UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 001-33368

Glu Mobile Inc.

(Exact name of the Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		91-2143667 (I.R.S. Employer Identification No.)

2207 Bridgepointe Parkway, Suite 250
San Mateo, California 94404
(Address of Principal Executive Offices, including Zip Code)

(650) 532-2400
(Registrant’s Telephone number, including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Shares of Glu Mobile Inc. common stock, $0.0001 par value per share, outstanding as of October 31, 2009: 30,301,983 shares.

 

 

GLU MOBILE INC.

FORM 10-Q

Quarterly Period Ended September 30, 2009

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34
ITEM 4. CONTROLS AND PROCEDURES			35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			36
ITEM 1A. RISK FACTORS			36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			54
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			54
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			54
ITEM 5. OTHER INFORMATION			54
ITEM 6. EXHIBITS			55
SIGNATURES			56
Exhibit 10.01
Exhibit 10.03
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GLU MOBILE INC.

		September 30,				December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	9,861			$	19,166
Accounts receivable, net			16,059				19,826
Prepaid royalties			10,126				15,298
Prepaid expenses and other			2,369				2,704
Total current assets			38,415				56,994
Property and equipment, net			3,620				4,861
Prepaid royalties			3,391				4,349
Other long-term assets			1,015				930
Intangible assets, net			14,524				20,320
Goodwill			4,608				4,622
Total assets		$	65,573			$	92,076
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,090			$	6,569
Accrued liabilities			768				686
Accrued compensation			2,511				2,184
Accrued royalties			12,964				18,193
Accrued restructuring			1,246				1,000
Deferred revenues			581				727
Current portion of long-term debt			12,564				14,000
Total current liabilities			34,724				43,359
Other long-term liabilities			10,107				11,798
Long-term debt, less current portion			3,062				10,125
Total liabilities			47,893				65,282
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000 shares authorized at September 30, 2009 and December 31, 2008; no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Common stock, $0.0001 par value: 250,000 shares authorized at September 30, 2009 and December 31, 2008; 30,195 and 29,584 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			3				3
Additional paid-in capital			187,230				184,757
Deferred stock-based compensation			—				(11	)
Accumulated other comprehensive income			855				1,170
Accumulated deficit			(170,408	)			(159,125	)
Total stockholders’ equity			17,680				26,794
Total liabilities and stockholders’ equity		$	65,573			$	92,076

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues		$	19,645			$	23,894			$	60,292			$	68,190
Cost of revenues:
Royalties			5,302				5,753				16,782				16,642
Impairment of prepaid royalties and guarantees			513				1,921				1,102				2,155
Amortization of intangible assets			1,420				3,247				5,680				8,089
Total cost of revenues			7,235				10,921				23,564				26,886
Gross profit			12,410				12,973				36,728				41,304
Operating expenses:
Research and development			6,662				9,223				19,707				24,604
Sales and marketing			3,556				6,004				11,214				17,828
General and administrative			3,986				5,085				12,376				16,576
Amortization of intangible assets			58				67				160				204
Impairment of goodwill			—				46,618				—				46,618
Restructuring charge			919				126				1,432				287
Acquired in-process research and development			—				—				—				1,110
Total operating expenses			15,181				67,123				44,889				107,227
Loss from operations			(2,771	)			(54,150	)			(8,161	)			(65,923	)
Interest and other income/(expense), net:
Interest income			7				127				86				844
Interest expense			(279	)			(30	)			(1,008	)			(50	)
Other income/(expense), net			(28	)			(1,991	)			272				(2,175	)
Interest and other income/(expense), net			(300	)			(1,894	)			(650	)			(1,381	)
Loss before income taxes			(3,071	)			(56,044	)			(8,811	)			(67,304	)
Income tax (provision)/benefit			(917	)			(822	)			(2,472	)			(2,165	)
Net loss		$	(3,988	)		$	(56,866	)		$	(11,283	)		$	(69,469	)
Net loss per share — basic and diluted:		$	(0.13	)		$	(1.93	)		$	(0.38	)		$	(2.37	)
Weighted average common shares outstanding — basic and diluted			29,864				29,470				29,694				29,311
Stock-based compensation expense included in:
Research and development		$	166			$	261			$	546			$	511
Sales and marketing			170				1,298				480				3,903
General and administrative			338				569				1,176				1,716

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

		Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities:
Net loss		$	(11,283	)		$	(69,469	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation and accretion			1,766				2,107
Amortization of intangible assets			5,840				8,293
Stock-based compensation			2,202				6,130
MIG earnout expense			875				—
Interest expense on debt			895				—
Amortization of loan agreement costs			113				47
Non-cash foreign currency remeasurement gain			(270	)			917
Acquired in-process research and development			—				1,110
Impairment of goodwill							46,618
Impairment of prepaid royalties and guarantees			1,102				2,155
Write down of auction-rate securities			—				1,152
Changes in allowance for doubtful accounts			51				118
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			3,863				1,001
Prepaid royalties			5,225				(5,696	)
Prepaid expenses and other assets			239				268
Accounts payable			(2,544	)			(2,615	)
Other accrued liabilities			47				1,434
Accrued compensation			289				1,011
Accrued royalties			(5,394	)			2,496
Deferred revenues			(184	)			73
Accrued restructuring charge			187				(2,630	)
Other long-term liabilities			(1,732	)			2,263
Net cash provided by/(used in) operating activities			1,287				(3,217	)
Cash flows from investing activities:
Purchase of property and equipment			(569	)			(3,691	)
Acquisition of Superscape, net of cash acquired			—				(30,008	)
Acquisition of MIG, net of cash acquired			—				(693	)
Net cash used in investing activities			(569	)			(34,392	)
Cash flows from financing activities:
Proceeds from line of credit			43,612				—
Payments on line of credit			(39,673	)			—
MIG loan payments			(14,191	)			—
Proceeds from exercise of stock options and ESPP			279				231
Proceeds from exercise of stock warrants			—				101
Net cash provided by/(used in) financing activities			(9,973	)			332
Effect of exchange rate changes on cash			(50	)			(644	)
Net decrease in cash and cash equivalents			(9,305	)			(37,921	)
Cash and cash equivalents at beginning of period			19,166				57,816
Cash and cash equivalents at end of period		$	9,861			$	19,895
Supplemental disclosure of non-cash activities
Accrued interest on MIG loan payments		$	732			$	—

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

Note 1 — The Company, Basis of Presentation and Summary of Significant Accounting Policies

Glu Mobile Inc. (the “Company” or “Glu”) was incorporated in Nevada in May 2001 and reincorporated in the state of Delaware in March 2007. The Company creates mobile games and related applications based on third-party licensed brands and other intellectual property, as well as its own original intellectual property. The Company has recently developed and launched games on new platform applications such as the Apple App Store and Facebook.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2009. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of September 30, 2009 and its results of operations for the three months and nine months ended September 30, 2009 and 2008, respectively. These unaudited condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The unaudited consolidated balance sheet presented as of December 31, 2008 has been derived from the audited consolidated financial statements as of that date, and the consolidated balance sheet presented as of September 30, 2009 has been derived from the unaudited condensed consolidated financial statements as of that date.

