Glu Mobile, Inc. Annual Report 2009

Plain-text annual report

Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009ORoo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934Commission file number: 001-33368Glu Mobile Inc.(Exact name of registrant as specified in its charter)Delaware 91-2143667(State or Other Jurisdiction of (IRS EmployerIncorporation or Organization) Identification No.) 2207 Bridgepointe Parkway, Suite 300 94404San Mateo, California (Zip Code)(Address of Principal Executive Offices) (650) 532-2400(Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $0.0001 per share NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act:None(Title of Class)Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No 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 Actof 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 tosuch filing requirements for the past 90 days. Yes  No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 Regulation S-T (§ 232.405 of this chapter during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes o No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. 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  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 The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of such stock on June 30,2009, the last business day of the registrant’s most recently completed second fiscal quarter, as reported by The NASDAQ Global Market, wasapproximately $27,900,486. Shares of common stock held by each executive officer and director of the registrant and by each person who owns10% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determination for other purposes.The number of outstanding shares of the registrant’s common stock as of March 1, 2010 was 30,571,402.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive proxy statement for registrant’s 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within120 days after registrant’s fiscal year ended December 31, 2009 are incorporated by reference into Part III of this Annual Report on Form 10-K. TABLE OF CONTENTS PagePART I Item 1. Business 3 Item 1A. Risk Factors 11 Item 1B. Unresolved Staff Comments 31 Item 2. Properties 31 Item 3. Legal Proceedings 32 Item 4. Reserved 32 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 32 Item 6. Selected Financial Data 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 56 Item 8. Financial Statements and Supplementary Data 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 98 Item 9A. Controls and Procedures 98 Item 9B. Other Information 98 PART III Item 10. Directors, Executive Officers and Corporate Governance 99 Item 11. Executive Compensation 100 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 100 Item 13. Certain Relationships and Related Transactions, and Director Independence 100 Item 14. Principal Accountant Fees and Services 100 PART IV Item 15. Exhibits and Financial Statement Schedules 100 Signatures 102 EX-10.05 EX-21.01 EX-23.01 EX-31.01 EX-31.02 EX-32.01 EX-32.02Forward Looking StatementsThe information in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the“Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties. Any statements containedherein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may,”“will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends”and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differsignificantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such differencesinclude, but are not limited to, those discussed elsewhere in this report in the section titled “Risk Factors” and the risks discussed in ourother Securities and Exchange Commission (the “SEC”) filings. We undertake no obligation to update the forward-looking statementsafter the date of this report.2Table of ContentsPART IItem 1. BusinessCorporate BackgroundGeneralGlu Mobile designs, markets and sells mobile games. We have developed and published a portfolio of casual and traditional gamesdesigned to appeal to a broad cross section of the subscribers served by our wireless carriers and other distributors, as well as to users ofsmartphones who purchase our games through direct-to-consumer digital storefronts. We create games and related applications based onthird-party licensed brands and other intellectual property, as well as on our own original brands and intellectual property. Our gamesbased on licensed intellectual property include Call of Duty, Deer Hunter, Diner Dash, Guitar Hero 5, Family Feud, Family Guy,The Price Is Right, Transformers, Wedding Dash, Who Wants to Be a Millionaire?, World Series of Poker and Zuma. Our originalgames based on our own intellectual property include Beat It!, Bonsai Blast, Brain Genius, Glyder, Stranded and Super K.O. Boxing.We have also recently begun developing games for social networking websites. We are based in San Mateo, California and have offices inBrazil, Canada, Chile, China, England, France, Germany, Italy, Russia and Spain.We were incorporated in Nevada in May 2001 as Cyent Studios, Inc. and changed our name to Sorrent, Inc. later that year. InNovember 2001, we incorporated a wholly owned subsidiary in California, and, in December 2001, we merged the Nevada corporationinto this California subsidiary to form Sorrent, Inc., a California corporation. In May 2005, we changed our name to Glu Mobile Inc. InMarch 2007, we reincorporated in Delaware and implemented a 3-for-1 reverse split of our common stock and convertible preferred stock.Also in March 2007, we completed our initial public offering and our common stock is traded on the NASDAQ Global Market under thesymbol “GLUU”.AcquisitionsIn December 2004, we acquired Macrospace Limited, or Macrospace, a company registered in England and Wales; in March 2006,we acquired iFone Holdings Limited, or together with its affiliates iFone, a company registered in England and Wales; in December 2007,we acquired Beijing Zhangzhong MIG Information Technology Co. Ltd., or together with its affiliates MIG, a domestic limited liabilitycompany organized under the laws of China; and in March 2008, we acquired Superscape Group plc, or together with its affiliatesSuperscape, a company registered in England and Wales with operations in Russia and the United States.Available InformationWe file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and otherreports, and amendments to these reports, required of public companies with the SEC. The public may read and copy the materials wefile with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain informationon the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.govthat contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Wemake available free of charge on the Investor Relations section of our corporate website all of the reports we file with the SEC as soon asreasonably practicable after the reports are filed. Our internet website is located at www.glu.com and our investor relations website islocated at www.glu.com/investors. The information on our website is not incorporated into this report. Copies of this 2009 AnnualReport on Form 10-K may also be obtained, without charge, by contacting Investor Relations, Glu Mobile Inc., 2207Bridgepointe Parkway, Suite 300, San Mateo, California 94404 or by calling 650-532-2400.3Table of ContentsBusiness Developments and HighlightsSince January 1, 2009, we have taken the following actions to support our business: • We increased our focus on designing, marketing and selling games for more advanced platforms and smartphones, such asApple’s iPhone, Google’s Android and Research In Motion’s BlackBerry; for example, since January 1, 2009, we have developedand made available 18 games on the Apple App Store. The revenues that we generated from smartphone platforms grew 248.1%in 2009 as compared to 2008, and grew by 98.0% in the fourth quarter of 2009 as compared to the third quarter of 2009. Todate, we have had more than 25 million downloads of our products on the Apple App Store, which consists of purchases of ourgames, downloads of free versions of our games, downloads of updates to purchased versions of our games and micro-transactions made by consumers playing one of our games. • We began developing games for social networking websites such as Facebook, and released one game and beta versions of twoadditional games on Facebook during 2009. • We reduced our total operating expenses, net of goodwill, by approximately 28.6% in 2009 from 2008 levels to better align ourexpenses with our revenue expectations, which enabled us to generate cash from operations in each of the second, third and fourthquarters of 2009 and generate a total of $1.1 million in cash from operations for the full fiscal year. • In August 2009, February 2010 and March 2010, we amended our $8.0 million credit facility to (1) reduce certain of theminimum targets contained in the facility’s EBITDA-related covenant, (2) change the measurement period for the EBITDAcovenant from a rolling six-month calculation to a quarterly calculation, (3) extend the maturity date of the credit facility fromDecember 22, 2010 until June 30, 2011 and (4) increase the interest rate for borrowings under the credit facility by 0.75%, to thehigher of the lender’s prime rate, plus 1.75%, or 5%. • On December 28, 2009, our board of directors appointed Niccolo de Masi as our new President and Chief Executive Officer,effective January 4, 2010.The mobile games market continued to undergo meaningful changes in 2009. The global economic downturn has caused aslowdown in traditional handset sales, which in turn reduced the number of games purchased on traditional carrier-based feature phones.We believe that this slowdown in our base carrier business will continue to accelerate and will result in an absolute reduction in thenumber of feature phones sold in 2010, which in turn will likely result in a slowdown in sales of our games and an overall decline in ourrevenues in 2010.However, we believe that there has been, and that there will continue to be, an acceleration in the number of smartphones being soldas consumers continue to migrate from traditional handsets to more advanced platforms and smartphones. The introduction of theseadvanced platforms and smartphones has drawn a significant number of our customers away from the feature phone business, whichcontinues to represent the substantial majority of our customer base. For us to succeed in 2010 and beyond, we believe that we mustincreasingly publish mobile games that are widely accepted and commercially successful on the smartphone digital storefronts, whichinclude Apple’s App Store, Google’s Android Market, Microsoft’s Windows Marketplace for Mobile, Palm’s App Catalog, Nokia’s OviStore and Research In Motion’s Blackberry App World. Although, as noted above, we experienced certain successes on these smartphonestorefronts in 2009, particularly with respect to the Apple App Store, revenues from these advanced platforms and smartphonesrepresented less than 10% of our revenues for 2009.As part of our strategy for growth in 2010 and beyond, we intend to significantly increase our studio capacity that is dedicatedtowards these advanced platforms and smartphones. We expect that a significant portion of our development activities for these advancedplatforms and smartphones will be focused on persistent-state, “freemium” gaming — games that are downloadable without an initialcharge or for a small fee, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through variousadvertizing techniques. We believe this approach will enable us to build a growing and more direct relationship with our customers. Weintend to have the majority of these persistent-state, freemium games be predominately based upon our own intellectual property, which webelieve will significantly enhance our margins and long-term value. However, we do not expect to release any persistent-state gaming orfreemium titles prior to the fourth quarter of4Table of Contents2010. Significantly growing our revenues and further succeeding in our efforts with respect to advanced platforms and smartphones maybe challenging for us for several reasons, including: (1) the open nature of many of the smartphone storefronts increases substantially thenumber of our competitors and competitive products, which makes it more difficult for us to achieve prominent placement or featuringfor our games, (2) the competitive advantage of our porting capabilities may be reduced as these advanced platforms and smartphonesbecome more widely adopted; (3) many of our key licenses do not grant us the rights to develop games for the iPhone and othersmartphones; (4) open storefront distribution is still relatively new for us, and we must develop a marketing strategy that allows us togenerate sustainable and increasingly profitable revenues, without significantly increasing our marketing or development expenses; (5) thepricing and revenue models for titles on these smartphone storefronts are rapidly evolving, and has resulted, and may continue to result,in significantly lower average selling prices for our games developed for smartphones as compared to games we have developed for featurephones in our traditional carrier channels and (6) we have a limited ability to invest heavily in this strategy. As a result, despite the factthat we expect our revenues to increase from these advanced platforms and smartphones in 2010, we do not expect this increase to fullyoffset the anticipated decline in revenues from games we develop for feature phones in our traditional base carrier business.In addition, during the third quarter of 2009 we announced that we intend to increase our focus on developing games for socialnetworking websites such as Facebook. As noted above, during 2009, we released one game and beta versions of two additional games onFacebook. However, we have not yet derived any meaningful revenues from these efforts. Significantly growing our revenues andsucceeding on this platform may be challenging for us for several reasons, including: (1) we have very limited experience developinggames for social networking websites, and in order to succeed, we will likely need to hire additional personnel with experience in socialnetworking gaming and divert internal resources from other projects to focus on our social networking initiatives; (2) social networkingplatforms such as Facebook are rapidly evolving markets and we must determine how best to build and maintain an audience base andmonetize our games; (3) the open nature of the development and marketing platforms for social networking websites subjects us tosignificant competition from many additional companies that have greater experience in developing and monetizing games on socialnetworking websites, have an established presence and user community for their games and who have invested significant time andresources in marketing their games; and (4) we have a limited ability to invest heavily in this strategy.Our ProductsWe design our portfolio of games to appeal to the diverse interests of the broad wireless subscriber population as well as users ofsmartphones. We focus on developing a portfolio of games across a number of genres designed to increase adoption and repeat purchaserates by subscribers. Revenues from applications other than games were not material.For our traditional carrier-based feature phone business, end users typically purchase our games from their wireless carrier and arebilled on their monthly phone bill. In the United States, one-time fees for unlimited use generally range between approximately $5.00 and$10.00, and prices for subscriptions generally range between approximately $2.50 and $4.00 per month, typically varying by game andcarrier. In Europe, one-time fees for unlimited use generally range between approximately $2.50 and $10.00 (at current exchange rates),and prices for subscriptions generally range between approximately $1.50 and $4.00 per month (at current exchange rates), typicallyvarying by game and carrier. Prices in the Asia-Pacific and Latin America regions are generally lower than in the United States andEurope. Carriers normally share with us 40% to 65% of their subscribers’ payments for our games, which we record as revenues.With respect to our games for smartphones, end users purchase our games through direct-to-consumer digital storefronts, withprices generally ranging between $0.99 and $4.99. These direct-to-consumer digital storefronts generally share with us 70% of theconsumers’ payments for our games, which we record as revenues. In addition, we have begun to embed micro-transaction capabilitiesinto certain of our games for smartphones, as well as our social networking games which are otherwise free to play, and intend to continueto utilize innovative monetization techniques for these games. For example, certain of our games that are available in the Apple App Storeallow users to extend game life or purchase additional weapons or other items to enhance game play by paying an additional fee. We havealso begun to experiment with a number of advertizing monetization techniques.5Table of ContentsFor games based on licensed brands, we share with the content licensor a portion of our revenues. The average royalty rate that wepaid on games based on licensed intellectual property was approximately 35.5% in 2009, 33.5% in 2008 and 31.2% in 2007. However,the individual royalty rates that we pay can be significantly above or below the average because our licenses were signed over a number ofyears and in some cases were negotiated by one of the companies we acquired. The royalty rates also vary based on factors, such as thestrength of the licensed brand, the platforms for which we are permitted to distribute the licensed content, and our development or portingobligations.Our portfolio of games includes original games based on our own intellectual property and games based on brands and otherintellectual property licensed from branded content owners. These latter games are inspired by non-mobile brands and intellectualproperty, including movies, board games, Internet-based casual games and console games. In 2009, 2008 and 2007, Glu-branded originalgames accounted for approximately 22.5%, 25.0% and 11.9% of our revenues, respectively.For more information on the revenues for the last three fiscal years by geographic areas, please see Note 13 of Notes to ConsolidatedFinancial Statements included in Item 8 of this report.Sales, Marketing and DistributionFor our traditional carrier-based feature phone business, we market and sell our games primarily through wireless carriers. We alsocoordinate our marketing efforts with carriers and mobile handset manufacturers in the launch of new games with new handsets. We areoften required to execute simultaneous and coordinated “day-and-date” game launches, which are typically used for games associated withother content platforms such as films, television and console games. If we are unable to execute any such launch, our relationship with thecontent owner may be harmed, we could be subject to litigation or we could fail to recognize revenues associated with a timely launch of agame, any of which could harm our business and result in a loss of revenues.We co-market our games with our partners, including wireless carriers, branded content owners and direct-to-consumer companies.For example, when we create an idea for a game, we discuss the game with wireless carriers early in the development process to gain anunderstanding of the attractiveness of the game to them, to obtain their other feedback regarding the game, and to develop plans for co-marketing and a potential launch strategy. We also coordinate our marketing efforts with those of branded content owners, especially for acoordinated day-and-date launch. In addition, we work with our wireless carriers to develop merchandising initiatives, such as pre-loading of games on handsets, often with free trials, Glu-branded game menus that offer games for trial or sale, and pay-per-play or otheralternative billing arrangements.We believe that placement of games on the top level or featured handset menu or toward the top of the genre-specific or other menus,rather than lower down or in sub-menus, is likely to result in games achieving a greater degree of commercial success. We believe that anumber of factors may influence the deck placement of a game including: • the perceived attractiveness of the title or brand; • the past critical or commercial success of the game or of other games previously introduced by a publisher; • the number of handsets for which a version of the game is available; • the relationship with the applicable carrier and pipeline of quality titles for it; • the carrier’s economic incentives with respect to the particular game, such as the revenue split percentage; and • the level of marketing support, including marketing development funds.If wireless carriers choose to give our games less favorable deck placement, our games may be less successful than we anticipate andour business, operating results and financial condition may be materially harmed.End users download our mobile games and related applications to their handsets, and typically their carrier bills them a one-time feeor monthly subscription fee, depending on the end user’s desired payment arrangement6Table of Contentsand the carrier’s offerings. Our carrier distribution agreements establish the portion of revenues that will be retained by the carrier fordistributing our games and other applications. Our carrier agreements do not establish us as the exclusive provider of mobile games withthe carriers, do not require them to market or distribute our games and typically have a term of one or two years with automatic renewalprovisions upon expiration of the initial term, absent a contrary notice from either party. In addition, the carriers can usually terminatethese agreements early and, in some instances, at any time without cause, which could give them the ability to renegotiate economic orother terms. In many of these agreements, we warrant that our games do not contain libelous or obscene content, do not contain materialdefects or viruses, and do not violate third-party intellectual property rights and we indemnify the carrier for any breach of a third party’sintellectual property.For the traditional carrier-based feature phone business, where we have historically generated most of our revenues, wireless carriersgenerally control the price charged to end users for our mobile games either by approving or establishing the price of the games charged totheir subscribers. Some of our carrier agreements also restrict our ability to change established prices. In cases where carrier approval isrequired, approvals may not be granted in a timely manner or at all. A failure or delay in obtaining these approvals, the prices establishedby the carriers for our games, or changes in these prices could adversely affect market acceptance of those games. Similarly, for thesignificant minority of our carriers, including Verizon Wireless, when we make changes to a pricing plan (the wholesale price and thecorresponding suggested retail price based on our negotiated revenue-sharing arrangement), adjustments to the actual retail price charged toend users may not be made in a timely manner or at all, even though our wholesale price was reduced. A failure or delay by these carriersin adjusting the retail price for our games could adversely affect sales volume and our revenues for those games.We currently have agreements with numerous wireless carriers and other distributors. Verizon Wireless accounted for 20.5%, 21.4%and 23.0% of our revenues in 2009, 2008 and 2007, respectively. No other carrier represented more than 10.0% of our revenues in any ofthese years. In addition, in 2009, 2008 and 2007, we derived approximately 49.1%, 51.4% and 55.4%, respectively, of our revenuesfrom relationships with our top five carriers, in each year including Verizon Wireless. We expect that we will continue to generate asubstantial majority of our revenues through distribution relationships with fewer than 20 carriers for the foreseeable future.Although we expect carriers will continue to be our primary means of distributing our games in 2010, we also market and sell ourgames through various Internet portals and, increasingly, direct-to-consumer digital storefronts, such as Apple’s App Store, Google’sAndroid Market, Microsoft’s Windows Marketplace for Mobile, Palm’s App Catalog, Nokia’s Ovi Store and Research In Motion’sBlackberry App World. Our revenues from these alternative distribution channels represented less than 10% of our revenues in 2009.However, we believe that consumers will continue to migrate from traditional feature phones to more advanced platforms andsmartphones, and our strategy for growth in 2010 and beyond includes significantly increasing our studio capacity dedicated towards thecreation of games for these advanced platforms and smartphones.As part of our efforts to successfully market our games on the direct-to-consumer digital storefronts, we attempt to educate the digitalstorefront owners regarding our title roadmap and seek to have our games featured or otherwise prominently placed within the digitalstorefront. We believe that the featuring or prominent placement of our games is likely to result in our games achieving a greater degree ofcommercial success. We believe that a number of factors may influence the featuring or placement of a game in these digital storefronts,including: • the perceived attractiveness of the title or brand; • the past critical or commercial success of the game or of other games previously introduced by a publisher; • the publisher’s relationship with the applicable digital storefront owner and future pipeline of quality titles for it; and • the current market share of the publisher.7Table of ContentsIn addition to our efforts to secure prominent featuring or placement for our games in these digital storefronts, we have alsoundertaken a number of marketing initiatives designed to increase the sales of our games for advanced platforms and smartphones. Theseinitiatives include the following: • Introducing free limited versions of certain of our games which enable consumers who are unwilling or hesitant to purchase thefull version of the game to download and play a portion of the full game for free. This strategy has resulted in many consumerstrying the free version of one of our games and subsequently purchasing the full version of the game. • Embedding cross-promotional features in our games that inform users about, and enable them to easily purchase, other of ourgames. • Utilizing social networking websites such as Facebook and Twitter to build a base of fans and followers to whom we canquickly and easily provide information about our games. • Engaging in co-marketing efforts with our licensing partners, which may include a coordinated day-and-date launch. • Undertaking extensive outreach efforts with video game websites and related media outlets, such as providing reviewers withadvance access to our games prior to launch, which efforts are designed to help promote our games and increase sales. • Promoting our games through both online and in-game advertisements. • Expanding monetization techniques to include microtransactions and various advertizing techniques.SeasonalityMany new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season. Becausemany end users download our games soon after they purchase new handsets, we generally experience seasonal sales increases based onthe holiday selling period. However, due to the time between handset purchases and game purchases, most of this holiday impact occursfor us in our first calendar quarter. In addition, we seek to release many of our games in conjunction with specific events, such as therelease of a related movie. Further, for a variety of reasons, including roaming charges for data downloads that may make purchase of ourgames prohibitively expensive for many end users while they are traveling, we sometimes experience seasonal sales decreases during thesummer, particularly in parts of Europe.StudiosWe have six internal studios that create and develop games and other entertainment products. These studios, based in San Mateo,California; London, England; Beijing, China; Hefei, China; Sao Paulo, Brazil and Moscow, Russia, have the ability to design and buildproducts from original intellectual property, based on games originated in other media such as online and game consoles, or based onother licensed brands and intellectual property.Where we license intellectual property from films or other brands or content not based on games from other media, our gamedevelopment process involves a significant amount of creativity. Generally, for the carrier distribution channel, licensed console or Internetgames require more than a simple port to the mobile environment, and our developers must create games that are inspired by the gameplay of the original. In each of these cases, creative and technical studio expertise is necessary to design games that appeal to end usersand work well on handsets with their inherent limitations, such as small screen sizes and control buttons.Product DevelopmentWe have developed proprietary technologies and product development processes that are designed to enable us to rapidly and costeffectively develop and publish games that meet the needs of our wireless carriers and other distributors. These technologies and processesinclude: • core development platforms;8Table of Contents • porting tools and processes; • broad development capabilities; • application hosting; • provisioning and billing capabilities; • merchandising, monetization tools and marketing platform; and • thin client-server platform.Since the markets for our products are characterized by rapid technological change, particularly in the technical capabilities ofmobile handsets, and changing end-user preferences, continuous investment is required to innovate and publish new games and tomodify existing games for distribution on new platforms. We publish the majority of our games internally, as described under“— Studios” above; however, in certain cases we will retain a third-party to support our development activities. To date, we have not filedto register any patents or copyrights related to our product development processes or our games.As of December 31, 2009, we had 402 employees in research and development compared with 445 as of December 31, 2008.Research and development expenses were $26.0 million, $32.1 million and $22.4 million for 2009, 2008 and 2007, respectively. Weexpect 2010 spending for research and development activities to be similar to 2009 levels, but we intend to shift a substantial portion ofthese dollars to development activities for advanced platforms and smartphones, as well as social networking websites. However, wecannot be certain that we will be able to successfully develop new games that satisfy end user preferences and technological changes orthat any such games will achieve market acceptance and commercial success.CompetitionOur primary competitors in both our traditional carrier-based mobile phone business and for advanced platforms and smartphonesinclude Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts having the largest market share of any company in the mobilegames market. We have also recently begun to develop and market games for social networking websites like Facebook, and thecompanies with the largest market share are Zynga and Electronic Arts (Playfish). In the future, likely competitors in our target marketsinclude major media companies, traditional video game publishers, content aggregators, mobile software providers and independentmobile game publishers. Wireless carriers may also decide to develop, internally or through a managed third-party developer, anddistribute their own mobile games.Developing, distributing and selling mobile games is a highly competitive business. For end users, we compete primarily on thebasis of game quality, brand and price. For carrier and other application storefronts, we compete for promotional placement based onthese factors, as well as historical performance and perception of sales potential and relationships with licensors of brands and otherintellectual property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions of developmentquality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete for experienced andtalented employees.Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets,include the following: • significantly greater revenues and financial resources; • stronger brand and consumer recognition regionally or worldwide; • the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products; • more substantial intellectual property of their own from which they can develop games without having to pay royalties; • greater platform specific focus, experience and expertise;9Table of Contents • pre-existing relationships with brand owners or carriers that afford them access to intellectual property while blocking the accessof competitors to that same intellectual property; • greater resources to make acquisitions; • the ability or willingness to offer competing products at no charge or supported by in-game advertising; • lower labor and development costs; and • broader global distribution and presence.In addition, given the open nature of the development and distribution for certain advanced platforms and smartphones, such as theApple iPhone, Google Android and Research In Motion’s BlackBerry, as well as social networking websites, we also compete or willcompete with a vast number of small companies and individuals who are able to create and launch games and other content for thesemobile devices and social networking websites utilizing limited resources and with limited start-up time or expertise. Many of thesesmaller developers are able to offer their games at no cost or substantially reduce their prices to levels at which we may be unable torespond competitively and still achieve profitability given their low overhead. In addition, publishers who create content for traditionalgaming consoles and for online play have also begun developing games for smartphones and social networking websites. As an exampleof the competition that we face, it has been estimated that more than 25,000 active games were available on the Apple App Store as ofMarch 26, 2010, and that there could be even more games available on Facebook than on the Apple App Store. The proliferation of titlesin these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for end userswho purchase content for their smartphones or spend money in connection with playing Facebook games without substantially reducingour prices, increasing development costs or increasing spending to market our products. Certain of our large competitors have greaterintellectual property rights and access to more licenses to develop titles for the Apple App Store and have considerably greater resourcesthan we do, which enables them to develop a greater volume of games, more rapidly than us. If our industry continues to shift to a salesand distribution model similar to the Apple App Store our ability to compete would be further challenged, since the significant majority ofour current revenue is currently derived from our wireless carrier-based distribution channel and not from fully open storefront channels.For more information on our competition, please see the Risk Factor — “The markets in which we operate are highly competitive,and many of our competitors have significantly greater resources than we do” and the other risk factors described in Item 1A of thisreport.Intellectual PropertyOur intellectual property is an essential element of our business. We use a combination of trademark, copyright, trade secret andother intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. Our employees andindependent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship,developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they mayclaim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual propertythat we own or license. Unauthorized use of our intellectual property by third parties, including piracy, and the expenses incurred inprotecting our intellectual property rights, may adversely affect our business.We own 23 trademarks registered with the U.S. Patent and Trademark Office, including Glu, Superscape, Bonsai Blast, BrainGenius, Gum Blox, Space Monkey, Super K.O. Boxing and our 2-D ‘g’ character logo, and have six trademark applications pendingwith the U.S. Patent and Trademark Office, including Gun Bros, Rock Breaker, Rock Mania, Vegas Hustler and our 3-D ‘g’ characterlogo. We also own, or have applied to own, one or more registered trademarks in certain foreign countries, depending on the relevance ofeach brand to other markets. Registrations of both U.S. and foreign trademarks are renewable every ten years.In addition, many of our games and other applications are based on or incorporate intellectual property that we license from thirdparties. We have both exclusive and non-exclusive licenses to use these properties for terms that generally range from two to five years.Our licensed brands include, among others, Call of Duty, Deer Hunter, Diner10Table of ContentsDash, Guitar Hero 5, Family Feud, Family Guy, The Price Is Right, Transformers, Wedding Dash, Who Wants to Be aMillionaire?, World Series of Poker and Zuma. Our licensors include a number of well-established video game publishers and majormedia companies. However, third-party licenses may not continue to be available to us on commercially acceptable terms, or at all.From time to time, we encounter disputes over rights and obligations concerning intellectual property. If we do not prevail in thesedisputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of our games or other applicationsdetermined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party, any of which would have amaterial adverse effect on our business, financial condition and results of operations.Government RegulationLegislation is continually being introduced that may affect both the content of our products and their distribution. For example, dataand consumer protection laws in the United States and Europe impose various restrictions, which will be increasingly important to ourbusiness as we continue to market our products directly to end users and we collect information, including personal identifiableinformation, about our end user customers. Those rules vary by territory although the Internet recognizes no geographical boundaries. Inthe United States, for example, numerous federal and state laws have been introduced which attempt to restrict the content or distributionof games. Legislation has been adopted in several states, and proposed at the federal level, that prohibits the sale of certain games tominors. In addition, two self-regulatory bodies in the United States (the Entertainment Software Rating Board) and the European Union(Pan European Game Information) provide consumers with rating information on various products such as entertainment software similarto our products based on the content (e.g., violence, sexually explicit content, language). Furthermore, the Chinese government has recentlyadopted measures designed to eliminate violent or obscene content in games. In response to these measures, some Chinesetelecommunications operators have suspended billing their customers for certain mobile gaming platform services, including thoseservices that do not contain offensive or unauthorized content, which could negatively impact our revenues in China. China has alsoadopted measures that prohibit the use of virtual currency to purchase any real world good or service.We are subject to federal and state laws and government regulations concerning employee safety and health and environmentalmatters. The Department of Labor, Occupational Safety and Health Administration, the Environmental Protection Agency, and otherfederal and state agencies have the authority to establish regulations that may have an impact on our operations.EmployeesAs of March 18, 2010, we had 479 employees, including 363 in research and product development. Of our total employees as ofMarch 18, 2010, 116 were based in the United States and Canada, 131 were based in Europe, 165 were based in Asia Pacific and 67were based in Latin America. None of our employees is represented by a labor union or is covered by a collective bargaining agreement.We have never experienced any employment-related work stoppages and consider relations with our employees to be good. We believe thatour future success depends in part on our continued ability to hire, assimilate and retain qualified personnel.Item 1A. Risk FactorsOur business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events orcircumstances described below occurs, our business and financial performance could be harmed, our actual results could differmaterially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not theonly ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe arematerial that may harm our business and financial performance. Because of the risks and uncertainties discussed below, as well as othervariables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performanceand investors should not use historical trends to anticipate results or trends in future periods.11Table of ContentsWe have a history of net losses, may incur substantial net losses in the future and may not achieve profitability.We have incurred significant losses since inception, including a net loss of $3.3 million in 2007, a net loss of $106.7 million in2008 and a net loss of $18.2 million in 2009. As of December 31, 2009, we had an accumulated deficit of $177.3 million. During 2008,we incurred aggregate charges of approximately $77.6 million for goodwill, royalty impairments and restructuring activities, and during2009, we incurred aggregate charges of approximately $8.5 million for royalty impairments and restructuring activities. If we continue toincur these charges, it will continue to negatively affect our operating results. In addition, we may be required to incur increased costs inorder to implement additional initiatives designed to increase revenues, such as increased marketing for our new games, particularly thosedesigned for advanced platforms and smartphones and social networking websites. If our revenues do not increase to offset theseadditional expenses, if we experience unexpected increases in operating expenses or if we are required to take additional charges related toimpairments or restructurings, we will continue to incur significant losses and will not become profitable. Finally, our 2009 revenues werelower than our 2008 revenues, and we expect that our revenues will likely decline in 2010 from 2009 levels. Accordingly, we may notachieve profitability in the future.Our financial results could vary significantly from quarter to quarter and are difficult to predict, particularly in light of thecurrent economic environment, which in turn could cause volatility in our stock price.Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of whichare outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, wemay not be able to predict our future revenues or results of operations. We base our current and future expense levels on our internaloperating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costssufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately andadversely affect financial results for that quarter. This will be particularly true for 2010, as we implemented significant cost-reductionmeasures in 2008 and 2009, as well as in the first quarter of 2010, making it more difficult for us to further reduce our operatingexpenses without a material adverse impact on our prospects in future periods. Individual games and carrier relationships representmeaningful portions of our revenues and net income or loss in any quarter. We may incur significant or unanticipated expenses whenlicenses are added or renewed, we may experience a significant reduction in revenue if licenses are not renewed or we may incurimpairments of prepaid royalty guarantees if our forecast for games based on licensed intellectual property is lower than we anticipated atthe time we entered into the agreement. For example, in 2008 and 2009, we impaired $6.3 million and $6.6 million, respectively, ofcertain prepaid royalties and royalty guarantees primarily due to several distribution arrangements in our Europe, Middle East and Africaregion and other global development and distribution arrangements that we entered into in 2007 and 2008. In addition, some paymentsfrom carriers that we recognize as revenue on a cash basis may be delayed unpredictably.We are also subject to macroeconomic fluctuations in the United States and global economies, including those that impactdiscretionary consumer spending, which have deteriorated significantly in many countries and regions, including the United States, andmay remain depressed for the foreseeable future. Some of the factors that could influence the level of consumer spending includecontinuing conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumerconfidence and other macroeconomic factors affecting consumer spending. These issues can also cause foreign currency rates to fluctuate,which can have an adverse impact on our business since we transact business in more than 70 countries in more than 20 differentcurrencies. In 2008, some of these currencies fluctuated by up to 40%, and we experienced continued significant fluctuations in 2009.These issues may continue to negatively impact the economy and our growth. If these issues persist, or if the economy enters a prolongedperiod of decelerating growth or recession, our results of operations may be harmed. As a result of these and other factors, our operatingresults may not meet the expectations of investors or public market analysts who choose to follow our company. Our failure to meetmarket expectations would likely result in a decline in the trading price of our common stock.12Table of ContentsIn addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly resultsinclude: • the number of new games released by us and our competitors, including those for smartphones and social networking websites; • the timing of release of new games by us and our competitors, particularly those that may represent a significant portion ofrevenues in a period; • the popularity of new games and games released in prior periods; • changes in the prominence of deck placement for our leading games and those of our competitors; • fluctuations in the size and rate of growth of overall consumer demand for mobile handsets, games and related content; • the rate at which consumers continue to migrate from traditional feature phones to more advanced platforms and smartphones; • the strength or weakness in consumer demand for new mobile devices; • the expiration of existing content licenses for particular games; • the timing of charges related to impairments of goodwill, intangible assets, prepaid royalties and guarantees; • changes in pricing policies by us, our competitors or our carriers and other distributors; • changes in pricing policies by our carriers related to downloading content, such as our games, which pricing policies could beinfluenced by the lower average prices for content on advanced platforms and smartphones; • changes in the mix of original and licensed games, which have varying gross margins; • carrier policies around off portal marketing and monetization; • the timing of successful mobile handset launches; • the timeliness and accuracy of reporting from carriers; • the seasonality of our industry; • our success in developing and monetizing games for social networking websites; • strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments orchanges in business strategy; • our success in entering new geographic markets; • changes in accounting rules, such as those governing recognition of revenue; • the timing of compensation expense associated with equity compensation grants; and • decisions by us to incur additional expenses, such as increases in marketing or research and development.We may need to raise additional capital or borrow funds to grow our business, and we may not be able to raise capital orborrow funds on terms acceptable to us or at all.The operation of our business, and our efforts to grow our business, requires significant cash outlays and commitments. As ofDecember 31, 2009, we had $10.5 million of cash and cash equivalents. In addition to our general operating expenses and prepaid andguaranteed royalty payments, we had debt service obligations related to $16.4 million outstanding as of December 31, 2009. These debtservice obligations consisted of $11.7 million in remaining principal and accrued interest that we owed under the $25.0 million inprincipal amount of subordinated notes that we issued in December 2008 in connection with our restructuring of the MIG earnout andbonus payments (the “MIG subordinated notes”), and $4.7 million that was outstanding under our revolving credit facility. In13Table of Contentsaddition, of our $10.5 million of cash and cash equivalents that we held as of December 31, 2009, $5.5 million was held in our Chinasubsidiaries. To the extent we require additional working capital in our U.S. or other non-Chinese operations, it could be very difficult torepatriate this money due to foreign exchange controls and such repatriation would be subject to taxation, potentially at high rates.If our cash and cash equivalents, together with any cash generated from operations and borrowings under our credit facility, areinsufficient to meet our cash requirements, we will either need to seek additional capital, potentially through debt or equity financings, byincreasing the amount available to us for borrowing under the credit facility or selling some of our assets, to fund our operations and debtrepayment obligations or we will need to restructure our obligations under the MIG subordinated notes. We may not be able to raise neededcash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to ourstockholders, particularly given our current stock price. The holders of new securities may also receive rights, preferences or privilegesthat are senior to those of existing holders of our common stock, all of which is subject to the provisions of our credit facility.Additionally, we may be unable to increase the size of the credit facility, or to do so on terms that are acceptable to us, particularly in lightof the current credit market conditions. We also may not be able to access the full amount of our credit facility, as the credit facility’sborrowing base is based upon our accounts receivable; at our current revenue levels, we are not able to access the full $8.0 million of thecredit facility. If new sources of financing are required but are insufficient or unavailable, or if we are unable to restructure our obligationsunder the MIG subordinated notes to the extent we may need to do so, we would be required to modify our growth and operating plans tothe extent of available funding, which would harm our ability to grow our business. Furthermore, if we are unable to remain incompliance with the financial or other covenants contained in the credit facility and do not obtain a waiver from the lender then, subject toapplicable cure periods, any outstanding indebtedness under the credit facility could be declared immediately due and payable, whichwould also trigger the cross-default provisions of the MIG subordinated notes. This credit facility also is scheduled to expire on June 30,2011, and we cannot assure you that we will be able to extend the terms of this facility on terms favorable to us or at all. In the event thatwe default under our credit facility or are unable to successfully extend its term beyond June 30, 2011, we would need to seek additionalsources of financing, which could have unfavorable terms, and any failure to do so would have a serious impact on our business,financial position and liquidity, including potentially forcing us to file for bankruptcy protection. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Sufficiency of Current Cash, andCash Equivalents.”The markets in which we operate are highly competitive, and many of our competitors have significantly greater resourcesthan we do.The development, distribution and sale of mobile games is a highly competitive business. For end users, we compete primarily onthe basis of game quality, brand and price. For carrier and other application storefronts, we compete for promotional placement based onthese factors, as well as historical performance and perception of sales potential and relationships with licensors of brands and otherintellectual property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions of developmentquality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete for experienced andtalented employees.Our primary competitors in both our traditional carrier-based mobile phone business and for advanced platforms and smartphonesinclude Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts having the largest market share of any company in the mobilegames market. We have also recently begun to develop and market games for social networking websites like Facebook, and thecompanies with the largest market share are Zynga and Electronic Arts (Playfish). In the future, likely competitors in our target marketsinclude major media companies, traditional video game publishers, content aggregators, mobile software providers and independentmobile game publishers. Wireless carriers may also decide to develop, internally or through a managed third-party developer, anddistribute their own mobile games.Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets,include the following: • significantly greater revenues and financial resources;14Table of Contents • stronger brand and consumer recognition regionally or worldwide; • the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products; • more substantial intellectual property of their own from which they can develop games without having to pay royalties; • greater platform specific focus, experience and expertise; • pre-existing relationships with brand owners or carriers that afford them access to intellectual property while blocking the accessof competitors to that same intellectual property; • greater resources to make acquisitions; • the ability or willingness to offer competing products at no charge or supported by in-game advertising; • lower labor and development costs; and • broader global distribution and presence.In addition, given the open nature of the development and distribution for certain advanced platforms and smartphones, such as theApple iPhone, Google Android and Research In Motion’s BlackBerry, as well as social networking websites, we also compete or willcompete with a vast number of small companies and individuals who are able to create and launch games and other content for thesemobile devices and social networking websites utilizing limited resources and with limited start-up time or expertise. Many of thesesmaller developers are able to offer their games at no cost or substantially reduce prices to levels at which we may be unable to respondcompetitively and still achieve profitability given their low overhead. In addition, publishers who create content for traditional gamingconsoles and for online play have also begun developing games for smartphones and social networking websites. As an example of thecompetition that we face, it has been estimated that more than 25,000 active games were available on the Apple App Store as of March 26,2010 and that there could be even more games available on Facebook than on the Apple App Store. The proliferation of titles in these opendeveloper channels makes it difficult for us to differentiate ourselves from other developers and to compete for end users who purchasecontent for their smartphones or spend money in connection with playing Facebook games without substantially reducing our prices,increasing development costs or increasing spending to market our products. Certain of our large competitors have greater intellectualproperty rights and access to more licenses to develop titles for the Apple App Store and have considerably greater resources than we do,which enables them to develop a greater volume of games, more rapidly than us. If our industry continues to shift to a sales anddistribution model similar to the Apple App Store our ability to compete would be further challenged, since the significant majority of ourcurrent revenue is currently derived from our wireless carrier-based distribution channel and not from fully open storefront channels.If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline,our margins could decline and we could lose market share, any of which would materially harm our business, operating results andfinancial condition.Our stock price has fluctuated and declined significantly since our initial public offering in March 2007, and maycontinue to fluctuate, may not rise and may decline further, which could cause our stock to be delisted from trading on theNASDAQ Global Market.The trading price of our common stock has fluctuated in the past and is expected to continue to fluctuate in the future, as a result ofa number of factors, many of which are outside our control, such as: • price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole, such as therecent and continuing unprecedented volatility in the financial markets; • changes in the operating performance and stock market valuations of other technology companies generally, or those in ourindustry in particular; • actual or anticipated fluctuations in our operating results;15Table of Contents • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts whofollow our company or our industry, our failure to meet these estimates or failure of those analysts to initiate or maintain coverageof our stock; • ratings or other changes by any securities analysts who follow our company or our industry; • announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures,capital raising activities or capital commitments; • the public’s response to our press releases or other public announcements, including our filings with the SEC; • lawsuits threatened or filed against us; and • market conditions or trends in our industry or the economy as a whole.In addition, the stock markets, including the NASDAQ Global Market on which our common stock is listed, have recently and inthe past, experienced extreme price and volume fluctuations that have affected the market prices of many companies, some of whichappear to be unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations couldadversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often been brought against that company. Securities class action litigationagainst us could result in substantial costs and divert our management’s attention and resources.Since becoming a publicly traded security listed on the NASDAQ Global Market in March 2007, our common stock has reached aclosing high of $14.67 per share and closing low of $0.23 per share. Our common stock traded below $1.00 per share from October 30,2008 until June 12, 2009, for portions of July and August 2009 and for portions of February and March 2010, and the last reported saleprice of our common stock on March 30, 2010 was $0.99 per share. Under NASDAQ’s continued listing standards, if the closing bidprice of our common stock is under $1.00 per share for 30 consecutive trading days, NASDAQ may notify us that it may delist ourcommon stock from the NASDAQ Global Market. If the closing bid price of our common stock does not thereafter regain compliance fora minimum of ten consecutive trading days during the 180-days following notification by NASDAQ, NASDAQ may delist our commonstock from trading on the NASDAQ Global Market. As a result, we cannot assure you that our common stock will remain eligible fortrading on the NASDAQ Global Market. If our stock were delisted, the ability of our stockholders to sell any of our common stock at allwould be severely, if not completely, limited, causing our stock price to continue to decline.We have outstanding debt obligations and may incur additional debt in the future, which could adversely affect our financialcondition and results of operations.In December 2008, we renegotiated and extended our $8.0 million revolving credit facility, which is secured by substantially all ofour assets, including our intellectual property, and we further amended this credit facility in August 2009, February 2010 and March2010. As of December 31, 2009, we had outstanding borrowings of $4.7 million under this credit facility, and we expect to continue toborrow during the term of the facility for general working capital purposes and to satisfy our other debt obligations. In addition, inDecember 2008, we issued an aggregate of $25.0 million in principal amount of the MIG subordinated notes, of which we had repaid$14.0 million in principal as of December 31, 2009. This debt may adversely affect our operating results and financial condition by,among other things: • requiring us to dedicate a portion of our expected cash from operations to service our debt, thereby reducing the amount ofexpected cash flow available for other purposes, including funding our operations; • increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industryconditions;16Table of Contents • limiting our ability to pursue acquisitions that may be accretive to our business; and • limiting our flexibility in planning for, or reacting to, changes in our business and our industry.Our credit facility imposes restrictions on us, including restricting our ability to incur specified liens and sell the company andrequiring us to maintain compliance with specified covenants and to maintain a certain level of cash deposits with the lender. Our abilityto comply with certain of these covenants may be affected by events beyond our control. Our expectations regarding cash sufficiencyassume that our operating results will be sufficient to enable us to comply with the EBITDA-related covenant. Our revenues depend on anumber of factors, including the rate of sales of mobile devices, our relationships with our carriers and licensors, consumer tastes,competitive pressures, our ability to generate revenues from advanced platforms and smartphones and foreign exchange rate fluctuations.If our revenues are lower than we anticipate, we will be required to reduce our operating expenses to remain in compliance with thiscovenant. However, reducing our operating expenses could be very challenging for us, since we undertook operating expense reductionsand restructuring activities in the third and fourth quarters of 2008 that reduced our operating expenses significantly from second quarterof 2008 levels, and we implemented additional expense reduction measures in the third quarter of 2009 and the first quarter of 2010.Reducing operating expenses further could have the effect of reducing our revenues. If we breach any of the covenants under our creditfacility and do not obtain a waiver from the lender, then, subject to applicable cure periods, any outstanding indebtedness under the creditfacility could be declared immediately due and payable, which would also trigger the cross-default provision of our MIG subordinatednotes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and CapitalResources — Sufficiency of Current Cash, Cash Equivalents” for additional information regarding our credit facility and the MIGsubordinated notes. Should the lender call the loan at a time when we did not have or were unable to secure cash to repay it, it would havea serious impact on our business, financial position and liquidity, including potentially forcing us to file for bankruptcy protection. Inaddition, this credit facility also is scheduled to expire on June 30, 2011, and we cannot assure you that we will be able to extend the termsof this facility on terms favorable to us or at all. For more information about our debt obligations, see Note 8 to Notes to ConsolidatedFinancial Statements.An acceleration in the slowdown in sales of feature phones in our traditional carrier-based business, which represents thesignificant majority of our revenues, or a decline in the average selling prices of our games sold through wireless carriers,could have a material adverse impact on our revenues, financial position and results of operations.We currently derive the significant majority of our revenues from sales of our games on traditional feature phones through wirelesscarriers. Our revenues for the year ended December 31, 2009 declined from the year ended December 31, 2008 due to a decrease in sales inour carrier-based business, resulting primarily from a decrease in feature phone sales, which in turn led to a decrease in the number ofgames that we sold, as well as increasing movement by a number of consumers to smartphones that enable the download of applicationsfrom sources other than a carrier’s branded e-commerce service, such as the Apple App Store. We expect that we will continue to derive thesignificant majority of our revenues from our carrier-based business during 2010. However, we believe that the slowdown in our basecarrier business will continue to accelerate and will result in an overall decline in our revenues in 2010. The ability of the smartphones orsocial networking websites to serve as a source of significant new revenues is uncertain, and we will likely be unable to generate sufficientrevenues from these platforms in 2010 to make up for the expected decline in our traditional carrier business. In addition, games sold onsmartphones typically have lower average prices than our games sold through our wireless carriers, and to the extent consumers continueto migrate to smartphones, it could result in lower average prices for our games in our carrier business. Any acceleration in the slowdownin our carrier business or in sales of feature phones for that business, or any reduction in the average prices of our games sold throughour wireless carriers, could have a material adverse impact on our revenues, financial position and results of operations.17Table of ContentsOur strategy to grow our business includes developing titles for advanced platforms and smartphones beyond our wirelesscarrier channel, which currently comprises the significant majority of our revenues. If we do not succeed in generatingconsiderable revenues and gross margins from these advanced platforms and smartphones, our revenues, financial positionand operating results may suffer.We believe that the slowdown in our base carrier business, which currently comprises the substantial majority of our revenues, willcontinue to accelerate and will result in an overall decline in our revenues in 2010. As part of our strategy to grow our business, we havestarted to develop titles for smartphone digital storefronts (such as Apple’s App Store, Google’s Android Market, Research In Motion’sBlackberry App World, Palm’s App Catalog, Nokia’s Ovi Store and Microsoft’s Windows Marketplace for Mobile). The introduction ofthese smartphone storefronts has drawn many of our customers away from our carrier-based business. In order to succeed, we believethat we must publish mobile games that are widely accepted and commercially successful on the new advanced platforms andsmartphones. However, our efforts on these advanced platforms and smartphones may prove unsuccessful or, even if successful, it maytake us longer to achieve significant revenue than anticipated because, among others reasons: • the open nature of many of these smartphone storefronts increases substantially the number of our competitors and competitiveproducts and makes it more difficult for us to achieve prominent placement or featuring for our games; • the pricing and revenue models for titles on these smartphone storefronts are rapidly evolving (for example, the recent introductionof micro-transaction capabilities and the potential introduction of usage-based pricing for games), and has resulted, and maycontinue to result, in significantly lower average selling prices for our games developed for smartphones as compared to gamesdeveloped for feature phones in our traditional carrier channels, and a lower than expected return on investment for these games; • the competitive advantage of our porting capabilities may be reduced as these advanced platforms and smartphones become morewidely adopted; • many of our key licenses do not grant us the rights to develop games for the iPhone and certain other smartphones; • we have relatively little experience with open storefront distribution channels; • these smartphone digital storefronts are effectively new markets, for which we are less able to forecast with accuracy revenuelevels, required marketing and developments expenses, and net income or loss; • many OEMs and carriers are developing their own storefronts and it may be difficult for us to predict which ones will besuccessful, and we may expend time and resources developing games for storefronts that ultimately do not succeed; and • competitors may have substantially greater resources available to invest in development and publishing of products for advancedplatforms and smartphones.If we do not succeed in generating considerable revenues and gross margins from the advanced platforms and smartphones, ourrevenues, financial position and operating results may suffer.If we do not achieve a sufficient return on our investment with respect to our efforts to develop games for social networkingwebsites, it could negatively affect our operating results.We recently announced that we intend to increase our focus on developing games for social networking websites such as Facebook.We face a number of challenges in pursuing this opportunity. For example, we have historically designed, marketed and sold games onlyfor mobile phones and we have very limited experience developing games for social networking websites. In order to increase the level ofexpertise in our company, we need to hire additional personnel with experience in social networking gaming, which could make it moredifficult for us reduce our operating expenses in the event of an unexpected decline in revenues. In addition, we will need to divert internalresources from other projects to focus on our social networking initiatives, which could negatively impact our ability to design, marketand sell games for mobile phones and, consequently, reduce our revenues.18Table of ContentsSocial networking websites are rapidly evolving markets, for which we are less able to forecast with accuracy revenue levels, requiredmarketing and developments expenses, and net income or loss. We must determine how best to build and maintain an audience base andmonetize our games, as most games on social networking websites are available free of charge and users may be reluctant to pay inconnection with playing our games. Furthermore, the open nature of the development and marketing platforms for social networkingwebsites subjects us to significant competition from many additional companies that have greater experience in developing and monetizinggames on social networking websites. The proliferation of games on social networking websites will make it difficult for us to differentiateourselves from these other game developers and to compete for end users, particularly due to the fact that many of these other gamedevelopers have an established presence and user community for their games on social networking websites. In addition, somecompetitors may have substantially greater resources available to invest in development and publishing of products for social networkingwebsites. Social networking websites have also been subject to “copycat” tactics, where some companies have released games that arenearly identical to successful games released by their competitors in an effort to confuse the market and divert users from the competitor’sgame to the copycat game. As a result, even if we succeed in developing and monetizing games for social networking websites, competitorsmay produce copycat games that could result in user confusion and ultimately reduce the success of our games. Finally, many of our keylicenses do not grant us the rights to develop games for social networking websites, which could limit our ability to offer certain of ourgames on these websites. If we do not achieve a sufficient return on our investment with respect to develop games for social networkingwebsites, it could negatively affect our operating results.Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect ourbusiness and operating results.Although we currently transact approximately one-half of our business in U.S. Dollars, we also transact approximately one-fourth ofour business in pounds sterling and Euros and the remaining portion of our business in other currencies. Conducting business incurrencies other than U.S. Dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reportedoperating results. Fluctuations in the value of the U.S. Dollar relative to other currencies impact our revenues, cost of revenues andoperating margins and result in foreign currency exchange gains and losses. For example, in 2008, we recorded a $3.0 million foreigncurrency exchange loss primarily related to the revaluation of intercompany balance sheet accounts. To the extent foreign exchange ratescontinue to negatively affect our operating results, it will negatively affect our ability to remain in compliance with the EBITDA-relatedcovenant in our credit facility. To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in theforeseeable future. Even if we were to implement hedging strategies to mitigate this risk, these strategies might not eliminate our exposure toforeign exchange rate fluctuations and would involve costs and risks of their own, such as cash expenditures, ongoing management timeand expertise, external costs to implement the strategies and potential accounting implications.We face additional risk if a currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, in which ourChinese operations principally transact business, are subject to limitations on conversion into other currencies, which can limit ourability to react to rapid foreign currency devaluations and to repatriate funds to the United States should we require additional workingcapital.Failure to renew our existing brand and content licenses on favorable terms or at all and to obtain additional licenses wouldimpair our ability to introduce new mobile games or to continue to offer our current games based on third-party content.Revenues derived from mobile games and other applications based on or incorporating brands or other intellectual property licensedfrom third parties accounted for 77.5%, 75.0% and 88.1% of our revenues in 2009, 2008 and 2007, respectively. In 2009, revenuesderived under various licenses from our five largest licensors, Activision, Atari, Fox Mobile Entertainment, Freemantle Media andHarrah’s, together accounted for approximately 27.8% of our revenues, and we expect that this percentage will increase in 2010. Even ifmobile games based on licensed content or brands remain popular, any of our licensors could decide not to renew our existing license ornot to license additional intellectual property and instead license to our competitors or develop and publish its own mobile games or otherapplications, competing with us in the marketplace. For example, one of our licenses with19Table of ContentsHasbro under which we created our Battleship, Clue, Game of Life and Monopoly games, which in the past had accounted for asignificant portion of our revenues, expired in March 2008, and we experienced a decline in revenues as a result. Many of these licensorsalready develop games for other platforms and may have significant experience and development resources available to them should theydecide to compete with us rather than license to us. In addition, our licensors could decide to breach the terms of our license agreements,including failure to provide the content and intellectual property required under our license agreements and necessary to develop ourgames, and our remedies may be limited to recovering our direct costs but not our lost profits, and we may not be able to realize profitsthat we may have anticipated from such license agreements. We may be required to resort to potentially costly litigation in an effort toenforce our rights, which efforts might prove unsuccessful. Moreover, many of our licensors have not granted us the right to developgames for some smartphones, such as the iPhone, or social networking platforms, such as Facebook, and may instead choose to developgames for such platforms themselves. Additionally, licensors may elect to work with publishers who can develop and publish productsacross multiple platforms, such as mobile, online and console, which we currently cannot offer.Increased competition for licenses may lead to larger guarantees, advances and royalties that we must pay to our licensors, whichcould significantly increase our cost of revenues and cash usage. We may be unable to renew these licenses or to renew them on termsfavorable to us, and we may be unable to secure alternatives in a timely manner. Our budget for new licenses in 2009 was a substantialreduction from the amount we spent for new licenses in prior years, and we expect our spending for new licenses in 2010 to besignificantly reduced from 2009 levels. Our reduced spending on new licenses may adversely impact our title plan and our ability togenerate revenues in 2010 and future periods. Failure to maintain or renew our existing licenses or to obtain additional licenses wouldimpair our ability to introduce new games or to continue to offer our current games, which would materially harm our business, operatingresults and financial condition.Even if we succeed in gaining new licenses or extending existing licenses, we may fail to anticipate the entertainment preferences ofour end users when making choices about which brands or other content to license. If the entertainment preferences of end users shift tocontent or brands owned or developed by companies with which we do not have relationships, we may be unable to establish andmaintain successful relationships with these developers and owners, which would materially harm our business, operating results andfinancial condition.We currently rely primarily on wireless carriers, in particular Verizon Wireless, to market and distribute our games and thusto generate our revenues. The loss of or a change in any significant carrier relationship, including their credit worthiness,could materially reduce our revenues and adversely impact our