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

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

Commission File Number 001-33368

Glu Mobile Inc.

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

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

45 Fremont Street, Suite 2800
San Francisco, California 94105
(Address of Principal Executive Offices, including Zip Code)

(415) 800-6100
(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 þ 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 o		Non-accelerated filer þ		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 August 5, 2011: 63,160,690

 

 

GLU MOBILE INC.

FORM 10-Q

Quarterly Period Ended June 30, 2011

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010			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			35
ITEM 4. CONTROLS AND PROCEDURES			37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			38
ITEM 1A. RISK FACTORS			38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			56
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			56
ITEM 4. RESERVED			56
ITEM 5. OTHER INFORMATION			56
ITEM 6. EXHIBITS			56
SIGNATURES			57
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

GLU MOBILE INC.

		June 30,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	26,400			$	12,863
Accounts receivable, net			12,365				10,660
Prepaid royalties			734				2,468
Prepaid expenses and other			2,450				2,557
Total current assets			41,949				28,548
Property and equipment, net			2,812				2,134
Other long-term assets			542				574
Intangible assets, net			7,374				8,794
Goodwill			4,875				4,766
Total assets		$	57,552			$	44,816
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,117			$	5,666
Accrued liabilities			926				939
Accrued compensation			4,053				4,414
Accrued royalties			4,871				7,234
Accrued restructuring			1,291				1,689
Deferred revenues			1,811				842
Current portion of long-term debt			—				2,288
Total current liabilities			20,069				23,072
Other long-term liabilities			7,591				7,859
Total liabilities			27,660				30,931
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000 shares authorized at June 30, 2011 and December 31, 2010; no shares issued and outstanding at June 30, 2011 and December 31, 2010			—				—
Common stock, $0.0001 par value: 250,000 shares authorized at June 30, 2011 and December 31, 2010; 55,978 and 44,585 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively			6				4
Additional paid-in capital			224,727				203,464
Accumulated other comprehensive income			825				1,159
Accumulated deficit			(195,666	)			(190,742	)
Total stockholders’ equity			29,892				13,885
Total liabilities and stockholders’ equity		$	57,552			$	44,816

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

GLU MOBILE INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues		$	17,680			$	15,952			$	34,106			$	33,241
Cost of revenues:
Royalties and impairment of prepaid royalties and guarantees			3,121				4,943				6,961				9,634
Amortization of intangible assets			703				1,006				1,520				2,234
Total cost of revenues			3,824				5,949				8,481				11,868
Gross profit			13,856				10,003				25,625				21,373
Operating expenses:
Research and development			8,439				6,229				15,605				12,890
Sales and marketing			3,344				2,437				7,101				5,408
General and administrative			3,506				3,052				6,440				6,865
Amortization of intangible assets			—				52				—				107
Restructuring charge			147				693				637				1,287
Total operating expenses			15,436				12,463				29,783				26,557
Loss from operations			(1,580	)			(2,460	)			(4,158	)			(5,184	)
Interest and other income/(expense), net:
Interest income			7				6				29				13
Interest expense			(32	)			(137	)			(72	)			(441	)
Other income/(expense), net			354				(429	)			552				(763	)
Interest and other income/(expense), net			329				(560	)			509				(1,191	)
Loss before income taxes			(1,251	)			(3,020	)			(3,649	)			(6,375	)
Income tax provision			(501	)			(198	)			(1,275	)			(499	)
Net loss		$	(1,752	)		$	(3,218	)		$	(4,924	)		$	(6,874	)
Net loss per common share — basic and diluted:		$	(0.03	)		$	(0.10	)		$	(0.09	)		$	(0.22	)
Weighted average common shares outstanding — basic and diluted			54,587				30,676				53,318				30,567

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

GLU MOBILE INC.

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(4,924	)		$	(6,874	)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:
Depreciation and accretion			833				1,111
Amortization of intangible assets			1,520				2,341
Stock-based compensation			902				873
Interest expense on debt			2				356
Amortization of loan agreement costs			70				85
Non-cash foreign currency remeasurement (gain)/loss			(561	)			761
Impairment of prepaid royalties and guarantees			371				663
Changes in allowance for doubtful accounts			90				155
Changes in operating assets and liabilities:
Accounts receivable			(1,730	)			4,174
Prepaid royalties			1,367				1,797
Prepaid expenses and other assets			275				(213	)
Accounts payable			1,388				(616	)
Other accrued liabilities			(28	)			(715	)
Accrued compensation			338				1,095
Accrued royalties			(2,454	)			(2,517	)
Deferred revenues			969				180
Accrued restructuring charge			(858	)			(562	)
Other long-term liabilities			(148	)			86
Net cash (used in)/provided by operating activities			(2,578	)			2,180
Cash flows from investing activities:
Purchase of property and equipment			(1,353	)			(244	)
Net cash used in investing activities			(1,353	)			(244	)
Cash flows from financing activities:
Proceeds from line of credit			—				22,867
Payments on line of credit			(2,288	)			(24,733	)
Net proceeds from Public Offering			15,661				—
MIG loan payments			(698	)			(4,458	)
Proceeds from exercise of warrants and issuance of common stock			3,167				—
Proceeds from exercise of stock options and ESPP			1,351				349
Net cash provided by/(used in) in financing activities			17,193				(5,975	)
Effect of exchange rate changes on cash			275				(319	)
Net increase/(decrease) in cash and cash equivalents			13,537				(4,358	)
Cash and cash equivalents at beginning of period			12,863				10,510
Cash and cash equivalents at end of period		$	26,400			$	6,152

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 its own original intellectual property, as well as third-party licensed brands and other intellectual property.

The Company has incurred recurring losses from operations since inception and had an accumulated deficit of $195,666 as of June 30, 2011. For the three months ended June 30, 2011, the Company incurred a net loss from operations of $1,752. For the six months ended June 30, 2011, the Company incurred a net loss from operations of $4,924. The Company may incur additional operating losses and negative cash flows in the future. Failure to generate sufficient revenues, reduce spending or raise additional capital could adversely affect the Company’s ability to achieve profitability and its intended business objectives.

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 for the year ended December 31, 2010 filed with the SEC on March 21, 2011. 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 June 30, 2011 and its results of operations for the three and six months ended June 30, 2011 and 2010, 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, 2010 has been derived from the audited consolidated financial statements as of that date, and the consolidated balance sheet presented as of June 30, 2011 has been derived from the unaudited condensed consolidated financial statements as of that date.

Basis of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

Concentration of Credit Risk

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

The Company derives its accounts receivable from revenues earned from customers located in the United States and 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 more than 10% of the Company’s revenues for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Apple			19.3	%			*	%			17.6	%			*	%
Tapjoy			20.6				*				15.2				*
Verizon Wireless			*				15.7				*				16.9

At June 30, 2011, Apple accounted for 15.5%, Tapjoy accounted for 13.1%, Telecomunicaciones Movilnet accounted for 12.5% and China Mobile accounted for 11.1% of total accounts receivable. At December 31, 2010, Verizon Wireless accounted for 18.3% and Telecomunicaciones Movilnet accounted for 14.8% 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.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net loss		$	(1,752	)		$	(3,218	)		$	(4,924	)		$	(6,874	)
Basic and diluted shares:
Weighted average common shares outstanding			54,622				30,676				53,335				30,567
Weighted average unvested common shares subject to restrictions			(35	)			—				(17	)			—
Weighted average shares used to compute basic and diluted net loss per share			54,587				30,676				53,318				30,567
Net loss per share — basic and diluted		$	(0.03	)		$	(0.10	)		$	(0.09	)		$	(0.22	)

The following weighted average options to purchase common stock, warrants to purchase common stock and unvested shares of common stock subject to restrictions 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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Warrants to purchase common stock			5,769				106				6,231				106
Unvested common shares subject to restrictions			35				—				17				—
Options to purchase common stock			7,810				6,329				7,403				6,032
			13,614				6,435				13,651				6,138

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASC ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) — Intangibles — Goodwill and Other (“ASU 2010-28”). ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The amendments to this update were effective for us in the first quarter of 2011. The adoption of ASU 2010-28 did not have a material impact on our condensed consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively for reporting periods beginning on or after December 15, 2011. The Company anticipates that the adoption of this standard will not materially impact the Condensed Consolidated Financial Statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The Company anticipates that the adoption of this standard will not materially impact the Condensed Consolidated Financial Statements.