The Company had $9,861 of cash and cash equivalents as of September 30, 2009. During the nine months ended September 30, 2009, the Company generated $1,287 of cash from operating activities, which was offset by $569 of cash used in investing activities and $9,973 of cash used in financing activities. The Company expects to continue to fund its operations and satisfy its contractual obligations for the remainder of 2009 primarily through its cash and cash equivalents, borrowings under the Company’s revolving credit facility and cash generated by operations during the second half of 2009. However, there can be no assurances that the Company will be able to generate positive operating cash flow during the fourth quarter of 2009 or beyond. The Company believes its cash and cash equivalents, together with cash flows from operations and borrowings under its credit facility will be sufficient to meet its anticipated cash needs for at least the next 12 months. However, the Company’s cash requirements for the next 12 months may be greater than anticipated due to, among other reasons, lower than expected cash generated from operating activities including the impact of foreign currency rate changes, revenues that are lower than currently anticipated, greater than expected operating expenses, usage of cash to fund its foreign operations, unanticipated limitations or timing restrictions on its ability to access funds that are held in its non-U.S. subsidiaries, a deterioration of the quality of the Company’s accounts receivable, which could lower the borrowing base under its credit facility, and any failure on the Company’s part to remain in compliance with the covenants under the revolving credit facility and any failure to agree upon satisfactory earnings before interest, depreciation and amortization (“EBITDA”) related covenants with the lender for the fiscal quarter ending June 30, 2010 and each quarter thereafter. The Company’s expectations regarding cash sufficiency assume that its operating results will be sufficient to enable it to comply with the EBITDA-related covenant contained in the credit facility. If revenues are lower than anticipated, the Company may be required to reduce its operating expenses to remain in compliance with this covenant. However, further reducing operating expenses could be very challenging for the Company, since it undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008 and during the third quarter of 2009 that reduced operating expenses significantly from second quarter of 2008 levels. Reducing operating expenses further could have the effect of reducing revenues. On August 24, 2009, the Company entered into an amendment to its Loan and Security Agreement with the lender, which reduced certain of the minimum targets contained in the EBITDA-related covenant (see Note 7). The minimum EBITDA covenant for the fiscal quarter ending June 30, 2010 and each quarter thereafter is still to be negotiated and established upon terms satisfactory to both the lender and the Company following the lender’s receipt of the Company’s 2010 internal plan. As of September 30, 2009 the Company was in compliance with the modified covenants.

If the Company’s cash sources are insufficient to satisfy the Company’s cash requirements, the Company may be required to sell convertible debt or equity securities to raise additional capital or seek to increase the amount available to the Company for borrowing under the Company’s credit facility and/or restructure the MIG earnout and bonus payments. The Company may be unable to raise additional capital through the sale of securities, or to do so on terms that are favorable to it, particularly given current capital market and overall economic conditions. Any sale of convertible debt securities or additional equity securities could result in substantial dilution to the Company’s stockholders. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of the Company’s common stock, all of which is subject to the provisions of the credit facility. Additionally, the Company may be unable to increase the size of the Company’s credit facility, or to do so on terms that are acceptable to it, particularly in light of the current credit market conditions. Similarly, the Company may be unable to restructure the MIG earnout and bonus payments to the extent it may need. If the amount of cash that the Company generates from operations is less than anticipated, it could also be required to extend the term beyond its December 2010 expiration date (or replace it with an alternate loan arrangement), and resulting debt payments thereunder could further inhibit the Company’s ability to achieve profitability in the future.

If the liquidity matters discussed above are not adequately addressed by the Company, the audit report included in the Company’s Form 10-K for the year ending December 31, 2009 may include an explanatory paragraph regarding the Company’s ability to continue as a going concern.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable.

The Company derives its accounts receivable from revenues earned from customers located in the United States and other locations outside of the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and currently does not require any collateral from its customers. The Company bases its allowance for doubtful accounts on management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews past due balances over a specified amount individually for collectability on a monthly basis and all other balances quarterly. The Company writes off accounts receivable balances against the allowance when it determines that the amount will not be recovered.

The following table summarizes the revenues from customers that accounted for in excess of 10% of the Company’s revenues for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Verizon Wireless			19.5	%			21.0	%			20.7	%			21.1	%
China Mobile			10.2				*				10.2				10.7

At September 30, 2009, Verizon Wireless accounted for 24.3% of total accounts receivable. At December 31, 2008, Verizon Wireless accounted for 25.7% of total accounts receivable. No other carrier represented more than 10% of the Company’s total accounts receivable as of these dates.

Net Loss Per Share

The Company computes basic net loss per share attributable to common stockholders by dividing its net loss for the period by the weighted average number of common shares outstanding during the period less the weighted average number of unvested common shares subject to repurchase by the Company.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net loss		$	(3,988	)		$	(56,866	)		$	(11,283	)		$	(69,469	)
Basic and diluted shares:
Weighted average common shares outstanding			29,865				29,472				29,695				29,337
Weighted average unvested common shares subject to repurchase			(1	)			(2	)			(1	)			(26	)
Weighted average shares used to compute basic and diluted net loss per share			29,864				29,470				29,694				29,311
Net loss per share — basic and diluted		$	(0.13	)		$	(1.93	)		$	(0.38	)		$	(2.37	)

The following weighted average options to purchase common stock, warrants to purchase common stock and unvested shares of common stock subject to repurchase have been excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have had an anti-dilutive effect:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Warrants to purchase common stock			106				106				106				122
Unvested common shares subject to repurchase			1				2				1				26
Options to purchase common stock			5,063				4,618				5,045				4,465
			5,170				4,726				5,152				4,613

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that are of significance, or potential significance to the Company.

Adopted Accounting Pronouncements

Effective July 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles (“ASC 105-10”) (the “Codification”). ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification will supersede all existing non-SEC accounting and reporting standards. The Company has included the references to the Codification, as appropriate, in these consolidated financial statements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855-10”). The standard modifies the names of the two types of subsequent events either as “recognized subsequent events” (previously referred to in practice as Type I subsequent events) or “non-recognized subsequent events” (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The standard did not result in significant changes in the practice of subsequent event disclosures or the related accounting thereof, and therefore the adoption did not have any impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on the Company’s consolidated financial statements.

In February 2008, the FASB issued an accounting standard update that delayed the effective date of fair value measurements accounting for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. These include goodwill and other non-amortizable intangible assets. The Company adopted this accounting standard update effective January 1, 2009. The adoption of this update to non-financial assets and liabilities, as codified in ASC 820-10, did not have any impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations, ASC 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Although the Company did not enter into any business combinations during the first nine months of 2009, the Company believes ASC 805-10 may have a material impact on the Company’s future consolidated financial statements if the Company were to enter into any future business combinations depending on the size and nature of any such future transactions.

New Accounting Pronouncements

In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.

In August 2009, the FASB issued Update No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of the Codification to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: (1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, (2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and (3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This standard is effective beginning fourth quarter of 2009 for the Company. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

Note 2 — Acquisitions

Acquisition of Superscape Group plc

On March 7, 2008, the Company declared its cash tender offer for all of the outstanding shares of Superscape Group plc (“Superscape”) wholly unconditional in all respects when it had received 80.95% of the issued share capital of Superscape. The Company offered 10 pence (pound sterling) in cash for each issued share of Superscape (“Superscape Shares”), valuing the acquisition at approximately £18,300 (or $36,500) based on 183,099 Superscape Shares outstanding.

The Company acquired the net assets of Superscape in order to deepen and broaden its game library, gain access to 3-D game development and to augment its internal production and publishing resources with a studio in Moscow, Russia. These factors contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired, and as a result, the Company recorded goodwill in connection with this transaction.

On March 21, 2008, the date the recommended cash tender offer expired, the Company owned or had received valid acceptances representing approximately 93.57% of the Superscape Shares, with an aggregate purchase price of $34,477. In May 2008, the Company acquired the remaining 6.43% of the outstanding Superscape shares on the same terms as the recommended cash offer for $2,335.

The Company’s consolidated financial statements include the results of operations of Superscape from the date of acquisition, March 7, 2008. Under the purchase method of accounting, the Company allocated the total purchase price of $38,810 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date.

The following summarizes the purchase price allocation of the Superscape acquisition:

Assets acquired:
Cash		$	8,593
Accounts receivable			4,353
Prepaid and other current assets			1,507
Property and equipment			182
Titles, content and technology			9,190
Carrier contracts and relationships			7,400
Trade name			330
In-process research and development			1,110
Goodwill			13,432
Total assets acquired			46,097
Liabilities assumed:
Accounts payable			(2,567	)
Accrued liabilities			(585	)
Accrued compensation			(367	)
Accrued restructuring			(3,768	)
Total current liabilities			(7,287	)
Total liabilities			(7,287	)
Net acquired assets		$	38,810

The Company recorded an estimate for costs to terminate some activities associated with the Superscape operations in accordance with the guidance ASC 805, Business Combinations (“ASC 805-10”). This restructuring accrual of $3,768 principally related to the termination of 29 Superscape employees of $2,277, restructuring of facilities of $1,466 and other agreement termination fees of $25.