cash position.A significant portion of our revenues is derived from a limited number of carriers. In 2009, we derived approximately 49.1% of ourrevenues from relationships with five carriers, including Verizon Wireless, which accounted for 20.5% of our revenues. We expect that wewill continue to generate a substantial majority of our revenues through distribution relationships with fewer than 20 carriers for theforeseeable future. If any of our carriers decides not to market or distribute our games or decides to terminate, not renew or modify theterms of its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreementwith acceptable alternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us. In addition, havingour revenues concentrated among a limited number of carriers also creates a credit concentration risk for us, and in the event that anysignificant carrier were unable to fulfill its payment obligations to us, our operating results and cash position would suffer. Finally, ourcredit facility’s borrowing base is tied to our accounts receivable. If any of our wireless carriers were delinquent in their payments to us, itwould reduce our borrowing base and could require us to immediately repay any borrowings outstanding related to such carrier. If any ofthese eventualities come to pass, it could materially reduce our revenues and otherwise harm our business.End user tastes are continually changing and are often unpredictable; if we fail to develop and publish new mobile gamesthat achieve market acceptance, our sales would suffer.Our business depends on developing and publishing mobile games that wireless carriers will place on their decks or digitalstorefront owners will prominently feature and that end users will buy. We must continue to invest significant resources in research anddevelopment, licensing efforts, marketing and regional expansion to enhance20Table of Contentsour offering of games and introduce new games, and we must make decisions about these matters well in advance of product release totimely implement them. Our success depends, in part, on unpredictable and volatile factors beyond our control, including end-userpreferences, competing games, new mobile platforms and the availability of other entertainment activities. If our games and relatedapplications do not respond to the requirements of carriers and digital storefront owners or the entertainment preferences of end users, orthey are not brought to market in a timely and effective manner, our business, operating results and financial condition would be harmed.Even if our games are successfully introduced and initially adopted, a subsequent shift in our carriers or the entertainment preferences ofend users could cause a decline in our games’ popularity that could materially reduce our revenues and harm our business, operatingresults and financial condition.A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the developmentperiod for our games, increase our costs and cause our games to be of lower quality or to be published later thananticipated.End users of games must have a mobile handset with multimedia capabilities enabled by technologies capable of running third-partygames and related applications such as ours. Our development resources are concentrated in the BREW and Java platforms, and morerecently the Apple iPhone, Google Android, Blackberry, i-mode, Mophun, Palm, Symbian and Windows Mobile platforms. If one ormore of these technologies fall out of favor with handset manufacturers and wireless carriers and there is a rapid shift to a differenttechnology platform, such as Adobe Flash or Flash Lite, or a new technology where we do not have development experience or resources,the development period for our games may be lengthened, increasing our costs, and the resulting games may be of lower quality, and maybe published later than anticipated. In such an event, our reputation, business, operating results and financial condition might suffer.Inferior deck placement or storefront featuring would likely adversely impact our revenues and thus our operating resultsand financial condition.Wireless carriers provide a limited selection of games that are accessible to their subscribers through a deck on their mobilehandsets. The inherent limitation on the number of games available on the deck is a function of the limited screen size of handsets andcarriers’ perceptions of the depth of menus and numbers of choices end users will generally utilize. Carriers typically provide one or moretop-level menus highlighting games that are recent top sellers, that the carrier believes will become top sellers or that the carrier otherwisechooses to feature, in addition to a link to a menu of additional games sorted by genre. We believe that deck placement on the top-level orfeatured menu or toward the top of genre-specific or other menus, rather than lower down or in sub-menus, is likely to result in highergame sales. If carriers choose to give our games less favorable deck placement, our games may be less successful than we anticipate, ourrevenues may decline and our business, operating results and financial condition may be materially harmed.Conversely, the open nature of the smartphone storefronts , such as the Apple App Store, allow for vast numbers of applications tobe offered to consumers from a much wider array of competitors than in the traditional carrier channel. This may reduce the competitiveadvantage of our established network of relationships with wireless carriers. It may also require us to expend significantly increasedamounts to generate substantial revenues on these platforms, reducing or eliminating the profitability of publishing games for them.The open nature of many of the smartphone storefronts substantially increases the number of our competitors and competitiveproducts, which makes it more difficult for us to achieve prominent placement or featuring for our games. Our failure to achieveprominent placement or featuring for our games on the smartphone storefronts could result in our games not generating significant sales.We believe that a number of factors may influence the featuring or placement of a game in these digital storefronts, including: • the perceived attractiveness of the title or brand; • the past critical or commercial success of the game or of other games previously introduced by a publisher;21Table of Contents • the publisher’s relationship with the applicable digital storefront owner and future pipeline of quality titles for it; and • the current market share of the publisher.If carriers choose to give our games less favorable deck placement, our games may be less successful than we anticipate, ourrevenues may decline and our business, operating results and financial condition may be materially harmed.We have depended on no more than ten mobile games for a majority of our revenues in recent fiscal periods. If these gamesdo not continue to succeed or we do not release highly successful new games, our revenues would decline.In our industry, new games are frequently introduced, but a relatively small number of games account for a significant portion ofindustry sales. Similarly, a significant portion of our revenues comes from a limited number of mobile games, although the games in thatgroup have shifted over time. For example, in 2009, 2008 and 2007, we generated approximately 35.0%, 30.5% and 52.7% of ourrevenues, respectively, from our top ten games, but no individual game represented more than 10% of our revenues in any of thoseperiods. In addition, our revenues from our top ten games in absolute dollars have declined in recent periods. We expect to release arelatively small number of new games each year for the foreseeable future. If these games are not successful, our revenues could be limitedand our business and operating results would suffer in both the year of release and thereafter.If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our games or if we incurexcessive expenses promoting and maintaining our brand or our games, our potential revenues could be limited, our costscould increase and our operating results and financial condition could be harmed.We believe that establishing and maintaining our brand is critical to retaining and expanding our existing relationships with wirelesscarriers and content licensors, as well as developing new such relationships, and is also critical to establishing a direct relationship withend users who purchase our products from direct-to-consumer channels, such as the Apple App Store, and, in the future, socialnetworking websites. Our ability to promote the Glu brand depends on our success in providing high-quality mobile games and, high-quality games on social networking websites. Similarly, recognition of our games by end users depends on our ability to develop engaginggames of high quality with attractive titles. However, our success also depends, in part, on the services and efforts of third parties, overwhich we have little or no control. For instance, if our carriers fail to provide high levels of service, our end users’ ability to access ourgames may be interrupted, which may adversely affect our brand. If end users, branded content owners and carriers do not perceive ourexisting games as high-quality or if we introduce new games that are not favorably received by our end users and carriers, then we maynot succeed in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand andrecognition of our games will be costly and will involve extensive management time to execute successfully, particularly as we expand ourefforts to increase awareness of our brand and games among international consumers. Moreover, if a game is introduced with defects,errors or failures or unauthorized objectionable content, we could experience damage to our reputation and brand, and our attractiveness towireless carriers, licensors and end users might be reduced. If we fail to increase and maintain brand awareness and consumer recognitionof our games, our potential revenues could be limited, our costs could increase and our business, operating results and financial conditioncould suffer.We face added business, political, regulatory, operational, financial and economic risks as a result of our internationaloperations and distribution, any of which could increase our costs and adversely affect our operating results.International sales represented approximately 52.2%, 52.0% and 46.2% of our revenues in 2009, 2008 and 2007, respectively. Inaddition, as part of our international efforts, we acquired U.K.-based Macrospace in December 2004, UK-based iFone in March 2006,China-based MIG in December 2007 and Superscape, which has a significant presence in Russia, in March 2008. We have internationaloffices located in Brazil, Canada, Chile,22Table of ContentsChina, Colombia, England, France, Germany, Italy, Russia and Spain. We expect to maintain our international presence, and we expectinternational sales to be an important component of our revenues. Risks affecting our international operations include: • challenges caused by distance, language and cultural differences; • multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations; • foreign currency exchange rate fluctuations; • difficulties in staffing and managing international operations; • potential violations of the Foreign Corrupt Practices Act, particularly in certain emerging countries in East Asia, Eastern Europeand Latin America; • greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles andgreater difficulty collecting accounts receivable; • protectionist laws and business practices that favor local businesses in some countries; • regulations that could potentially affect the content of our products and their distribution, particularly in China; • potential adverse foreign tax consequences; • foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States,particularly China; • price controls; • the servicing of regions by many different carriers; • imposition of public sector controls; • political, economic and social instability; • restrictions on the export or import of technology; • trade and tariff restrictions and variations in tariffs, quotas, taxes and other market barriers; and • difficulties in enforcing intellectual property rights in certain countries.In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoinginternational expansion efforts may be more costly than we expect. As a result of our international expansion in Asia, Europe and LatinAmerica, we must pay income tax in numerous foreign jurisdictions with complex and evolving tax laws. If we become subject toincreased taxes or new forms of taxation imposed by governmental authorities, our results of operations could be materially and adverselyaffected.These risks could harm our international operations, which, in turn, could materially and adversely affect our business, operatingresults and financial condition.Changes made by wireless carriers to their policies regarding pricing, revenue sharing, supplier status, billing andcollections could adversely affect our business and operating results.Wireless carriers generally control the price charged for our mobile games either by approving or establishing the price of the gamescharged to their subscribers. Some of our carrier agreements also restrict our ability to change prices. In cases where carrier approval isrequired, approvals may not be granted in a timely manner or at all. A failure or delay in obtaining these approvals, the prices establishedby the carriers for our games, or changes in these prices could adversely affect market acceptance of those games. Similarly, for some ofour carriers, including Verizon Wireless, when we make changes to a pricing plan (the wholesale price and the corresponding suggestedretail price based on our negotiated revenue-sharing arrangement), adjustments to the actual retail price charged to end users may not bemade in a timely manner or at all (even though our wholesale price was reduced). A failure or23Table of Contentsdelay by these carriers in adjusting the retail price for our games, could adversely affect sales volume and our revenues for those games.In addition, wireless carriers have the ability to change their pricing policy with their customers for downloading content, such asour games. For example, Verizon Wireless, our largest carrier, in 2008 began imposing a data surcharge to download content on those ofits customers who had not otherwise subscribed to a data plan. Such charges have, and could in the future, deter end users frompurchasing our content. In addition, wireless carriers could renegotiate the revenue sharing arrangement that we have in place with them toour detriment. For example, China Mobile, the largest carrier in China, has reduced the revenue share that we receive from certain of ourgames sold in ten provinces in China, which will likely negatively impact our revenues in China. Furthermore, a substantial portion ofour revenues is derived from subscriptions. Our wireless carriers have the ability to discontinue offering subscription pricing, withoutour approval.In China, sales to wireless carriers such as China Mobile may only be made by service providers, which are companies who havebeen licensed by the government to operate and publish mobile games. China Mobile has designated four classes of licenses for serviceproviders with respect to mobile gaming, with a Class A license being the highest designation. We hold, through our Chinese subsidiaries,one of the five Class A licenses that have been awarded by China Mobile. In order to maintain this Class A license, we must maintainmonthly revenues of at least 2 million Chinese Renminbi, as well as meet certain minimum download and customer satisfaction levels. Ifwe were to lose this Class A license, our revenues in China would be significantly and adversely impacted.Carriers and other distributors also control billings and collections for our games, either directly or through third-party serviceproviders. If our carriers or their third-party service providers cause material inaccuracies when providing billing and collection servicesto us, our revenues may be less than anticipated or may be subject to refund at the discretion of the carrier. Our market is experiencing agrowth in adoption of smartphones, such as the Apple iPhone and Research In Motion Blackberry devices. For many of our wirelesscarriers, these smartphones are not yet directly integrated into the carrier’s provisioning infrastructure that would allow them to sell gamesdirectly to consumers, and games are instead sold through third parties, which is a more cumbersome process for consumers and resultsin a smaller revenue share for us. These factors could harm our business, operating results and financial condition.If we fail to deliver our games at the same time as new mobile handset models are commercially introduced, our sales maysuffer.Our business depends, in part, on the commercial introduction of new handset models with enhanced features, including larger,higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. For example,some companies have recently launched new smartphones or mobile platforms, including Apple’s iPhone, Google’s Android and ResearchIn Motion’s Blackberry. In addition, consumers generally purchase the majority of content, such as our games, for a new handset withina few months of purchasing the handset. We do not control the timing of these handset launches. Some new handsets are sold by carrierswith one or more games or other applications pre-loaded, and many end users who download our games do so after they purchase theirnew handsets to experience the new features of those handsets. Some handset manufacturers give us access to their handsets prior tocommercial release. If one or more major handset manufacturers were to cease to provide us access to new handset models prior tocommercial release, we might be unable to introduce compatible versions of our games for those handsets in coordination with theircommercial release, and we might not be able to make compatible versions for a substantial period following their commercial release. If,because we do not adequately build into our title plan the demand for games for a particular handset or platform or experience of gamelaunch delays, we miss the opportunity to sell games when new handsets are shipped or our end users upgrade to a new handset, ourrevenues would likely decline and our business, operating results and financial condition would likely suffer.24Table of ContentsFuture mobile handsets may significantly reduce or eliminate wireless carriers’ control over delivery of our games and forceus to rely further on alternative sales channels, which, if not successful, could require us to increase our sales andmarketing expenses significantly.The significant majority of our games are currently sold through carriers’ branded e-commerce services. We have investedsignificant resources developing this sales channel. However, a growing number of handset models currently available allow wirelesssubscribers to browse the Internet and, in some cases, download applications from sources other than a carrier’s branded e-commerceservice, such as the Apple App Store. In addition, developing other application delivery mechanisms, such as premium-SMS, enablesubscribers to download applications without having to access a carrier’s branded e-commerce service. Increased use by subscribers ofopen operating system handsets or premium-SMS delivery systems will enable them to bypass carriers’ branded e-commerce services andcould reduce the market power of carriers. This could force us to rely further on alternative sales channels where we may not besuccessful selling our games and could require us to increase our sales and marketing expenses significantly. As with our carriers, webelieve that inferior placement of our games and other mobile entertainment products in the menus of off-deck distributors will result inlower revenues than might otherwise be anticipated from these alternative sales channels. We may be unable to develop and promote ourdirect website distribution sufficiently to overcome the limitations and disadvantages of off-deck distribution channels and our efforts topromote direct distribution could prove expensive. This could harm our business, operating results and financial condition.If a substantial number of the end users that purchase our games by subscription change mobile handsets or if wirelesscarriers switch to subscription plans that require active monthly renewal by subscribers or change or cease offeringsubscription plans, our sales could suffer.Subscriptions represent a significant portion of our revenues. As handset development continues, over time an increasing percentageof end users who already own one or more of our subscription games will likely upgrade from their existing handsets. With some wirelesscarriers, end users are not able to transfer their existing subscriptions from one handset to another. In addition, carriers may switch tosubscription billing systems that require end users to actively renew, or opt-in, each month from current systems that passively renewunless end users take some action to opt-out of their subscriptions, or change or cease offering subscription plans altogether. If oursubscription revenues decrease significantly for these or other reasons, our sales would suffer and this could harm our business,operating results and financial condition.If we fail to maintain and enhance our capabilities for porting games to a broad array of mobile handsets, our attractivenessto wireless carriers and branded content owners will be impaired, and our sales and financial results could suffer.To reach large numbers of wireless subscribers, mobile entertainment publishers like us must support numerous mobile handsetsand technologies. Once developed, a mobile game may be required to be ported to, or converted into separate versions for, more than 1,000different handset models, many with different technological requirements. These include handsets with various combinations ofunderlying technologies, user interfaces, keypad layouts, screen resolutions, sound capabilities and other carrier-specific customizations.If we fail to maintain or enhance our porting capabilities, our sales could suffer, branded content owners might choose not to grant uslicenses and carriers might choose to give our games less desirable deck placement or not to give our games placement on their decks atall.Changes to our game design and development processes to address new features or functions of handsets or networks might causeinefficiencies in our porting process or might result in more labor intensive porting processes. In addition, in the future we will be requiredto port existing and new games to a broader array of handsets and develop versions specific to new smartphones. If we utilize more labor-intensive porting processes, our margins could be significantly reduced and it may take us longer to port games to an equivalent numberof handsets. For example, the time required to develop and port games to some of the new smartphones, including the iPhone and thosebased on the Android platform, is longer and thus developing and porting for the advanced platforms is more costly than developing andporting for games for traditional mobile phones. Since the significant majority of our revenues are currently derived from our carrierbusiness, it is important that we maintain and enhance our porting25Table of Contentscapabilities. However, as additional smartphone storefronts are developed and gain market prominence, our porting capabilities representless of a business advantage for us, yet we could be required to invest considerable resource in this area to support our existing business.These additional costs could harm our business, operating results and financial condition.Our industry is subject to risks generally associated with the entertainment industry, any of which could significantly harmour operating results.Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control.These risks could negatively impact our operating results and include: the popularity, price and timing of release of games and mobilehandsets on which they are played; the commercial success of any movies upon which one of more of our games are based; economicconditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity ofother forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily bepredicted.If one or more of our games were found to contain hidden, objectionable content, our reputation and operating resultscould suffer.Historically, many video games have been designed to include hidden content and gameplay features that are accessible through theuse of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. For example, our SuperK.O. Boxing game released for feature phones includes additional characters and game modes that are available with a code (usuallyprovided to a player after accomplishing a certain level of achievement in the game). These features have been common in console andcomputer games. However, in several recent cases, hidden content or features have been included in other publishers’ products by anemployee who was not authorized to do so or by an outside developer without the knowledge of the publisher. From time to time, some ofthis hidden content and these hidden features have contained profanity, graphic violence and sexually explicit or otherwise objectionablematerial. If a game we published were found to contain hidden, objectionable content, our wireless carriers and other distributors of ourgames could refuse to sell it, consumers could refuse to buy it or demand a refund of their money, and, if the game was based on licensedcontent, the licensor could demand that we incur significant expense to remove the objectionable content from the game and all portedversions of the game. This could have a materially negative impact on our business, operating results and financial condition.Our business and growth may suffer if we are unable to hire and retain key personnel.Our future success will depend, to a significant extent, on our ability to retain and motivate our key personnel, namely ourmanagement team and experienced sales and engineering personnel. In addition, in order to grow our business, succeed on our newbusiness initiatives, such as developing persistent state, freemium titles and games for social networking websites, and replace departingemployees, we must be able to identify and hire qualified personnel. Competition for qualified management, sales, engineering and otherpersonnel can be intense, and we may not be successful in attracting and retaining such personnel. This may be particularly the case forus to the extent our stock price remains at a depressed level, as individuals may elect to seek employment with other companies that theybelieve have better long-term prospects. Competitors have in the past and may in the future attempt to recruit our employees, and ourmanagement and key employees are not bound by agreements that could prevent them from terminating their employment at any time. Forexample, Jill S. Braff, our former Senior Vice President of Global Publishing, terminated her employment with us in October 2009 tobecome the President and Chief Executive Officer of a private company. In addition, L. Gregory Ballard, our former President and ChiefExecutive Officer, left our company in December 2009. We may also experience difficulty assimilating our newly hired personnel andthey may be less effective or productive than we anticipated, which may adversely affect our business. In addition, we do not maintain akey-person life insurance policy on any of our officers. Our business and growth may suffer if we are unable to hire and retain keypersonnel.Acquisitions could result in operating difficulties, dilution and other harmful consequences.We have acquired a number of businesses in the past, including, most recently, Superscape, which has a significant presence inRussia, in March 2008 and MIG, which is based in China, in December 2007. We expect to26Table of Contentscontinue to evaluate and consider a wide array of potential strategic transactions, including business combinations and acquisitions oftechnologies, services, products and other assets. At any given time, we may be engaged in discussions or negotiations with respect to oneor more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. Theprocess of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areaswhere we may face difficulties include: • diversion of management time and a shift of focus from operating the businesses to issues related to integration andadministration; • declining employee morale and retention issues resulting from changes in compensation, management, reporting relationships,future prospects or the direction of the business; • the need to integrate each acquired company’s accounting, management, information, human resource and other administrativesystems to permit effective management, and the lack of control if such integration is delayed or not implemented; • the need to implement controls, procedures and policies appropriate for a larger public company that the acquired companieslacked prior to acquisition; • in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address theparticular economic, currency, political and regulatory risks associated with specific countries; and • liability for activities of the acquired companies before the acquisition, including violations of laws, rules and regulations,commercial disputes, tax liabilities and other known and unknown liabilities.If the anticipated benefits of any future acquisitions do not materialize, we experience difficulties integrating businesses acquired inthe future, or other unanticipated problems arise, our business, operating results and financial condition may be harmed.In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and otherintangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns,we may be required to take charges to our earnings based on this impairment assessment process, which could harm our operatingresults. For example, during 2008 we incurred an aggregate goodwill impairment charge related to write-downs in the third and fourthquarters of 2008 of $69.5 million as the fair values of our three reporting units were determined to be below their carrying values.Moreover, the terms of acquisitions may require that we make future cash or stock payments to shareholders of the acquiredcompany, which may strain our cash resources or cause substantial dilution to our existing stockholders at the time the payments arerequired to be made. For example, pursuant to our merger agreement with MIG, we were required to make $25.0 million in future cashand stock payments to the former MIG shareholders, which payments we renegotiated in December 2008. Had we paid the MIG earnoutand bonus payments on their original terms, we could have experienced cash shortfall related to the cash payments and our stockholderscould have experienced substantial dilution related to the stock payments.Our reported financial results could be adversely affected by changes in financial accounting standards or by theapplication of existing or future accounting standards to our business as it evolves.Our reported financial results are impacted by the accounting policies promulgated by the SEC and national accounting standardsbodies and the methods, estimates, and judgments that we use in applying our accounting policies. Due to recent economic events, thefrequency of accounting policy changes may accelerate. Policies affecting software revenue recognition have and could furthersignificantly affect the way we account for revenue related to our products and services. For example, we are developing and selling gamesfor smartphones and have begun meaningful development of games for social networking websites, and the accounting for revenuederived from these platforms is still evolving and, in some cases, uncertain. As we enhance, expand and diversify our business andproduct offerings, the application of existing or future financial accounting standards, particularly27Table of Contentsthose relating to the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily onour cash flows.If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accuratelyor prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negativelyimpact the price of our stock.Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of theSarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. We have incurred, andexpect to continue to incur, substantial accounting and auditing expenses and expend significant management time in complying with therequirements of Section 404. Even if we conclude, that our internal control over financial reporting provides reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent ordetect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation,could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accountingfirm discover a material weakness or a significant deficiency in our internal control, the disclosure of that fact, even if quickly remedied,could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance withSection 404 could subject us to a variety of administrative sanctions, including ineligibility for short form resale registration, action bythe SEC, the suspension or delisting of our common stock from the NASDAQ Global Market and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperlyuse our intellectual property and our business and operating results may be harmed.Our intellectual property is an essential element of our business. We rely on a combination of copyright, trademark, trade secret andother intellectual property laws and restrictions on disclosure to protect our intellectual property rights. To date, we have not sought patentprotection. Consequently, we will not be able to protect our technologies from independent invention by third parties. Despite our efforts toprotect our intellectual property rights, unauthorized parties may attempt to copy or otherwise to obtain and use our technology and games.Monitoring unauthorized use of our games is difficult and costly, and we cannot be certain that the steps we have taken will preventpiracy and other unauthorized distribution and use of our technology and games, particularly internationally where the laws may notprotect our intellectual property rights as fully as in the United States. In the future, we may have to resort to litigation to enforce ourintellectual property rights, which could result in substantial costs and divert our management’s attention and our resources.In addition, although we require our third-party developers to sign agreements not to disclose or improperly use our trade secrets andacknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalfare our property and to assign to us any ownership they may have in those works, it may still be possible for third parties to obtain andimproperly use our intellectual properties without our consent. This could harm our business, operating results and financial condition.Our business is subject to increasing regulation of content, consumer privacy, distribution and online hosting and deliveryin the key territories in which we conduct business. If we do not successfully respond to these regulations, our business maysuffer.Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, dataand consumer protection laws in the United States and Europe impose various restrictions on our websites, which will be increasinglyimportant to our business as we continue to market our products directly to end users. Those rules vary by territory although the Internetrecognizes no geographical boundaries. In the United States, for example, numerous federal and state laws have been introduced whichattempt to restrict the content or distribution of games. Legislation has been adopted in several states, and proposed at the28Table of Contentsfederal level, that prohibits the sale of certain games to minors. If such legislation is adopted and enforced, it could harm our business bylimiting the games we are able to offer to our customers or by limiting the size of the potential market for our games. We may also berequired to modify certain games or alter our marketing strategies to comply with new and possibly inconsistent regulations, which couldbe costly or delay the release of our games. In addition, two self-regulatory bodies in the United States (the Entertainment Software RatingBoard) and the European Union (Pan European Game Information) provide consumers with rating information on various products suchas entertainment software similar to our products based on the content (for example, violence, sexually explicit content, language).Furthermore, the Chinese government has recently adopted measures designed to eliminate violent or obscene content in games. In responseto these measures, some Chinese telecommunications operators have suspended billing their customers for certain mobile gaming platformservices, including those services that do not contain offensive or unauthorized content, which could negatively impact our revenues inChina. Any one or more of these factors could harm our business by limiting the products we are able to offer to our customers, bylimiting the size of the potential market for our products, or by requiring costly additional differentiation between products for differentterritories to address varying regulations.Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and financial condition.We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required indetermining our worldwide provision for income taxes, and, in the ordinary course of our business, there are many transactions andcalculations where the ultimate tax determination is uncertain.We are also required to estimate what our tax obligations will be in the future. Although we believe our tax estimates are reasonable,the estimation process and applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. The tax laws’treatment of software and internet-based transactions is particularly uncertain and in some cases currently applicable tax laws are ill-suited to address these kinds of transactions. Apart from an adverse resolution of these uncertainties, our effective tax rate also could beadversely affected by our profit level, by changes in our business or changes in our structure, changes in the mix of earnings in countrieswith differing statutory tax rates, changes in the elections we make, changes in applicable tax laws (in the United States or foreignjurisdictions), or changes in the valuation allowance for deferred tax assets, as well as other factors. Further, our tax determinations aresubject to audit by tax authorities which could adversely affect our income tax provision. Should our ultimate tax liability exceed ourestimates, our income tax provision and net income or loss could be materially affected.We incur certain tax expenses that do not decline proportionately with declines in our consolidated pre-tax income or loss. As a result,in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss thanat higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.We are also required to pay taxes other than income taxes, such as payroll, value-added, net worth, property and goods and servicestaxes, in both the United States and foreign jurisdictions. We are subject to examination by tax authorities with respect to these non-incometaxes. There can be no assurance that the outcomes from examinations, changes in our business or changes in applicable tax rules will nothave an adverse effect on our earnings and financial condition. In addition, we do not collect sales and use taxes since we do not maketaxable sales in jurisdictions where we have employees and/or property or we do not have nexus in the state. If tax authorities assert that wehave taxable nexus in the state, those authorities might seek to impose past as well as future liability for taxes and/or penalties. Suchimpositions could also impose significant administrative burdens and decrease our future sales. Moreover, state and federal legislatureshave been considering various initiatives that could change our position regarding sales and use taxes.Furthermore, as we expand our international operations, adopt new products and new distribution models, implement changes to ouroperating structure or undertake intercompany transactions in light of changing tax laws, acquisitions and our current and anticipatedbusiness and operational requirements, our tax expense could increase.29Table of ContentsThird parties may sue us, including for intellectual property infringement, which, if successful, may disrupt our businessand could require us to pay significant damage awards.Third parties may sue us, including for intellectual property infringement, or initiate proceedings to invalidate our intellectualproperty, which, if successful, could disrupt the conduct of our business, cause us to pay significant damage awards or require us topay licensing fees. For example, recently Skinit, Inc. filed a complaint against us and other defendants, seeking unspecified damages,plus attorney’s fees and costs. The complaint alleges breach of contract, interference with economic relations, conspiracy andmisrepresentation of fact. In the event of a successful claim against us, we might be enjoined from using our or our licensed intellectualproperty, we might incur significant licensing fees and we might be forced to develop alternative technologies. Our failure or inability todevelop non-infringing technology or games or to license the infringed or similar technology or games on a timely basis could force us towithdraw games from the market or prevent us from introducing new games. In addition, even if we are able to license the infringed orsimilar technology or games, license fees could be substantial and the terms of these licenses could be burdensome, which mightadversely affect our operating results. We might also incur substantial expenses in defending against third-party disputes, litigation orinfringement claims, regardless of their merit. Successful claims against us might result in substantial monetary liabilities, an injunctionagainst us and might materially disrupt the conduct of our business and harm our financial results.Maintaining and improving our financial controls and the requirements of being a public company may strain ourresources, divert management’s attention and affect our ability to attract and retain qualified members for our board ofdirectors.As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of2002, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations has significantlyincreased our legal, accounting and financial compliance costs, makes some activities more difficult, time-consuming and costly andmay also place undue strain on our personnel, systems and resources.The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internalcontrol over financial reporting. This can be difficult to do. For example, we depend on the reports of wireless carriers for informationregarding the amount of sales of our games and related applications and to determine the amount of royalties we owe branded contentlicensors and the amount of our revenues. These reports may not be timely, and in the past they have contained, and in the future theymay contain, errors.To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, weexpend significant resources and provide significant management oversight to implement appropriate processes, document our system ofinternal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result,management’s attention may be diverted from other business concerns, which could harm our business, operating results and financialcondition. These efforts also involve substantial accounting-related costs. In addition, if we are unable to continue to meet theserequirements, we may not be able to remain listed on the NASDAQ Global Market.The Sarbanes-Oxley Act and the rules and regulations of the NASDAQ Stock Market make it more difficult and more expensive forus to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantiallyhigher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retainqualified directors, especially those directors who may be considered independent for purposes of the NASDAQ Stock Market rules, andofficers will be significantly curtailed.System or network failures could reduce our sales, increase costs or result in a loss of revenues or end users of our games.We rely on wireless carriers’ and other third-party networks to deliver games to end users and on their or other third parties’ billingsystems to track and account for the downloading of our games. In certain circumstances, we also rely on our own servers to delivergames on demand to end users through our carriers’ networks. In addition, certain of our subscription-based games, such as WorldSeries of Poker, require access over the mobile Internet to30Table of Contentsour servers to enable certain features. Any technical problem with carriers’, third parties’ or our billing, delivery or information systemsor communications networks could result in the inability of end users to download our games, prevent the completion of billing for agame, or interfere with access to some aspects of our games. For example, from time to time, our carriers have experienced failures withtheir billing and delivery systems and communication networks, including gateway failures that reduced the provisioning capacity oftheir branded e-commerce system. Any such technical problems could cause us to lose end users or revenues or incur substantial repaircosts and distract management from operating our business.Some provisions in our certificate of incorporation, bylaws and the terms of some of our licensing and distributionagreements and our credit facility may deter third parties from seeking to acquire us.Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult withoutthe approval of our board of directors, including the following: • our board of directors is classified into three classes of directors with staggered three-year terms; • only our chairman of the board, our lead independent director, our chief executive officer, our president or a majority of ourboard of directors is authorized to call a special meeting of stockholders; • our stockholders are able to take action only at a meeting of stockholders and not by written consent; • only our board of directors and not our stockholders is able to fill vacancies on our board of directors; • our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares ofwhich may be issued without stockholder approval; and • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before ameeting of stockholders.In addition, the terms of a number of our agreements with branded content owners and wireless carriers effectively provide that, ifwe undergo a change of control, the applicable content owner or carrier will be entitled to terminate the relevant agreement. Also, our creditfacility provides that a change in control of our company is an event of default, which accelerates all of our outstanding debt, thuseffectively requiring that we or the acquirer be willing to repay the debt concurrently with the change of control or that we obtain theconsent of the lender to proceed with the change of control transaction. Individually or collectively, these matters may deter third partiesfrom seeking to acquire us.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesWe lease approximately 52,100 square feet in San Mateo, California for our corporate headquarters, including our operations, studioand research and development facilities, pursuant to a sublease agreement that expires in July 2012. We have a right of first offer to leaseadditional space on the second floor of our building. We lease approximately 10,600 square feet in London, England for our principalEuropean offices, pursuant to a lease that expires in October 2011. We have an option to extend the London lease for five years and a rightof first refusal to lease additional space in our building. We lease approximately 16,354 square feet in Beijing, China for our principalAsia Pacific offices and our China studio facilities, pursuant to two leases that both expire in July 2010. We have an option to extend theBeijing leases for two years. We lease approximately 9,150 square feet in Moscow, Russia for our Russia studio facilities, pursuant to alease that expires in November 2012. We also lease properties in Brazil, Chile, Hefei, China, France, Germany and Spain. We believe ourspace is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeableexpansion of our operations.31Table of ContentsItem 3. Legal ProceedingsFrom time to time, we are subject to various claims, complaints and legal actions in the normal course of business. For example, weare engaged in a contractual dispute with a licensor, Skinit, Inc., related to, among other claims, alleged underpayment of royalties andfailure to perform under a distribution agreement, pursuant to which Skinit previously claimed that it is owed approximately $600,000.On April 21, 2009, Skinit filed a complaint against us and other defendants, seeking unspecified damages plus attorney’s fees and costs.The complaint, filed in the Superior Court of California in Orange County (case number 30-2009), alleges breach of contract, interferencewith economic relations, conspiracy and misrepresentation of fact. On June 25, 2009, we filed a motion in the Superior Court in OrangeCounty requesting an order compelling Skinit to arbitrate its claim against us and requesting that the court stay the action pending thedetermination of the motion and the subsequent arbitration. On July 30, 2009, the court granted our motion in its entirety and the disputewill now proceed to arbitration, which is currently scheduled to occur on August 9, 2010.We do not believe we are party to any currently pending litigation, the outcome of which will have a material adverse effect on ouroperations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome,litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources andother factors.Item 4. ReservedPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information for Common StockOur common stock has been listed on the NASDAQ Global Market under the symbol “GLUU” since our initial public offering inMarch 2007. The following table sets forth, for the periods indicated, the high and low intra-day prices for our common stock as reportedon the NASDAQ Global Market. The closing price of our common stock on March 30, 2010 was $0.99. High LowYear ended December 31, 2008 First quarter $5.72 $3.75 Second quarter $5.77 $3.85 Third quarter $4.70 $1.86 Fourth quarter $2.00 $0.22 Year ended December 31, 2009 First quarter $0.96 $0.35 Second quarter $1.84 $0.48 Third quarter $1.57 $0.75 Fourth quarter $1.52 $0.92 Our stock price has fluctuated and declined significantly since our initial public offering, and has traded below $1.00 per sharefrom October 30, 2008 until June 12, 2009, for portions of July and August 2009 and for portions of February and March 2010. If ourstock price continues to remain below $1.00, our stock could be delisted from trading on the NASDAQ Global Market. Please see theRisk Factor — “Our stock price has fluctuated and declined significantly since our initial public offering in March 2007, and maycontinue to fluctuate, may not rise and may decline further, which could cause our stock to be delisted from trading on the NASDAQGlobal Market” — in Item 1A of this report.32Table of ContentsStock Price Performance GraphThe following graph shows a comparison from March 22, 2007 (the date our common stock commenced trading on The NASDAQStock Market) through December 31, 2009 of the cumulative total return for an investment of $100 (and the reinvestment of dividends)in our common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index. Such returns are based onhistorical results and are not intended to suggest future performance.The above information under the heading “Stock Price Performance Graph” shall not be deemed to be “filed” for purposes ofSection 18 of the Exchange Act, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act, andshall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether made before orafter the date of this report, regardless of any general incorporation language in such filing, except as shall be expressly set forth byspecific reference in such filing.Equity Compensation Plan InformationThe following table sets forth certain information, as of December 31, 2009, concerning securities authorized for issuance under allof our equity compensation plans: our 2001 Second Amended and Restated Stock Option Plan (the “2001 Plan”), which plan terminatedupon the adoption of the 2007 Equity Incentive Plan (the “2007 Plan”), 2007 Employee Stock Purchase Plan (the “ESPP”) and 2008Equity Inducement Plan (the “Inducement Plan”). Each of the 2007 Plan and ESPP contains an “evergreen” provision, pursuant to whichon January 1st of each year we automatically add 3% and 1%, respectively, of our shares of common stock outstanding on the precedingDecember 31st to the shares reserved for issuance under each plan. In addition, pursuant to a “pour over” provision in our 2007 Plan,options that are cancelled, expired or terminated under the 2001 Plan are added to the number of shares reserved for issuance under our2007 Plan. Number of Securities Remaining Available Number of for Future Issuance Securities to be Under Equity Issued upon Weighted-Average Compensation Plans Exercise of Exercise Price of (Excluding Outstanding Outstanding Securities Options, Warrants Options, Warrants Reflected in Column Plan Category and Rights and Rights (a)) (a) (b) (c) Equity compensation plans approved by security holders 4,672,216 $3.46 1,916,445(1)Equity compensation plans not approved by securityholders 169,245(2) 4.39 1,250,000(3)Total: 4,841,461 $3.49 3,166,445(4)33Table of Contents(1)Represents 1,404,193 shares available for issuance under our the 2007 Plan, which plan permits the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock, stock awards and restricted stock units; and 512,252 sharesavailable for issuance under the ESPP. In addition, 995,719 shares subject to outstanding options under the 2001 Plan may be re-issued under the 2007 Plan pursuant to the pour over provision described above.(2)Represents outstanding options under the Inducement Plan.(3)Represents shares available for issuance under the Inducement Plan, which plan permits the grant of non-qualified stock options.(4)Excludes 910,796 shares available for issuance under the 2007 Plan and 303,599 shares available for issuance under the ESPP,which in each case were added to the respective share reserve on January 1, 2010 pursuant to the evergreen provisions describedabove.In March 2008, our Board of Directors adopted the Inducement Plan to augment the shares available under our existing 2007 Plan.The Inducement Plan, which has a ten-year term, did not require the approval of our stockholders. We initially reserved 600,000 shares ofour common stock for grant and issuance under the Inducement Plan, and on December 28, 2009, the Compensation Committee of ourBoard of Directors increased the number of shares reserved for issuance under the Inducement Plan to 1,250,000 shares in connectionwith the appointment of Niccolo M. de Masi as our new President and Chief Executive Officer. As of December 31, 2009, there were1,250,000 shares available for future grants under the Inducement Plan, and on January 4, 2010, we granted Mr. de Masi a stock optionto purchase 1,250,000 shares of our common stock under the Inducement Plan. We may only grant Nonqualified Stock Options(“NSOs”) under the Inducement Plan and grants under the Inducement Plan may only be made to persons not previously an employee ordirector of Glu, or following a bona fide period of non-employment, as an inducement material to such individual’s entering intoemployment with us and to provide incentives for such persons to exert maximum efforts for our success. We may grant NSOs under theInducement Plan at prices less than 100% of the fair value of the shares on the date of grant, at the discretion of our Board of Directors.The fair value of our common stock is determined by the last sale price of our stock on the NASDAQ Global Market on the date ofdetermination. If any option granted under the Inducement Plan expires or terminates for any reason without being exercised in full, theunexercised shares will be available for grant by us under the Inducement Plan. All outstanding NSOs are subject to adjustment for anyfuture stock dividends, splits, combinations, or other changes in capitalization as described in the Inducement Plan. If we were acquiredand the acquiring corporation did not assume or replace the NSOs granted under the Inducement Plan, or if we were to liquidate ordissolve, all outstanding awards will expire on such terms as our Board of Directors determines.StockholdersAs of March 30, 2010, we had approximately 124 record holders of our common stock and more than 1,500 beneficial holders.Dividend PolicyWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and donot expect to pay any dividends in the foreseeable future. Our line of credit facility, entered into in February 2007 and amended inDecember 2008, August 2009, February 2010 and March 2010, prohibits us from paying any cash dividends without the prior writtenconsent of the lender. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors.Recent Sales of Unregistered SecuritiesFor the year ended December 31, 2009, we did not sell any unregistered securities.Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone.34Table of ContentsItem 6. Selected Financial DataThe following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” Item 8, “Financial Statements and Supplementary Data,” and otherfinancial data included elsewhere in this report. Our historical results of operations are not necessarily indicative of results of operations tobe expected for any future period. Year Ended December 31, 2009 2008 2007 2006 2005 (In thousands, except per share amounts) Consolidated Statements of Operations Data: Revenues $79,344 $89,767 $66,867 $46,166 $25,651 Cost of revenues: Royalties 21,829 22,562 18,381 13,713 7,256 Impairment of prepaid royalties and guarantees 6,591 6,313 — 355 1,645 Amortization of intangible assets 7,092 11,309 2,201 1,777 2,823 Impairment of intangible assets — — — — 1,103 Total cost of revenues 35,512 40,184 20,582 15,845 12,827 Gross profit 43,832 49,583 46,285 30,321 12,824 Operating expenses(1): Research and development 25,975 32,140 22,425 15,993 14,557 Sales and marketing 14,402 26,066 13,224 11,393 8,515 General and administrative 16,271 20,971 16,898 12,072 8,434 Amortization of intangible assets 215 261 275 616 616 Restructuring charge 1,876 1,744 — — 450 Acquired in-process research and development — 1,110 59 1,500 — Impairment of goodwill — 69,498 — — — Gain on sale of assets — — (1,040) — — Total operating expenses 58,739 151,790 51,841 41,574 32,572 Loss from operations (14,907) (102,207) (5,556) (11,253) (19,748)Interest and other income (expense), net (1,127) (1,359) 1,965 (872) 541 Loss before income taxes and cumulative effect of change in accountingprinciple (16,034) (103,566) (3,591) (12,125) (19,207)Income tax benefit (provision) (2,160) (3,126) 265 (185) 1,621 Loss before cumulative effect of change in accounting principle (18,194) (106,692) (3,326) (12,310) (17,586)Cumulative effect of change in accounting principle — — — — (315)Net loss (18,194) (106,692) (3,326) (12,310) (17,901)Accretion to preferred stock — — (17) (75) (63)Deemed dividend — — (3,130) — — Net loss attributable to common stockholders $(18,194) $(106,692) $(6,473) $(12,385) $(17,964)Net loss per share attributable to common stockholders — basic anddiluted loss before cumulative effect of change in accounting principle $(0.61) $(3.63) $(0.14) $(2.48) $(4.37)Cumulative effect of change in accounting principle — — — — (0.07)Accretion to preferred stock — — — (0.02) (0.02)Deemed dividend — — (0.14) — — Net loss per share attributable to common stockholders — basic anddiluted $(0.61) $(3.63) $(0.28) $(2.50) $(4.46)Weighted average common shares outstanding 29,853 29,379 23,281 4,954 4,024 (1)Includes stock-based compensation expense as follows:Research and development $716 $714 $939 $207 $158 Sales and marketing 564 5,174 674 322 132 General and administrative 1,646 2,097 2,186 1,211 987 35Table of Contents Year Ended December 31, 2009 2008 2007 2006 2005 (In thousands) Cash and cash equivalents and short-term investments $10,510 $19,166 $59,810 $12,573 $21,616 Total assets 57,738 92,076 161,505 81,799 49,498 Current portion of long-term debt 16,379 14,000 — 4,339 — Long-term debt, less current portion — 10,125 — 724 — Redeemable convertible preferred stock — — — 76,363 57,190 Total stockholder’s equity/(deficit) $11,693 $26,794 $129,461 $(25,185) $(17,393)Please see Note 2, Note 3 and Note 8 of Notes to Consolidated Financial Statements, for a discussion of factors such as accountingchanges, business combinations, and any material uncertainties (if any) that may materially affect the comparability of the informationreflected in selected financial data, described in Item 8 of this report.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based uponcurrent expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical factmay 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, including our intention tosignificantly increase our studio capacity dedicated toward advanced platforms and smartphones; • our expectations regarding competition and our ability to compete effectively; • our expectations regarding the development of future products, including those for smartphones and social networkingwebsites, as well as our intention to shift a larger portion of our research and development expenses towards thesedevelopment efforts; • our expectation that a larger portion of the games we develop for smartphones and social networking websites will bebased on our own intellectual property; • our intention to increase our use of micro-transactions and other monetization techniques with respect to the games wedevelop for smartphones and social networking websites; • our expectations regarding our revenues and expenses, including the expected decline in revenues from games we developfor feature phones in our base carrier business; • our assumptions regarding the impact of Recent Accounting Pronouncements applicable to us; • our assessments and estimates that determine our effective tax rate and valuation allowance; • our belief that our cash and cash equivalents, borrowings under our revolving credit facility and cash flows fromoperations will be sufficient to meet our working capital needs, contractual obligations, debt service obligations, capitalexpenditure requirements and similar commitments; • our expectation regarding our ability to maintain compliance with or negotiate the financial and other covenants in ourcredit facility; and • our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that we mayincur as a result of those proceedings.Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-lookingstatements. Factors that might cause such a discrepancy include, but are not limited to, those36Table of Contentsdiscussed in “Risk Factors” included in Section 1A of this report. All forward-looking statements in this document are based oninformation available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements toreflect future events or circumstances.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with theconsolidated financial statements and related notes contained elsewhere in this report. Our Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (“MD&A”) includes the following sections: • 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 judgmentsunderlying 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 sheetsand our financial commitments.OverviewThis overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believethat an understanding of these trends is important to understand our financial results for fiscal 2009, as well as our future prospects.This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis providedelsewhere in this report, including our consolidated financial statements and accompanying notes.Financial Results and TrendsRevenues for 2009 were $79.3 million, a 12% decrease from 2008, in which we reported revenues of $89.8 million. This decreasewas primarily driven by a decrease in feature phone unit sales in our traditional carrier business, which in turn led to a decrease in thenumber of games that we sold, and, to a lesser extent, the impact of foreign currency exchange rates, which had a greater positive impacton our 2008 revenues compared to our 2009 revenues. The decline in our feature phone revenues was both a result of the global economicslowdown and the continued migration of users from traditional feature phones to more advanced platforms and smartphones, such asApple’s iPhone, Google’s Android and Research In Motion’s BlackBerry, which offer enhanced functionality. We believe that thistransition will accelerate in 2010 as consumers increasingly upgrade their phones. As a result, we expect an overall decline in our revenuesin 2010 from our base carrier business, which we expect will still generate the significant majority of our revenues in 2010.For us to succeed in 2010 and beyond, we believe that we must increasingly publish mobile games that are widely accepted andcommercially successful on the smartphone storefronts, which include Apple’s App Store, Google’s Android Market, Microsoft’sWindows Marketplace for Mobile, Palm’s App Catalog, Nokia’s Ovi Store and Research In Motion’s Blackberry App World. Althoughwe experienced certain successes on these smartphone storefronts in 2009, particularly with respect to the Apple App Store, oursmartphone revenues did not meet our expectations and represented less than 10% of our revenues for 2009. In addition, despite the factthat we expect our revenues to increase in this channel in 2010, we do not expect this increase to fully offset the anticipated decline inrevenues from games we develop for feature phones in our traditional base carrier business. Significantly growing our revenues andfurther succeeding in this channel may be challenging for us for several reasons, including: (1) the open nature of many new smartphonestorefronts increases substantially the number of our competitors and competitive products, which makes it more difficult for us toachieve prominent placement or featuring for our games, (2) the competitive advantage of our porting capabilities may be reduced as theseadvanced platforms and smartphones become more widely adopted; (3) many of our key licenses do not grant us the rights to developgames for the iPhone and other smartphones; (4) open storefront distribution is still relatively new for us, and we must develop amarketing strategy that allows us to generate sustainable and increasingly profitable revenues, without37Table of Contentssignificantly increasing our marketing or development expenses; (5) the pricing and revenue models for titles on these smartphonestorefronts are rapidly evolving, and has resulted, and may continue to result, in significantly lower average selling prices for our gamesdeveloped for smartphones as compared to games we have developed for feature phones in our traditional carrier channels; and (6) wehave a limited ability to invest heavily in this strategy.In addition, our revenues will continue to depend significantly on growth in the mobile games market, our ability to continue toattract new end users in that market and the overall strength of the economy, particularly in the United States. Our revenues may also beadversely impacted by decisions by our carriers to alter their customer terms for downloading our games. For example, Verizon Wireless,our largest carrier, imposes a data surcharge to download content on those Verizon customers who have not otherwise subscribed to a dataplan. Our revenues depend on a variety of other factors, including our relationships with the feature phone and smartphone storefrontsand our licensors. Even if mobile games based on licensed content or brands remain popular with end users, any of our licensors coulddecide not to renew an existing license or not to license additional intellectual property to us and instead license to our competitors ordevelop and publish their own mobile games or other applications, competing with us in the marketplace. The loss of any keyrelationships with our carriers, other distributors or licensors could impact our revenues in the future. We expect our 2010 revenues to belower than our 2009 revenues, and in future periods, our revenues could continue to decline.Our net loss in 2008 was $106.7 million versus a net loss of $18.2 million in 2009. This decrease was driven primarily by adecrease in operating expenses of $93.1 million, which includes a reduction in goodwill impairment charges from $69.5 million recordedin 2008 to none in 2009, a decrease in costs of revenues of $4.7 million, and a decrease in interest and other expense of $232,000, whichwas partially offset by a $10.4 million reduction in revenues. The decrease in our operating expense for the year ended December 31, 2009compared with the year ended December 31, 2008 was in part due to the headcount reductions and related measures that we took inconnection with the restructurings that we implemented in both the third and fourth quarters of 2008 and the third quarter of 2009 and therestructuring that we implemented in connection with our acquisition of Superscape in March 2008. Our operating results are also affectedby fluctuations in foreign currency exchange rates of the currencies in which we incur meaningful operating expenses (principally theBritish Pound Sterling, Chinese Renminbi, Brazilian Real and Russian Ruble) and our customers’ reporting currencies, as we transactbusiness in more than 70 countries in more than 20 different currencies, and in 2008 and 2009, some of these currencies fluctuated by upto 40%.We expect that our expenses to develop and port games for advanced platforms and smartphones will increase as we enhance ourexisting titles and develop new titles to take advantage of the additional functionality offered by these platforms. In addition, we expect toincur additional expenses in connection with our efforts to develop games for social networking websites. Our ability to attain profitabilitywill be affected by our ability to grow our revenues and the extent to which we must incur additional expenses to expand our sales,marketing, development, and general and administrative capabilities to grow our business. The largest component of our recurringexpenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-basedcompensation, for our employees. We expect that our cash expenses will decline in 2010 compared to 2009 in terms of absolute dollars asa result of the restructuring measures we implemented in the first quarter of 2010, which primarily consisted of headcount reductions.Our business has historically been impacted by seasonality, as many new mobile handset models are released in the fourth calendarquarter to coincide with the holiday shopping season. Because many end users download our games soon after they purchase newhandsets, we generally experience seasonal sales increases based on the holiday selling period. However, due to the time between handsetpurchases and game purchases, most of this holiday impact occurs for us in our first calendar quarter. In addition, we release many ofour products in conjunction with specific events, such as the release of a related movie. Further, for a variety of reasons, includingroaming charges for data downloads that may make purchase of our games prohibitively expensive for many end users while they aretraveling, we sometimes experience seasonal sales decreases during the summer, particularly in parts of Europe. We expect these seasonaltrends to continue in the future.Cash and cash equivalents at December 31, 2009 totaled $10.5 million, a decrease of $8.7 million from $19.2 million atDecember 31, 2008. This decrease was primarily due to $14.0 million in principal that we paid during 2009 with respect to thepromissory notes that we issued to the former MIG shareholders that are discussed in38Table of Contentsfurther detail in “Significant Transactions” below. We also used $838,000 for capital expenditures. These outflows were partially offsetby the net proceeds of $4.7 million from borrowings under our credit facility, $1.1 million of cash generated from operations andproceeds of $402,000 from stock option exercises and purchases under our employee stock purchase plan. We believe our cash and cashequivalents, together with cash flows from operations and borrowings under our credit facility, will be sufficient to meet our anticipatedcash needs for at least the next 12 months.We currently expect that we will be able to comply with the EBITDA-related covenants contained in our revolving credit facility.However, if our revenues are lower than we anticipate, we will be required to further reduce our operating expenses to remain incompliance with these covenants. Reducing our operating expenses could be very challenging for us, since we undertook operating expensereductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009 and the first quarter of 2010 thatreduced our operating expenses significantly from second quarter of 2008 levels. Reducing operating expenses further could have the effectof reducing our revenues. In August 2009, February 2010 and March 2010, we entered into amendments to our revolving credit facilitywith the lender, which (1) reduced certain of the minimum targets contained in the earnings before interest, depreciation and amortization(“EBITDA”) related covenant, (2) changed the measurement period for the EBITDA covenant from a rolling six-month calculation to aquarterly calculation, (3) extended the maturity date of the credit facility from December 22, 2010 to June 30, 2011 and (4) increased theinterest rate for borrowings under the credit facility by 0.75% to the higher of the lender’s prime rate plus 1.75%, or 5% (see Liquidityand Capital Resources — Sufficiency of Current Cash and Cash Equivalents below). A failure on our part to remain in compliance withthe covenants under the revolving credit facility could adversely impact our cash requirements for the next twelve months.Significant TransactionsIn December 2008, we renegotiated and extended our credit facility, and, as discussed above, we have amended the terms of thecredit facility in August 2009, February 2010 and March 2010. The credit facility, as amended, provides for borrowings of up to$8.0 million, subject to a borrowing base equal to 80% of our eligible accounts receivable.In March 2008, we acquired Superscape, a global publisher of mobile games, to deepen and broaden our game library, gain accessto 3-D game development resources and to augment our internal production and publishing resources with a studio in Moscow, Russia.We paid 10 pence (pound sterling) in cash for each issued share of Superscape for a total purchase price of $38.8 million, consisting ofcash consideration of $36.8 million and transaction costs of $2.1 million. Due to decreases in our long-term forecasts and current marketcapitalization the entire goodwill resulting from the Superscape acquisition was impaired during the year ended December 31, 2008.In December 2007, we acquired MIG to accelerate our presence in China, deepen our relationship with China Mobile, the largestwireless carrier in China, acquire access and rights to leading franchises for the Chinese market, and augment our internal productionand publishing resources with a studio in China. We purchased all of MIG’s then outstanding shares for a total purchase price of$30.5 million, consisting of cash consideration to MIG shareholders of $14.7 million and transaction costs of $1.3 million. As a result ofthe attainment of the revenue and operating income milestones in 2008 by MIG, we were committed to pay the $20.0 million in additionalconsideration to the MIG shareholders and the $5.0 million of bonuses to two officers of MIG. In December 2008, due to our cashposition and liquidity concerns, we restructured the timing and nature of these payments and issued to the former shareholders of MIG anaggregate of $25.0 million in promissory notes. We repaid $14.0 million in principal on these notes in 2009 and the remainder is due in2010. Due to decreases in our long-term forecasts and current market capitalization, a portion of the goodwill resulting from the MIGacquisition was impaired during the year ended December 31, 2008.In March 2007, we completed our initial public offering, or IPO, in which we sold and issued 7.3 million shares of common stockat a price of $11.50 per share to the public. We raised a total of $84.0 million in gross proceeds from the IPO, or approximately$74.8 million in net proceeds after deducting underwriting discounts and commissions of $5.9 million and other offering costs of$3.3 million.39Table of ContentsCritical Accounting Policies and EstimatesOur consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, orGAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets andliabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidatedfinancial statements, and the reported amounts of revenues and expenses during the periods presented. Although we believe that ourestimates and judgments are reasonable under the circumstances existing at the time these estimates and judgments are made, actualresults may differ from those estimates, which could affect our consolidated financial statements.We believe the following to be critical accounting policies because they are important to the portrayal of our financial condition orresults of operations and they require critical management estimates and judgments about matters that are uncertain: • revenue recognition; • advance or guaranteed licensor royalty payments; • short-term investments; • business combinations — purchase accounting; • long-lived assets; • goodwill; • stock-based compensation; and • income taxes.Revenue RecognitionWe estimate revenues from carriers in the current period when reasonable estimates of these amounts can be made. Several carriersprovide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month,both of which allow us to make reasonable estimates of revenues and therefore to recognize revenues during the reporting period when theend user licenses the game. Determination