Note 2 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Effective January 1, 2010, the Company adopted ASU 2010-06, which amended ASC 820 to require new disclosures for transfers of financial assets and liabilities into and out of Levels 1 and 2 in the fair value hierarchy and for activity in Level 3 in the fair value hierarchy. The adoption of the amended disclosure requirements for fair value measurements did not affect the disclosures because the Company did not transfer financial assets or liabilities between levels in the fair value hierarchy. 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 June 30, 2011 and December 31, 2010, the Company had $26,400 and $12,863 in cash and cash equivalents.

Note 3 — Balance Sheet Components

Accounts Receivable

		June 30,				December 31,
		2011				2010
Accounts receivable		$	12,959			$	11,164
Less: Allowance for doubtful accounts			(594	)			(504	)
		$	12,365			$	10,660

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 and six months ended June 30, 2011 and 2010.

Property and Equipment

		June 30,				December 31,
		2011				2010
Computer equipment		$	5,486			$	4,974
Furniture and fixtures			532				487
Software			3,808				2,919
Leasehold improvements			2,530				2,392
			12,356				10,772
Less: Accumulated depreciation and amortization			(9,544	)			(8,638	)
		$	2,812			$	2,134

Depreciation expense for the three months ended June 30, 2011 and June 30, 2010 was $406 and $548, respectively. Depreciation expense for the six months ended June 30, 2011 and June 30, 2010 was $833 and $1,111, respectively.

Other Long-Term Liabilities

		June 30,				December 31,
		2011				2010
Uncertain tax position obligations			5,064				4,991
Deferred income tax liability			1,197				1,170
Restructuring			313				773
Other			1,017				925
		$	7,591				7,859

Note 4 — 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 June 30, 2011 and December 31, 2010 were as follows:

				June 30, 2011												December 31, 2010
								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		$	8,644			$	(8,644	)		$	—			$	13,545			$	(13,545	)		$	—
Catalogs		1 yr			1,246				(1,246	)			—				1,203				(1,203	)			—
ProvisionX Technology		6 yrs			205				(205	)			—				198				(198	)			—
Carrier contract and related relationships		5 yrs			19,095				(11,997	)			7,098				18,832				(10,352	)			8,480
Licensed content		5 yrs			2,891				(2,891	)			—				2,829				(2,810	)			19
Service provider license		9 yrs			456				(180	)			276				446				(151	)			295
Trademarks		3 yrs			221				(221	)			—				547				(547	)			—
					32,758				(25,384	)			7,374				37,600				(28,806	)			8,794
Other intangible assets amortized to operating expenses:
Emux Technology		6 yrs			1,329				(1,329	)			—				1,283				(1,283	)			—
Noncompete agreement		2 yrs			581				(581	)			—				562				(562	)			—
					1,910				(1,910	)			—				1,845				(1,845	)			—
Total intangibles assets				$	34,668			$	(27,294	)		$	7,374			$	39,445			$	(30,651	)		$	8,794

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. During the second quarter of 2011, the Company wrote off $5,330 of its Superscape intangible assets and accumulated amortization relating to trademarks, titles and technology, all of which were fully amortized. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the three months ended June 30, 2011 and 2010, the Company recorded amortization expense in the amounts of $703 and $1,006 respectively, in cost of revenues. During the six months ended June 30, 2011 and 2010, the Company recorded amortization expense in the amounts of $1,520 and $2,234 respectively, in cost of revenues. During the three months ended June 30, 2011 and 2010, the Company recorded amortization expense in the amounts of zero and $52, respectively, in operating expenses. During the six months ended June 30, 2011 and 2010, the Company recorded amortization expense in the amounts of zero and $107, respectively, in operating expenses.

As of June 30, 2011, the total expected future amortization related to intangible assets was as follows:

		Amortization
		Included in
		Cost of
Year Ending December 31,		Revenues
2011 (remaining six months)		$	1,415
2012			2,829
2013			2,758
2014			273
2015 and thereafter			99
		$	7,374

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:

		June 30, 2011																December 31, 2010
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Balance as of January 1
Goodwill		$	24,871			$	25,354			$	24,039			$	74,264			$	24,871			$	25,354			$	23,881			$	74,106
Accumulated Impairment Losses			(24,871	)			(25,354	)			(19,273	)			(69,498	)			(24,871	)			(25,354	)			(19,273	)			(69,498	)
			—				—				4,766				4,766				—				—				4,608				4,608
Goodwill Acquired during the year			—				—				—				—				—				—				—				—
Effects of Foreign Currency Exchange			—				—				109				109				—				—				158				158
Balance as of period ended:			—				—				4,875				4,875				—				—				4,766				4,766
Goodwill			24,871				25,354				24,148				74,373				24,871				25,354				24,039				74,264
Accumulated Impairment Losses			(24,871	)			(25,354	)			(19,273	)			(69,498	)			(24,871	)			(25,354	)			(19,273	)			(69,498	)
		$	—			$	—			$	4,875			$	4,875			$	—			$	—			$	4,766			$	4,766

In accordance with ASC 350, Intangibles — Goodwill and Other (“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, the Company performs the annual impairment review of its goodwill balance as of September 30 or more frequently if triggering events occur.

ASC 350 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 unit. The fair value of the reporting units is 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 geographic segments comprised of the 1) Americas, 2) EMEA and 3) APAC regions. As of June 30, 2011, the Company had goodwill attributable to the APAC reporting unit. The Company performed an annual impairment review as of September 30, 2010 as prescribed in ASC 350 and concluded that it was not at risk of failing the first step, as the fair value of the APAC reporting unit exceeded its carrying value and thus no adjustment to the carrying value of goodwill was necessary. As a result, the Company was not required to perform the second step. In order to determine the fair value of the Company’s reporting units, the Company utilizes the discounted cash flow method 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 were determined using the Company’s best estimates as of the date of the impairment review.

Note 5 — Commitments and Contingencies

Leases

The Company leases office space under non-cancelable operating facility leases with various expiration dates through November 2013. Rent expense for the three months ended June 30, 2011 and 2010 was $530 and $602, respectively. Rent expense for the six months ended June 30, 2011 and 2010 was $1,092 and $1,267, 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 $285 and $379 at June 30, 2011 and December 31, 2010, respectively, and was included within other long-term liabilities

At June 30, 2011, 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
2011 (remaining six months)		$	1,860			$	428			$	1,432
2012			2,802				391				2,411
2013			1,069				—				1,069
		$	5,731			$	819			$	4,912

Minimum Guaranteed Royalties and Developer Commitments

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. The Company also has contracts with various external software developers (“third-party developers”) to design and develop games as part of its “Glu Partners” initiative. The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones.

Future minimum royalty payments and developer commitments for those agreements as of June 30, 2011 were as follows:

		Minimum
		Guaranteed				Developer
Year Ending December 31,		Royalties				Commitments				Total
2011 (remaining six months)		$	159			$	2,333			$	2,492
2012 and thereafter			—				250				250
		$	159			$	2,583			$	2,742

These minimum guaranteed royalty payments are included in current prepaid and accrued royalties. The developer commitments reflected in the above table are the Company’s minimum cash obligations but do not necessarily represent the periods in which they will be expensed. The Company expenses developer commitments as services are provided, as payment is contingent upon performance by the developer.

Income Taxes

As of June 30, 2011, 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 June 30, 2011, 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 June 30, 2011 or December 31, 2010.