The valuation of the identifiable intangible assets acquired was based on management’s estimates, currently available information and reasonable and supportable assumptions. The allocation was generally based on the fair value of these assets determined using the income and market approaches. Of the total purchase price, $16,920 was allocated to amortizable intangible assets. The amortizable intangible assets are being amortized using a straight-line method over their respective estimated useful lives of one to six years.

In conjunction with the acquisition of Superscape, the Company recorded a $1,110 expense for acquired in-process research and development (“IPR&D”) within operating expenses during the year ended December 31, 2008 because feasibility of the acquired technology had not been established and no future alternative uses existed. As a result of the minority interest ownership during the first quarter of 2008, only $1,039 of the IPR&D expense was recognized during the three months ended March 31, 2008. The remainder of the expense was recorded in the second quarter of 2008.

The IPR&D is related to the development of new game titles. The Company determined the value of acquired IPR&D using the discounted cash flow approach. The Company calculated the present value of the expected future cash flows attributable to the in-process technology using a 22% discount rate.

The Company allocated the residual value of $13,432 to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350, Intangibles- Goodwill and Other (“ASC 350-10”), goodwill will not be amortized but will be tested for impairment at least annually. Goodwill is not deductible for tax purposes. Based on the Company’s annual and interim goodwill impairment tests, all of the goodwill related to the Superscape acquisition that had been attributed to the Americas reporting unit was impaired during the year ended December 31, 2008.

Superscape’s results of operations have been included in the Company’s consolidated financial statements subsequent to the date of acquisition. The financial information in the table below summarizes the combined results of operations of the Company and Superscape, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented, and includes the IPR&D charge resulting from the acquisition of Superscape:

		Nine Months Ended
		September 30,
		2008
Total pro forma revenues		$	70,903
Gross profit			37,037
Pro forma net loss			(69,828	)
Pro forma net loss per share — basic and diluted		$	(2.37	)

Note 3 — Short-Term Investments and Fair Value Measurements

Short-Term Investments

The Company did not have any marketable securities classified as available-for-sale as of September 30, 2009. The Company had $124 of marketable securities classified as available-for-sale as of December 31, 2008 which approximated fair value.

Fair Value Measurements

The Company’s cash and investment instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. As of September 30, 2009, the Company had $9,861 in cash and cash equivalents.

Note 4 — Balance Sheet Components

Accounts Receivable

		September 30,				December 31,
		2009				2008
Accounts receivable		$	16,578			$	20,294
Less: Allowance for doubtful accounts			(519	)			(468	)
		$	16,059			$	19,826

Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates. The Company had no significant write-offs or recoveries during the three or nine months ended September 30, 2009 and 2008.

Property and Equipment

		September 30,				December 31,
		2009				2008
Computer equipment		$	5,073			$	4,644
Furniture and fixtures			427				386
Software			2,696				2,628
Leasehold improvements			3,174				3,055
			11,370				10,713
Less: Accumulated depreciation and amortization			(7,750	)			(5,852	)
		$	3,620			$	4,861

Depreciation expense for the three months ended September 30, 2009 and 2008 was $588 and $746, respectively. Depreciation expense for the nine months ended September 30, 2009 and 2008 was $1,766 and $2,098, respectively.

Other Long-Term Liabilities

		September 30,				December 31,
		2009				2008
Accrued royalties		$	1,635			$	3,409
Uncertain tax position obligations			4,531				4,399
Deferred income tax liability			2,453				2,461
Other			1,488				1,529
		$	10,107				11,798

Note 5 — Goodwill and Intangible Assets

The Company’s intangible assets were acquired in connection with the acquisitions of Macrospace in 2004, iFone in 2006, MIG in 2007 and Superscape in 2008. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange translation, at September 30, 2009 and December 31, 2008 were as follows:

				September 30, 2009												December 31, 2008
								Accumulated												Accumulated
								Amortization												Amortization
								Expense												Expense
								(Including												(Including
		Estimated		Gross				Impact of				Net				Gross				Impact of				Net
		Useful		Carrying				Foreign				Carrying				Carrying				Foreign				Carrying
		Life		Value				Exchange)				Value				Value				Exchange)				Value
Intangible assets amortized to cost of revenues:
Titles, content and technology		2.5 yrs		$	13,598			$	(13,094	)		$	504			$	13,370			$	(10,478	)		$	2,892
Catalogs		1 yr			1,238				(1,238	)			—				1,126				(1,126	)			—
ProvisionX Technology		6 yrs			204				(159	)			45				185				(119	)			66
Carrier contract and related relationships		5 yrs			18,557				(6,347	)			12,210				18,463				(3,845	)			14,618
Licensed content		5 yrs			2,753				(1,685	)			1,068				2,744				(1,029	)			1,715
Service provider license		9 yrs			431				(86	)			345				432				(50	)			382
Trademarks		3 yrs			544				(458	)			86				540				(285	)			255
					37,325				(23,067	)			14,258				36,860				(16,932	)			19,928
Other intangible assets amortized to operating expenses:
Emux Technology		6 yrs			1,321				(1,055	)			266				1,201				(809	)			392
Noncompete agreement		2 yrs			578				(578	)			—				525				(525	)			—
					1,899				(1,633	)			266				1,726				(1,334	)			392
Total intangibles assets				$	39,224			$	(24,700	)		$	14,524			$	38,586			$	(18,266	)		$	20,320

Additions to intangible assets during the year ended December 31, 2008 of $16,920 were the result of the Superscape acquisition (see Note 2).

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the three months ended September 30, 2009 and 2008, the Company recorded amortization expense in the amounts of $1,420 and $3,247, respectively, in cost of revenues. During the nine months ended September 30, 2009 and 2008, the Company recorded amortization expense in the amounts of $5,680 and $8,089, respectively, in cost of revenues. During the three months ended September 30, 2009 and 2008, the Company recorded amortization expense in the amounts of $58 and $67, respectively, in operating expenses. During the nine months ended September 30, 2009 and 2008, the Company recorded amortization expense in the amounts of $160 and $204, respectively, in operating expenses.

As of September 30, 2009, the total expected future amortization related to intangible assets was as follows:

		Amortization				Amortization
		Included in				Included in				Total
		Cost of				Operating				Amortization
Year Ending December 31,		Revenues				Expenses				Expense
2009 (remaining three months)		$	1,397			$	55			$	1,452
2010			4,231				211				4,442
2011			2,858				—				2,858
2012			2,738				—				2,738
2013			2,671				—				2,671
2014 and thereafter			363				—				363
		$	14,258			$	266			$	14,524

Goodwill

The Company attributes all of the goodwill resulting from the Macrospace acquisition to its Europe, Middle East and Africa (“EMEA”) reporting unit. The goodwill resulting from the iFone acquisition is evenly attributed to the Americas and EMEA reporting units. The Company attributes all of the goodwill resulting from the MIG acquisition to its Asia and Pacific (“APAC”) reporting unit and all of the goodwill resulting from the Superscape acquisition to the Americas reporting unit. The goodwill allocated to the Americas reporting unit is denominated in U.S. Dollars (“USD”), the goodwill allocated to the EMEA reporting unit is denominated in Pounds Sterling (“GBP”) and the goodwill allocated to the APAC reporting unit is denominated in Chinese Renminbi (“RMB”). As a result, the goodwill attributed to the EMEA and APAC reporting units are subject to foreign currency fluctuations.

