4 | $ 9.4 |
Debt - Schedule of Net Carrying Amount of Liability and Equity Components of Notes (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
Dec. 17, 2020 |
Jun. 14, 2019 |
---|---|---|---|---|
Liability component: | ||||
Principal | $ 1,564.5 | $ 1,564.5 | ||
Unamortized debt discount | (225.7) | (249.9) | ||
Unamortized transaction costs | (22.2) | (24.7) | ||
Net carrying amount | 1,316.6 | 1,289.9 | ||
Equity component, net of transaction costs | 278.6 | 278.6 | ||
Convertible Senior Notes Due 2024 [Member] | ||||
Liability component: | ||||
Principal | 690.0 | 690.0 | $ 690.0 | |
Unamortized debt discount | (72.2) | (83.8) | ||
Unamortized transaction costs | (9.1) | (10.5) | ||
Net carrying amount | 608.7 | 595.7 | ||
Equity component, net of transaction costs | 114.9 | 114.9 | $ 118.0 | |
Convertible Senior Notes Due 2026 [Member] | ||||
Liability component: | ||||
Principal | 874.5 | 874.5 | $ 874.5 | |
Unamortized debt discount | (153.5) | (166.1) | ||
Unamortized transaction costs | (13.1) | (14.2) | ||
Net carrying amount | 707.9 | 694.2 | ||
Equity component, net of transaction costs | $ 163.7 | $ 163.7 | $ 167.1 |
Debt - Schedule of Interest Expense Recognized Related to Notes (Detail) - USD ($) $ in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Debt Disclosure [Abstract] | ||||
Contractual interest expense | $ 0.4 | $ 0.4 | $ 0.9 | $ 0.9 |
Amortization of debt discount | 12.1 | 5.6 | 24.2 | 11.1 |
Amortization of transaction costs | 1.4 | 0.7 | 2.5 | 1.4 |
Total | $ 13.9 | $ 6.7 | $ 27.6 | $ 13.4 |
Other Current and Non-Current Liabilities - Schedule of Other Current Liabilities (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Other Liabilities Current [Abstract] | ||
Present value of contingent consideration obligation | $ 327.1 | $ 323.6 |
Accrued payables from acquisitions | 137.5 | |
Accrued accounts payable | 72.2 | 58.1 |
Accrued compensation liability | 38.9 | 61.7 |
Value-added taxes payable | 7.1 | 6.4 |
Other current liabilities | 13.6 | 12.6 |
Total other current liabilities | $ 596.4 | $ 462.4 |
Other Current and Non-Current Liabilities - Schedule of Other Non-Current Liabilities (Detail) - USD ($) $ in Millions |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Other Liabilities Noncurrent [Abstract] | ||
Deferred consideration payable from acquisitions | $ 25.0 | $ 24.4 |
Uncertain tax positions, including interest and penalties | 24.9 | 24.8 |
Contingent consideration obligation | 213.6 | |
Accrued payables from acquisitions | 136.0 | |
Other non-current liabilities | 2.4 | 2.3 |
Total other non-current liabilities | $ 52.3 | $ 401.1 |
Net Income (Loss) Per Share of Common Stock - Shares Excluded from Calculation of Diluted Net Income (Loss) per Share (Detail) - shares shares in Millions |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items] | ||||
Anti-dilutive securities excluded from computation of earnings per share amount | 0.1 | 80.0 | 0.1 | 75.9 |
Stock Options and Employee Stock Purchase Plan [Member] | ||||
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items] | ||||
Anti-dilutive securities excluded from computation of earnings per share amount | 31.8 | 31.4 | ||
RSUs [Member] | ||||
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items] | ||||
Anti-dilutive securities excluded from computation of earnings per share amount | 0.1 | 48.2 | 0.1 | 44.5 |
Commitments and Contingencies - Schedule of Future Minimum Contractual Royalty Payments to Licensors and Marketing Commitments (Detail) $ in Millions |
Jun. 30, 2021
USD ($)
|
---|---|
Commitments And Contingencies Disclosure [Abstract] | |
Remaining 2021 | $ 15.8 |
2022 | 7.1 |
2023 | 10.4 |
2024 | 0.0 |
2025 | 10.0 |
Thereafter | 0.0 |
Total | $ 43.3 |
Commitments and Contingencies - Schedule of Future Minimum Purchase Commitments (Detail) $ in Millions |
Jun. 30, 2021
USD ($)
|
---|---|
Commitments And Contingencies Disclosure [Abstract] | |
Remaining 2021 | $ 11.5 |
2022 | 13.5 |
2023 | 3.8 |
2024 | 0.3 |
Thereafter | 0.0 |
Total | $ 29.1 |
Commitments and Contingencies - Additional Information (Detail) - USD ($) $ in Millions |
Aug. 01, 2021 |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|---|
Loss Contingencies [Line Items] | |||
Uncertain tax positions liability, including interest and penalties | $ 24.9 | $ 24.8 | |
Subsequent Event | |||
Loss Contingencies [Line Items] | |||
Purchase commitments | $ 90.0 | ||
Minimum [Member] | Subsequent Event | |||
Loss Contingencies [Line Items] | |||
Purchase commitments | 28.0 | ||
Maximum [Member] | Subsequent Event | |||
Loss Contingencies [Line Items] | |||
Purchase commitments | $ 32.0 |
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