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. To date, the Company has not 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 June 30, 2011 or December 31, 2010.

Contingencies

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company’s estimate of losses is developed in consultation with inside and outside council, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. After taking all of the above factors into account, the Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed reasonable probable and can be reasonable estimated. The Company further determines whether an estimated loss from a contingency should be disclosed by assessing whether a loss is deemed reasonably possible. Such disclosure will include an estimate of the additional loss or range of loss or will state that an estimate cannot be made.

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 6 — Debt

MIG Notes

In December 2007, the Company acquired MIG to accelerate its presence in China. 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 required that the Company pay off the remaining principal and interest in installments. 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. In January 2011, the Company paid $698 of taxes that had been withheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders in China. As of June 30, 2011, the Company had fully repaid both the Earnout Notes and Special Bonus Notes.

Credit Facility

In December 2008, the Company entered into a revolving credit facility (the “Credit Facility”), which amended and superseded the Loan and Security Agreement that the Company had previously entered into with the lender in February 2007, as amended. On August 24, 2009 and February 10, 2010, the Company and the lender entered into amendments to the Credit Facility, which reduced certain of the minimum targets specified in the EBITDA-related covenant contained in the Credit Facility. The February 10, 2010 amendment also changed the measurement period for the EBITDA covenant from a rolling six month calculation to a quarterly calculation. On March 18, 2010, the Company and the lender entered into a third amendment to the agreement which extended the maturity date of the Credit Facility from December 22, 2010 until June 30, 2011 and increased the interest rate for borrowings under the Credit Facility by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%. On February 2, 2011, the Company and the lender entered into a fourth amendment which waived the Company’s default in maintaining minimum levels of EBITDA specified in the Credit Facility for the period beginning October 1, 2010 and ending December 31, 2010. Prior to this date, the Company was in compliance with all covenants under the Credit Facility. This amendment also removed the EBITDA financial covenant from the Credit Facility in its entirety and replaced this covenant with a net cash covenant, which requires the Company to maintain at least $10,000 in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that is owed to the lender under the Credit Facility.

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.

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 paid an additional fee of $55 during 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.

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.

The Credit Facility also includes a “material adverse change” clause. As a result, if a material adverse change occurs with respect to the Company’s business, operations or financial condition, then that change could constitute an event of default under the terms of the Credit Facility. When an event of default occurs, the lender can, among other things, declare all obligations immediately due and payable, could stop advancing money or extending credit under the Credit Facility and could terminate the Credit Facility. The Company’s believes that the risk of a material adverse change occurring with respect to its business, operations or financial condition and the lender requesting immediate repayment of amounts already borrowed, stopping advancing the remaining credit or terminating the Credit Facility is remote.

The Credit Facility matured on June 30, 2011. The Company was in compliance with all covenants and had no borrowings outstanding under the Credit Facility as of June 30, 2011.

Note 7 — Stockholders’ Equity

Public Offering

In January 2011, the Company sold in an underwritten public offering an aggregate of 8,415 shares of its common stock at a public offering price of $2.05 per share for net cash proceeds of approximately $15,661 after underwriting discounts and commissions and offering expenses. The underwriters of this offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc. and Northland Capital Markets.

Shelf Registration Statement

In December 2010, the Securities and Exchange Commission declared effective the Company’s shelf registration statement which allows the Company to issue various types of debt and equity instruments, including common stock, preferred stock and warrants. Issuances under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The ability to issue debt and equity is subject to market conditions and other factors impacting the Company’s borrowing capacity. The Company has a $30,000 limit on the amount securities that can be issued under this shelf registration statement and has utilized $17,250 of this amount as of June 30, 2011 pursuant to the public offering in January 2011 described above.

Private Placement

On August 2010, the Company completed a private placement of its common stock (the “2010 Private Placement”) in which it issued to its investors (i) an aggregate of 13,495 shares of the Company’s common stock at $1.00 per share and (ii) warrants initially exercisable to purchase up to 6,748 shares of the Company’s common stock at $1.50 per share (the “Warrants”), for initial proceeds of approximately $13,218 net of issuance costs (excluding any proceeds the Company may receive upon exercise of the Warrants). Of this amount, $2,198 was allocated to the value of the Warrants and $11,020 was allocated to the common stock. All amounts are recorded within stockholders’ equity. In March 2011, one of the investors fully exercised its warrant to purchase 500 shares of the Company’s common stock, and the Company received gross proceeds of $750 in connection with such exercise. During the second quarter of 2011, three of the investors fully exercised their warrants to purchase 1,600 shares of the Company’s common stock, and the Company received gross proceeds of $2,400 in connection with these exercises.

Warrants to Purchase Common Stock

The Warrants issued in connection with the 2010 Private Placement have an initial exercise price of $1.50 per share of common stock, can be exercised immediately, have a five-year term and provide for weighted-average anti-dilution protection in addition to customary adjustment for dividends, reorganization and other common stock events.

Warrants outstanding as of June 30, 2011 were as follows:

Number

Exercise

of Shares

Price

Outstanding

Term

per

Under

Issue Date

(Years)

Share

Warrant

May 2006

7

9.03

106

August 2010

5

$

1.50

4,648

4,754

Comprehensive Loss

Comprehensive loss consists of two components, net loss and other comprehensive income/(loss). Other comprehensive income/(loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income/(loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency. Comprehensive loss for the three months ended June 30, 2011 and 2010 was $2,064 and $3,231, respectively. Comprehensive loss for the six months ended June 30, 2011 and 2010 was $5,257 and $6,729, respectively.

Note 8 — Stock Option and Other Benefit Plans

2007 Equity Incentive Plan

In January 2007, the Company’s Board of Directors adopted, and in March 2007 the Company’s stockholders approved, the 2007 Equity Incentive Plan (the “2007 Plan”). At the time of adoption, there were 1,766 shares of common stock authorized for issuance under the 2007 Plan plus 195 shares of common stock from the Company’s 2001 Stock Option Plan (the “2001 Plan”) that were unissued. In addition, shares that were not issued or subject to outstanding grants under the 2001 Plan on the date of adoption of the 2007 Plan and any shares issued under the 2001 Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under the 2007 Plan. On June 3, 2010, at the Company’s 2010 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the 2007 Plan to increase the aggregate number of shares of common stock authorized for issuance under the 2007 Plan by 3,000 shares. Furthermore, the number of shares available for grant and issuance under the 2007 Plan was increased automatically on January 1 of each of 2008 through 2011 by an amount equal to 3% of the Company’s shares outstanding on the immediately preceding December 31.

The Company may grant options under the 2007 Plan at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by its Board of Directors, provided, however, that (i) the exercise price of an incentive stock option (“ISO”) or non-qualified stock options (“NSO”) may not be less than 100% or 85%, respectively, of the estimated fair value of the underlying shares of common stock on the grant date, and (ii) the exercise price of an ISO or NSO granted to a 10% stockholder may not be less than 110% of the estimated fair value of the shares on the grant date. Prior to the Company’s IPO, the Board determined the fair value of common stock in good faith based on the best information available to the Board and Company’s management at the time of the grant. Following the IPO, the fair value of the Company’s common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination. The stock options granted to employees generally vest with respect to 25% of the underlying shares one year from the vesting commencement date and with respect to an additional 1/48 of the underlying shares per month thereafter. Stock options granted during 2007 prior to October 25, 2007 have a contractual term of ten years and stock options granted on or after October 25, 2007 have a contractual term of six years.

The 2007 Plan also provides the Board of Directors the ability to grant restricted stock awards, stock appreciation rights, restricted stock units, performance shares and stock bonuses. As of June 30, 2011, 3,882 shares were available for future grants under the 2007 Plan.

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.

As of June 30, 2011, 693 shares were available for issuance under the 2007 Purchase Plan.