Goodwill by geographic region for the periods indicated was as follows:

														Effects of												Effects of
														Foreign				Impairment								Foreign
		January 1,				Goodwill								Currency				of				December 31,				Currency				September 30,
		2008				Acquired				Adjustments				Exchange				Goodwill				2008				Exchange				2009
Americas		$	11,426			$	13,445			$	—			$	—			$	(24,871	)		$	—			$	—			$	—
EMEA			27,860				—				—				(2,506	)			(25,354	)			—				—				—
APAC			7,976				—				15,510				409				(19,273	)			4,622				(14	)			4,608
Total		$	47,262			$	13,445			$	15,510			$	(2,097	)		$	(69,498	)		$	4,622			$	(14	)		$	4,608

Goodwill was acquired during 2008 as a result of the Superscape acquisition (see Note 2). The net adjustment increase to goodwill in 2008 of $15,510 was a result of additional purchase consideration for MIG of $14,536 due to the restructuring in the fourth quarter of 2008 of the MIG earnout payments and additional professional fees of $974 related to the MIG acquisition.

In accordance with ASC 350, the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350-10, the Company performs the annual impairment review of its goodwill balance as of September 30.

ASC 350-10 requires a two-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events or changes in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairment by applying the fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying the fair value-based tests to individual assets and liabilities within each reporting units. The fair value of the reporting units are estimated using a combination of the market approach, which utilizes comparable companies’ data, and/or the income approach, which uses discounted cash flows.

The Company has three reportable segments comprised of 1) Americas, 2) Asia-Pacific (“APAC”) and 3) EMEA geographic regions. As of September 30, 2009, the Company had goodwill attributable to the APAC reporting unit. The Company performed its annual impairment review as of September 30, 2009 as prescribed in ASC 350. The Company concluded that its goodwill attributed to the Company’s APAC reporting unit was not impaired as the fair value of the reporting unit exceeded the carrying value, including goodwill and determined that no adjustment to the carrying value of goodwill for any reporting units was necessary. In order to determine the fair value of the Company’s reporting units, the Company utilizes the discounted cash flow and market methods. The Company has consistently utilized both methods in its goodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests as it believes both, in conjunction with each other, provide a reasonable estimate of the determination of fair value of the reporting unit — the discounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Company’s market sector including its competitors. The assumptions supporting the discounted cash flow method, including the discount rate, which was assumed to be 36.0%, were determined using the Company’s best estimates as of the date of the impairment review.

In 2008, the Company recorded an aggregate goodwill impairment of $69,498 as the fair values of the Americas, APAC and EMEA reporting units were determined to be below their respective carrying values.

Note 6 — Commitments and Contingencies

Leases

The Company leases office space under non-cancelable operating facility leases with various expiration dates through July 2013. Rent expense for the three months ended September 30, 2009 and 2008 was $694 and $991, respectively. Rent expense for the nine months ended September 30, 2009 and 2008 was $2,031 and $2,938 respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. The deferred rent balance was $476 and $606 at September 30, 2009 and December 31, 2008, respectively, and was included within other long-term liabilities.

At September 30, 2009, future minimum lease payments under non-cancelable operating leases were as follows:

		Minimum
		Operating								Net
		Lease				Sub-lease				Lease
Year Ending December 31,		Payments				Income				Payments
2009 (remaining three months)		$	887			$	15			$	872
2010			2,519				—				2,519
2011			1,937				—				1,937
2012			1,076				—				1,076
2013			191				—				191
		$	6,610			$	15			$	6,595

Minimum Guaranteed Royalties

The Company has entered into license and development agreements with various owners of brands and other intellectual property to develop and publish games for mobile handsets. Pursuant to some of these agreements, the Company is required to pay minimum royalties over the term of the agreements regardless of actual game sales. Future minimum royalty payments for those agreements as of September 30, 2009 were as follows:

		Minimum
		Guaranteed
Year Ending December 31,		Royalties
2009 (remaining three months)		$	3,194
2010			3,806
2011			348
2012			43
2013 and thereafter			50
		$	7,441

Commitments in the above table include $7,141 of guaranteed royalties to licensors that are included in the Company’s consolidated balance sheet as of September 30, 2009 because the licensors do not have any significant performance obligations. These commitments are included in both current and long-term prepaid and accrued royalties.

Income Taxes

As of September 30, 2009, unrecognized tax benefits and potential interest and penalties are classified within “Other long-term liabilities” on the Company’s condensed consolidated balance sheets. As of September 30, 2009, the settlement of the Company’s income tax liabilities could not be determined; however, the liabilities are not expected to become due within the next 12 months.

Indemnification Agreements

The Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime for certain events or occurrences while the officer or director is or was serving at the Company’s request in that capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had recorded no liabilities for these agreements as of September 30, 2009 or December 31, 2008.

In the ordinary course of its business, the Company includes standard indemnification provisions in most of its license agreements with carriers and other distributors. Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered or incurred in connection with its games, including as a result of intellectual property infringement and viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited. The Company has never incurred costs to defend lawsuits or settle indemnified claims of these types. As a result, the Company believes the estimated fair value of these indemnity provisions is minimal. Accordingly, the Company had recorded no liabilities for these provisions as of September 30, 2009 or December 31, 2008.

Contingencies

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. For example, the Company is engaged in a contractual dispute with a licensor, Skinit, Inc., related to, among other claims, alleged underpayment of royalties and failure to perform under a distribution agreement, pursuant to which Skinit previously claimed that it is owed approximately $600. On April 21, 2009, Skinit filed a complaint against the Company and other defendants, seeking unspecified damages plus attorney’s fees and costs. The complaint, filed in the Superior Court of California in Orange County (case number 30-2009), alleges breach of contract, interference with economic relations, conspiracy and misrepresentation of fact. On June 25, 2009, the Company filed a motion in the Superior Court in Orange County requesting an order compelling Skinit to arbitrate its claim against the Company and requesting that the court stay the action pending the determination of the motion and the subsequent arbitration. On July 30, 2009, the court granted the Company’s motion in its entirety and the dispute will now proceed to arbitration.

The Company does not believe it is party to any currently pending litigation, the outcome of which will have a material adverse effect on its operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors.

Note 7 — Debt

MIG Notes

In December 2008, the Company amended the MIG merger agreement to acknowledge the full achievement of the earnout milestones and at the same time entered into secured promissory notes in the aggregate principal amount of $20,000 payable to the former MIG shareholders (the “Earnout Notes”) as full satisfaction of the MIG earnout. The Earnout Notes require that the Company pay off the principal and interest in installments with aggregate remaining principal payments scheduled as follows:

March 31, 2010		$	1,500
June 30, 2010		$	1,500
September 30, 2010		$	1,500
December 31, 2010		$	1,500
			6,000

The Earnout Notes are secured by a lien on substantially all of the Company’s assets and are subordinated to the Company’s obligations to the lender under the Company’s Loan and Security Agreement, dated as of February 15, 2007, as amended (the “Credit Facility”), and any replacement credit facility that meets certain conditions. The Earnout Notes began accruing simple interest on April 1, 2009 at the rate of 7% compounded annually and may be prepaid without penalty. A change of control of the Company accelerates the payment of principal and interest under the Earnout Notes.

During the nine months ended September 30, 2009, the Company paid $14,000 of principal and $191 of interest to the MIG shareholders related to the Earnout Notes.

In December 2008, the Company also entered into secured promissory notes in the aggregate principal amount of $5,000 payable to two former shareholders of MIG (the “Special Bonus Notes”) as full satisfaction of the special bonus provisions of their employment agreements. The Company currently intends to pay the $5,000 of principal plus accrued interest from cash held in China. The Special Bonus Notes provide for cash payments as follows:

March 31, 2010		$	937
June 30, 2010		$	937
September 30, 2010		$	1,563
December 31, 2010		$	1,563
			5,000

The Special Bonus Notes are guaranteed by the Company and the Company’s obligations are secured by a lien on substantially all of the Company’s assets. The Special Bonus Notes are subordinated to the Credit Facility and any replacement credit facility that meets certain conditions. The Special Bonus Notes began accruing simple interest on April 1, 2009 at the rate of 7% compounded annually, and may be paid off in advance without penalty. A change of control of the Company accelerates the payment of principal and interest under the Earnout Notes. The Company has recorded the entire $5,000 of the Special Bonus Notes as of September 30, 2009 as the former MIG shareholders are fully vested in the special bonus.

As of September 30, 2009, the Company’s current portion of long-term debt related to the Earnout and Special Bonus Notes was $8,479 and the long-term portion was $3,062.