of the appropriate amount of revenue recognized involves judgments and estimates that webelieve are reasonable, but it is possible that actual results may differ from our estimates. Our estimates for revenues includeconsideration of factors such as preliminary sales data, carrier-specific historical sales trends, the age of games and the expected impactof newly launched games, successful introduction of new handsets, promotions during the period and economic trends. When we receivethe final carrier reports, to the extent not received within a reasonable time frame following the end of each month, we record anydifferences between estimated revenues and actual revenues in the reporting period when we determine the actual amounts. Historically, therevenues on the final revenue report have not differed by more than one-half of 1% of the reported revenues for the period, which wedeemed to be immaterial. Revenues earned from certain carriers may not be reasonably estimated. If we are unable to reasonably estimatethe amount of revenue to be recognized in the current period, we recognize revenues upon the receipt of a carrier revenue report and whenour portion of a game’s licensed revenues is fixed or determinable and collection is probable. To monitor the reliability of our estimates,our management, where possible, reviews the revenues by carrier and by game on a weekly basis to identify unusual trends such asdifferential adoption rates by carriers or the introduction of new handsets. If we deem a carrier not to be creditworthy, we defer all revenuesfrom the arrangement with that carrier until we receive payment and all other revenue recognition criteria have been met.Advance or Guaranteed Licensor Royalty PaymentsOur contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimatevolume of sales to end users. In accordance with the criteria set forth in Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 460-10-15, Guarantees, we recorded a minimum guaranteed liability of approximately $4.0 million asof December 31, 2009. When no significant performance remains with the licensor, we initially record each of these guarantees as an assetand as a40Table of Contentsliability at the contractual amount. We believe that the contractual amount represents the fair value of our liability. When significantperformance remains with the licensor, we record royalty payments as an asset when actually paid and as a liability when incurred,rather than upon execution of the contract. We classify minimum royalty payment obligations as current liabilities to the extent they arecontractually due within the next twelve months.Each quarter, we also evaluate the realization of our royalties as well as any unrecognized guarantees not yet paid to determineamounts that we deem unlikely to be realized through product sales. We use estimates of revenues, cash flows and net margins to evaluatethe future realization of prepaid royalties and guarantees. This evaluation considers multiple factors, including the term of the agreement,forecasted demand, game life cycle status, game development plans and current and anticipated sales levels. To the extent that thisevaluation indicates that the remaining prepaid and guaranteed royalty payments are not recoverable, we record an impairment charge inthe period such impairment is indicated. Subsequently, if actual market conditions are more favorable than anticipated, amounts ofprepaid royalties previously written down may be utilized, resulting in lower cost of revenues and higher income from operations thanpreviously expected in that period. During 2009, 2008 and 2007, we recorded impairment charges of $6.6 million, $6.3 million andzero, respectively. The impairments we recorded in 2009 were predominantly related to distribution agreements in Europe, Middle Eastand Africa (“EMEA”) and several global properties whose actual and forecasted sales have not met our initial expectations and will notgenerate sufficient revenues to recoup our royalty commitment.Short-Term InvestmentsIn the past, we invested in auction-rate securities that are bought and sold in the marketplace through a bidding process sometimesreferred to as a “Dutch Auction.” After the initial issuance of the securities, the interest rate on the securities is reset periodically, atintervals set at the time of issuance (e.g., every seven, 28 or 35 days or every six months), based on the market demand at the resetperiod. The “stated” or “contractual” maturities for these securities, however, generally are 20 to 30 years. As of December 31, 2009 and2008, we had no investments in auction-rate securities.We periodically review our investments for impairment. In the event the carrying value of an investment exceeds its fair value and thedecline in fair value is determined to be other-than-temporary, we write down the value of the investment to its fair value. We realized again of $806,000 for the year ended December 31, 2008 in respect of two securities that had been previously written down to fair valuebased on two failed auctions; these were redeemed at their respective par values by the sponsoring broker in the fourth quarter of 2008.Business Combinations — Purchase AccountingFor acquisitions prior to January 1, 2009, we utilized the purchase method of accounting, which required that we allocate thepurchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on theirestimated fair values. We record the excess of purchase price over the aggregate fair values as goodwill. We engage third-party appraisalfirms to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to makesignificant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing purchased technology,customer lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If thesubsequent actual results and updated projections of the underlying business activity change compared with the assumptions andprojections used to develop these values, we could experience impairment charges. See “— Goodwill” below. In addition, we haveestimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If ourestimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.Long-Lived AssetsWe evaluate our long-lived assets, including property and equipment and intangible assets with finite lives, for impairment wheneverevents or changes in circumstances indicate that the carrying value of these assets may not be recoverable in accordance with ASC 360,Property Plant & Equipment (“ASC 360”). Factors considered important that could result in an impairment review include significantunderperformance relative to expected historical or41Table of Contentsprojected future operating results, significant changes in the manner of use of the acquired assets, significant negative industry oreconomic trends, and a significant decline in our stock price for a sustained period of time. We recognize impairment based on thedifference between the fair value of the asset and its carrying value. Fair value is generally measured based on either quoted market prices,if applicable, or a discounted cash flow analysis.GoodwillIn accordance with ASC 350, Intangibles — Goodwill and Other (“ASC 350”), we do not amortize goodwill or other intangibleassets with indefinite lives but rather test them for impairment. ASC 350 requires us to perform an impairment review of our goodwillbalance at least annually, which we do as of September 30 each year, and also whenever events or changes in circumstances indicate thatthe carrying amount of these assets may not be recoverable. In our impairment reviews, we look at the goodwill allocated to our reportingunits — the Americas, EMEA and Asia-Pacific (“APAC”).ASC 350 requires a two-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events orchanges in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairmentby applying the fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment byapplying the fair value-based tests to individual assets and liabilities within each reporting units. The fair value of the reporting units areestimated using a combination of the market approach, which utilizes comparable companies’ data, and/or the income approach, whichuses discounted cash flows.We have three geographic segments comprised of the (1) Americas, (2) APAC and (3) EMEA regions. As of December 31, 2009, weonly had goodwill attributable to the APAC reporting unit. We performed an annual impairment review as of September 30, 2009 asprescribed in ASC 350 and concluded that we were not at risk of failing the first step, as the fair value of the APAC reporting unitexceeded its carrying value and thus no adjustment to the carrying value of goodwill was necessary. As a result, we were not required toperform the second step. In order to determine the fair value of the reporting units, we utilized the discounted cash flow and marketmethods. We have consistently utilized both methods in our goodwill impairment tests and weight both results equally and we believeboth, in conjunction with each other, provide a reasonable estimate of the determination of fair value of the reporting unit — thediscounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based onour market sector including our competitors. The assumptions supporting the discounted cash flow method, were determined using ourbest estimates as of the date of the impairment review.In 2008, we recorded an aggregate goodwill impairment of $69.5 million as the fair values of the Americas, APAC and EMEAreporting units were determined to be below their respective carrying values.Application of the goodwill impairment test requires judgment, including the identification of the reporting units, the assigning ofassets and liabilities to reporting units, the assigning of goodwill to reporting units and the determining of the fair value of each reportingunit. Significant judgments and assumptions include the forecast of future operating results used in the preparation of the estimated futurecash flows, including forecasted revenues and costs based on current titles under contract, forecasted new titles that we expect to release,timing of overall market growth and our percentage of that market, discount rates and growth rates in terminal values. The marketcomparable approach estimates the fair value of a company by applying to that company market multiples of publicly traded firms insimilar lines of business. The use of the market comparable approach requires judgments regarding the comparability of companies withlines of business similar to ours. This process is particularly difficult in a situation where no domestic public mobile games companiesexist. The factors used in the selection of comparable companies include growth characteristics as measured by revenue or other financialmetrics; margin characteristics; product-defined markets served; customer-defined markets served; the size of a company as measuredby financial metrics such as revenue or market capitalization; the competitive position of a company, such as whether it is a marketleader in terms of indicators like market share; and company-specific issues that suggest appropriateness or inappropriateness of aparticular company as a comparable. Further, the total gross value calculated under each method was not materially different, andtherefore if the weighting were different we do not believe that this would have significantly impacted our conclusion. If differentcomparable companies had been used, the market multiples and resulting estimates of the fair value of our stock would also have beendifferent.42Table of ContentsChanges in these estimates and assumptions could materially affect the determination of fair value for each reporting unit, which couldtrigger impairment.Stock-Based CompensationEffective January 1, 2006, we adopted the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”),which supersedes our previous accounting under APB No. 25. ASC 718 requires the recognition of compensation expense using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate thefair value of share-based payment awards on the grant date using an option pricing model. To value awards granted on or after January 1,2006, we used the Black-Scholes option pricing model, which requires, among other inputs, an estimate of the fair value of theunderlying common stock on the date of grant and assumptions as to volatility of our stock over the term of the related options, theexpected term of the options, the risk-free interest rate and the option forfeiture rate. We determined the assumptions used in this pricingmodel at each grant date. We concluded that it was not practicable to calculate the volatility of our share price since our securities havebeen publicly traded for a limited period of time. Therefore, we based expected volatility on the historical volatility of a peer group ofpublicly traded entities. We determined the expected term of our options based upon historical exercises, post-vesting cancellations and theoptions’ contractual term. We based the risk-free rate for the expected term of the option on the U.S. Treasury Constant Maturity Rate asof the grant date. We determined the forfeiture rate based upon our historical experience with option cancellations adjusted for unusual orinfrequent events.In 2009, 2008 and 2007, we recorded total employee non-cash stock-based compensation expense of $2.9 million, $8.0 million and$3.8 million, respectively. In future periods, stock-based compensation expense may increase as we issue additional equity-based awardsto continue to attract and retain key employees. Additionally, ASC 718 requires that we recognize compensation expense only for theportion of stock options that are expected to vest. If the actual number of forfeitures differs from that estimated by management, we maybe required to record adjustments to stock-based compensation expense in future periods.Income TaxesWe account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income tax benefit (provision) in each of the jurisdictions in which weoperate. This process involves estimating our current income tax benefit (provision) together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities,which are included within our consolidated balance sheet using the enacted tax rates in effect for the year in which we expect thedifferences to reverse.We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be realized. As ofDecember 31, 2009 and 2008, our valuation allowance on our net deferred tax assets was $58.5 million and $52.3 million, respectively.While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for thevaluation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of ournet recorded amount, we would need to make an adjustment to the allowance for the deferred tax asset, which would increase income inthe period that determination was made.We account for uncertain income tax positions in accordance with ASC 740, which clarifies the accounting for uncertainty inincome taxes recognized in financial statements. ASC 740 prescribes a recognition threshold and measurement attribute of tax positionstaken or expected to be taken on a tax return. The interpretation also provides guidance on de-recognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. The total amount of unrecognized tax benefits as of the adoption datewas $575,000. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. We do notexpect that the amount of unrecognized tax benefits will change significantly within the next 12 months.We have not provided federal income taxes on the unremitted earnings of our foreign subsidiaries, other than China, because theseearnings are intended to be reinvested permanently. During the fourth quarter of 2008, we43Table of Contentschanged our assertion such that foreign earnings of one China subsidiary are no longer intended to be indefinitely reinvested. As a resultwe analyzed the need to record deferred taxes related to the foreign undistributed earnings. No deferred tax asset was recognized since wedo not believe the deferred tax asset will reverse in the foreseeable future. There was no significant impact of this change in assertion on theprovision for (or benefit from) income tax.Results of OperationsThe following sections discuss and analyze the changes in the significant line items in our statements of operations for thecomparison periods identified.Comparison of the Years Ended December 31, 2009 and 2008Revenues Year Ended December 31, 2009 2008 (In thousands)Revenues $79,344 $89,767 Our revenues decreased $10.4 million, or 11.6%, from $89.8 million in 2008 to $79.3 million in 2009. This decrease was dueprimarily to a decline in feature phone unit sales in our traditional carrier business, which in turn led to a decrease in the number ofgames that we sold, and a migration of users from feature phones to smartphones where we were unable to capture the same market shareas we have in our traditional carrier business. Foreign currency exchange rates also had a greater positive impact on our revenues duringthe year ended December 31, 2008 compared to the year ended December 31, 2009. Due to the diversification of our product portfolio,including the titles resulting from the acquisitions of MIG and Superscape, no single title represented 10% or more of sales in either 2008or 2009. International revenues decreased by $5.3 million, from $46.7 million in 2008 to $41.4 million in 2009. The decrease ininternational revenues was primarily a result of decreased unit sales in EMEA and China, which was partially offset by increased unitsales in Latin America. We expect our 2010 revenues to be lower than our 2009 revenues as a result of the anticipated acceleration of theslowdown in our base carrier business as consumers increasingly migrate from traditional feature phones to more advanced platformsand smartphones. Although we expect our revenues from games designed for smartphones to increase in 2010, we do not expect thisincrease to fully offset the anticipated decline in revenues from our traditional base carrier business.Cost of Revenues Year Ended December 31, 2009 2008 (In thousands) Cost of revenues: Royalties $21,829 $22,562 Impairment of prepaid royalties and guarantees 6,591 6,313 Amortization of intangible assets 7,092 11,309 Total cost of revenues $35,512 $40,184 Revenues $79,344 $89,767 Gross margin 55.2% 55.2%Our cost of revenues decreased $4.7 million, or 11.6%, from $40.2 million in 2008 to $35.5 million in 2009. This decrease wasprimarily due to a $4.2 million reduction in amortization for titles and content associated with intangible assets acquired from Superscapethat were fully amortized in the first quarter of 2009 and a decrease of $733,000 in royalty expense, offset by a $278,000 increaseassociated with the impairment of certain royalty guarantees. Revenues attributable to games based upon branded intellectual propertyincreased as a percentage of revenues from 75.0% in 2008 to 77.5% in 2009, primarily due to a decrease in sales of games developed byMIG and Superscape based on their original intellectual property. The average royalty rate that we paid on games based on licensedintellectual property, excluding royalty impairments, increased from 34.0% in 2008 to 35.5% in 2009 due44Table of Contentsto increased sales of titles with higher royalty rates. The impairment of prepaid royalties and guarantees of $6.6 million in 2009 and$6.3 million in 2008 primarily related to large distribution deals in EMEA and, with respect to the 2009 charge, several global propertiesthat have not performed nor do we believe will perform as initially expected. Overall royalties, including impairment of prepaid royaltiesand guarantees, as a percentage of total revenues increased from 32.0% in 2008 to 35.8% in 2009.Research and Development Expenses Year Ended December 31, 2009 2008 (In thousands)Research and development expenses $25,975 $32,140 Percentage of revenues 32.7% 35.8%Our research and development expenses decreased $6.2 million, or 19.2%, from $32.1 million in 2008 to $26.0 million in 2009.The decrease in research and development costs was primarily due to decreases in salaries and benefits of $2.5 million, a reduction inthird-party outside services costs for porting and external development of $1.7 million, a reduction in facility and overhead costs of$1.4 million due to reduced headcount and a decrease in travel and entertainment expenses of $322,000. We decreased our research anddevelopment staff from 445 employees in 2008 to 402 in 2009, and salaries and benefits decreased as a result. As a percentage ofrevenues, research and development expenses declined from 35.8% in 2008 to 32.7% in 2009. Research and development expensesincluded $716,000 of stock-based compensation expense in 2009 and $714,000 in 2008. We expect 2010 spending for research anddevelopment activities to be similar to 2009 levels, but we intend to shift a substantial portion of these dollars to development activities forsmartphones and social networking websites.Sales and Marketing Expenses Year Ended December 31, 2009 2008 (In thousands)Sales and marketing expenses $14,402 $26,066 Percentage of revenues 18.2% 29.0%Our sales and marketing expenses decreased $11.7 million, or 44.7%, from $26.1 million in 2008 to $14.4 million in 2009. Thedecrease was primarily due to a decrease in stock-based compensation of $4.6 million primarily related to the MIG stock-basedcompensation earnout being fully expensed, a $4.4 million decrease in the MIG earnout expense due to lower amortization associated withreaching the end of the vesting terms and conditions, a $1.6 million decrease in salaries and benefits as we reduced our sales andmarketing headcount from 73 on September 30, 2008 to 67 on December 31, 2009, a $598,000 decrease in marketing promotions and a$329,000 decrease in facility and overhead costs due to reduced headcount. As a percentage of revenues, sales and marketing expensesdecreased from 29.0% in 2008 to 18.2% in 2009. Sales and marketing expenses included $564,000 of stock-based compensation expensein 2009 and $5.2 million in 2008. We expect our sales and marketing expenses to decline in 2010 from 2009 levels due primarily to therestructurings we implemented in 2009 and the first quarter of 2010.General and Administrative Expenses Year Ended December 31, 2009 2008 (In thousands)General and administrative expenses $16,271 $20,971 Percentage of revenues 20.5% 23.4%Our general and administrative expenses decreased $4.7 million, or 22.4%, from $21.0 million in 2008 to $16.3 million in 2009.The decrease in general and administrative expenses was primarily due to a $2.2 million decrease in salaries and benefits, a $1.4 milliondecrease in professional and consulting fees, a $452,000 decrease in45Table of Contentsstock-based compensation and a $395,000 decrease in facility and overhead costs. We increased our general and administrativeheadcount from 71 in 2008 to 72 in 2009, but salaries and benefits decreased primarily as a result of moving headcount to lower costlocations. As a percentage of revenues, general and administrative expenses decreased from 23.4% in 2008 to 20.5% in 2009. General andadministrative expenses included $1.6 million of stock-based compensation expense in 2009 and $2.1 million in 2008. We expect ourgeneral and administrative expenses to decline in 2010 from 2009 levels due primarily to the restructurings we implemented in 2009 andthe first quarter of 2010.Other Operating ExpensesOur restructuring charges increased from $1.7 million in 2008 to $1.9 million in 2009. The $1.9 million of restructuring chargesin 2009 consisted of $867,000 of facility related charges, $657,000 of severance and termination benefits associated with the departureof our former Chief Executive Officer, and $352,000 related to employee termination costs in our U.S. and U.K. offices. The facilitycharges consisted of $708,000 of charges associated with changes in the sublease probability assumption for the vacated office space inour U.S. headquarters and an additional restructuring charge of $159,000 net of sublease income, resulting from vacating a portion ofour EMEA headquarters based in the United Kingdom. The $1.7 million of restructuring charges in 2008 consisted of $989,000 relatedto employee severance and benefit arrangements due to the termination of employees in France, Hong Kong, Sweden, the United Kingdomand the United States and $755,000 related to vacated office space at our United States headquarters.Our impairment of goodwill decreased from $69.5 million in 2008 to zero in 2009. The analysis of our goodwill balance in 2008caused us to conclude that all $25.3 million of the goodwill attributed to the EMEA reporting unit was impaired, as was all of the$24.9 million of goodwill attributed to the Americas reporting unit and $19.3 million of the $23.9 million of goodwill attributed to theAPAC reporting unit. As a result, a non-cash goodwill impairment charge to operations totaling $69.5 million was recorded in 2008. Nogoodwill impairment charge was recorded related to our APAC reporting unit in 2009 as the fair value of the reporting unit exceeded thecarrying value of its goodwill. The fair value was determined using an estimate of forecasted discounted cash flows and our marketcapitalization. We have $4.6 million of goodwill remaining as of December 31, 2009, which is allocated to the APAC reporting unit.Our in-process research and development (“IPR&D”) charge was $1.1 million in 2008; there was no charge in 2009. The IPR&Dcharge recorded in 2008 related to the in-process development of new 2D and 3D games by Superscape at the date of acquisition.Other Income (Expense), netInterest and other income/(expense), net, decreased from a net expense of $1.4 million in 2008 to a net expense of $1.1 million in2009. This change was primarily due to an increase of $1.2 million in interest expense related to the MIG notes and borrowings under ourcredit facility, a decrease in interest income of $825,000 resulting from lower cash balances as a result of the MIG and Superscapeacquisitions, which was offset by a $2.3 million decrease in other expense. This change in other expense was primarily due to an increasein foreign currency gains of $3.1 million related to the revaluation of certain assets and liabilities, offset by a net decrease of $806,000associated with lower mark to market gains on disposal of long-term investments in 2008.Income Tax Benefit (Provision)Income tax provision decreased from $3.1 million in 2008 to $2.2 million in 2009 as a result of taxable profits in certain foreignjurisdictions, changes in the valuation allowance and increased foreign withholding taxes resulting from increased sales in countries withwithholding tax requirements. The provision for income taxes differs from the amount computed by applying the statutory U.S. federalrate principally due to the effect of our non-U.S. operations, non-deductible stock-based compensation expense, an increase in thevaluation allowance and increased foreign withholding taxes. Our effective income tax benefit rate for the year ended December 31, 2009was 13.5% compared to 3.0% in the prior year. The higher effective benefit tax rate in 2009 was mainly attributable46Table of Contentsto a decrease in pre-tax losses, changes in withholding taxes, dividends and non-deductible stock based compensation.Our effective income tax rates for 2010 and future periods will depend on a variety of factors, including changes in the deferred taxvaluation allowance, as well as changes in our business such as from intercompany transactions and any acquisitions, any changes inour international structure, any changes in the geographic location of our business functions or assets, changes in the geographic mix ofour income, any changes in or termination of our agreements with tax authorities, changes in applicable accounting rules, applicable taxlaws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income orloss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-taxincome or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.One of our subsidiaries in China has received approval as a High & New Technology Enterprise qualification from the Ministry ofScience and Technology, and also a Software Enterprise Qualification from the Ministry of Industry and Information Technology. Thesequalifications provide preferential income tax treatment which will be effective upon the approval of our application with the StateAdministration of Taxation to apply the favorable tax benefits to operations beginning as of January 1, 2009. In the event that the StateAdministration for Taxation approves our application, certain taxes that were expensed in 2009 could be refunded and certain deferred taxassets and liabilities will be revalued.Comparison of the Years Ended December 31, 2008 and 2007Revenues Year Ended December 31, 2008 2007 (In thousands)Revenues $89,767 $66,867 Our revenues increased $22.9 million, or 34.2%, from $66.9 million in 2007 to $89.8 million in 2008, due primarily to revenuesfrom MIG and Superscape, our catalog of titles, broader international distribution reach and increased unit sales of our games. Norevenues from MIG or Superscape titles were recorded during the year ended December 31, 2007 compared to $19.1 million recordedduring the year ended December 31, 2008. Due to the diversification of our product portfolio, including the titles resulting from theacquisitions of MIG and Superscape, we were not dependent on any single title in 2008. International revenues, defined as revenuesgenerated from carriers whose principal operations are located outside the United States, increased $15.9 million from $30.9 million in2007 to $46.7 million in 2008, primarily as a result of increased sales in APAC, EMEA and other developing markets, including LatinAmerica.Cost of Revenues Year Ended December 31, 2008 2007 (In thousands) Cost of revenues: Royalties $22,562 $18,381 Impairment of prepaid royalties and guarantees 6,313 — Amortization of intangible assets 11,309 2,201 Total cost of revenues $40,184 $20,582 Revenues $89,767 $66,867 Gross margin 55.2% 69.2%47Table of ContentsOur cost of revenues increased $19.6 million, or 95.2%, from $20.6 million in 2007 to $40.2 million in 2008. The increaseresulted from an increase in royalties, impairment of prepaid royalties and guarantees, and amortization of acquired intangible assets.Royalties increased $4.2 million principally because of higher revenues with associated royalties, including those acquired fromSuperscape. Revenues attributable to games based upon branded intellectual property decreased as a percentage of revenues from 88.1% in2007 to 75.0% in 2008 as a result of sales of games based on original intellectual property developed by MIG and Superscape. Theaverage royalty rate that we paid on games based on licensed intellectual property increased from 31% in 2007 to 34% in 2008 primarily asa result of our new distribution arrangements with higher royalty rates. As a result of the increase in royalty rates for branded titles andthe impairment of prepaid royalties and guarantees, overall royalties as a percentage of total revenues increased from 27% in 2007 to 32%in 2008. The increase in impairment of prepaid royalties and guarantees of $6.3 million in 2008 primarily related to large distributiondeals in EMEA that have not performed nor do we believe will perform as initially expected. Amortization of intangible assets increased by$9.1 million as the completion of amortization for certain intangible assets acquired from Macrospace and iFone was offset by thecommencement of amortization of intangible assets acquired in 2008 from MIG and Superscape.Research and Development Expenses Year Ended December 31, 2008 2007 (In thousands)Research and development expenses $32,140 $22,425 Percentage of revenues 35.8% 33.5%Our research and development expenses increased $9.7 million, or 43.3%, from $22.4 million in 2007 to $32.1 million in 2008. Theincrease in research and development costs was due to additional costs related to the MIG and Superscape acquisitions and primarilyrelated to payroll and benefit costs of $6.3 million, allocated facilities and facility related costs of $2.4 million, and outside services costsof $0.7 million.We had 445 employees in research and development as of December 31, 2008 compared to 287 as of December 31. 2007. Arestructuring that we effected in the fourth quarter of 2008 resulted in the elimination of 37 research and development employees, but dueto the net increase in employees, our salaries and benefits related costs had increased as a result. Research and development expensesincluded stock-based compensation expense of $0.7 million in 2008 and $0.9 million in 2007. As a percentage of revenues, research anddevelopment expenses increased from 33.5% in 2007 to 35.8% in 2008.Sales and Marketing Expenses Year Ended December 31, 2008 2007 (In thousands)Sales and marketing expenses $26,066 $13,224 Percentage of revenues 29.0% 19.8%Our sales and marketing expenses increased $12.8 million, or 97.1%, from $13.2 million in 2007 to $26.1 million in 2008. Theincrease was attributable to increases of $5.3 million for the MIG earn out expense, which was recorded in sales and marketing as the twoformer officers of MIG performed customer and selling related activities, $4.5 million in stock-based compensation, $2.0 million insalaries and benefits, as we increased our sales and marketing headcount in 2008, $0.7 million in allocated facilities costs and$0.6 million in marketing promotion costs. We increased staffing to expand our marketing efforts for our games and the Glu brand,increase sales efforts to our new and existing wireless carriers and expand our sales and marketing operations into the Asia-Pacific andLatin America regions. As a percentage of revenues, sales and marketing expenses increased from 19.8% in 2007 to 29.0% in 2008 as oursales and marketing activities generated more revenues across a greater number of carriers and mobile handsets. Sales and marketingexpenses included $0.7 million of stock-based compensation expense in 2007 and $5.2 million in 2008, the majority of which related tothe stock component of the MIG earnout that was to be issued before we renegotiated the payment terms in December 2008.48Table of ContentsGeneral and Administrative Expenses Year Ended December 31, 2008 2007 (In thousands)General and administrative expenses $20,971 $16,898 Percentage of revenues 23.4% 25.3%Our general and administrative expenses increased $4.1 million, or 24.1%, from $16.9 million in 2007 to $21.0 million in 2008.The increase in general and administrative expenses was primarily the result of a $1.5 million increase in accounting, consulting andprofessional fees, $0.9 million increase in sales, use and business tax fees, $0.8 million increase in salaries and benefits and$0.7 million in depreciation and facilities related costs, partially offset by a reduction in travel, equipment and stock based compensationexpense. We increased our general and administrative headcount from 68 in 2007 to 71 in 2008. As a percentage of revenues, general andadministrative expenses decreased from 25.3% in 2007 to 23.4% in 2008 as a result of the overall growth of our revenues, which resultedin economies of scale in our general and administrative expenses. General and administrative expenses included stock-based compensationexpense of $2.2 million in 2007 and $2.1 million in 2008.Other Operating ExpensesWe had no restructuring charge in 2007 and $1.7 million in 2008. Of the total 2008 restructuring charge recorded, $1.0 million wasrecorded in the United States, $630,000 was recorded in EMEA and $94,000 was recorded in APAC.Our acquired in-process research and development increased from $0.1 million related to the MIG acquisition in 2007 to$1.1 million related to the Superscape acquisition in 2008. The IPR&D charges recorded in 2007 and 2008 were related to the developmentof new games. We determined the value of acquired IPR&D from Superscape using a discounted cash flows approach. We calculated thepresent value of expected future cash flows attributable to the in-process technology using a 22% discount rate. This rate took into accountthe percentage of completion of the development effort ranging from approximately 20% to 50% and the risks associated with ourdeveloping technology given changes in trends and technology in our industry. As of December 31, 2008, all acquired IPR&D projectshad been completed at a cost similar to the original projections.Our goodwill impairment increased from zero in 2007 to $69.5 million in 2008 as the carrying values of our Americas, APAC andEMEA reporting units exceeded their fair values at the time of our annual and interim impairment tests. These assessments were basedupon a discounted cash flow analysis and analysis of our market capitalization.Our gain on sale of assets decreased from $1.0 million in 2007 to zero in 2008. In 2007, we recorded a one time gain on sale of assetsof $1.0 million related to the sale of ProvisionX software to a third party in February 2007. Under the terms of the agreement, we will co-own the intellectual property rights to the ProvisionX software, excluding any alterations or modifications following the sale, by the thirdparty.Other Income (Expense), netInterest and other income (expense), net, decreased from income of $2.0 million in 2007 to a net expense of $1.4 million in 2008.This decrease was primarily due to foreign currency exchange losses of $3.0 million but partially offset by a $806,000 gain in 2008 forthe redemption of the auction-rate securities that were written down in 2007. Additionally, our interest expense decreased $802,000 due toreduced debt outstanding as our $12.0 million loan was repaid in March 2007. This decrease in interest expense was offset by a$2.0 million decrease in our interest income in 2008 as a result of our lower cash balances due to our cash outlays for the acquisitions ofMIG and Superscape.Income Tax Benefit (Provision)Income tax benefit (provision) decreased from a benefit of $0.3 million in 2007 to a provision of $3.1 million in 2008 as a result oftaxable profits in certain foreign jurisdictions, changes in the valuation allowance and increased49Table of Contentsforeign withholding taxes resulting from increased sales in countries with withholding tax requirements. The provision for income taxesdiffers from the amount computed by applying the statutory U.S. federal rate principally due to the effect of our non-U.S. operations,non-deductible stock-based compensation expense, an increase in the valuation allowance, increased foreign withholding taxes, and a non-deductible goodwill impairment charge. Our effective income tax benefit rate for the year ended December 31, 2008 was 3.0% compared toan effective income tax expense rate of 7.4% in the prior year. The higher effective benefit tax rate in 2008 was mainly attributable tochanges in our deferred tax valuation allowance and a non-deductible goodwill impairment charge in 2008.Liquidity and Capital Resources Year Ended December 31, 2009 2008 2007 (In thousands)Consolidated Statement of Cash Flows Data: (Capital expenditures) $838 $3,772 $2,343 Cash flows provided by (used in) operating activities 1,130 (5,889) (951)Cash flows used in investing activities (838) (31,673) (8,227)Cash flows (used in) provided by financing activities (8,925) 332 62,923 Since our inception, we have incurred losses, and we