2008 Equity Inducement Plan

In March 2008, the Company’s Board of Directors adopted the 2008 Equity Inducement Plan (the “Inducement Plan”) to augment the shares available under its existing 2007 Plan. The Inducement Plan did not require the approval of the Company’s stockholders. The Company initially reserved 600 shares of its common stock for grant and issuance under the Inducement Plan. On December 28, 2009, the Company’s Board of Directors appointed Niccolo de Masi as the Company’s President and Chief Executive Officer and the Compensation Committee of the Company’s Board of Directors awarded him a non-qualified stock option to purchase 1,250 shares of the Company’s common stock, which was issued on January 4, 2010 under the Inducement Plan. Immediately prior to the grant of this award, the Compensation Committee amended the Inducement Plan to increase the number of shares available for grant under the plan by 819 shares to 1,250 shares. The Company may only grant NSOs under the Inducement Plan. Grants under the Inducement Plan may only be made to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such individual’s entering into employment with the Company and to provide incentives for such persons to exert maximum efforts for the Company’s success. The Company may grant NSOs under the Inducement Plan at prices less than 100% of the fair value of the shares on the date of grant, at the discretion of its Board of Directors. The fair value of the Company’s common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination.

As of June 30, 2011, 66 shares were reserved for future grants under the Inducement Plan.

Stock Option Activity

The following table summarizes the Company’s stock option activity for the three months ended June 30, 2011:

						Options Outstanding
										Weighted				Weighted
						Number				Average				Average				Aggregate
		Shares				of				Exercise				Contractual				Intrinsic
		Available				Shares				Price				Term (Years)				Value
Balances at December 31, 2010			4,148				6,928			$	2.02
Increase in authorized shares			1,338
Options granted			(2,088	)			2,088				3.76
Options canceled			550				(550	)			1.60
Options exercised			—				(659	)			1.80
Balances at June 30, 2011			3,948				7,807			$	2.54				4.78			$	22,970
Options vested and expected to vest at June 30, 2011							6,312			$	2.60				4.68			$	18,499
Options exercisable at June 30, 2011							2,121			$	3.37				3.84			$	5,625

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 $5.27 per share as of June 30, 2011. Consolidated net cash proceeds from option exercises were $1,185 and $349 for the six months ended June 30, 2011 and 2010, respectively. The Company realized no significant income tax benefit from stock option exercises during the six months ended June 30, 2011 or 2010. 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”). Under ASC 718, 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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Dividend yield			—	%			—	%			—	%			—	%
Risk-free interest rate			1.46	%			1.38	%			1.50	%			1.37	%
Expected volatility			63.9	%			77.2	%			63.8	%			76.5	%
Expected term (years)			4.00				3.05				4.00				3.13

The Company based its expected volatility on its own historic volatility and 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 six months ended June 30, 2011 and 2010 was $1.85 and $0.61, respectively.

The Company calculated employee stock-based compensation expense recognized in the six months ended June 30, 2011 and 2010 based on awards ultimately expected to vest and reduced it for estimated forfeitures. ASC 718 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								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Research and development		$	131			$	116			$	231			$	280
Sales and marketing			94				40				160				113
General and administrative			280				193				511				480
Total stock-based compensation expense		$	505			$	349			$	902			$	873

As of June 30, 2011, the Company had $4,285 of total unrecognized compensation expense under ASC 718, net of estimated forfeitures, which will be recognized over a weighted average period of 2.96 years. As permitted by ASC 718, the Company has deferred the recognition of its excess tax benefit from non-qualified stock option exercises.

Note 9 — Income Taxes

The Company recorded an income tax provision of $501 and $198 for the three months ended June 30, 2011 and 2010, respectively, related to foreign withholding taxes and income taxes. The Company recorded an income tax provision of $1,275 and $499 for the six months ended June 30, 2011 and 2010, respectively, also 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 estimates its annual effective tax rate at the end of each quarterly period, and records the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized and jurisdictions where a reliable estimate of ordinary income cannot be made are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740”). As of June 30, 2011 and December 31, 2010, the total amount of unrecognized tax benefits was $3,275 and $3,326, respectively. As of June 30, 2011 and December 31, 2010, approximately $19 and $73, respectively, 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 $61 and $58 of interest on uncertain tax positions during the three months ended June 30, 2011 and 2010, respectively. The Company recorded $122 and $115 of interest on uncertain tax positions during the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, the Company had a liability of $3,754 and $3,630, respectively, related to interest and penalties for uncertain tax positions.

One of the Company’s subsidiaries in China has received the High & New Technology Enterprise qualification from the Ministry of Science and Technology, and also the Software Enterprise Qualification from the Ministry of Industry and Information Technology. During the third quarter of 2010, the State Administration of Taxation approved the Company’s application to apply the favorable tax benefits to operations beginning January 1, 2009. The Company has revalued certain deferred tax assets and liabilities during the fourth quarter of 2010, and certain taxes that were expensed in 2009 were refunded in 2010, and the tax benefit was recognized. These qualifications are reviewed annually, and in the event that circumstances change and the Company no longer meets the requirements of the original qualification, the Company would need to revalue certain deferred tax assets and liabilities.

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 State of California, United States, United Kingdom and 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 2008 filed tax return in the United Kingdom will begin to expire (close) in 2011. The Company’s China income tax returns are open by statute for tax years 2005 and forward. In practice, a tax audit, examination or tax assessment notice issued by the Chinese tax authorities does not represent finalization or closure of a tax year.

Note 10 — Segment Reporting

ASC 280, Segment Reporting (“ASC 280”), 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 are included within 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.

A breakdown of the Company’s total sales to customers in the feature phone and smartphone markets is shown below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(in thousands)								(in thousands)
Feature phone		$	8,253			$	13,707			$	18,731			$	28,813
Smartphone			9,427				2,245				15,375				4,428
Revenues		$	17,680			$	15,952			$	34,106			$	33,241

The Company generates its revenues in the following geographic regions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
United States of America		$	9,218			$	7,341			$	16,493			$	15,590
China			885				1,155				2,312				2,755
Americas, excluding the USA			1,455				2,232				3,371				4,408
EMEA			4,989				4,478				10,060				9,140
Other			1,133				746				1,870				1,348
		$	17,680			$	15,952			$	34,106			$	33,241

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:

		June 30,				December 31,
		2011				2010
Americas		$	1,909			$	1,013
EMEA			511				714
Other			392				407
		$	2,812			$	2,134

Note 11 — Restructuring

Restructuring information as of June 30, 2011 was as follows:

		Restructuring
		2011								2010								2009
						Facilities								Facilities								Facilities				Superscape
		Workforce				Related				Workforce				Related				Workforce				Related				Plan				Total
Balance as of January 1, 2010		$	—			$	—			$	—			$	—			$	629			$	737			$	40			$	1,406
Charges to operations			—				—				1,540				1,854				—				235				—				3,629
Non Cash Adjustments			—				—				—				(269	)			—				—				(3	)			(272	)
Charges settled in cash			—				—				(1,244	)			—				(629	)			(414	)			(14	)			(2,301	)
Balance as of December 31, 2010			—				—				296				1,585				—				558				23				2,462
Charges to operations			500				96				41				—				—				—				—				637
Non Cash Adjustments			—				(86	)			—				—				—				—				(4	)			(90	)
Charges settled in cash			(500	)			(10	)			(220	)			(504	)			—				(171	)			—				(1,405	)
Balance as of June 30, 2011		$	—			$	—			$	117			$	1,081			$	—			$	387			$	19			$	1,604