Based on the borrowing rates currently available to the Company with similar terms and maturities, the carrying value of the Earnout and Special Bonus Notes of $11,541 in principal and accrued interest approximates fair value.

Credit Facility

In December 2008, the Company entered into a revolving credit facility (“the Credit Facility’), which amends and supersedes the Loan and Security Agreement entered into in February 2007, as amended. On August 24, 2009, the Company entered into an amendment to the Credit Facility, which reduced certain of the minimum targets contained in the EBITDA-related covenant discussed below. The Credit Facility provides for borrowings of up to $8,000, subject to a borrowing base equal to 80% of the Company’s eligible accounts receivable. The Company’s obligations under the Credit Facility are guaranteed by certain of the Company’s domestic and foreign subsidiaries and are secured by substantially all of the Company’s assets, including all of the capital stock of certain of the Company’s domestic subsidiaries and 65% of the capital stock of certain of its foreign subsidiaries.

The interest rate for the Credit Facility is the lender’s prime rate, plus 1.0%, but no less than 5.0%. Interest is due monthly, with all outstanding obligations due at maturity. The Company must also pay the lender a monthly unused revolving line facility fee of 0.35% on the unused portion of the $8,000 commitment. In addition, the Company paid the lender a non-refundable commitment fee of $55 in December 2008 and will pay an additional $55 in December 2009. The Credit Facility limits the Company and certain of its subsidiaries’ ability to, among other things, dispose of assets, make acquisitions, incur additional indebtedness, incur liens, pay dividends and make other distributions, and make investments. The Credit Facility requires the Company to establish a separate account at the lender for collection of its accounts receivables. All deposits into this account are automatically applied by the lender to the Company’s outstanding obligations under the Credit Facility.

In addition, under the Credit Facility, the Company must comply with the following financial covenants:

(a)

EBITDA. The Company must maintain, measured on consolidated basis as of the end of each of the following periods, adjusted EBITDA of at least the following:

April 1, 2009 through September 30, 2009		$	1
July 1, 2009 through December 31, 2009		$	1,000
October 1, 2009 through March 31, 2010		$	2,600

The minimum EBITDA covenant for the fiscal quarter ending June 30, 2010 and each quarter thereafter will be negotiated and established upon terms satisfactory to both the Company and the lender, following the lender’s receipt of the Company’s 2010 board plan. For purposes of the above covenant, EBITDA means (a) the Company’s consolidated net income, determined in accordance with U.S. GAAP, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expense, plus (f) non-cash goodwill and other intangible assets and royalty impairments, plus (g) non-cash foreign exchange translation charges, minus (h) all non-cash income of the Company and its subsidiaries for such period.

(b)

Minimum Domestic Liquidity: The Company must maintain at the lender an amount of cash, cash equivalents and short-term investments of not less than the greater of: (a) 20% of the Company’s total consolidated unrestricted cash, cash equivalents and short-term investments, or (b) 15% of outstanding obligations under the Credit Facility.

The Company’s failure to comply with the financial or operating covenants in the Credit Facility would not only prohibit the Company from borrowing under the facility, but would also constitute a default, permitting the lender to, among other things, declare any outstanding borrowings, including all accrued interest and unpaid fees, becoming immediately due and payable. A change in control of the Company (as defined in the Credit Facility) also constitutes an event of default, permitting the lender to accelerate the indebtedness and terminate the Credit Facility. To the extent an event of default occurs under the Credit Facility and the lender accelerates the indebtedness and terminates the Credit Facility, this would also trigger the cross-default provisions of the Earnout Notes and Special Bonus Notes. The Credit Facility also contains other customary events of default.

The Credit Facility matures on December 29, 2010, when all amounts outstanding will be due. If the Credit Facility is terminated prior to maturity by the Company or by the lender after the occurrence and continuance of an event of default, then the Company will owe a termination fee equal to $80, or 1.00% of the total commitment.

As of September 30, 2009, the Company was in compliance with all covenants of the Credit Facility and had outstanding obligations of $4,085. Based on the borrowing rates currently available to the Company with similar terms and maturities, the carrying value approximates fair value.

Note 8 — Stockholders’ Equity

Common Stock

In March 2007, the Company completed its initial public offering (“IPO”) of common stock in which it sold and issued 7,300 shares of common stock at an issue price of $11.50 per share. The Company raised a total of $83,950 in gross proceeds from the IPO, or approximately $74,758 in net proceeds after deducting underwriting discounts and commissions of $5,877 and other offering costs of $3,315. Upon the closing of the IPO, all shares of redeemable convertible preferred stock outstanding automatically converted into 15,680 shares of common stock.

In April 2007, the underwriters exercised a portion of the over-allotment option as to 199 shares, all of which were sold by stockholders and not by the Company.

Warrants to Purchase Common Stock

In March 2008, a holder of warrants elected to net exercise warrants to purchase 18 shares of the Company’s common stock, which were converted into 10 shares of common stock. Also in March 2008, a holder of warrants elected to exercise warrants to purchase 53 shares of the Company’s common stock at $1.92 per share for total cash consideration of $101.

Warrants outstanding as of September 30, 2009 were as follows:

Number

Exercise

of Shares

Price

Outstanding

Term

per

Under

Issue Date

(Years)

Share

Warrant

May 2006

7

$

9.03

106

Note 9 — Stock Option and Other Benefit Plans

2007 Employee Stock Purchase Plan

In January 2007, the Company’s Board of Directors adopted, and in March 2007 the Company’s stockholders approved, the 2007 Employee Stock Purchase Plan (the “2007 Purchase Plan”). The Company initially reserved 667 shares of its common stock for issuance under the 2007 Purchase Plan. On each January 1 for the first eight calendar years after the first offering date, the aggregate number of shares of the Company’s common stock reserved for issuance under the 2007 Purchase Plan will be increased automatically by the number of shares equal to 1% of the total number of outstanding shares of the Company’s common stock on the immediately preceding December 31, provided that the Board of Directors may reduce the amount of the increase in any particular year and provided further that the aggregate number of shares issued over the term of this plan may not exceed 5,333. The 2007 Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or after a purchase period ends.

In January 2009, the 2007 Purchase Plan was amended to provide that the Compensation Committee of the Company’s Board of Directors may fix a maximum number of shares that may be purchased in the aggregate by all participants during any single offering period (the “Maximum Offering Period Share Amount”). The Committee may later raise or lower the Maximum Offering Period Share Amount. The Committee established the Maximum Offering Period Share Amount of 500 shares for the offering period that commenced on February 15, 2009 and ended on August 14, 2009, and a Maximum Offering Period Share Amount of 200 shares for each offering period thereafter. The Company issued 500 shares under the 2007 Purchase Plan and received cash proceeds of $212 during the nine months ended September 30, 2009.

As of September 30, 2009, 512 shares were available for issuance under the 2007 Purchase Plan.

2009 Stock Option Exchange Program

On April 22, 2009, the Company launched a voluntary stock option exchange program (the “Exchange Program”) pursuant to which its eligible United States and United Kingdom employees (“Eligible Employees”) had the right to exchange all options to purchase shares of its common stock outstanding prior to the Exchange Program launch date having an exercise price equal to or greater than $1.25 per share (“Eligible Options”) granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) or the Company’s 2001 Stock Option Plan for new nonqualified stock options to be granted under the 2007 Plan (“New Options”). Eligible Options that were tendered for New Options were cancelled and returned to the 2007 Plan for re-issuance thereunder. The Company’s executive officers and directors were not eligible to participate in the Exchange Program. The Exchange Program provided that Eligible Employees would receive a New Option for each tendered Eligible Option, depending on the exercise price of the Eligible Option tendered, in accordance with the exchange ratios set forth in the table below:

		Exchange Ratio
		(New Options-for-
Exercise Price		Eligible Options)
$1.25 – $1.99		1-for-1
2.00 – 3.99		1-for-2
4.00 – 5.94		1-for-3
5.95 or greater		1-for-4

The Company completed the Exchange Program in the second quarter of 2009. Eligible Employees tendered options to purchase 821 shares of common stock in exchange for replacement options to purchase 261 shares of common stock under the Company’s 2007 Plan. This resulted in $15 of incremental stock-based compensation to be amortized monthly over three years. The new options have a six-year term and vest over three years in 36 equal monthly installments. The exercise price of the New Options equals the closing sale price of the Company’s common stock of $0.78 per share as reported on The NASDAQ Global Market on May 22, 2009.