had an accumulated deficit of $177.3 million as of December 31, 2009. Priorto our initial public offering, our primary sources of liquidity had been private placements of shares of our preferred stock andborrowings under our credit facilities.Operating ActivitiesIn 2009, net cash provided by operating activities was $1.1 million as compared to $5.9 million in net cash used in operatingactivities in 2008. This increase was primarily due to a decrease in prepaid royalties of $6.4 million, which was caused primarily by theimpairment of certain titles during 2009, and a decrease in accounts receivable of $3.7 million due to declining sales in our carrierbusiness. In addition, we had adjustments for non-cash items, including amortization expense of $7.3 million, impairment of prepaidroyalties and guarantees of $6.6 million, stock-based compensation expense of $2.9 million, depreciation expense of $2.3 million,interest expense on debt of $1.3 million and MIG earnout expense of $875,000. These amounts were partially offset by a net loss of$18.2 million, a decrease in accrued royalties of $5.7 million, a decrease in long term liabilities of $4.2 million due to reclassification ofthe MIG earnout from long-term to short-term liabilities, a decrease in accounts payable of $2.2 million due to lower operating costs andimprovements in processing of payments and a non-cash foreign currency translation gain of $55,000.In 2008, we used $5.9 million of net cash in operating activities as compared to $1.0 million in 2007. This increase was primarilydue to an increase in our net loss by $103.4 million, increases in prepaid royalties of $6.3 million for new license arrangements,payments for restructuring activities of $2.9 million, a decrease in our accounts payable of $3.4 million and payments for prepaid andother assets of $2.3 million. The increase was partially offset by increases in certain non-cash charges for goodwill impairment of$69.5 million, MIG earn out expense of $9.6 million, impairment of prepaid royalties and guarantees of $6.3 million, and decreases inaccounts receivable of $4.6 million, respectively.Investing ActivitiesOur primary investing activities have consisted of purchases and sales of short-term investments, purchases of property andequipment and, in 2008 and 2007, the acquisitions of Superscape and MIG, respectively. We may use more cash in investing activities in2010 for property and equipment related to supporting our infrastructure and our development and design studios. We expect to fund theseinvestments with our existing cash and cash equivalents and our revolving credit facility.In 2009, we used $838,000 of cash for investing activities resulting primarily from purchases of computer and networkingequipment, software equipment and leasehold improvements.50Table of ContentsIn 2008, we used $31.7 million of cash in investing activities. This net use of cash resulted from the acquisition of Superscape, netof cash acquired, of $30.0 million, the purchase of property and equipment of $3.8 million, and additional costs related to the MIGacquisition, net of cash acquired, of $0.7 million, offset by the redemption of $2.8 million of our previously impaired investments inauction rate securities.In 2007, we used $8.2 million of cash in investing activities. This net use of cash resulted from the acquisition of MIG, net of cashacquired, of $12.9 million, the purchase of property and equipment of $2.3 million offset by the net sales of short-term investments of$6.0 million and proceeds from the sale of ProvisionX software of $1.0 million.Financing ActivitiesIn 2009, net cash used in financing activities was $8.9 million due to the payment of $14.0 million in principal amount related tothe MIG notes, which was partially offset by the net proceeds from borrowings under our credit facility of $4.7 million and proceedsfrom option exercises and purchases under our employee stock purchase plan of $402,000.In 2008, we generated $0.3 million of net cash from financing activities resulting from net proceeds from exercises of common stockof $0.2 million and net proceeds from exercises of stock warrants of $0.1 million.In 2007, we generated $62.9 million of net cash from financing activities, substantially all of which came from the net proceeds ofour IPO of $74.8 million, partially offset by the repayment of a loan from Pinnacle Ventures of $12.1 million.Sufficiency of Current Cash and Cash EquivalentsOur cash and cash equivalents were $10.5 million as of December 31, 2009. During the year ended December 31, 2009, we used$8.7 million of cash. We expect to continue to fund our operations and satisfy our contractual obligations for 2010 primarily through ourcash and cash equivalents, borrowings under our revolving credit facility and any cash generated by operations. However, there can be noassurances that we will be able to generate positive operating cash flow during 2010 or beyond. We believe our cash and cash equivalents,together with any cash flows from operations and borrowings under our credit facility, will be sufficient to meet our anticipated cashneeds for at least the next 12 months. However, our cash requirements for the next 12 months may be greater than we anticipate due to,among other reasons, lower than expected cash generated from operating activities including the impact of foreign currency rate changes,revenues that are lower than we currently anticipate, greater than expected operating expenses, usage of cash to fund our foreignoperations, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries, adeterioration of the quality of our accounts receivable, which could lower the borrowing base under our credit facility, and any failure onour part to remain in compliance with the covenants under our revolving credit facility. Our expectations regarding cash sufficiencyassume that our operating results will be sufficient to enable us to comply with our credit facility’s EBITDA-related covenant discussedbelow. If our revenues are lower than we anticipate, we might be required to reduce our operating expenses to remain in compliance withthis financial covenant. Reducing our operating expenses could be very challenging for us, since we undertook operating expensereductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009 and the first quarter of 2010 thatreduced our operating expenses significantly from second quarter of 2008 levels. Reducing operating expenses further could have the effectof reducing our revenues.Our cash needs include our requirement to repay $6.0 million of principal under the MIG notes as of December 31, 2009, which ispayable in 2010 from our domestic entities, as well as $5.0 million of principal under promissory notes issued to two formershareholders of MIG which is payable in 2010 from our Chinese entities. (See Note 8 of Notes to Consolidated Financial Statementsincluded in Item 8 of this report for more information regarding our debt.) Our anticipated cash requirements during 2010 also includepayments for prepaid royalties and guarantees, of which a portion is related to anticipated new license agreements (for which there are noexisting contractual commitments), which amount we may elect to reduce if we require more working capital than we currently anticipate.(See Note 7 of Notes to Consolidated Financial Statements included in Item 8 of this report for more information regarding our contractualcommitments.) However, this reduced spending on new licenses and51Table of Contentsany additional reduction in spending may adversely impact our title plan for 2010 and beyond, and accordingly our ability to generaterevenues in future periods. Conversely, if cash available to us is greater than we currently anticipate, we may elect to increase prepaidroyalties above currently anticipated levels if we believe it will contribute to enhanced revenue growth and profitability.We currently have an $8.0 million credit facility, which expires on June 30, 2011. Our credit facility contains financial covenantsand restrictions that limit our ability to draw down the entire $8.0 million. These covenants are as follows: • EBITDA. On August 24, 2009, we entered into an amendment to our credit facility, which reduced certain of the minimumtargets contained in the EBITDA-related covenant. On February 10, 2010 we entered into a second amendment to the agreement.The second amendment changed the measurement period for the EBITDA covenant from a rolling six month calculation to aquarterly calculation. On March 18, 2010, we entered into a third amendment to the agreement which (1) extended the maturitydate of the credit facility from December 22, 2010 until June 30, 2011, (2) increased the interest rate for borrowings under thecredit facility by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%, and (3) requires us to maintain, measuredon a consolidated basis at the end of each of the following periods, EBITDA of at least the following:July 1, 2009 through December 31, 2009 $1,000,000 January 1, 2010 through March 31, 2010 $(2,100,000)April 1, 2010 through June 30, 2010 $(1,100,000)July 1, 2010 through September 30, 2010 $(500,000)October 1, 2010 through December 31, 2010 $1,750,000 January 1, 2011 through March 31, 2011 $(300,000)April 1, 2011 through June 30, 2011 $100,000 We currently believe that we will be able to comply with the minimum EBITDA targets set forth above. For purposes of the abovecovenant, EBITDA means (a) our consolidated net income, determined in accordance with U.S. GAAP, plus (b) interest expense, plus(c) to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus (d) income tax expense,plus (e) non-cash stock compensation expense, plus (f) non-cash goodwill and other intangible assets and royalty impairments, plus(g) non-cash foreign exchange translation charges, minus (h) all of our non-cash income and the non-cash income of our subsidiaries forsuch period. • Minimum Domestic Liquidity: We must maintain at the lender an amount of cash, cash equivalents and short-term investmentsof not less than the greater of: (a) 20% of our total consolidated unrestricted cash, cash equivalents and short-term investments, or(b) 15% of outstanding obligations under the credit facility.The credit facility also includes a “material adverse change” clause. As a result, if a material adverse change occurs with respect toour business, operations or financial condition, then that change could constitute an event of default under the terms of our credit facility.When an event of default occurs, the lender can, among other things, declare all obligations immediately due and payable, could stopadvancing money or extending credit under the credit facility and could terminate the credit facility. We believe that the risk of a materialadverse change occurring with respect to our business, operations or financial condition and the lender requesting immediate repayment ofamounts already borrowed, stopping advancing the remaining credit or terminating the credit facility is remote.Our credit facility is collateralized by eligible customer accounts receivable balances, as defined by the lender. There can be noassurances that our eligible accounts receivable balances will be adequate to allow us to draw down on the entire $8.0 million creditfacility particularly if any of our larger customers’ creditworthiness deteriorates. At our current revenue levels, we are not able to accessthe full $8.0 million of the credit facility. In addition, among other things, the credit facility limits our ability to dispose of certain assets,make acquisitions, incur additional indebtedness, incur liens, pay dividends and make other distributions, and make investments.Further, the credit facility requires us to maintain a separate account with the lender for collection of our accounts receivables. All depositsinto this account will be automatically applied by the lender to our outstanding obligations under the credit facility.52Table of ContentsAs of December 31, 2009, we had outstanding borrowings of $4.7 million under our credit facility, which is classified as a currentliability on the December 31, 2009 balance sheet. Subsequent to year end, the maturity date of the credit facility was extended to June 30,2011. Our failure to comply with the financial or operating covenants in the credit facility would not only prohibit us from borrowingunder 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, immediately due and payable. A change in control of Glu also constitutes an event ofdefault, permitting the lender to accelerate the indebtedness and terminate the credit facility. The credit facility also contains othercustomary events of default. To the extent an event of default occurred under the credit facility and the lender accelerated the indebtednessand terminated the credit facility, this would also trigger the cross-default provisions of the MIG notes. Utilizing our credit facility resultsin debt payments that bear interest at the lender’s prime rate plus 1.75%, but no less than 5.0%, which adversely impacts our cashposition and result in operating and financial covenants that restrict our operations. See Note 8 of Notes to Consolidated FinancialStatements included in Item 8 of this report for more information regarding our debt.The credit facility matures on June 30, 2011, when all amounts outstanding will be due. If the credit facility is terminated prior tomaturity by us or by the lender after the occurrence and continuance of an event of default, then we will owe a termination fee equal to$80,000, or 1.00% of the total commitment. As of December 31, 2009, we were in compliance with all covenants.Of the $10.5 million of cash and cash equivalents that we held at December 31, 2009, approximately $6.0 million were held inaccounts in China. To fund our operations and repay our debt obligations, we repatriated approximately $4.0 million of available fundsfrom China to the United States during 2009, which was subject to withholding taxes of 5%. We intend to pay $5.0 million of principalunder promissory notes issued to two former shareholders of MIG which is payable in 2010 from our Chinese entities. In addition, giventhe current global economic environment and other potential developments outside of our control, we may be unable to utilize the fundsthat we hold in all of our non-U.S. accounts, which funds include cash and marketable securities, since the funds may be frozen byadditional international regulatory actions, the accounts may become illiquid for an indeterminate period of time or there may be othersuch circumstances that we are unable to predict.In addition, we may require additional cash resources due to changes in business conditions or other future developments, includingany investments or acquisitions we may decide to pursue, and to defend against, settle or pay damages related to a litigation dispute towhich we are currently a party. We also intend to enter into new licensing arrangements for existing or new licensed intellectual properties,which may require us to make royalty payments at the outset of the agreements well before we are able to collect cash payments and/orrecognize revenues associated with the licensed intellectual properties.If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital by selling convertibledebt or equity securities, seeking to increase the amount available to us for borrowing under our credit facility or selling some of ourassets, or we may seek to restructure our obligations under the MIG notes. We may be unable to raise additional capital through the sale ofsecurities, or to do so on terms that are favorable to us, particularly given current capital market and overall economic conditions. Anysale of convertible debt securities or additional equity securities could result in substantial dilution to our stockholders. The holders ofnew securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock, all ofwhich is subject to the provisions of the credit facility. Additionally, we may be unable to increase the size of our credit facility, or to do soon terms that are acceptable to us, particularly in light of the current credit market conditions. We may also be unable to restructure ourobligations under the MIG notes to the extent we may need. If the amount of cash that we generate from operations is less than anticipated,or if we use cash in our operations, we could also be required to extend the term of our credit facility beyond its June 30, 2011 expirationdate (or replace it with an alternate loan arrangement), and resulting debt payments thereunder could further inhibit our ability to achieveprofitability in the future.53Table of ContentsContractual ObligationsThe following table is a summary of our contractual obligations as of December 31, 2009: Payments Due by Period Less Than Total 1 Year 1-3 Years 3-5 Years Thereafter (In thousands)Operating lease obligations, net of sublease income $8,272 $3,309 $4,963 $— $— Guaranteed royalties(1) 6,066 5,626 390 50 — MIG Earnout and Bonus notes(2) 11,721 11,721 — — — Line of credit(3) 4,658 — 4,658 — — Uncertain tax obligations, including interest andpenalties(4) 4,614 — — — 4,614 (1)We have entered into license and development arrangements with various owners of brands and other intellectual property so that wecan create and publish games for mobile handsets based on that intellectual property. A significant portion of these agreements requireus to pay guaranteed royalties over the term of the contracts regardless of actual game sales. Some of these minimum paymentstotaling $3.9 million have been recorded as liabilities on our consolidated balance sheet because payment is not contingent uponperformance by the licensor.(2)We have issued $25.0 million of notes payable to former shareholders of MIG, of which we had paid an aggregate principal amountof $14.0 million as of December 31, 2009. The amounts in the table above include interest accrued through December 31, 2009. SeeNote 8 of Notes to Consolidated Financial Statements included in Item 8 of this report for more information regarding our debt.(3)In March 2010, we signed a third amendment to the credit facility which extended the maturity date of the credit facility fromDecember 22, 2010 until June 30, 2011, when all amounts outstanding will be due. As of December 31, 2009, the above amount hasbeen classified within current liabilities.(4)As of December 31, 2009, unrecognized tax benefits and potential interest and penalties are classified within “Other long-termliabilities” on our consolidated balance sheets. As of December 31, 2009, the settlement of our income tax liabilities could not bedetermined; however, the liabilities are not expected to become due during 2010.Off-Balance Sheet ArrangementsAt December 31, 2009, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K.Recent Accounting PronouncementsIn October 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements — a consensus of theFASB Emerging Issues Task Force (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currentlyincluded under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements withMultiple Deliverables (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need forobjective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit ofaccounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands thedisclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or afterJune 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year ofadoption. The adoption of this standard update is not expected to impact our consolidated financial statements.In October 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements — aconsensus of the FASB Emerging Issues Task Force (ASU 2009-14) which amended the accounting54Table of Contentsrequirements under the Software Topic, ASC 985-605 Revenue Recognition. The objective of this update is to address the accountingfor revenue arrangements that contain tangible products and software. Specifically, products that contain software that is “more thanincidental” to the product as a whole will be removed from the scope of ASC subtopic 985-605 (previously AICPA Statement of Position97-2). The amendments align the accounting for these revenue transaction types with the amendments under ASU 2009-13 mentionedabove. The guidance provided within ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and allows for eitherprospective or retrospective application, with early adoption permitted. The adoption of this standard update is not expected to impact ourconsolidated financial statements.In August 2009, the FASB issued Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — MeasuringLiabilities at Fair Value (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of theCodification to provide further guidance on how to measure the fair value of a liability. It primarily does three things: (1) sets forth thetypes of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is notavailable, (2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input oradjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and (3) clarifies that both aquoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability whentraded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair valuemeasurements. This standard became effective in the fourth quarter of 2009. The adoption of this standard update did not impact ourconsolidated financial statements.Effective July 1, 2009, we adopted ASC105-10, Generally Accepted Accounting Principles (“ASC 105-10”) (the “Codification”).ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules andinterpretive releases, which are also authoritative GAAP for SEC registrants. The Codification will supersede all existing non-SECaccounting and reporting standards. We have included the references to the Codification, as appropriate, in these consolidated financialstatements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our consolidatedfinancial statements.Effective April 1, 2009, we adopted ASC 855, Subsequent Events (“ASC 855-10”). The standard modifies the names of the twotypes of subsequent events either as “recognized subsequent events” (previously referred to in practice as Type I subsequent events) or“non-recognized subsequent events” (previously referred to in practice as Type II subsequent events). In addition, the standard modifiesthe definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financialstatements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the datethrough which subsequent events have been evaluated. The adoption of this standard did not have any impact on our consolidatedfinancial statements.Effective April 1, 2009, we adopted three accounting standard updates which were intended to provide additional applicationguidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additionalguidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, providesadditional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified inASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing thecurrent requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude animpairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not berequired to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65,increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15,2009. The adoption of these accounting updates did not have any impact on our consolidated financial statements.Effective January 1, 2009, we adopted a new accounting standard update regarding business combinations, ASC 805, whichestablishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also provides guidancefor recognizing and measuring the goodwill acquired in the55Table of Contentsbusiness combination and determines what information to disclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. ASC 805-10 applies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Although we did not enter intoany business combinations during 2009, we believe ASC 805-10 may have a material impact on our future consolidated financialstatements if we were to enter into any future business combinations depending on the size and nature of any such future transactions.Item 7A. Quantitative and Qualitative Disclosures about Market RiskInterest Rate and Credit RiskOur exposure to interest rate risk relates primarily to (1) our interest payable under our $8.0 million credit facility and potentialincreases in our interest payments arising from increases in interest rates and (2) our investment portfolio and the potential losses arisingfrom changes in interest rates.We are exposed to the impact of changes in interest rates as they affect interest payments under our $8.0 million credit facility.Advances under the credit facility accrue interest at rates that are equal to our credit facility lender’s prime rate, plus 1.75%, but no lessthan 5.0%. Consequently, our interest expense will fluctuate with changes in the general level of interest rates. At December 31, 2009, wehad $4.7 million outstanding under the credit facility and our effective interest rate at that time was approximately 5.0%. We believe that a10% change in the lender’s prime rate would have a significant impact on our interest expense, results of operations and liquidity.We are also potentially exposed to the impact of changes in interest rates as they affect interest earned on our investment portfolio. Asof December 31, 2009, we had no short-term investments and substantially all $10.5 million of our cash and cash equivalents was heldin operating bank accounts earning nominal interest. Accordingly, we do not believe that a 10% change in interest rates would have asignificant impact on our interest income, operating results or liquidity related to these amounts.The primary objectives of our investment activities are, in order of importance, to preserve principal, provide liquidity andmaximize income without significantly increasing risk. We do not currently use or plan to use derivative financial instruments in ourinvestment portfolio.In addition, during 2007 and 2008 we held auction-rate securities. See Note 4 of Notes to Consolidated Financial Statements includedin Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity andCapital Resources — Investing Activities,” in Item 7 of this report; and “Risk Factors” in Item 1A of this report for a description ofmarket events that affected the liquidity and fair value of these securities. As of December 31, 2009, we held no auction-rate securities.The primary objectives of our investment activities are, in order of importance, to preserve principal, provide liquidity and maximizeincome without significantly increasing risk. We do not currently use or plan to use derivative financial instruments in our investmentportfolio.As of December 31, 2009 and December 31, 2008, our cash and cash equivalents were maintained by financial institutions in theUnited States, the United Kingdom, Australia, Brazil, Chile, China, Columbia, France, Germany, Hong Kong, Italy, Russia andSpain, and our current deposits are likely in excess of insured limits.Our accounts receivable primarily relate to revenues earned from domestic and international wireless carriers. We perform ongoingcredit evaluations of our carriers’ financial condition but generally require no collateral from them. As of December 31, 2009 andDecember 31, 2008, Verizon Wireless accounted for 24.1% and 25.7% of our total accounts receivable, respectively, and no other carrierrepresented more than 10% of our total accounts receivable as of these dates.Foreign Currency Exchange RiskWe transact business in more than 70 countries in more than 20 different currencies, and in 2008 and 2009, some of thesecurrencies fluctuated by up to 40%. Our revenues are usually denominated in the functional currency of the carrier while the operatingexpenses of our operations outside of the United States are maintained in their local currency, with the significant operating currenciesconsisting of British Pound Sterling (“GBP”), Chinese56Table of ContentsRenminbi, Brazilian Real and Russian Ruble. Although recording operating expenses in the local currency of our foreign operationsmitigates some of the exposure of foreign currency fluctuations, variances among the currencies of our customers and our foreignoperations relative to the United States Dollar (“USD”) could have and have had a material impact on our results of operations.Our foreign currency exchange gains and losses have been generated primarily from fluctuations in GBP versus the USD and in theEuro versus GBP. At month-end, foreign currency-denominated accounts receivable and intercompany balances are marked to marketand unrealized gains and losses are included in other income (expense), net. Translation adjustments arising from the use of differingexchange rates are included in accumulated other comprehensive income in stockholders’ equity. We have in the past experienced, and inthe future may experience, foreign currency exchange gains and losses on our accounts receivable and intercompany receivables andpayables. Foreign currency exchange gains and losses could have a material adverse effect on our business, operating results andfinancial condition.There is also additional risk if the currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, inwhich our Chinese operations principally transact business, are subject to limitations on conversion into other currencies, which canlimit out ability to react to foreign currency devaluations.To date, we have not engaged in exchange rate hedging activities and we do not expect to do so in the foreseeable future.InflationWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costswere to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases.Our inability or failure to do so could harm our business, operating results and financial condition.57 Item 8. Financial Statements and Supplementary DataGLU MOBILE INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageGlu Mobile Inc. Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 59 Consolidated Balance Sheets 60 Consolidated Statements of Operations 61 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity/(Deficit) 62 Consolidated Statements of Cash Flows 63 Notes to Consolidated Financial Statements 64 58Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Glu Mobile Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemableconvertible preferred stock and stockholders’ equity/(deficit) and of cash flows present fairly, in all material respects, the financialposition of Glu Mobile Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in theUnited States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 31, 201059Table of ContentsGLU MOBILE INC.CONSOLIDATED BALANCE SHEETS As of December 31, 2009 2008 (In thousands, except pershare data) ASSETSCurrent assets: Cash and cash equivalents $10,510 $19,166 Accounts receivable, net 16,030 19,826 Prepaid royalties 6,738 15,298 Prepaid expenses and other 2,520 2,704 Total current assets 35,798 56,994 Property and equipment, net 3,344 4,861 Prepaid royalties 96 4,349 Other long-term assets 833 930 Intangible assets, net 13,059 20,320 Goodwill 4,608 4,622 Total assets $57,738 $92,076 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable $4,480 $6,569 Accrued liabilities 817 686 Accrued compensation 1,829 2,184 Accrued royalties 12,604 18,193 Accrued restructuring 1,406 1,000 Deferred revenues 914 727 Current portion of long-term debt 16,379 14,000 Total current liabilities 38,429 43,359 Other long-term liabilities 7,616 11,798 Long-term debt, less current portion — 10,125 Total liabilities 46,045 65,282 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $0.0001 par value; 5,000 shares authorized at December 31, 2009 and 2008; no shares issued andoutstanding at December 31, 2009 and 2008 — — Common stock, $0.0001 par value: 250,000 authorized at December 31, 2009 and 2008; 30,360 and 29,584 sharesissued and outstanding at December 31, 2009 and 2008 3 3 Additional paid-in capital 188,078 184,757 Deferred stock-based compensation — (11)Accumulated other comprehensive income 931 1,170 Accumulated deficit (177,319) (159,125)Total stockholders’ equity 11,693 26,794 Total liabilities and stockholders’ equity $57,738 $92,076 The accompanying notes are an integral part of these consolidated financial statements.60Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2009 2008 2007 (In thousands, except per share data) Revenues $79,344 $89,767 $66,867 Cost of revenues: Royalties 21,829 22,562 18,381 Impairment of prepaid royalties and guarantees 6,591 6,313 — Amortization of intangible assets 7,092 11,309 2,201 Total cost of revenues 35,512 40,184 20,582 Gross profit 43,832 49,583 46,285 Operating expenses: Research and development 25,975 32,140 22,425 Sales and marketing 14,402 26,066 13,224 General and administrative 16,271 20,971 16,898 Amortization of intangible assets 215 261 275 Restructuring charge 1,876 1,744 — Acquired in-process research and development — 1,110 59 Impairment of goodwill — 69,498 — Gain on sale of assets — — (1,040)Total operating expenses 58,739 151,790 51,841 Loss from operations (14,907) (102,207) (5,556)Interest and other income/(expense), net: Interest income 94 919 2,953 Interest expense (1,276) (78) (880)Other income/(expense), net 55 (2,200) (108)Interest and other income/(expense), net (1,127) (1,359) 1,965 Loss before income taxes and minority interest (16,034) (103,566) (3,591)Income tax benefit/(provision) (2,160) (3,126) 265 Net loss (18,194) (106,692) (3,326)Accretion to preferred stock — — (17)Deemed dividend — — (3,130)Net loss attributable to common stockholders $(18,194) $(106,692) $(6,473)Net loss per share attributable to common stockholders — basic and diluted: Net loss $(0.61) $(3.63) $(0.14)Accretion to preferred stock — — — Deemed dividend — — (0.14)Net loss per share attributable to common stockholders — basic and diluted $(0.61) $(3.63) $(0.28)Weighted average common shares outstanding 29,853 29,379 23,281 The accompanying notes are an integral part of these consolidated financial statements.61Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK ANDSTOCKHOLDERS’ EQUITY/(DEFICIT) Accumulated Other Compre- Total Redeemable Convertible Common Additional Deferred hensive Stockholders’ Compre- Preferred Stock Stock Paid-In Stock-Based Income Accumulated Equity hensive Shares Amount Shares Amount Capital Compensation (loss) Deficit Deficit Loss (In thousands, except per share data) Balances at December 31, 2006 15,681 76,363 5,457 1 19,894 (388) 1,285 (45,977) (25,185) Net loss — — — — — — — (3,326) (3,326) $(3,326)Proceeds from initial public offering of common stock,net of issuance costs of $3,315 — — 7,300 — 74,758 — — — 74,758 — Automatic conversion of preferred stock to common stock upon completion of initial public offering (15,681) (76,380) 15,681 2 76,378 — — — 76,380 — Transfer of preferred stock warrant liability to additional paid-in capital — — — — 1,985 — — — 1,985 — Deemed dividend related to issuance of common stock warrants — — — — 3,130 — — (3,130) — — Issuance of restricted stock — — 4 — 1 — — — 1 — Adjustment to deferred stock-based compensation for terminated employees — — — — (17) 17 — — — — Stock-based compensation expense — — — — 3,541 258 — — 3,799 — Vesting of early exercised options — — — — 46 — — — 46 — Accretion to preferred stock redemption value — 17 — — (17) — — — (17) — Issuance of common stock upon exercise of stock options — — 268 — 225 — — — 225 — Issuance of common stock upon exercise of warrants — — 313 — — — — — — — Unrealized loss on auction-rate securities — — — — — — — — — (806)Reversal of unrealized loss on — — — — — — — — — 806 auction-rate securities Foreign currency translation adjustment — — — — — — 795 — 795 795 Comprehensive loss — — — — — — — — — $(2,531)Balances at December 31, 2007 — — 29,023 3 179,924 (113) 2,080 (52,433) 129,461 Net loss — — — — — — — (106,692) (106,692) $(106,692)Adjustment to deferred stock-based compensation for terminated employees — — — — (6) 6 — — — — Reclass of previously recorded stock-based MIG earnout to note payable — — — — (4,315) — — — (4,315) — Stock-based compensation expense — — — — 7,888 96 — — 7,984 — Vesting of early exercised options — — — — 18 — — — 18 — Issuance of common stock upon exercise of stock options — — 258 — 231 — — — 231 — Issuance of common stock upon exercise of warrants — — 63 — 101 — — — 101 — Issuance of common stock pursuant to Employee Stock Purchase Plan — — 240 — 916 — — — 916 — Foreign currency translation adjustment — — — — — — (910) — (910) (910)Comprehensive loss — — — — — — — — — $(107,602)Balances at December 31, 2008 — $— 29,584 $3 $184,757 $(11) $1,170 $(159,125) $26,794 Net loss — — — — — — — (18,194) (18,194) $(18,194)Adjustment to deferred stock-based compensation for terminated employees — — — — — 11 — — 11 — Stock-based compensation expense — — — — 2,915 — — — 2,915 — Vesting of early exercised options — — — — 4 — — — 4 — Issuance of common stock upon exercise of stock options — — 276 — 190 — — — 190 — Issuance of common stock pursuant to Employee Stock Purchase Plan — — 500 — 212 — — — 212 — Foreign currency translation adjustment — — — — — — (239) — (239) (239)Comprehensive loss — — — — — — — — — $(18,433)Balances at December 31, 2009 — $— 30,360 $3 $188,078 $— $931 $(177,319) $11,693 The accompanying notes are an integral part of these consolidated financial statements.62Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2009 2008 2007 (In thousands) Cash flows from operating activities: Net loss $(18,194) $(106,692) $(3,326)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,330 2,756 2,116 Amortization of intangible assets 7,307 11,570 2,476 Stock-based compensation 2,926 3,669 3,799 MIG earnout expense 875 9,591 — Change in carrying value of preferred stock warrant liability — — 10 Amortization of value of warrants issued in connection with loan — — 477 Interest expense on debt 1,125 — — Amortization of loan agreement costs 151 74 101 Non-cash foreign currency remeasurement (gain)/loss (55) 2,901 (690)Acquired in-process research and development — 1,110 59 Impairment of goodwill — 69,498 — Impairment of prepaid royalties and guarantees 6,591 6,313 — (Gain)/write down of auction-rate securities — (806) 806 Gain on sale of assets — — (1,040)Write off of fixed assets — 411 — Changes in allowance for doubtful accounts 78 99 (94)Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 3,687 1,783 (2,672)Prepaid royalties 6,420 (8,320) (2,039)Prepaid expenses and other assets 233 314 (2,598)Accounts payable (2,159) (1,825) 1,555 Other accrued liabilities (311) (499) (1,270)Accrued compensation (412) 1,258 166 Accrued royalties (5,738) 3,959 642 Deferred revenues 150 258 436 Accrued restructuring charge 348 (2,943) (36)Other long-term liabilities (4,222) (368) 171 Net cash provided by (used in) operating activities 1,130 (5,889) (951)Cash flows from investing activities: Purchase of short-term investments — — (73,600)Sale of short-term investments — 2,800 79,550 Purchase of property and equipment (838) (3,772) (2,343)Proceeds from sale of assets, net of delivery costs — — 1,040 Acquisition of Superscape, net of cash acquired — (30,008) — Acquisition of MIG, net of cash acquired — (693) (12,874)Net cash used in investing activities (838) (31,673) (8,227)Cash flows from financing activities: Proceeds from line of credit 55,852 — — Payments on line of credit (51,179) — — MIG loan payments (14,000) — — Proceeds from