During 2009, 2010 and the first two quarters of 2011, the Company’s management approved restructuring plans to improve the effectiveness and efficiency of its operating model and reduce operating expenses around the world. The 2011 restructuring plan included $500 of restructuring charges relating to employee termination costs in the Company’s APAC, Latin America, Russia and United Kingdom offices. The remaining restructuring charge of $96 related primarily to facility related charges resulting from vacating a portion of the Company’s Moscow offices, which includes an $86 non-cash adjustment relating to a write off of leasehold improvements. Since the inception of the 2010 restructuring plan through June 30, 2011, the Company incurred $1,581 of restructuring charges relating to employee termination costs in the Company’s United States, APAC, Latin America and United Kingdom offices. The remaining restructuring charge of $1,854 related primarily to facility related charges resulting from the relocation of the Company’s corporate headquarters to San Francisco, which includes a $269 non-cash adjustment, primarily relating to a write off in fixed assets. Since the inception of the 2009 restructuring plan through June 30, 2011, the Company incurred $2,111 in restructuring charges. These charges included $1,009 of workforce related charges, comprised of severance and termination benefits of $657 associated with the departure of the Company’s former Chief Executive Officer, and $352 relating to employee termination costs in the Company’s United States and United Kingdom offices. The remaining restructuring charge included $1,102 of facility related charges, comprised of $944 of charges associated with changes in the sublease probability assumption for the vacated office space in the Company’s United States headquarters and an additional restructuring charge of $158 net of sublease income, resulting from vacating a portion of the Company’s EMEA headquarters based in the United Kingdom. The Company does not expect to incur any additional charges under the 2009 restructuring plan.

As of June 30, 2011, the Company’s remaining restructuring liability of $1,604 was comprised of $117 of severance and benefits payments due to a former executive, which are due to be paid during 2011, and $1,487 of facility related costs that are expected to be paid over the remainder of the lease terms of one to two years. As of June 30, 2011, approximately $313 of facility costs included in the above table were classified as other long-term liabilities. As of December 31, 2010, the Company’s remaining restructuring liability of $2,462 was comprised of $296 of severance and benefits payments due to former executives, of which $179 were paid in the first two quarters of 2011, and $2,166 of facility related costs, which included $773 of facility costs that were classified as other long-term liabilities. The Company paid $675 of these facility costs during the first two quarters of 2011.

Note 12 — Subsequent Events

Acquisition of Blammo Games

On August 1, 2011, the Company completed the acquisition of Blammo Games Inc., a company organized under the laws of Ontario (“Blammo”), by entering into a Share Purchase Agreement (the “Share Purchase Agreement”) by and among the Company, Blammo and each of the owners of the outstanding share capital of Blammo (the “Sellers”). Blammo is a developer of freemium games for the iOS platform located in Toronto, Canada.

Pursuant to the terms of the Share Purchase Agreement, the Company purchased from the Sellers all of the issued and outstanding share capital of Blammo (the “Share Purchase”), and in exchange for such Blammo share capital, the Company (i) issued to the Sellers, in the aggregate, 1,000 shares of the Company’s common stock (the “Initial Shares”), which resulted in initial consideration of $5,070 and (ii) agreed to issue to the Sellers, in the aggregate, up to an additional 3,313 shares of the Company’s common stock (the “Additional Shares”) if Blammo achieves certain net revenue targets during the years ending March 31, 2013, March 31, 2014 and March 31, 2015, as more fully described below. 100 of the Initial Shares will be held in escrow for 12 months to satisfy indemnification claims under the Share Purchase Agreement.

The Additional Shares will be issued to the Sellers if, and to the extent that, Blammo achieves certain Net Revenue (as such term is defined in the Share Purchase Agreement) performance targets as follows: (i) for fiscal 2013 (April 1, 2012 through March 31, 2013), (a) 227 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and (b) up to an additional 682 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, (ii) for fiscal 2014 (April 1, 2013 through March 31, 2014), (a) 417 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and (b) up to an additional 833 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, and (iii) for fiscal 2015 (April 1, 2014 through March 31, 2015), (a) no Additional Shares will be issued to the Sellers if Blammo does not meet its Baseline Net Revenue goal for such fiscal year and (b) up to 1,154 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year. To the extent that Blammo meets its Baseline Net Revenue goal for a fiscal year but does not meet its Upside Net Revenue goal for such fiscal year, Additional Shares will be issued to the Sellers on a straight-line basis based on the amount by which Blammo exceeded the Baseline Net Revenue goal. Blammo’s Baseline and Upside Net Revenue goals for fiscal 2013, 2014 and 2015 are as follows:

Fiscal Year		Baseline Net Revenue				Upside Net Revenue
Fiscal 2013		US$	3,500			US$	5,000
Fiscal 2014		US$	5,500			US$	10,000
Fiscal 2015		US$	8,500			US$	15,000

In addition, under the terms of the Share Purchase Agreement, the Company has agreed to file a shelf registration statement with the SEC within 20 days after the closing of the Share Purchase to register all of the Initial Shares.

Acquisition of Griptonite

On August 2, 2011, the Company completed the acquisition of Griptonite, Inc., a Washington corporation (“Griptonite”) and formerly a wholly owned subsidiary of Foundation 9 Entertainment, Inc., a Delaware corporation (“Foundation 9”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Granite Acquisition Corp., a Washington corporation and wholly owned subsidiary of the Company (“Sub”), Foundation 9 and Griptonite. Pursuant to the terms of the Merger Agreement, Sub merged with and into Griptonite in a statutory reverse triangular merger (the “Merger”), with Griptonite surviving the Merger as a wholly owned subsidiary of the Company. Griptonite, which is based in Kirkland, WA, is a developer of games for the Xbox 360, Wii, DS, PSP and iPhone platforms.

In connection with the Merger, the Company issued to Foundation 9, as Griptonite’s sole shareholder, in exchange for all of the issued and outstanding shares of Griptonite capital stock, a total of 6,106 shares of the Company’s common stock, for consideration of approximately $29,564; 600 shares will be held in escrow for 15 months to satisfy indemnification claims under the Merger Agreement. In addition, the Company may be required to issue additional shares (not to exceed, when aggregated with the 6,106 shares issued at the closing of the Merger, more than 19.99% of the Company’s issued and outstanding shares immediately prior to the closing of the Merger) (i) in satisfaction of indemnification obligations in the case of breaches of its representations, warranties and covenants or (ii) pursuant to a working capital adjustment that may take place after the Company files an amendment to the Current Report on Form 8-K it filed to report the Merger to file required financial statements of Griptonite.

The Company has agreed to file a shelf registration statement with the SEC within 20 days after the closing of the Merger to register all of the shares of the Company’s common stock issuable to Foundation 9 under the Merger Agreement.

The Company has not made all of the required disclosures in accordance with ASC 805-10-50-2, Business Combinations, as it is currently in the process of evaluating the purchase accounting implications of the above two transactions.

Assumption of Griptonite Lease

In connection with the Merger, the Company agreed to assume the obligations of Griptonite under that certain lease dated as of November 5, 2007, by and among Foundation 9, Griptonite and Marymoor Warehouse Associates, LLC, as a successor in interest to Mastro Willows 2, LLC, with respect to the premises located at 12421 Willows Road NE, Kirkland, Washington (the “Griptonite Lease”). The Griptonite Lease covers approximately 54 rentable square feet and has a term that commenced on April 1, 2008 and terminates on September 30, 2015. The lease currently provides for monthly base rent of $84, with the monthly base rent increasing by $2 every 12 months such that the monthly rent under the Griptonite Lease for the final 12 months of the lease will be $93.

Amendment to 2008 Equity Inducement Plan

In connection with the Merger and the Share Purchase, the Compensation Committee of the Company’s Board of Directors increased the number of shares reserved for issuance under the Company’s 2008 Equity Inducement Plan by 1,050 shares. Glu utilized these additional shares in order to grant stock options to certain of the new non-executive employees of Griptonite and Blammo to purchase a total of 1,033 shares of Glu’s common stock.

Departure of Executive Officer

On July 28, 2011, the Company terminated the employment of Giancarlo Mori, its Chief Creative Officer, effective as of August 2, 2011.