Stock Option Activity

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2009:

						Options Outstanding
										Weighted				Weighted
						Number				Average				Average				Aggregate
		Shares				of				Exercise				Contractual				Intrinsic
		Available				Shares				Price				Term (Years)				Value
Balances at December 31, 2008			935				5,130				5.18
Increase in authorized shares			887
Options granted			(1,528	)			1,528				0.81
Options canceled			1,565				(1,565	)			6.29
Options exercised			—				(111	)			0.60
Balances at September 30, 2009			1,859				4,982			$	3.59				4.76			$	843
Options vested and expected to vest at September 30, 2009							4,423			$	3.81				4.76			$	690
Options exercisable at September 30, 2009							1,953			$	5.69				4.66			$	100

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock of $1.17 per share as of September 30, 2009. Consolidated net cash proceeds from option exercises were $67 and $231 for the nine months ended September 30, 2009 and 2008, respectively. The Company realized no significant income tax benefit from stock option exercises during the nine months ended September 30, 2009 or 2008. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

The Company applies the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718-10”). Under ASC 718-10, the Company estimated the fair value of each option award on the grant date using the Black-Scholes option valuation model and the weighted average assumptions noted in the following table.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Dividend yield			—	%			—	%			—	%			—	%
Risk-free interest rate			1.48	%			2.87	%			1.43	%			2.67	%
Expected volatility			59.7	%			41.9	%			58.1	%			43.9	%
Expected term (years)			3.11				4.08				3.15				4.08

The Company based its expected volatility on the historical volatility of a peer group of publicly traded entities. The expected term of options gave consideration to early exercises, post-vesting cancellations and the options’ contractual term, which was extended for all options granted subsequent to September 12, 2005 but prior to October 25, 2007 from five to ten years. Stock options granted on or after October 25, 2007 have a contractual term of six years. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Constant Maturity Rate as of the date of grant. The weighted-average fair value of stock options granted during the nine months ended September 30, 2009 and 2008 was $0.33 and $1.70, respectively.

The Company calculated employee stock-based compensation expense recognized in the three and nine months ended September 30, 2009 and 2008 based on awards ultimately expected to vest and reduced it for estimated forfeitures. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes the consolidated stock-based compensation expense by line items in the consolidated statement of operations:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Research and development		$	166			$	261			$	546			$	511
Sales and marketing			170				1,298				480				3,903
General and administrative			338				569				1,176				1,716
Total stock-based compensation expense		$	674			$	2,128			$	2,202			$	6,130

As of September 30, 2009, the Company had $4,313 of total unrecognized compensation expense under ASC 718-10, net of estimated forfeitures, which will be recognized over a weighted average period of 2.46 years. As permitted by ASC 718-10, the Company has deferred the recognition of its excess tax benefit from non-qualified stock option exercises.

Note 10 — Income Taxes

The Company recorded an income tax provision of $917 and $822 for the three months ended September 30, 2009 and 2008, respectively, related to foreign withholding taxes and income taxes in some foreign jurisdictions. The Company recorded an income tax provision of $2,472 and $2,165 for the nine months ended September 30, 2009 and 2008, respectively, related to foreign withholding taxes and income taxes. The income tax rates vary from the Federal and State statutory rates due to the valuation allowances on the Company’s net operating losses, foreign tax rate differences, and withholding taxes.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740-10”). The total amount of unrecognized tax benefits as of the date of adoption was $575. As of September 30, 2009 and December 31, 2008, the total amount of unrecognized tax benefits was $3,625 and $2,406, respectively. As of September 30, 2009, approximately $66 of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate. The remaining balance, if recognized, would adjust the Company’s goodwill from acquisitions or would adjust the Company’s deferred tax assets which are subject to a valuation allowance.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company recorded $58 and $59 of interest on uncertain tax positions during the three months ended September 30, 2009 and 2008, respectively. The Company recorded $173 and $133 of interest on uncertain tax positions during the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, the Company had a liability of $3,220 related to interest and penalties for uncertain tax positions.

The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the United States, California, United Kingdom and the People’s Republic of China (“China”). The Company’s Federal tax return is open by statute for tax years 2001 and forward and could be subject to examination by the tax authorities. The Company’s California income tax returns are open by statute for tax years 2001 and forward. The statute of limitations for the Company’s 2006 tax return in the United Kingdom will close in 2009. The Company’s China tax returns are open by statute for tax years 2002 and forward.

Note 11 — Segment Reporting

ASC 280, Segment Reporting (“ASC 280-10”), establishes standards for reporting information about operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information on a geographic basis, however these aggregate into one operating segment for purposes of allocating resources and evaluating financial performance.

Accordingly, the Company reports as a single operating segment — mobile games. It attributes revenues to geographic areas based on the country in which the carrier’s principal operations are located.

The Company generates its revenues in the following geographic regions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
United States of America		$	9,177			$	11,070			$	28,902			$	31,743
United Kingdom			670				1,126				2,127				4,103
China			2,021				2,326				6,154				7,369
Americas, excluding the USA			2,605				2,891				7,564				6,977
EMEA, excluding the United Kingdom			4,373				5,662				13,610				15,618
Other			799				819				1,935				2,380
		$	19,645			$	23,894			$	60,292			$	68,190

The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Property and equipment, net of accumulated depreciation and amortization, summarized by geographic location was as follows:

		September 30,				December 31,
		2009				2008
Americas		$	2,430			$	3,208
EMEA			628				790
Other			562				863
		$	3,620			$	4,861

Note 12 — Restructuring

Restructuring information as of September 30, 2009 was as follows:

		Fiscal 2009 Restructuring								Fiscal 2008 Restructuring
						Facilities								Facilities				Superscape
		Workforce				Related				Workforce				Related				Plan				Total
Balance as of December 31, 2007
Charges assumed as part of acquisition		$	—				—			$	—				—				3,768			$	3,768
Charges to operations			—				—				989				755				—				1,744
Charges settled in cash			—				—				(889	)			(312	)			(3,311	)			(4,512	)
Balance as of December 31, 2008			—				—				100				443				457				1,000
Charges to operations			919				513				—				—				—				1,432
Charges settled in cash			(336	)			—				(100	)			(344	)			(406	)			(1,186	)
Balance as of September 30, 2009		$	583			$	513			$	—			$	99			$	51			$	1,246

During 2008 and the third quarter of 2009, the Company’s management approved restructuring plans to improve the effectiveness and efficiency of its business and reduce operating expenses around the world. During the three months ended September 30, 2009, the Company paid $300 of facility related charges and $336 of workforce related charges. During the nine months ended September 30, 2009, the Company paid $436 of workforce related charges and $750 of facility related charges.

During the three months ended September 30, 2009, the company recorded $919 of workforce restructuring charges, comprised of severance and termination benefits of $574 associated with the impending departure of our Chief Executive Officer, or CEO and $345 relating to employee termination costs in our United States and United Kingdom offices. As of September 30, 2009, the Company’s remaining restructuring liability of $1,246 was comprised of $663 of facility related costs related to restructuring of our headquarters in the United States that are expected to be paid over the remainder of the lease terms of one to three years and $583 of restructuring charges primarily associated with the impending departure of the Company’s CEO.

During the remainder of fiscal 2009, the Company anticipates incurring approximately $300 of restructuring charges, primarily related to a $174 non-cash facility related restructuring charge, resulting from vacating a portion of our EMEA headquarters based in the United Kingdom, and an additional $110 of restructuring charges associated with the anticipated fulfillment of the terms of the CEO’s separation agreement.