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 (the “Securities Act”), 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 smartphones and tablets;

• our expectation that we will release 15 to 20 social, freemium games during 2011, of which approximately one-fourth will be developed by third parties pursuant to our Glu Partners program;

• our intention to focus our development efforts on social, freemium games and continue our use of in-game advertising, offers, micro-transactions and other monetization techniques with respect to the games we develop for smartphones and tablets;

• our expectation that the substantial majority of the social, freemium games that we are developing for smartphones will be based on our own intellectual property, which we believe will significantly enhance our margins and long-term value;

• our expectations regarding our revenues, including the expected decline in revenues from games we develop for feature phones in our traditional carrier-based business and our belief that with our smartphone revenues having surpassed our feature phone revenues in the second quarter of 2011 we are positioned to return to overall revenue growth in the longer term;

• our expectations regarding our operating expenses, including anticipated increased spending on sales and marketing and research and development initiatives during 2011 compared with 2010, as well as the anticipated impact that our recent Blammo and Griptonite acquisitions will have on our operating expenses;

• our expectation that the Blammo and Griptonite acquisitions will approximately double our studio capacity;

• our expectation that our first title created by Blammo will be released in the first quarter of 2012, while the first title created by our Griptonite studio should be launched by the second quarter of 2012;

• 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; and

• our belief that our cash and cash equivalents and cash flows from operations, if any, will be sufficient to meet our cash needs for at least the next 12 months.

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 unaudited condensed 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 first and second quarters of 2011, 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 June 30, 2011 were $17.7 million, an 11% increase compared to the three months ended June 30, 2010, in which we reported revenues of $16.0 million. Revenues for the six months ended June 30, 2011 were $34.1 million, a 3% increase compared to the six months ended June 30, 2010, in which we reported revenues of $33.2 million. These increases in revenues were primarily due to a significant increase in our revenues that we generated from games for smartphones, such as Apple’s iPhone and mobile phones utilizing Google’s Android operating system. We believe that the migration of users from feature phones to smartphone devices, which offer enhanced functionality, will continue to accelerate for the remainder of 2011 and for the foreseeable future as consumers increasingly upgrade their mobile phones. Accordingly, we have shifted our product development focus towards developing new titles for smartphones and tablet devices, such as Apple’s iPad, and intend to release fewer games for feature phones in future periods.

For us to succeed in 2011 and beyond, we believe that we must increasingly publish mobile games that are widely accepted and commercially successful on smartphone and tablet digital storefronts, which include Apple’s App Store, Google’s Android Market, Microsoft’s Windows Marketplace for Mobile and Palm’s App Catalog. Our smartphone revenue accounted for approximately 45% and 13% of our revenues for the six months ended June 30, 2011 and June 30, 2010, respectively and 53% and 14% of our revenues for the three months ended June 30, 2011 and June 30, 2010, respectively. Our strategy for increasing our revenues from smartphones and tablets involves becoming the leading publisher of social, mobile “freemium” games — games that are downloadable without an initial charge, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through various advertising and offer techniques. Our social, freemium games are generally designed to be persistent through regular content updates. We believe this approach will enable us to build and grow a longer lasting and more direct relationship with our customers, which will assist us in our future sales and marketing efforts. We intend to have the substantial majority of our social, freemium games be based upon our own intellectual property, which we believe will significantly enhance our margins and long-term value.

Our smartphone revenues surpassed our feature phone revenues for the first time in the second quarter of 2011, and we believe that this transition will position us to return to overall revenue growth in the longer term. However, significantly growing our revenues from smartphones and tablets may be challenging for us for several reasons, including: (1) our inability since the middle of the second quarter of 2011 to include certain types of offers in our games sold on the Apple App Store, which offers accounted for approximately one-third of our smartphone revenues during the three and six months ended June 30, 2011; (2) the open nature of many of the smartphone and tablet storefronts substantially increases the number of our competitors and competitive products; (3) we have only relatively recently concentrated our efforts on developing and marketing social, freemium games; (4) our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertizing and offers have caused us, and may continue to cause us, to have difficulty optimizing the monetization of our social, freemium games; (5) we historically have had more limited success in generating significant revenues from games based on our own intellectual property rather than licensed brands; and (6) our social, freemium games may not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games.

In addition, our revenues will continue to depend significantly on growth in the mobile games market, our ability to continue to attract new end users in that market and the overall strength of the economy, particularly in the United States. Our revenues may also be adversely impacted by decisions by digital storefront owners or our carriers to alter their terms related to the distribution of our games. For example, during the quarter ended June 30, 2011, Apple stopped permitting publishers to include certain types of offers in games sold through the Apple App Store, and, this change in Apple policy has negatively impacted our smartphone revenues. Our revenues depend on a variety of other factors, including our relationships with digital storefront owners, carriers and our licensors. The loss of any key relationships with our digital storefront owners, carriers, other distributors or licensors could adversely impact our revenues in the future.

Our net loss in the three months ended June 30, 2011 was $1.8 million versus a net loss of $3.2 million in the three months ended June 30, 2010. This decrease was driven primarily by a decrease in costs of revenues of $2.1 million due to a decrease in royalty-burdened revenues and impairments of advanced royalties, a $1.7 million increase in revenues related to higher smartphone revenues and a decrease in other income and expenses of $889,000 related primarily to lower interest charges as the MIG promissory notes were fully repaid and favorable foreign exchange revaluations in the second quarter of 2011 compared to same period in the prior year. These decreases were partially offset by a $3.0 million increase in operating expenses and a $303,000 increase in the tax provision. The increase in our operating expenses for the three months ended June 30, 2011 compared with the three months ended June 30, 2010 was primarily due to increased research and development and sales and marketing expenses associated with the launch and development of our freemium titles. Our net loss in the six months ended June 30, 2011 was $5.0 million versus a net loss of $6.9 million in the six months ended June 30, 2010. This decrease was driven primarily by a decrease in costs of revenues of $3.4 million due to a decrease in royalty-burdened revenues and impairments of advanced royalties, a decrease in other income and expenses of $1.7 million related primarily to lower interest charges as the MIG promissory notes were fully repaid and favorable foreign exchange revaluations in the first and second quarters of 2011 compared to same periods in the prior year and a $865,000 increase in revenues related to higher smartphone revenues. These decreases were partially offset by a $3.2 million increase in operating expenses and a $776,000 increase in the tax provision. The increase in our operating expenses for the six months ended June 30, 2011 compared with the six months ended June 30, 2010 was primarily due to increased research and development and sales and marketing expenses associated with the launch of our freemium titles. 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 these currencies fluctuated significantly in 2010 and the first six months of 2011.

We significantly increased our spending on sales and marketing initiatives in the first half of 2011 in connection with the launch and promotion of our initial social, freemium titles, and we expect our sales and marketing expenditures to remain at least at this increased level during the remainder 2011. We also expect that our expenses to develop and port games for advanced platforms and smartphones will increase as we enhance our existing titles and develop new titles to take advantage of the additional functionality offered by these platforms, including through our external development relationships as part of our Glu Partners program. In addition, we expect our overall operating expenses, particularly our research and development expenses, to significantly increase in the third quarter of 2011 and beyond due to our recently completed acquisitions of Griptonite, Inc. (“Griptonite”), a developer of games for the Xbox 360, Wii, DS, PSP and iPhone platforms and formerly a wholly owned subsidiary of Foundation 9 Entertainment, Inc. (“Foundation 9”), and Blammo Games Inc. (“Blammo”), a developer of freemium games for the iOS platform located in Toronto, Canada. As a result of these acquisitions and the increased spending on sales and marketing and research and development initiatives, we expect to use a significant amount of cash in operations as we seek to grow our business. Our ability to attain profitability will be affected by our ability to grow our revenues, including our ability to integrate these acquisitions and begin deriving significant revenues from the efforts of the acquired companies, particularly Griptonite, 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 the restructuring measures we implemented during 2010 and first and second quarters of 2011, which primarily consisted of headcount reductions, will have a beneficial effect on our overall operating expenses, but will not fully offset the expected increases in our operating expenses. Our business has historically been impacted by seasonality, as many new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season. Because many end users download our games soon after they purchase new mobile phones and tablets, we generally experience seasonal sales increases based on the holiday selling period. However, due to the time between mobile phone and tablet purchases and game purchases, some of this holiday impact occurs for us in our first calendar quarter. We expect these seasonal trends to continue in the future.

Cash and cash equivalents at June 30, 2011 totaled $26.4 million, an increase of $13.5 million from the balance at December 31, 2010. This increase was primarily due to $15.7 million of net proceeds we received from the underwritten public offering of common stock that we completed in January 2011 (the “2011 Public Offering”), and $4.5 million of proceeds received from warrant exercises, option exercises and purchases under our employee stock purchase program. These inflows were partially offset by $2.3 million paid under our credit facility, $2.6 million of cash used in operations, $1.4 million of capital expenditures and $698,000 of taxes that had been withheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders. In addition, in August 2011, we acquired approximately $10.2 million in cash in connection with our acquisition of Griptonite. We believe our cash and cash equivalents and cash flows from operations, if any, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Significant Transactions

Acquisition of Blammo

On August 1, 2011, we completed the acquisition of Blammo by entering into a Share Purchase Agreement (the “Share Purchase Agreement”) by and among Glu, Blammo and each of the owners of the outstanding share capital of Blammo (the “Sellers”).

Pursuant to the terms of the Share Purchase Agreement, we purchased from the Sellers all of the issued and outstanding share capital of Blammo (the “Share Purchase”), and in exchange for such Blammo share capital, we (i) issued to the Sellers, in the aggregate, 1,000,000 shares of our common stock (the “Initial Shares”) and (ii) agreed to issue to the Sellers, in the aggregate, up to an additional 3,312,937 shares of our common stock (the “Additional Shares”) if Blammo achieves certain net revenue targets during the years ending March 31, 2013, March 31, 2014 and March 31, 2015, as more fully described below. 100,000 of the Initial Shares will be held in escrow for 12 months to satisfy indemnification claims under the Share Purchase Agreement.

The Additional Shares will be issued to the Sellers if, and to the extent that, Blammo achieves certain Net Revenue (as such term is defined in the Share Purchase Agreement) performance targets as follows: (i) for fiscal 2013 (April 1, 2012 through March 31, 2013), (a) 227,273 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and (b) up to an additional 681,818 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, (ii) for fiscal 2014 (April 1, 2013 through March 31, 2014), (a) 416,667 Additional Shares will be issued to the Sellers if, and only in the event that, Blammo meets its Baseline Net Revenue goal for such fiscal year, and (b) up to an additional 833,333 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year, and (iii) for fiscal 2015 (April 1, 2014 through March 31, 2015), (a) no Additional Shares will be issued to the Sellers if Blammo does not meet its Baseline Net Revenue goal for such fiscal year and (b) up to 1,153,846 Additional Shares will be issued to the Sellers to the extent that Blammo exceeds its Baseline Net Revenue goal and meets its Upside Net Revenue goal for such fiscal year. To the extent that Blammo meets its Baseline Net Revenue goal for a fiscal year but does not meet its Upside Net Revenue goal for such fiscal year, Additional Shares will be issued to the Sellers on a straight-line basis based on the amount by which Blammo exceeded the Baseline Net Revenue goal. Blammo’s Baseline and Upside Net Revenue goals for fiscal 2013, 2014 and 2015 are as follows:

Fiscal Year		Baseline Net Revenue				Upside Net Revenue
Fiscal 2013		US$	3,500,000			US$	5,000,000
Fiscal 2014		US$	5,500,000			US$	10,000,000
Fiscal 2015		US$	8,500,000			US$	15,000,000

Acquisition of Griptonite

On August 2, 2011, we completed the acquisition of Griptonite pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among Glu, Granite Acquisition Corp., a Washington corporation and wholly owned subsidiary of Glu (“Sub”), Foundation 9 and Griptonite. Pursuant to the terms of the Merger Agreement, Sub merged with and into Griptonite in a statutory reverse triangular merger (the “Merger”), with Griptonite surviving the Merger as a wholly owned subsidiary of Glu.

In connection with the Merger, we issued to Foundation 9, as Griptonite’s sole shareholder, in exchange for all of the issued and outstanding shares of Griptonite capital stock, a total of 6,106,015 shares of our common stock, of which 600,000 shares will be held in escrow for 15 months to satisfy indemnification claims under the Merger Agreement. In addition, we may be required to issue additional shares (not to exceed, when aggregated with the 6,106,015 shares issued at the closing of the Merger, more than 19.99% of our issued and outstanding shares immediately prior to the closing of the Merger) (i) in satisfaction of indemnification obligations in the case of breaches of its representations, warranties and covenants or (ii) pursuant to a working capital adjustment that may take place after we file an amendment to the Current Report on Form 8-K it filed to report the Merger to file required financial statements of Griptonite.

We expect the Blammo and Griptonite acquisitions will approximately double our studio capacity. We anticipate that our first title created by Blammo will be released in the first quarter of 2012, while the first title created by our Griptonite studio should be launched by the second quarter of 2012.

Public Offering

In January 2011, we completed the 2011 Public Offering in which we sold an aggregate of 8,414,635 shares of our common stock at a price to the public of $2.05 per share for net proceeds of approximately $15.7 million after underwriting discounts and commissions and offering expenses. The underwriters of the 2011 Public Offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc. and Northland Capital Markets.

Private Placement

In August 2010, we completed a private placement of our common stock (the “2010 Private Placement”) in which we issued and sold to certain investors an aggregate of 13,495,000 shares of common stock at $1.00 per share and warrants exercisable to purchase up to 6,747,500 shares of common stock at $1.50 per share for initial gross proceeds of approximately $13.5 million (excluding any proceeds we may receive upon exercise of the warrants).

Amendment of Credit Facility

In December 2008, we renegotiated and extended our credit facility, and also amended the terms of the credit facility in August 2009, February 2010, March 2010 and February 2011. The credit facility, as last amended, provided for borrowings of up to $8.0 million, subject to a borrowing base equal to 80% of our eligible accounts receivable. The most recent fourth amendment to the credit facility that we entered into in February 2011 waived our default in maintaining minimum levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) specified in the credit facility for the period beginning October 1, 2010 and ending December 31, 2010. This fourth amendment also removed the EBITDA financial covenant from the credit facility in its entirety and replaced this covenant with a net cash covenant, which required us to maintain at least $10.0 million in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that we owe to the lender under the credit facility. The credit facility expired on June 30, 2011 and, as of that date, we had no outstanding borrowings under it.

Critical Accounting Policies and Estimates

There were no significant changes in our Critical Accounting Policies and Estimates during the six months ended June 30, 2011 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, 2010.

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 June 30, 2011 and 2010

Revenues

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
Feature phone		$	8,253			$	13,707
Smartphone			9,427				2,245
Revenues		$	17,680			$	15,952

Our revenues increased $1.7 million, or 10.8%, from $16.0 million for the three months ended June 30, 2010 to $17.7 million for the three months ended June 30, 2011, due to a $7.2 million increase in smartphone revenues resulting from increased sales growth on Apple’s iOS-based devices and Android devices related primarily to micro-transactions, offers and advertisements. This was partially offset by a $5.5 million decline in feature phone revenue primarily due to the continued migration of users from feature phones to smartphones and our shift in our product development focus towards developing new titles for smartphone devices. International revenues (defined as revenues generated from carriers whose principal operations are located outside the United States) decreased by $149,000, from $8.6 million in the three months ended June 30, 2010 to $8.5 million in the three months ended June 30, 2011. This was primarily related to a $777,000 decrease in our Americas, excluding the United States, revenues, primarily related to declining feature phone revenues. This decrease was partially offset by a $511,000 increase in our EMEA revenues, primarily related to increased revenues from certain OEM relationships, partially offset by continued declines in our carrier-based business. Our smartphone revenues surpassed our feature phone revenues for the first time in the second quarter of 2011, and we believe that this transition will position us to return to overall revenue growth in the longer term. We have experienced significant growth with respect to the revenues that we derive from micro-transactions in our freemium games, and expect to experience additional growth during the remainder of 2011. However, our ability to grow smartphone revenue throughout the rest of 2011 will be negatively impacted by declining offer revenues resulting from our inability since the middle of the second quarter of 2011 to include certain types of offers in our games sold on the Apple App Store.