Note 13 — Subsequent Events

Management has reviewed and evaluated material subsequent events from the balance sheet date of September 30, 2009 through the financial statements issue date of November 9, 2009. All appropriate subsequent event disclosures, have been made in notes to the Company’s unaudited Condensed Consolidated Financial Statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this discussion and elsewhere in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “may,” “will,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “could,” “estimate,” “continue” and similar expressions or variations are intended to identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:

•

our expectations and beliefs regarding the future conduct and growth of our business;

•

our expectations regarding competition and our ability to compete effectively;

•

our expectations regarding the development of future products, including those for next-generation platforms and social networking websites;

•

our expectations regarding our revenues and expenses for the fourth quarter of 2009;

•

our assumptions regarding the impact of Recent Accounting Pronouncements applicable to us;

•

our assessments and estimates that determine our effective tax rate and valuation allowance;

•

our belief that our cash and cash equivalents, borrowings under our revolving credit facility and cash flows from operations will be sufficient to meet our working capital needs, contractual obligations, debt service obligations, capital expenditure requirements and similar commitments;

•

our expectation that we will generate cash from operations for the fiscal year of 2009;

•

our expectation regarding the costs that will be associated with the transition of our Chief Executive Officer and our ability to effect a smooth transition;

•

our expectation regarding our ability to maintain compliance with or negotiate the financial and other covenants in our credit facility; and

•

our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that we may incur as a result of those proceedings.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Risk Factors” elsewhere in this report. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this report. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following sections:

•

An Overview that discusses at a high level our operating results and some of the trends that affect our business;

•

Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements;

•

Recent Accounting Pronouncements;

•

Results of Operations, including a more detailed discussion of our revenues and expenses; and

•

Liquidity and Capital Resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments.

Overview

This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understand our financial results for the third quarter and first nine months of 2009, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our unaudited consolidated financial statements and accompanying notes.

Financial Results and Trends

Revenues for the three months ended September 30, 2009 were $19.6 million, a 18% decrease compared to the three months ended September 30, 2008, in which we reported revenues of $23.9 million. Revenues for the nine months ended September 30, 2009 were $60.3 million, a 12% decrease compared to the nine months ended September 30, 2008, in which we reported revenues of $68.2 million. These decreases were primarily driven by a decrease in handset sales in our traditional carrier business, which in turn led to a decrease in the number of games that we sold, and the impact of foreign currency exchange rates, which had a greater positive impact on our 2008 revenues compared to our 2009 revenues. Our revenues will continue to depend significantly on growth in the mobile games market and our ability to continue to attract new end users in that market, purchases of new mobile handsets and the overall strength of the economy, particularly in the United States. Our future revenues would be adversely affected if there were a continued slowdown in our carrier business, which we expect will continue to generate the vast majority of our revenues in the fourth quarter of 2009. Revenues from our traditional carrier business will be affected by the overall strength of the global economy, the extent to which consumers continue to migrate to next-generation platforms, such as the Apple App Store, that enable the download of applications from sources other than a carrier’s branded e-commerce service and whether the lower average prices for games on the next-generation platforms will eventually result in lower average prices for games in our carrier business. In addition, despite the movement by a growing number of consumers to these next generation platforms, to date, next generation platforms have not been as significant a source of revenue for us and the market as a whole as we expected. Our revenues may also be adversely impacted by decisions by our carriers to alter their customer terms for downloading our games. For example, Verizon Wireless, our largest carrier, imposes a data surcharge to download content on those Verizon customers who have not otherwise subscribed to a data plan. Our revenues depend on a variety of other factors, including our relationships with our carriers and licensors. Even if mobile games based on licensed content or brands remain popular with end users, any of our licensors could decide not to renew our existing license or not to license additional intellectual property to us and instead license to our competitors or develop and publish their own mobile games or other applications, competing with us in the marketplace. The loss of any key relationships with our carriers, other distributors or licensors could impact our revenues in the future. We expect our 2009 revenues to be lower than our 2008 revenues, and in future periods, our revenues could continue to decline.

Our net loss in the three months ended September 30, 2009 was $4.0 million versus a net loss of $56.9 million in the three months ended September 30, 2008. This decrease was driven primarily by a decrease in operating expenses of $51.9 million, including $46.6 million from a reduction in goodwill impairment charges from the third quarter of 2008, a decrease in costs of revenues of $3.7 million, a decrease in interest and other expense of $1.6 million, which was partially offset by a $4.2 million reduction in revenues. Our net loss in the nine months ended September 30, 2009 was $11.3 million versus a net loss of $69.5 million in the nine months ended September 30, 2008. This decrease was driven primarily by a decrease in operating expenses of $62.3 million, including $46.6 million from a reduction in goodwill impairment charges from the third quarter of 2008, a decrease in costs of revenues of $3.3 million, a decrease in interest and other expense of $731,000, which was partially offset by a $7.9 million reduction in revenues. The decreases in our operating expenses in the three and nine months ended September 30, 2009 compared with the corresponding periods in 2008 were in part due to the headcount reductions and related measures that we took in connection with the restructurings that we implemented in both the third and fourth quarters of 2008 and the third quarter of 2009 and the restructuring that we implemented in connection with our acquisition of Superscape. Our operating results are also affected by fluctuations in foreign currency exchange rates of the currencies in which we incur meaningful operating expenses (principally the British Pound Sterling, Chinese Renminbi, Brazilian Real and Russian Ruble) and our customers’ reporting currencies, as we transact business in more than 70 countries in more than 20 different currencies, and in 2008 and the first nine months of 2009, some of these currencies fluctuated by up to 40%.

We expect that our expenses to develop and port games for new mobile platforms will increase as we enhance our existing titles and develop new titles to take advantage of the additional functionality offered by these platforms. In addition, we expect to incur additional expenses in connection with our recently announced intention to increase our focus on developing games for social networking websites. Our ability to attain profitability will be affected by our ability to grow our revenues and the extent to which we must incur additional expenses to expand our sales, marketing, development, and general and administrative capabilities to grow our business. The largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees. We expect that our cash expenses will remain relatively constant compared to the third quarter of 2009 in terms of absolute dollars for the balance of the year. Our business is impacted by seasonality, with higher levels of consumer demand and a higher percentage of our sales occurring in the fourth quarter. In addition, we release many of our products in conjunction with specific events, such as the release of a related movie. We expect these seasonal trends to continue in the future.

Cash and cash equivalents at September 30, 2009 totaled $9.9 million, a decrease of $9.3 million from $19.2 million at December 31, 2008. This decrease was primarily due to $14.0 million in principal that we paid during the first nine months of 2009 with respect to the promissory notes that we issued to the MIG shareholders that are discussed in further detail in “Significant Transactions” below. We also recognized a $5.4 million decrease in our accrued royalties and a $2.5 million reduction in our accounts payables. These cash outflows were partially offset by net proceeds excluding interest of $4.1 million from the borrowings under our credit facility, a $5.2 million decrease in our prepaid royalties and a $3.9 million decrease in accounts receivable, which was partially due to better than expected collections and lower revenues. We believe our cash and cash equivalents, together with cash flows from operations and borrowings under our credit facility, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our expectations regarding cash sufficiency assume that our operating results will be sufficient to enable us to continue to comply with the financial covenants contained in our revolving credit facility. However, if our revenues are lower than we anticipate, we will be required to further reduce our operating expenses to remain in compliance with these covenants. Reducing our operating expenses could be very challenging for us, since we undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008 and during the third quarter of 2009 that reduced our operating expenses significantly from second quarter of 2008 levels. Reducing operating expenses further could have the effect of reducing our revenues. On August 24, 2009, we entered into an amendment to our revolving credit facility with the lender, which reduced certain of the minimum targets contained in the earnings before interest, depreciation and amortization (“EBITDA”) related covenant (see Liquidity and Capital Resources — Sufficiency of Current Cash and Cash Equivalents below). The minimum EBITDA covenant for the fiscal quarter ending June 30, 2010 and each quarter thereafter is still to be negotiated and established upon terms satisfactory to both the lender and ourselves, following the lender’s receipt of the our 2010 internal plan. A failure on our part to remain in compliance with the covenants under the revolving credit facility and any failure to agree upon satisfactory EBITDA-related covenants with the lender for the fiscal quarter ending June 30, 2010 and each quarter thereafter could adversely impact our cash requirements for the next twelve months.

Significant Transactions

In December 2008, we renegotiated and extended our credit facility. The credit facility provides for borrowings of up to $8.0 million, subject to a borrowing base equal to 80% of our eligible accounts receivable.

In March 2008, we acquired Superscape, a global publisher of mobile games, to deepen and broaden our game library, gain access to 3-D game development resources and to augment our internal production and publishing resources with a studio in Moscow, Russia. We paid 10 pence (pound sterling) in cash for each issued share of Superscape for a total purchase price of $38.8 million, consisting of cash consideration of $36.8 million and transaction costs of $2.0 million. Due to decreases in our long-term forecasts and current market capitalization, the entire goodwill resulting from the Superscape acquisition was impaired during the year ended December 31, 2008.

In December 2007, we acquired MIG to accelerate our presence in China, deepen our relationship with China Mobile, the largest wireless carrier in China, acquire access and rights to leading franchises for the Chinese market, and augment our internal production and publishing resources with a studio in China. We purchased all of MIG’s then outstanding shares for a total purchase price of $30.5 million, consisting of cash consideration to MIG shareholders of $14.7 million and transaction costs of $1.3 million. As a result of the attainment of the revenue and operating income milestones in 2008 by MIG, we were committed to pay the $20.0 million in additional consideration to the MIG shareholders and the $5.0 million of bonuses to two officers of MIG. In December 2008, we restructured the timing and nature of these payments and issued to former shareholders of MIG an aggregate of $25.0 million in promissory notes, which are due in 2009 and 2010. Due to decreases in our long-term forecasts and current market capitalization, a portion of the goodwill resulting from the MIG acquisition was impaired during the year ended December 31, 2008.

Critical Accounting Policies and Estimates

There were no significant changes in our Critical Accounting Policies and Estimates during the nine months ended September 30, 2009 as compared to the Critical Accounting Policies and Estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements in this report, which information is incorporated herein by reference.

Results of Operations

Comparison of the Three Months Ended September 30, 2009 and 2008

Revenues

		Three Months Ended
		September 30,
		2009				2008
		(in thousands)
Revenues		$	19,645			$	23,894

Our revenues decreased $4.2 million, or 17.8%, from $23.9 million for the three months ended September 30, 2008 to $19.6 million for the three months ended September 30, 2009, due primarily to a decrease in handset sales in our traditional carrier business, which in turn led to a decrease in the number of games that we sold. Foreign currency exchange rates also had a greater positive impact on our revenues for the three months ended September 30, 2008 compared to the three months ended September 30, 2009. International revenues (defined as revenues generated from carriers whose principal operations are located outside the United States) decreased by $2.3 million, from $12.8 million in the three months ended September 30, 2008 to $10.5 million in the three months ended September 30, 2009. The decrease in international revenues was primarily a result of decreased sales in EMEA, China and Latin America. We expect our 2009 revenues to be lower than our 2008 revenues as a result of the decrease in growth of our carrier-based business, primarily as a result of the overall decline in the strength of the economy, causing a decline in the rate of purchases of new mobile handsets which in turn led to a decrease in the number of games that we sold.

Cost of Revenues

		Three Months Ended
		September 30,
		2009				2008
		(in thousands)
Cost of revenues:
Royalties		$	5,302			$	5,753
Impairment of prepaid royalties and guarantees			513				1,921
Amortization of intangible assets			1,420				3,247
Total cost of revenues		$	7,235			$	10,921
Revenues		$	19,645			$	23,894
Gross margin			63.2	%			54.3	%

Our cost of revenues decreased $3.7 million, or 33.7%, from $10.9 million in the three months ended September 30, 2008 to $7.2 million in the three months ended September 30, 2009. The decrease was due primarily to a $1.7 million reduction in amortization for titles and content associated with intangible assets acquired from Superscape that were fully amortized in the first quarter of 2009 and a decrease of $1.4 million associated with the impairment of certain royalty guarantees. Revenues attributable to games based upon branded intellectual property increased as a percentage of revenues from 72.4% in the three months ended September 30, 2008 to 77.0% in the three months ended September 30, 2009, primarily due to a decrease in sales of games developed by MIG and Superscape based on their original intellectual property. The average royalty rate that we paid on games based on licensed intellectual property, excluding royalty impairments, increased from 33.3% in the three months ended September 30, 2008 to 35.0% in the three months ended September 30, 2009 due to increased sales of titles with higher royalty rates. Overall royalties, including impairment of prepaid royalties and guarantees, as a percentage of total revenues decreased from 32.1% in the three months ended September 30, 2008 to 29.6% in the three months ended September 30, 2009.

Research and Development Expenses

		Three Months Ended
		September 30,
		2009				2008
		(in thousands)
Research and development expenses		$	6,662			$	9,223
Percentage of revenues			33.9	%			38.6	%

Our research and development expenses decreased $2.6 million, or 27.8%, from $9.2 million in the three months ended September 30, 2008 to $6.7 million in the three months ended September 30, 2009. The decrease in research and development costs was primarily due to decreases in salaries and benefits of $975,000 due to reduced headcount and movement of employees to lower cost locations, outside services costs of $695,000 due to a reduction in third-party outside services costs for porting and external development and facility and overhead costs of $569,000 due to reduced headcount. We decreased our research and development staff from 454 employees at September 30, 2008 to 409 as of September 30, 2009, and salaries and benefits decreased as a result. As a percentage of revenues, research and development expenses declined from 38.6% for the three months ended September 30, 2008 compared to 33.9% for the three months ended September 30, 2009. Research and development expenses included $166,000 of stock-based compensation expense in the three months ended September 30, 2009 and $261,000 in the three months ended September 30, 2008.

Sales and Marketing Expenses

		Three Months Ended
		September 30,
		2009				2008
		(in thousands)
Sales and marketing expenses		$	3,556			$	6,004
Percentage of revenues			18.1	%			25.1	%

Our sales and marketing expenses decreased $2.4 million, or 40.8%, from $6.0 million in the three months ended September 30, 2008 to $3.6 million in the three months ended September 30, 2009. The decrease was primarily due to a decrease in stock-based compensation of $1.1 million primarily related to the MIG stock-based compensation earnout being fully expensed, a $622,000 decrease in the MIG earnout expense due to lower amortization associated with reaching the end of the vesting terms and conditions, a $375,000 decrease in salaries, benefits, variable compensation and expatriate costs as we reduced our sales and marketing headcount from 73 at September 30, 2008 to 66 at September 30, 2009, a $140,000 decrease in marketing and promotion costs and a $118,000 decrease in allocated facility and overhead costs. As a percentage of revenues, sales and marketing expenses decreased from 25.1% in the three months ended September 30, 2008 to 18.1% in the three months ended September 30, 2009. Sales and marketing expenses included $170,000 of stock-based compensation expense in the three months ended September 30, 2009 and $1.3 million in the three months ended September 30, 2008.

General and Administrative Expenses

		Three Months Ended
		September 30,
		2009				2008
		(in thousands)
General and administrative expenses		$	3,986			$	5,085
Percentage of revenues			20.3	%			21.3	%

Our general and administrative expenses decreased $1.1 million, or 21.6%, from $5.1 million in the three months ended September 30, 2008 to $4.0 million in the three months ended September 30, 2009. The decrease in general and administrative expenses was primarily due to a $468,000 decrease in salaries and benefits, a $294,000 decrease in professional and consulting fees and a $230,000 decrease in stock-based compensation. We decreased our general and administrative headcount from 72 at September 30, 2008 to 71 at September 30, 2009 but our salaries and benefits decreased primarily as a result of moving headcount to lower cost locations. As a percentage of revenues, general and administrative expenses decreased from 21.3% in the three months ended September 30, 2008 to 20.3% in the three months ended September 30, 2009. General and administrative expenses included $338,000 of stock-based compensation expense in the three months ended September 30, 2009 and $569,000 in the three months ended September 30, 2008.