Cost of Revenues

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
Cost of revenues:
Royalties and impairment of prepaid royalties and guarantees		$	3,121			$	4,943
Amortization of intangible assets			703				1,006
Total cost of revenues		$	3,824			$	5,949
Revenues		$	17,680			$	15,952
Gross margin			78.4	%			62.7	%

Our cost of revenues decreased $2.1 million, or 35.7%, from $5.9 million in the three months ended June 30, 2010 to $3.8 million in the three months ended June 30, 2011. This decrease was primarily due to a $1.8 million decrease in royalties associated with a decline in royalty-burdened revenue, impairments and recoupments of previously impaired titles. Our amortization of intangible assets decreased $303,000 due to certain intangible assets relating to our MIG, Macrospace and Superscape acquisitions being fully amortized during 2010. Revenues attributable to games based upon branded intellectual property decreased as a percentage of revenues from 80.6% in the three months ended June 30, 2010 to 52.9% in the three months ended June 30, 2011, primarily due to our focus on developing freemium games for smartphones that are based on our own intellectual property. Revenues attributable to games based upon original intellectual property were 47.1% of our total revenues for the three months ended June 30, 2011, primarily related to U.S. titles. 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 June 30, 2010 to 33.4% in the three months ended June 30, 2011. Overall royalties, including impairment of prepaid royalties and guarantees, as a percentage of total revenues decreased from 31.0% in the three months ended June 30, 2010 to 17.7% in the three months ended June 30, 2011.

Research and Development Expenses

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
Research and development expenses		$	8,439			$	6,229
Percentage of revenues			47.7	%			39.0	%

Our research and development expenses increased $2.2 million, or 35.5%, from $6.2 million in the three months ended June 30, 2010 to $8.4 million in the three months ended June 30, 2011. The increase in research and development costs was primarily due to an increase in outside service costs of $1.0 million associated with the development of new freemium smartphone games by external developers as part of our Glu Partners program. The increase was also due to a $654,000 increase in variable compensation paid to our employees under our bonus plans and a $628,000 increase in salaries and benefits, despite a decrease in our research and development staff from 352 employees at June 30, 2010 to 292 as of June 30, 2011. This increase in salaries and benefits was primarily the result of salary mix as we hired additional senior headcount to work in our U.S. studio during 2011 which was partially offset by cost savings associated with the restructuring of our Brazil, China and U.K. studios during 2010. These increased costs were partially offset by a $306,000 decrease in allocated facilities and overhead costs. As a percentage of revenues, research and development expenses increased from 39.0% for the three months ended June 30, 2010 compared to 47.7% for the three months ended June 30, 2011. Research and development expenses included $131,000 of stock-based compensation expense in the three months ended June 30, 2011 and $116,000 in the three months ended June 30, 2010. We anticipate that our research and development expenses will continue to increase during the remainder of 2011, primarily due to the Griptonite and Blammo acquisitions, which will increase headcount by approximately 200, and our expected release of 15 to 20 new social, freemium titles during 2011, approximately one-fourth of which will be developed by external developers as part of our Glu Partners program and which will require significant upfront cash payment to such developers.

Sales and Marketing Expenses

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
Sales and marketing expenses		$	3,344			$	2,437
Percentage of revenues			18.9	%			15.3	%

Our sales and marketing expenses increased $907,000, or 37.2%, from $2.4 million in the three months ended June 30, 2010 to $3.3 million in the three months ended June 30, 2011. The increase was primarily due to an $813,000 increase in marketing promotions associated with the launch of our new social, freemium game titles during the first and second quarters of 2011 and an $83,000 increase in consulting fees associated with converting our Latin America sales and marketing to third-party distribution agents as discussed below. The increase was also due to a $121,000 increase in variable compensation related to our sales bonus, which was partially offset by a $105,000 decrease in salaries and benefits costs as we reduced our sales and marketing headcount from 51 at June 30, 2010 to 30 at June 30, 2011, which was partially the result of converting our Latin America sales and marketing team from our employees to employees of a third party distribution agent in the second quarter of 2010 and headcount reductions to our MIG sales and marketing team. As a percentage of revenues, sales and marketing expenses increased from 15.3% in the three months ended June 30, 2010 to 18.9% in the three months ended June 30, 2011. Sales and marketing expenses included $94,000 of stock-based compensation expense in the three months ended June 30, 2011 and $40,000 in the three months ended June 30, 2010. We significantly increased our spending on sales and marketing initiatives in the first and second quarters of 2011 in connection with the launch of our social, freemium titles, and we expect our sales and marketing expenditures to remain at least at this increased level during the remainder of 2011.

General and Administrative Expenses

		Three Months Ended
		June 30,
		2011				2010
		(in thousands)
General and administrative expenses		$	3,506			$	3,052
Percentage of revenues			19.8	%			19.1	%

Our general and administrative expenses increased $454,000, or 14.9%, from $3.1 million in the three months ended June 30, 2010 to $3.5 million in the three months ended June 30, 2011. The increase in general and administrative expenses was primarily due to a $356,000 increase in salaries, benefits and variable compensation. The main component of which included a $328,000 increase in variable compensation under our bonus plan which offset any cost savings from reducing headcount from 58 at June 30, 2010 to 57 at June 30, 2011. We also had an increase of $169,000 in outside service costs, which was partially offset by an $111,000 decrease in allocated facility and overhead costs. As a percentage of revenues, general and administrative expenses increased from 19.1% in the three months ended June 30, 2010 to 19.8% in the three months ended June 30, 2011. General and administrative expenses included $280,000 of stock-based compensation expense in the three months ended June 30, 2011 and $193,000 in the three months ended June 30, 2010. We anticipate that our general and administrative expenses will increase during the remainder of 2011 due to the Griptonite and Blammo acquisitions

Restructuring

Our restructuring charge decreased from $693,000 in the three months ended June 30, 2010 to $147,000 in the three months ended June 30, 2011. Our restructuring charges for the three months ended June 30, 2011 were comprised of $147,000 of restructuring charges relating primarily to employee termination costs in our Italian sales office.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net, decreased from a net expense of $560,000 during the three months ended June 30, 2010 to net income of $329,000 in the three months ended June 30, 2011. This change was primarily due to an increase in foreign currency gains of $792,000 related to the revaluation of certain assets and liabilities including accounts payable and accounts receivable and a $106,000 decrease in net interest expense related to the lower balances outstanding on the MIG notes and borrowings under our credit facility. We expect a decrease in net interest expense due to having fully repaid the MIG notes at the end of 2010 and due to the expiration of our credit facility at June 30, 2011.

Income Tax Provision

Income tax provision increased from a tax provision of $198,000 in the three months ended June 30, 2010 to $501,000 in the three months ended June 30, 2011 primarily as a result of changes in the jurisdictions included in the anticipated effective tax rate computation and changes in pre-tax income in certain foreign entities year over year. We expect our effective tax rate in 2011 to fluctuate on a quarterly basis. The effective tax rate could be affected by changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Comparison of the Six Months Ended June 30, 2011 and 2010

Revenues

		Six Months Ended
		June 30,
		2011				2010
		(in thousands)
Feature phone		$	18,731			$	28,813
Smartphone			15,375				4,428
Revenues		$	34,106			$	33,241