initial public offering, net — — 74,758 Proceeds from exercise of stock options and ESPP 402 231 225 Proceeds from exercise of stock warrants — 101 — Debt payments — — (12,060)Net cash (used in)/provided by financing activities (8,925) 332 62,923 Effect of exchange rate changes on cash (23) (1,420) 248 Net increase/(decrease) in cash and cash equivalents (8,656) (38,650) 53,993 Cash and cash equivalents at beginning of period 19,166 57,816 3,823 Cash and cash equivalents at end of period $10,510 $19,166 $57,816 Supplemental disclosures of cash flow information Interest paid $403 $— $361 Income taxes paid $1,438 $2,297 $835 Supplemental disclosure of non-cash investing and financing activities Demed dividend related to issuance of common stock warrants $— $— $3,130 Accretion of preferred stock to redemption value $— $— $17 Reclassification of preferred stock warrants to (from) liability from (to) additional paid-incapital $— $— $(1,985)Reclassification of previously recorded stock-based compensation MIG earnout to note payable $— $4,315 $— The accompanying notes are an integral part of these consolidated financial statements.63Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data and percentages)NOTE 1 —THE COMPANYGlu Mobile Inc. (the “Company” or “Glu”) was incorporated in Nevada in May 2001 and reincorporated in the state of Delaware inMarch 2007. The Company creates mobile games and related applications based on third-party licensed brands and other intellectualproperty, as well as its own original intellectual property.NOTE 2 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States.The Company had $10,510 of cash and cash equivalents as of December 31, 2009. During the year ended December 31, 2009, theCompany generated $1,130 of cash from operating activities, which was offset by $838 of cash used in investing activities and $8,925of cash used in financing activities. The Company expects to continue to fund its operations and satisfy its contractual obligations for2010 primarily through its cash and cash equivalents, borrowings under the Company’s revolving credit facility and any cash generatedby operations. However, there can be no assurances that the Company will be able to generate positive operating cash flow during 2010 orbeyond. The Company believes its cash and cash equivalents, together with any cash flows from operations and borrowings under itscredit facility will be sufficient to meet its anticipated cash needs through at least December 31, 2010. However, the Company’s cashrequirements for the next 12 months may be greater than anticipated due to, among other reasons, lower than expected cash generated fromoperating activities including the impact of foreign currency rate changes, revenues that are lower than currently anticipated, greater thanexpected operating expenses, usage of cash to fund its foreign operations, unanticipated limitations or timing restrictions on its ability toaccess funds that are held in its non-U.S. subsidiaries, a deterioration of the quality of the Company’s accounts receivable, which couldlower the borrowing base under its credit facility, and any failure on the Company’s part to remain in compliance with the covenantsunder the revolving credit facility. The Company currently expects that it will be able to comply with the EBITDA-related covenantcontained in the credit facility. If revenues are lower than anticipated, the Company may be required to reduce its operating expenses toremain in compliance with this covenant. However, further reducing operating expenses could be very challenging for the Company, sinceit undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009and the first quarter of 2010 that reduced operating expenses significantly from second quarter of 2008 levels. Reducing operatingexpenses further could have the effect of reducing revenues. On August 24, 2009, February 10, 2010 and March 18, 2010, the Companyentered into amendments to its Loan and Security Agreement with the lender, which (1) reduced certain of the minimum targets containedin the EBITDA-related covenant, (2) changed the measurement period for the EBITDA covenant from a rolling six month calculation to aquarterly calculation, (3) extended the maturity date of the Loan and Security Agreement from December 22, 2010 until June 30, 2011 and(4) increased the interest rate for borrowings under the Loan and Security Agreement by 0.75% to the lender’s prime rate, plus 1.75%, butno less than 5.0% (see Note 8). As of December 31, 2009, the Company was in compliance with the modified covenants.If the Company’s cash sources are insufficient to satisfy the Company’s cash requirements, the Company may seek to raiseadditional capital by selling convertible debt or equity securities, seeking to increase the amount available to the Company for borrowingunder the Company’s credit facility or selling some of the Company’s assets, and/or the Company could seek to restructure the MIGearnout and bonus payments. The Company may be unable to raise additional capital through the sale of securities, or to do so on termsthat are favorable to it, particularly given current capital market and overall economic conditions. Any sale of convertible debt securitiesor additional equity securities could result in substantial dilution to the Company’s stockholders. The holders of new securities may alsoreceive rights, preferences or privileges that are senior to those of existing holders of the Company’s common stock, all of which is subjectto the provisions of the credit facility. Additionally, the Company64Table of Contentsmay be unable to increase the size of the Company’s credit facility, or to do so on terms that are acceptable to it, particularly in light of thecurrent credit market conditions. Similarly, the Company may be unable to restructure the MIG earnout and bonus payments to the extentit may need. If the amount of cash that the Company generates from operations is less than anticipated or if the Company uses cash in itsoperations, it could also be required to extend the term of its credit facility beyond its June 30, 2011 expiration date (or replace it with analternate loan arrangement), and resulting debt payments thereunder could further inhibit the Company’s ability to achieve profitability inthe future. The credit facility also contains other customary events of default, including a “material adverse change” clause (see Note 8).Basis of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All materialintercompany balances and transactions have been eliminated.Use of EstimatesThe preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles(“U.S. GAAP”) requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported inits consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on variousother assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities. Actual results may differ from these estimates and these differences may be material.Revenue RecognitionThe Company’s revenues are derived primarily by licensing software products in the form of mobile games. License arrangementswith the end user can be on a perpetual or subscription basis. A perpetual license gives an end user the right to use the licensed game onthe registered handset on a perpetual basis. A subscription license gives an end user the right to use the licensed game on the registeredhandset for a limited period of time, ranging from a few days to as long as one month. All games that require ongoing delivery of contentfrom the Company or connectivity through its network for multi-player functionality are only billed on a monthly subscription basis.The Company distributes its products primarily through mobile telecommunications service providers (“carriers”), which market thegames to end users. License fees for perpetual and subscription licenses are usually billed by the carrier upon download of the game bythe end user. In the case of subscriber licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out,while the others provide opt-in renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. TheCompany applies the provisions set forth in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 985-605, Software: Revenue Recognition.Revenues are recognized from the Company’s games when persuasive evidence of an arrangement exists, the game has beendelivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both perpetual and subscriptionlicenses, management considers a signed license agreement to be evidence of an arrangement with a carrier and a “clickwrap” agreement tobe evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download of the game by the enduser. The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made.Several carriers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the endof each month, both of which allow the Company to make reasonable estimates of revenues and therefore to recognize revenues during thereporting period when the end user licenses the game. Determination of the appropriate amount of revenue recognized involves judgmentsand estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates.The Company’s estimates for revenues include consideration of factors such as preliminary sales data, carrier-specific historical salestrends, the age of games and the expected impact of newly launched games, successful introduction of new handsets, promotions duringthe period and economic trends. When the Company receives the final carrier reports, to the extent not received within a reasonable timeframe following the end of each month, the Company records any differences between estimated revenues and actual revenues in thereporting period when the Company determines65Table of Contentsthe actual amounts. Historically, the revenues on the final revenue report have not differed by more than one half of 1% of the reportedrevenues for the period, which the Company deemed to be immaterial. Revenues earned from certain carriers may not be reasonablyestimated. If the Company is unable to reasonably estimate the amount of revenues to be recognized in the current period, the Companyrecognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of a game’s licensed revenues are fixed ordeterminable and collection is probable. To monitor the reliability of the Company’s estimates, management, where possible, reviews therevenues by carrier and by game on a weekly basis to identify unusual trends such as differential adoption rates by carriers or theintroduction of new handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from thearrangement until the Company receives payment and all other revenue recognition criteria have been met.In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, the Company recognizes as revenues theamount the carrier reports as payable upon the sale of the Company’s games. The Company has evaluated its carrier agreements and hasdetermined that it is not the principal when selling its games through carriers. Key indicators that it evaluated to reach this determinationinclude: • wireless subscribers directly contract with the carriers, which have most of the service interaction and are generally viewed as theprimary obligor by the subscribers; • carriers generally have significant control over the types of games that they offer to their subscribers; • carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes; • carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each game; • carriers generally must approve the price of the Company’s games in advance of their sale to subscribers, and the Company’smore significant carriers generally have the ability to set the ultimate price charged to their subscribers; and • the Company has limited risks, including no inventory risk and limited credit risk.Cash and Cash EquivalentsThe Company considers all investments purchased with an original or remaining maturity of three months or less at the date ofpurchase to be cash equivalents. The Company deposits cash and cash equivalents with financial institutions that management believesare of high credit quality. Deposits held with financial institutions are likely to exceed the amount of insurance on these deposits.Short-Term InvestmentsThe Company invested in auction-rate securities that were bought and sold in the marketplace through a bidding process sometimesreferred to as a “Dutch Auction.” After the initial issuance of the securities, the interest rate on the securities was reset periodically, atintervals set at the time of issuance (e.g., every seven, 28 or 35 days or every six months), based on the market demand at the resetperiod. The “stated” or “contractual” maturities for these securities, however, generally were 20 to 30 years.The Company classified these investments as available-for-sale securities under ASC 320, Investments-Debt and Equity Securities(“ASC 320”). In accordance with ASC 320, these securities were reported at fair value with any changes in market value reported as apart of comprehensive income/(loss). No unrealized gains or losses were recognized during the years ended December 31, 2009, 2008 or2007.The Company periodically reviews these investments for impairment. In the event the carrying value of an investment exceeds itsfair value and the decline in fair value is determined to be other-than-temporary, the Company writes down the value of the investment toits fair value. The Company recorded an $806 write down due to a decline in fair value of two failed auctions as of December 31, 2007that was determined to be other-than-temporary based on quantitative and qualitative assumptions and estimates using valuation modelsincluding a firm liquidation quote provided by the sponsoring broker and an analysis of other-than-temporary66Table of Contentsimpairment factors including the use of cash for the two recent acquisitions, the ratings of the underlying securities, the Company’s intentto continue to hold these securities and further deterioration in the auction-rate securities market. These securities were redeemed at theirrespective par values by the sponsoring broker in the fourth quarter of 2008, resulting in an $806 realized gain for the year endedDecember 31, 2008. The Company had no auction-rate securities as of December 31, 2009.Concentration of Credit RiskFinancial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable.The Company derives its accounts receivable from revenues earned from customers located in the U.S. and other locations outsideof the U.S. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateralfrom its customers. The Company bases its allowance for doubtful accounts on management’s best estimate of the amount of probablecredit losses in the Company’s existing accounts receivable. The Company reviews past due balances over a specified amountindividually for collectibility on a monthly basis. It reviews all other balances quarterly. The Company charges off accounts receivablebalances against the allowance when it determines that the amount will not be recovered.The following table summarizes the revenues from customers in excess of 10% of the Company’s revenues: Year Ended December 31, 2009 2008 2007Verizon Wireless 20.5% 21.4% 23.0%At December 31, 2009 and 2008, Verizon Wireless accounted for 24.1% and 25.7% of total accounts receivable, respectively. Noother customer represented greater than 10% of the Company’s revenues or accounts receivable in these periods or as of these dates.Fair ValueEffective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). OnJanuary 1, 2009, the Company adopted ASC 820 as it applies to non-financial assets and liabilities. The adoption of ASC 820 did nothave a material impact on the Company’s consolidated financial statements. ASC 820 defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange pricethat would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the assetor liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fairvalue under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describesa fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that maybe 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 orliabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observablemarket 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 theassets or liabilities.The adoption of ASC 820 requires additional disclosures of assets and liabilities measured at fair value (see Note 4); it did not havea material impact on the Company’s consolidated results of operations and financial condition.Effective January 1, 2008, the Company adopted ASC 825, Financial Instruments (“ASC 825”) which permits entities to chooseto measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.The Company did not elect to adopt the fair value option under ASC 825 as67Table of Contentsthis Statement is not expected to have a material impact on the Company’s consolidated results of operations and financial condition.Prepaid or Guaranteed Licensor RoyaltiesThe Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property,including trademarks and copyrights, in the development of the Company’s games. Royalty-based obligations are either paid in advanceand capitalized on the balance sheet as prepaid royalties or accrued as incurred and subsequently paid. These royalty-based obligationsare expensed to cost of revenues at the greater of the revenues derived from the relevant game multiplied by the applicable contractual rateor an effective royalty rate based on expected net product sales. Advanced license payments that are not recoupable against future royaltiesare capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of theultimate volume of sales to end users. In accordance with ASC 460-10-15, Guarantees (“ASC 460”), the Company recorded a minimumguaranteed liability of approximately $3,867 and $12,514 as of December 31, 2009 and 2008, respectively. When no significantperformance remains with the licensor, the Company initially records each of these guarantees as an asset and as a liability at thecontractual amount. The Company believes that the contractual amount represents the fair value of the liability. When significantperformance remains with the licensor, the Company records royalty payments as an asset when actually paid and as a liability whenincurred, rather than upon execution of the contract. The Company classifies minimum royalty payment obligations as current liabilitiesto the extent they are contractually due within the next twelve months.Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized guarantees not yet paid to determineamounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenues, cash flows and netmargins to evaluate the future realization of prepaid royalties and guarantees. This evaluation considers multiple factors, including theterm of the agreement, forecasted demand, game life cycle status, game development plans, and current and anticipated sales levels, aswell as other qualitative factors such as the success of similar games and similar genres on mobile devices for the Company and itscompetitors and/or other game platforms (e.g., consoles, personal computers and Internet) utilizing the intellectual property and whetherthere are any future planned theatrical releases or television series based on the intellectual property. To the extent that this evaluationindicates that the remaining prepaid and guaranteed royalty payments are not recoverable, the Company records an impairment charge tocost of revenues in the period that impairment is indicated. The Company did not incur impairment charges to cost of revenues in the yearended December 31, 2007, but recorded impairment charges to cost of revenues of $6,591 and $6,313 during the years endedDecember 31, 2009 and 2008, respectively.Goodwill and Intangible AssetsIn accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’s goodwill is not amortized but istested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assetsmay not be recoverable. Under ASC 350, the Company performs the annual impairment review of its goodwill balance as ofSeptember 30. This impairment review involves a two-step process as follows:Step — 1 The Company compares the fair value of each of its reporting units to the carrying value including goodwill of that unit.For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to step 2. If aunit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.Step — 2 The Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and intangible assets(other than goodwill) and liabilities. This allows the Company to derive an implied fair value for the unit’s goodwill. The Company thencompares the implied fair value of the reporting unit’s goodwill with the carrying value of the unit’s goodwill. If the carrying amount of theunit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge would be recognized for the excess.68Table of ContentsPurchased intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from one tosix years and are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”).Long-Lived AssetsThe Company evaluates its long-lived assets, including property and equipment and intangible assets with finite lives, forimpairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable inaccordance with ASC 360. Factors considered important that could result in an impairment review include significant underperformancerelative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, significantnegative industry or economic trends, and a significant decline in the Company’s stock price for a sustained period of time. TheCompany recognizes impairment based on the difference between the fair value of the asset and its carrying value. Fair value is generallymeasured based on either quoted market prices, if available, or a discounted cash flow analysis.Property and EquipmentThe Company states property and equipment at cost. The Company computes depreciation or amortization using the straight-linemethod over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the lease term of the respectiveassets, whichever is shorter.The depreciation and amortization periods for the Company’s property and equipment are as follows:Computer equipment Three yearsComputer software Three yearsFurniture and fixtures Three yearsLeasehold improvements Shorter of the estimated useful life or remaining term of leaseResearch and Development CostsThe Company charges costs related to research, design and development of products to research and development expense asincurred. The types of costs included in research and development expenses include salaries, contractor fees and allocated facilities costs.Software Development CostsThe Company applies the principles of ASC 985-20, Software-Costs of Computer Software to Be Sold, Leased, or OtherwiseMarketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development becharged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale,software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.The Company has adopted the “tested working model” approach to establishing technological feasibility for its games. Under thisapproach, the Company does not consider a game in development to have passed the technological feasibility milestone until the Companyhas completed a model of the game that contains essentially all the functionality and features of the final game and has tested the model toensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technologicalfeasibility and the release of a game for sale; thus, the Company has expensed all software development costs as incurred. The Companyconsiders the following factors in determining whether costs can be capitalized: the emerging nature of the mobile game market; thegradual evolution of the wireless carrier platforms and mobile phones for which it develops games; the lack of pre-orders or sales historyfor its games; the uncertainty regarding a game’s revenue-generating potential; its lack of control over the carrier distribution channelresulting in uncertainty as to when, if ever, a game will be available for sale; and its historical practice of canceling games at any stage ofthe development process.69Table of ContentsInternal Use SoftwareThe Company recognizes internal use software development costs in accordance with ASC 350-40, Intangibles-Goodwill andOther-Internal Use Software (“ASC 350-40”). Thus, the Company capitalizes software development costs, including costs incurred topurchase third-party software, beginning when it determines certain factors are present including, among others, that technology exists toachieve the performance requirements and/or buy versus internal development decisions have been made. The Company capitalizedcertain internal use software costs totaling approximately $114, $432 and $482 during the years ended December 31, 2009, 2008 and2007, respectively. The estimated useful life of costs capitalized is generally three years. During the years ended December 31, 2009, 2008and 2007, the amortization of capitalized software costs totaled approximately $421, $683 and $663, respectively. Capitalized internaluse software development costs are included in property and equipment, net.Income TaxesThe Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires recognition ofdeferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements ortax returns. Under ASC 740, the Company determines deferred tax assets and liabilities based on the temporary difference between thefinancial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which it expects the differencesto reverse. The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amount it expects to realize.On January 1, 2007, the Company adopted the guidance contained in ASC 740 relating to uncertain tax positions, whichsupplemented existing guidance by defining the confidence level that a tax position must meet in order to be recognized in the financialstatements. ASC 740 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained basedsolely on its technical merits as of the reporting date. The Company considers many factors when evaluating and estimating its taxpositions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.ASC 740 guidance relating to uncertain tax positions, requires companies to adjust their financial statements to reflect only those taxpositions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings andreported as a change in accounting principle as of the date of adoption. ASC 740 prescribes a comprehensive model for the financialstatement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income taxreturns. The total amount of unrecognized tax benefits as of the adoption date was $575. The Company’s policy is to recognize interestand penalties related to unrecognized tax benefits in income tax expense. See Note 12 for additional information, including the effects ofadoption on the Company’s consolidated financial position, results of operations and cash flows.RestructuringThe Company accounts for costs associated with employee terminations and other exit activities in accordance with ASC 420, Exitor Disposal Cost Obligations (“ASC 420”). The Company records employee termination benefits as an operating expense when itcommunicates the benefit arrangement to the employee and it requires no significant future services, other than a minimum retentionperiod, from the employee to earn the termination benefits.Stock-Based CompensationThe Company applies the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”). ASC 718requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments includingstock options. ASC 718 requires companies to estimate the fair value of share-based payment awards on the grant date using an optionpricing model. The Company adopted ASC 718 using the prospective transition method, which requires, that for nonpublic entities thatused the minimum value method for either pro forma or financial statement recognition purposes, ASC 718 shall be applied to optiongrants on and after70Table of Contentsthe required effective date. For options granted prior to the ASC 718 effective date that remain unvested on that date, the Companycontinues to recognize compensation expense under the intrinsic value method of APB 25. In addition, the Company continues to amortizethose awards valued prior to January 1, 2006 utilizing an accelerated amortization schedule, while it expenses all options granted ormodified after January 1, 2006 on a straight-line basis.The Company has elected to use the “with and without” approach as described in determining the order in which tax attributes areutilized. As a result, the Company will only recognize a tax benefit from stock-based awards in additional paid-in capital if anincremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized. In addition, theCompany has elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research tax credit,through its statement of operations.The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 718 and ASC505-50.Advertising ExpensesThe Company expenses the production costs of advertising, including direct response advertising, the first time the advertisingtakes place. Advertising expense was $1,734, $1,870 and $1,422 in the years ended December 31, 2009, 2008 and 2007, respectively.Comprehensive Income/(Loss)Comprehensive income/(loss) consists of two components, net income/(loss) and other comprehensive income/(loss). Othercomprehensive income/(loss) refers to gains and losses that under GAAP are recorded as an element of stockholders’ equity but areexcluded from net income/(loss). The Company’s other comprehensive income/(loss) included only foreign currency translationadjustments as of December 31, 2009.Foreign Currency TranslationIn preparing its consolidated financial statements, the Company translated the financial statements of its foreign subsidiaries fromtheir functional currencies, the local currency, into U.S. Dollars. This process resulted in unrealized exchange gains and losses, whichare included as a component of accumulated other comprehensive loss within stockholders’ deficit.Cumulative foreign currency translation adjustments include any gain or loss associated with the translation of a subsidiary’sfinancial statements when the functional currency of a subsidiary is the local currency. However, if the functional currency is deemed tobe the U.S. Dollar, any gain or loss associated with the translation of these financial statements would be included within the Company’sstatements of operations. If the Company disposes of any of its subsidiaries, any cumulative translation gains or losses would be realizedand recorded within the Company’s statement of operations in the period during which the disposal occurs. If the Company determinesthat there has been a change in the functional currency of a subsidiary relative to the U.S. Dollar, any translation gains or losses arisingafter the date of change would be included within the Company’s statement of operations.Net Loss per ShareThe Company computes basic net loss per share attributable to common stockholders by dividing its net loss attributable tocommon stockholders for the period by the weighted average number of common shares outstanding during the period less the weightedaverage unvested common shares subject to repurchase by the Company. Net loss attributable to common stockholders is calculatedusing the two-class method; however, preferred stock dividends were not included in the Company’s diluted net loss per sharecalculations because to do so would be anti-dilutive for all periods presented.71Table of Contents Year Ended December 31, 2009 2008 2007 Net loss attributable to common stockholders $(18,194) $(106,692) $(6,473)Basic and diluted shares: Weighted average common shares outstanding 29,854 29,399 23,263 Weighted average unvested common shares subject to repurchase (1) (20) (82)Weighted average shares used to compute basic and diluted net loss per share 29,853 29,379 23,281 Net loss per share attributable to common stockholders — basic and diluted $(0.61) $(3.63) $(0.28)The following weighted average convertible preferred stock, options and warrants to purchase common stock and unvested shares ofcommon stock subject to repurchase have been excluded from the computation of diluted net loss per share of common stock for theperiods presented because including them would have had an anti-dilutive effect: Year Ended December 31, 2009 2008 2007Convertible preferred stock upon conversion to common stock — — 3,702 Warrants to purchase common stock 106 119 210 Unvested common shares subject to repurchase 1 20 81 Options to purchase common stock 4,935 4,607 3,436 5,042 4,746 7,429 Recent Accounting PronouncementsIn September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements — a consensus of theFASB Emerging Issues Task Force (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currentlyincluded under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements withMultiple Deliverables (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need forobjective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit ofaccounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands thedisclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or afterJune 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year ofadoption. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.In October 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements — aconsensus of the FASB Emerging Issues Task Force (ASU 2009-14) which amended the accounting requirements under the SoftwareTopic, ASC 985-605 Revenue Recognition. The objective of this update is to address the accounting for revenue arrangements thatcontain tangible products and software. Specifically, products that contain software that is “more than incidental” to the product as awhole will be removed from the scope of ASC subtopic 985-605 (previously AICPA Statement of Position 97-2). The amendments alignthe accounting for these revenue transaction types with the amendments under ASU 2009-13 mentioned above. The guidance providedwithin ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospectiveapplication, with early adoption permitted. The adoption of this standard update is not expected to impact the Company’s consolidatedfinancial statements.In August 2009, the FASB issued Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — MeasuringLiabilities at Fair Value (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value72Table of ContentsMeasurements and Disclosures, of the Codification to provide further guidance on how to measure the fair value of a liability. Itprimarily does three things: (1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an activemarket for the identical liability is not available, (2) clarifies that when estimating the fair value of a liability, a reporting entity is notrequired to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of theliability and (3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted pricefor the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required areLevel 1 fair value measurements. This standard became effective beginning in the fourth quarter of 2009 for the Company. The adoptionof this standard update did not impact the Company’s consolidated financial statements.Effective July 1, 2009, the Company adopted ASC105-10, Generally Accepted Accounting Principles (“ASC 105-10”) (the“Codification”). ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except forSEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification will supersede all existingnon-SEC accounting and reporting standards. The Company has included the references to the Codification, as appropriate, in theseconsolidated financial statements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact onthe Company’s consolidated financial statements.Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855-10”). The standard modifies the namesof the two types of subsequent events either as “recognized subsequent events” (previously referred to in practice as Type I subsequentevents) or “non-recognized subsequent events” (previously referred to in practice as Type II subsequent events). In addition, the standardmodifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before thefinancial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of thedate through which subsequent events have been evaluated. The adoption of this standard did not have any impact on the Company’sconsolidated financial statements.Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additionalapplication guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provideadditional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65,provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, ascodified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities byreplacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order toconclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and itwill not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended afterJune 15, 2009. The adoption of these accounting updates did not have any impact on the Company’s consolidated financial statements.Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations, ASC 805,which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also provides guidancefor recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 appliesprospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. Although the Company did not enter into any business combinations during 2009, theCompany believes ASC 805-10 may have a material impact on the Company’s future consolidated financial statements if the Companywere to enter into any future business combinations depending on the size and nature of any such future transactions.73Table of ContentsNOTE 3 —ACQUISITIONSAcquisition of Superscape Group plcOn March 7, 2008, the Company declared its cash tender offer for all of the outstanding shares of Superscape Group plc(“Superscape”) wholly unconditional in all respects when it had received 80.95% of the issued share capital of Superscape. TheCompany offered 10 pence (pound sterling) in cash for each issued share of Superscape (“Superscape Shares”), valuing the acquisitionat approximately £18,300 based on 183,099 Superscape Shares outstanding.The Company acquired the net assets of Superscape in order to deepen and broaden its game library, gain access to 3-D gamedevelopment and to augment its internal production and publishing resources with a studio in Moscow, Russia. These factors contributedto a purchase price in excess of the fair value of the net tangible and intangible assets acquired, and as a result, the Company recorded$13,432 of goodwill in connection with this transaction.On March 21, 2008, the date the recommended cash tender offer expired, the Company owned or had received valid acceptancesrepresenting approximately 93.57% of the Superscape Shares, with an aggregate purchase price of $34,477. In May 2008, the Companyacquired the remaining 6.43% of the outstanding Superscape shares on the same terms as the recommended cash offer for $2,335.The Company’s consolidated financial statements include the results of operations of Superscape from the date of acquisition,March 7, 2008. Under the purchase method of accounting, the Company initially allocated the total purchase price of $38,810 to the nettangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date.The following summarizes the purchase price allocation of the Superscape acquisition:Assets acquired: Cash $8,593 Accounts receivable 4,353 Prepaid and other current assets 1,507 Property and equipment 182 Titles, content and technology 9,190 Carrier contracts and relationships 7,400 Trade name 330 In-process research and development 1,110 Goodwill 13,432 Total assets acquired 46,097 Liabilities assumed: Accounts payable (2,567)Accrued liabilities (585)Accrued compensation (367)Accrued restructuring (3,768)Total liabilities (7,287)Net acquired assets $38,810 The Company recorded an estimate for costs to terminate some activities associated with the Superscape operations in accordancewith the guidance of ASC 805. This restructuring accrual of $3,768 principally related to the termination of 29 Superscape employees of$2,277, restructuring of facilities of $1,466 and other agreement termination fees of $25.74Table of ContentsThe valuation of the identifiable intangible assets acquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. The allocation was generally based on the fair value of these assets determined using theincome and market approaches. Of the total purchase price, $16,920 was allocated to amortizable intangible assets. The amortizableintangible assets are being amortized using a straight-line method over their respective estimated useful lives of one to six years.In conjunction with the acquisition of Superscape, the Company recorded a $1,110 expense for acquired in-process research anddevelopment (“IPR&D”) during the year ended December 31, 2008 because feasibility of the acquired technology had not been establishedand no future alternative uses existed. The IPR&D expense is included in operating expenses in the consolidated statements of operationsfor the year ended December 31, 2008.The IPR&D is related to the development of new game titles. The Company determined the value of acquired IPR&D using thediscounted cash flow approach. The Company calculated the present value of the expected future cash flows attributable to the in-processtechnology using a 22% discount rate.The Company allocated the residual value of $13,432 to goodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance with ASC 350, goodwill will not be amortized but will be tested forimpairment at least annually. Goodwill is not deductible for tax purposes. Based on the Company’s annual and interim goodwillimpairment tests, all of the goodwill related to the Superscape acquisition that had been attributed to the Americas reporting unit wasimpaired during the year ended December 31, 2008 (see Note 6).Superscape’s results of operations have been included in the Company’s consolidated financial statements subsequent to the date ofacquisition. The financial information in the table below summarizes the combined results of operations of the Company andSuperscape, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented, andexcludes the IPR&D charge of $1,110 resulting from the acquisition of Superscape: Year Ended December 31, 2008 2007Total pro forma revenues $92,480 $81,361 Gross profit 50,025 47,684 Pro forma net loss (109,275) (18,073)Pro forma net loss per share — basic and diluted (3.72) (0.78)The Company is presenting pro forma financial information for informational purposes only, and this information is not intended tobe indicative of the results of operations that would have been achieved if the acquisitions hadAcquisition of Beijing Zhangzhong MIG Information Technology Co. Ltd.On December 19, 2007, the Company acquired the net assets of Awaken Limited group affiliates. Awaken Limited’s principaloperations are through Beijing Zhangzhong MIG Information Technology (“MIG”), a domestic limited liability company organized underthe laws of the People’s Republic of China (the “PRC”). The Company refers to the acquired companies collectively as “MIG.” TheCompany acquired MIG in order to accelerate the Company’s presence in China, to deepen Glu’s relationship with China Mobile, thelargest wireless carrier in China, to acquire access and rights to leading franchises for the Chinese market, and to augment its internalproduction and publishing resources with a studio in China. These factors contributed to a purchase price in excess of the fair value ofnet tangible and intangible assets acquired, and, as a result, the Company recorded goodwill of $23,390 in connection with thistransaction.The Company purchased all of the issued and outstanding shares of MIG for a total purchase price of $30,534 which consisted ofinitial cash consideration paid to MIG shareholders of $14,655, transaction costs of $1,343 and contingent earnout of $14,536. Subjectto MIG’s achievement of certain revenue and operating income milestones for the year ended December 31, 2008, the Company committedto pay additional consideration of $20,000 to the MIG shareholders and bonus payments of $5,000 to two officers of MIG who were alsoformer shareholders of MIG. As of the acquisition date, these two shareholders owned 27% of the outstanding shares of MIG. Inaccordance with ASC 805, the Company has not75Table of Contentsrecorded the additional consideration or bonus in the initial purchase price as these amounts were contingent on MIG’s future earnings.The Company recorded the contingent consideration and bonus earned by the two former MIG shareholders (totaling $10,400) ascompensation over the one year vesting period ended December 29, 2008, at which time the agreement was amended.In December 2008, the Company amended the merger agreement to acknowledge the full achievement of the earnout milestones,issued secured promissory notes for the full earnout of $20,000 (the “Earnout Notes”) and issued secured promissory notes for the specialbonus of $5,000 eligible to each of two officers of MIG who were also former shareholders of MIG (the “Special Bonus Notes”). Theamendment provides that the $20,000 earnout payment and $5,000 special bonus payment to the MIG shareholders shall be satisfied bythe issuance of the Earnout Notes and the Special Bonus Notes. During the year ended December 31, 2009, the Company paid $14,000of principal and $191 of interest to the MIG shareholders related to the Earnout Notes. The Earnout Notes originally required that theCompany pay off the remaining principal and interest in installments with aggregate principal payments scheduled for March 31, 2010($1,500), June 30, 2010 ($1,500), September 30, 2010 ($1,500) and December 31, 2010 ($1,500). The Special Bonus Notes originallyprovided for cash payments of $937 in the aggregate on each of March 31, 2010 and June 30, 2010, and of $1,563 in the aggregate oneach of September 30, 2010 and December 31, 2010. Additionally, the Company released one of the officers of MIG, who was also aformer shareholder of MIG from all future employment and service obligations initially required for vesting in the special bonus andmodified the employment obligation required for vesting in the special bonus for the other former shareholder of MIG from December 31,2009 to June 30, 2009. In March 2010, the Company entered into an agreement with the holders of the Earnout Notes and the SpecialBonus Notes to postpone the payments that would have been due on March 31, 2010 until at least May 1, 2010. See Note 8 for additionalinformation regarding the Earnout Notes and Special Bonus Notes.The Company’s consolidated financial statements include the results of operations of MIG from the date of acquisition. Under thepurchase method of accounting, the Company allocated the total purchase price of $30,534 to the net tangible and intangible assetsacquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date. The following summarizesthe purchase price allocation of the MIG acquisition:Assets acquired: Cash $1,899 Accounts receivable 843 Prepaid and other current assets 20 Property and equipment 71 Intangible assets: Content and technology 490 Existing Titles 2,200 Carrier contracts and relationships 8,510 Service providers license 400 Trade names 110 In-process research and development 59 Goodwill 23,390 Total assets acquired 37,992 Liabilities assumed: Accounts payable (21)Accrued liabilities (567)Accrued compensation (106)Total current liabilities (694)Long-term deferred tax liabilities (2,934)Other long-term liabilities (3,830)Total liabilities (7,458)Net acquired assets $30,534 76Table of ContentsThe valuation of the identifiable intangible assets acquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. The allocation was generally based on the fair value of these assets determined using theincome and market approaches. Of the total purchase price, $11,710 was allocated to amortizable intangible assets. The amortizableintangible assets are being amortized over the respective estimated useful life of two to nine years.In conjunction with the acquisition of MIG, the Company recorded a $59 expense for IPR&D during the fourth quarter of 2007because feasibility of the acquired technology had not been established and no future alternative uses existed. The IPR&D expense isincluded in operating expenses in the Company’s consolidated statements of operation for the year ended December 31, 2007.The IPR&D is related to the development of a new title. The Company determined the value of acquired IPR&D using the discountedcash flow approach. The Company calculated the present value of the expected future cash flows attributable to the in-process technologyusing a 21% discount rate. The cash flows generated from this new title began in 2008. This rate takes into account the percentage ofcompletion of the development effort of approximately 60% and the risks associated with the Company’s developing this technology givenchanges in trends and technology in the industry. As of February 29, 2008, this acquired IPR&D project had been completed at costssimilar to the original projections.The Company allocated the residual value of $23,390 to goodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. Any changes in consideration, transaction costs or fair value of MIG’s net assetsmay change the preliminary purchase price allocation and amount of goodwill recorded by the Company. In accordance with ASC 350,goodwill will not be amortized but will be tested for impairment at least annually. Goodwill is not deductible for tax purposes. Based onthe Company’s annual and interim goodwill impairment tests, a portion of the goodwill related to the MIG acquisition that had beenattributed to the APAC reporting unit was impaired during the year ended December 31, 2008 (see Note 6).MIG’s results of operations have been included in the Company’s consolidated financial statements subsequent to the date ofacquisition. The financial information in the table below summarizes the combined results of operations of the Company and MIG, on apro forma basis, as though the companies had been combined as of the beginning of each of the periods presented: December 31, 2007Total pro forma revenues $69,543 Gross profit 46,379 Pro forma net loss (6,596)Pro forma net loss per share — basic and diluted (0.28)The Company is presenting pro forma financial information for informational purposes only, and this information is not intended tobe indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of theperiods presented.NOTE 4 —SHORT-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTSShort-Term InvestmentsThe Company did not have any marketable securities classified as available-for-sale as of December 31, 2009. The Company had$124 of marketable securities classified as available-for-sale as of December 31, 2008 which approximates fair value.Fair Value MeasurementsThe Company’s cash and investment instruments are classified within Level 1 of the fair value hierarchy because they are valuedusing quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Thetypes of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities,sovereign government obligations, and money77Table of Contentsmarket securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. As of December 31, 2009, theCompany had $10,510 in cash and cash equivalents.NOTE 5 —BALANCE SHEET COMPONENTSProperty and Equipment December 31, 2009 2008 Computer equipment $5,167 $4,644 Furniture and fixtures 455 386 Software 2,742 2,628 Leasehold improvements 3,360 3,055 11,724 10,713 Less: Accumulated depreciation and amortization (8,380) (5,852) $3,344 $4,861 Depreciation and amortization for the years ended December 31, 2009, 2008 and 2007 were $2,330, $2,748 and $2,085,respectively.Accounts Receivable December 31, 2009 2008 Accounts receivable $16,576 $20,294 Less: Allowance for doubtful accounts (546) (468) $16,030 19,826 Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates.The movement in the Company’s allowance for doubtful accounts is as follows: Balance at Balance at Beginning of End ofDescription Year Additions Deductions YearYear ended December 31, 2009 $468 $233 $155 $546 Year ended December 31, 2008 $368 $148 $48 $468 Year ended December 31, 2007 $466 $64 $162 $368 The Company had no significant write-offs or recoveries during the years ended December 31, 2009, 2008 and 2007.Other Long-Term Liabilities December 31, 2009 2008 Accrued royalties $96 $3,409 Uncertain tax obligations 4,614 4,399 Deferred income tax liability 1,736 2,461 Other 1,170 1,529 $7,616 11,798 78Table of ContentsNOTE 6 —GOODWILL AND INTANGIBLE ASSETSIntangible AssetsThe Company’s intangible assets were acquired in connection with the acquisitions of Macrospace in 2004, iFone in 2006, MIG in2007 and Superscape in 2008. The carrying amounts and accumulated amortization expense of the acquired intangible assets, includingthe impact of foreign currency exchange translation at December 31, 2009 and 2008 were as follows: December 31, 2009 December 31, 2008 Accumulated Accumulated Amortization Amortization Expense Expense (Including (Including Estimated Gross Impact of Net Gross Impact of Net Useful Carrying Foreign Carrying Carrying Foreign Carrying Life Value Exchange) Value Value Exchange) Value Intangible assets amortized to cost ofrevenues: Titles, content and technology 2.5 yrs $13,599 $(13,411) $188 $13,370 $(10,478) $2,892 Catalogs 1 yr 1,239 (1,239) — 1,126 (1,126) — ProvisionX Technology 6 yrs 204 (168) 36 185 (119) 66 Carrier contract and related relationships 5 yrs 18,558 (7,149) 11,409 18,463 (3,845) 14,618 Licensed content 5 yrs 2,753 (1,902) 851 2,744 (1,029) 1,715 Service provider license 9 yrs 431 (98) 333 432 (50) 382 Trademarks 3 yrs 544 (512) 32 540 (285) 255 37,328 (24,479) 12,849 36,860 (16,932) 19,928 Other intangible assets amortized tooperating expenses: Emux Technology 6 yrs 1,321 (1,111) 210 1,201 (809) 392 Noncompete agreement 2 yrs 578 (578) — 525 (525) — 1,899 (1,689) 210 1,726 (1,334) 392 Total intangibles assets $39,227 $(26,168) $13,059 $38,586 $(18,266) $20,320 Additions to intangible assets in 2008 of $16,920 are a result of the Superscape acquisition and additions in 2007 of $11,710 are aresult of the MIG acquisition (see note 3).The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost ofrevenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities inoperating expenses. During the years ended December 31, 2009, 2008 and 2007, the Company recorded amortization expense in theamounts of $7,092, $11,309 and $2,201, respectively, in cost of revenues. During the years ended December 31, 2009, 2008 and 2007,the Company recorded amortization expense in the amounts of $215, $261 and $275, respectively, in operating expenses. TheCompany recorded no impairment charges during the years ended December 31, 2009, 2008 and 2007.79Table of ContentsAs of December 31, 2009, the total expected future amortization related to intangible assets was as follows: Amortization Amortization Included in Included in Total Cost of Operating Amortization Period Ending December 31, Revenues Expenses Expense 2010 $4,231 $210 $4,441 2011 2,858 — 2,858 2012 2,738 — 2,738 2013 2,671 — 2,671 2014 270 — 270 2015 and thereafter 81 — 81 $12,849 $210 $13,059 GoodwillThe Company attributes all of the goodwill resulting from the Macrospace acquisition to its EMEA reporting unit. The goodwillresulting from the iFone acquisition is evenly attributed to the Americas and EMEA reporting units. The Company attributes all of thegoodwill resulting from the MIG acquisition to its APAC reporting unit and all of the goodwill resulting from the Superscape acquisition tothe Americas reporting unit. The goodwill allocated to the Americas reporting unit is denominated in U.S. Dollars, the goodwill allocated tothe EMEA reporting unit is denominated in Pounds Sterling and the goodwill allocated to the APAC reporting unit is denominated inChinese Renminbi. As a result, the goodwill attributed to the EMEA and APAC reporting units are subject to foreign currencyfluctuations.Goodwill by geographic region is as follows: December 31, 2009 December 31, 2008 Americas EMEA APAC Total Americas EMEA APAC Total Balance as of January 1 Goodwill $24,871 $25,354 $23,895 $74,120 $11,426 $27,860 $7,976 $47,262 Accumulated Impairment Losses (24,871) (25,354) (19,273) (69,498) — — — — — — 4,622 4,622 11,426 27,860 7,976 47,262 Goodwill Acquired during the year — — — — 13,445 — — 13,445 Effects of Foreign Currency Exchange — — (14) (14) — (2,506) 409 (2,097)Adjustments — — — — — — 15,510 15,510 Impairment Losses — — — — (24,871) (25,354) (19,273) (69,498)Balance as of December 31 — — 4,608 4,608 — — 4,622 4,622 Goodwill 24,871 25,354 23,881 74,106 24,871 25,354 23,895 74,120 Accumulated Impairment Losses (24,871) (25,354) (19,273) (69,498) (24,871) (25,354) (19,273) (69,498) $— $— $4,608 $4,608 $— $— $4,622 $4,622 Goodwill was acquired during 2008 as a result of the Superscape acquisition (see Note 3). The net adjustment increase to goodwill in2008 of $15,510 was a result of additional purchase consideration for MIG of $14,536 due to the restructuring in the fourth quarter of2008 of the MIG earnout payments and additional professional fees of $974 related to the MIG acquisition.In accordance with ASC 350, the Company’s goodwill is not amortized but is tested for impairment on an annual basis or wheneverevents or changes in circumstances indicate that the carrying amount of these assets may80Table of Contentsnot be recoverable. Under ASC 350, the Company performs the annual impairment review of its goodwill balance as of September 30.ASC 350 requires a two-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events orchanges in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairmentby applying the fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment byapplying the fair value-based tests to individual assets and liabilities within each reporting units. The fair value of the reporting units areestimated using a combination of the market approach, which utilizes comparable companies’ data, and/or the income approach, whichuses discounted cash flows.The Company has three geographic segments comprised of the 1) Americas, 2) APAC and 3) EMEA regions. As of December 31,2009, the Company had goodwill attributable to the APAC reporting unit. The Company performed an annual impairment review as ofSeptember 30, 2009 as prescribed in ASC 350 and concluded that it was not at risk of failing the first step, as the fair value of the APACreporting unit exceeded its carrying value and thus no adjustment to the carrying value of goodwill was necessary. As a result, theCompany was not required to perform the second step. In order to determine the fair value of the Company’s reporting units, theCompany utilizes the discounted cash flow and market methods. The Company has consistently utilized both methods in its goodwillimpairment 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 cashflow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Company’smarket sector including its competitors. The assumptions supporting the discounted cash flow method, were determined using theCompany’s best estimates as of the date of the impairment review.In 2008, the Company recorded an aggregate goodwill impairment of $69,498 as the fair values of the Americas, APAC and EMEAreporting units were determined to be below their respective carrying values.NOTE 7 —COMMITMENTS AND CONTINGENCIESLeasesThe Company leases office space under non-cancelable operating facility leases with various expiration dates through July 2013.Rent expense for the years ended December 31, 2009, 2008 and 2007 was $2,813, $3,759 and $2,092, respectively. The terms of thefacility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over thelease period, and has accrued for rent expense incurred but not paid. The deferred rent balance was $440 and $606 at December 31, 2009and 2008, respectively, and was included within other long-term liabilities.At December 31, 2009, future minimum lease payments under non-cancelable operating leases were as follows: Minimum Operating Net Lease Sub-lease Lease Period Ending December 31, Payments Income Payments 2010 $3,412 $103 $3,309 2011 3,018 83 2,935 2012 1,832 — 1,832 2013 and thereafter 196 — 196 $8,458 $186 $8,272 Minimum Guaranteed RoyaltiesThe Company has entered into license and development agreements with various owners of brands and other intellectual property todevelop and publish games for mobile handsets. Pursuant to some of these agreements, the81Table of ContentsCompany is required to pay minimum guaranteed royalties over the term of the agreements regardless of actual game sales. Futureminimum royalty payments for those agreements as of December 31, 2009 were as follows: Minimum Guaranteed Period Ending December 31, Royalties 2010 $5,626 2011 348 2012 42 2013 — 2014 and thereafter 50 $6,066 Commitments in the above table include $3,867 of guaranteed royalties that are included in the Company’s consolidated balancesheet as of December 31, 2009 because the licensors do not have any significant performance obligations. These commitments areincluded in both current and long-term prepaid and accrued royalties.Income TaxesAt this time, the settlement of the Company’s income tax liabilities cannot be determined; however, the liabilities are not expected tobecome due during 2010.Indemnification ArrangementsThe Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime forcertain events or occurrences while the officer or director is or was serving at the Company’s request in that capacity. The maximumpotential 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 portionof any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of theseindemnification agreements is minimal. Accordingly, the Company had recorded no liabilities for these agreements as of December 31,2009 or 2008.In the ordinary course of its business, the Company includes standard indemnification provisions in most of its license agreementswith carriers and other distributors. Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered orincurred in connection with its games, including as a result of intellectual property infringement and viruses, worms and other malicioussoftware. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and themaximum potential amount of future payments the Company could be required to make under these indemnification provisions isgenerally unlimited. The Company has never incurred costs to defend lawsuits or settle indemnified claims of these types. As a result, theCompany believes the estimated fair value of these indemnity provisions is minimal. Accordingly, the Company had recorded noliabilities for these provisions as of December 31, 2009 or 2008.ContingenciesFrom time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. Forexample, the Company is engaged in a contractual dispute with a licensor, Skinit, Inc., related to, among other claims, allegedunderpayment of royalties and failure to perform under a distribution agreement, pursuant to which Skinit previously claimed that it isowed approximately $600. On April 21, 2009, Skinit filed a complaint against the Company and other defendants, seeking unspecifieddamages plus attorney’s fees and costs. The complaint, filed in the Superior Court of California in Orange County (case number30-2009), alleges breach of contract, interference with economic relations, conspiracy and misrepresentation of fact. On June 25, 2009,the Company filed a motion in the Superior Court in Orange County requesting an order compelling Skinit to arbitrate its claim againstthe Company and requesting that the court stay the action pending the determination of the motion and the subsequent arbitration. OnJuly 30, 2009, the court granted the Company’s motion in its entirety and the dispute will now proceed to arbitration, which is currentlyscheduled to occur on August 9, 2010.82Table of ContentsThe Company does not believe it is party to any currently pending litigation, the outcome of which will have a material adverseeffect on its operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless ofoutcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion ofmanagement resources and other factors.NOTE 8 —DEBTMIG NotesIn December 2008, the Company amended the MIG merger agreement to acknowledge the full achievement of the earnout milestonesand at the same time entered into secured promissory notes in the aggregate principal amount of $20,000 payable to the former MIGshareholders (the “Earnout Notes”) as full satisfaction of the MIG earnout. The Earnout Notes require that the Company pay off theprincipal and interest in installments with aggregate remaining principal payments scheduled as follows:May 1, 2010 $1,500 June 30, 2010 $1,500 September 30, 2010 $1,500 December 31, 2010 $1,500 6,000 The Earnout Notes are secured by a lien on substantially all of the Company’s assets and are subordinated to the Company’sobligations to the lender under the Company’s revolving credit facility (as described in further detail under “Line of Credit Facility”below”), and any replacement credit facility that meets certain conditions. The Earnout Notes began accruing simple interest on April 1,2009 at the rate of 7% compounded annually and may be prepaid without penalty. A change of control of the Company accelerates thepayment of principal and interest under the Earnout Notes.During the year ended December 31, 2009, the Company paid $14,000 of principal and $191 of interest to the former MIGshareholders related to the Earnout Notes.In December 2008, the Company also entered into secured promissory notes in the aggregate principal amount of $5,000 payable totwo former shareholders of MIG (the “Special Bonus Notes”) as full satisfaction of the special bonus provisions of their employmentagreements. The Company currently intends to pay the $5,000 of principal plus accrued interest from cash held in China. The SpecialBonus Notes provide for principal payments as follows:May 1, 2010 $937 June 30, 2010 $937 September 30, 2010 $1,563 December 31, 2010 $1,563 5,000 The Special Bonus Notes are guaranteed by the Company and the Company’s obligations are secured by a lien on substantially allof the Company’s assets. The Special Bonus Notes are subordinated to the Company’s revolving credit facility and any replacementcredit facility that meets certain conditions. The Special Bonus Notes began accruing simple interest on April 1, 2009 at the rate of 7%compounded annually, and may be repaid in advance without penalty. A change of control of the Company accelerates the payment ofprincipal and interest under the Earnout Notes. The Company had recorded the entire $5,000 of the Special Bonus Notes as ofDecember 31, 2009 as the former MIG shareholders are fully vested in the special bonus.As of December 31, 2009, the Company’s remaining debt related to the Earnout and Special Bonus Notes was all current andamounted to $11,721.Based on the borrowing rates currently available to the Company with similar terms and maturities, the carrying value of theEarnout and Special Bonus Notes of $11,721 in principal and accrued interest approximates fair value.83Table of ContentsCredit FacilityIn December 2008, the Company entered into a revolving credit facility (the “Credit Facility”), which amended and superseded theLoan and Security Agreement entered into in February 2007, as amended. On August 24, 2009 and February 10, 2010, the Companyentered into amendments to the Credit Facility, which reduced certain of the minimum targets contained in the EBITDA-related covenantdiscussed below. The February 10, 2010 amendment also changed the measurement period for the EBITDA covenant from a rolling sixmonth calculation to a quarterly calculation. On March 18, 2010, the Company entered into a third amendment to the agreement whichextended the maturity date of the Credit Facility from December 22, 2010 until June 30, 2011 and increased the interest rate forborrowings under the Credit Facility by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%.The Credit Facility providesfor borrowings of up to $8,000, subject to a borrowing base equal to 80% of the Company’s eligible accounts receivable. The Company’sobligations under the Credit Facility are guaranteed by certain of the Company’s domestic and foreign subsidiaries and are secured bysubstantially all of the Company’s assets, including all of the capital stock of certain of the Company’s domestic subsidiaries and 65%of the capital stock of certain of its foreign subsidiaries.The interest rate for the Credit Facility is the lender’s prime rate, plus 1.75%, but no less than 5.0%. Interest is due monthly, withall 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 inDecember 2008 and paid an additional fee of $55 during December 2009. The Credit Facility limits the Company and certain of itssubsidiaries’ ability to, among other things, dispose of assets, make acquisitions, incur additional indebtedness, incur liens, paydividends and make other distributions, and make investments. The Credit Facility requires the Company to establish a separate accountat the lender for collection of its accounts receivables. All deposits into this account are automatically applied by the lender to theCompany’s outstanding obligations under the Credit Facility.In addition, under the Credit Facility, the Company must comply with the following financial covenants:(a) EBITDA. The Company must maintain, measured on consolidated basis as of the end of each of the following periods,EBITDA of at least the following:July 1, 2009 through December 31, 2009 $1,000 January 1, 2010 through March 31, 2010 $(2,100)April 1, 2010 through June 30, 2010 $(1,100)July 1, 2010 through September 30, 2010 $(500)October 1, 2010 through December 31, 2010 $1,750 January 1, 2011 through March 31, 2011 $(300)April 1, 2011 through June 30, 2011 $100 For purposes of the above covenant, EBITDA means (a) the Company’s consolidated net income, determined in accordance withU.S. GAAP, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net income, depreciation expense andamortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expense, plus (f) non-cash goodwill and otherintangible assets and royalty impairments, plus (g) non-cash foreign exchange translation charges, minus (h) all non-cash income of theCompany and its subsidiaries for such period.(b) Minimum Domestic Liquidity: The Company must maintain at the lender an amount of cash, cash equivalents and short-terminvestments of not less than the greater of: (a) 20% of the Company’s total consolidated unrestricted cash, cash equivalents and short-terminvestments, or (b) 15% of outstanding obligations under the Credit Facility.The Company’s failure to comply with the financial or operating covenants in the Credit Facility would not only prohibit theCompany from borrowing under the facility, but would also constitute a default, permitting the lender to, among other things, declare anyoutstanding borrowings, including all accrued interest and unpaid fees, becoming immediately due and payable. A change in control ofthe Company (as defined in the Credit Facility) also constitutes an event of default, permitting the lender to accelerate the indebtedness andterminate the Credit Facility.84Table of ContentsTo the extent an event of default occurs under the Credit Facility and the lender accelerates the indebtedness and terminates the CreditFacility, this would also trigger the cross-default provisions of the Earnout Notes and Special Bonus Notes.The Credit Facility also includes a “material adverse change” clause. As a result, if a material adverse change occurs with respect tothe Company’s business, operations or financial condition, then that change could constitute an event of default under the terms of theCredit 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 believesthat the risk of a material adverse change occurring with respect to its business, operations or financial condition and the lenderrequesting immediate repayment of amounts already borrowed, stopping advancing the remaining credit or terminating the Credit Facilityis remote.The Credit Facility matures on June 30, 2011, when all amounts outstanding will be due. If the Credit Facility is terminated prior tomaturity by the Company or by the lender after the occurrence and continuance of an event of default, then the Company will owe atermination fee equal to $80, or 1.00% of the total commitment.As of December 31, 2009, the Company was in compliance with all covenants of the Credit Facility and had outstandingobligations of $4,658. Based on the borrowing rates currently available to the Company with similar terms and maturities, the carryingvalue approximates fair value.NOTE 9 —SALE OF PROVISIONX SOFTWAREIn January 2007, the Company signed an agreement with a third party for the sale of its ProvisionX software for $1,100. Under theterms of the agreement, the Company will co-own the intellectual property rights to the ProvisionX software, excluding any alterations ormodifications following completion of the sale, by the third party. The Company recognized a net gain on the sale of assets of $1,040during the year ended December 31, 2007 which included approximately $60 of selling costs incurred during the transition.NOTE 10 —STOCKHOLDERS’ EQUITY/(DEFICIT)Common StockIn March 2007, the Company completed its IPO of common stock in which it sold and issued 7,300 shares of common stock at anissue price of $11.50 per share. The Company raised a total of $83,950 in gross proceeds from the IPO, or approximately $74,758 innet proceeds after deducting underwriting discounts and commissions of $5,877 and other offering costs of $3,315. Upon the closing ofthe IPO, all shares of redeemable convertible preferred stock outstanding automatically converted into 15,680 shares of common stock.In April 2007, the underwriters exercised a portion of the over-allotment option as to 199 shares, all of which were sold bystockholders and not by the Company.At December 31, 2009, the Company was authorized to issue 250,000 shares of common stock. As of December 31, 2009, theCompany had reserved 8,114 shares for future issuance under its stock plans and outstanding warrants.Preferred StockAt December 31, 2009, the Company was authorized to issue 5,000 shares of preferred stock.Warrants to Purchase Common StockUpon the effective date of the IPO, warrants to purchase 229 shares of redeemable convertible preferred stock converted intowarrants to purchase 229 shares of common stock. The Company classified the freestanding redeemable convertible preferred stockwarrants as a liability and adjusted the warrants to fair value at each reporting period until the completion of the IPO. Upon closing of theIPO, the preferred stock warrant liability of $1,985 was reclassed to additional paid-in capital. During the year ended December 31,2007, a holder of warrants85Table of Contentselected to net exercise warrants to purchase 52 shares of common stock which were converted to 41 shares of common stock.In February 2007, the Company issued warrants to purchase an aggregate of 272 shares of common stock with an exercise price of$0.0003 per share to certain holders of Series D or D-1 redeemable convertible preferred stock as an inducement for these holders toconvert their preferred stock into common stock upon the consummation of the Company’s IPO. These warrants expired 30 daysfollowing the completion of the Company’s IPO, and if the date of effectiveness of that offering did not occur by March 31, 2007 orearlier, the warrants would expire at that time. In connection with the issuance of the warrants, the Company received an agreement toconvert all shares of preferred stock to common stock upon completion of the Company’s IPO from holders of the requisite number ofshares to cause that conversion, provided that the registration statement for the initial public offering was effective on or before March 31,2007. The Company recorded a deemed dividend of $3,130 in connection with the issuance of the warrants during the three monthsending March 31, 2007. The deemed dividend represented the fair value of the warrants and was calculated using the share price at thedate of the IPO closing of $11.50 per share and the strike price of the warrants of $0.0003 per share. These warrants were exercised inApril 2007.In March 2008, a holder of warrants elected to net exercise warrants to purchase 18 shares of the Company’s common stock, whichwere converted to 10 shares of common stock. Also in March 2008, a holder of warrants elected to exercise warrants to purchase53 shares of the Company’s common stock at $1.92 per share for total cash consideration of $101.Common stock warrants outstanding at December 31, 2009 were as follows: Number Exercise of Shares Price Outstanding Term per Under (Years) Share WarrantMay 2006 7 9.03 106 106 NOTE 11 —STOCK OPTION AND OTHER BENEFIT PLANS2007 Equity Incentive PlanIn January 2007, the Company’s Board of Directors adopted, and in March 2007 the stockholders approved, the 2007 EquityIncentive Plan (the “2007 Plan”). At the time of adoption, there were 1,766 shares of common stock authorized for issuance under the2007 Plan plus 195 shares of common stock from the Company’s 2001 Stock Option Plan (the “2001 Plan”) that were unissued. Inaddition, shares that were not issued or subject to outstanding grants under the 2001 Plan on the date of adoption of the 2007 Plan andany shares issued under the 2001 Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options thatexpire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under the2007 Plan.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 dateof 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 ofcommon 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% ofthe estimated fair value of the shares on the grant date. Prior to the Company’s IPO, the Board determined the fair value of common stockin 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 thedate of determination. The stock options granted to employees generally vest with respect to 25% of the underlying shares one year fromthe vesting commencement date and with respect to an additional 1/48 of the underlying shares per month thereafter. Stock options grantedduring 2007 prior to October 25, 2007 have a contractual term of ten years and stock options granted on or after October 25, 2007 have acontractual term of six years.86Table of ContentsThe 2007 Plan also provides the Board of Directors the ability to grant restricted stock awards, stock appreciation rights, restrictedstock units, performance shares and stock bonuses.As of December 31, 2009, 1,404 shares were available for future grants under the 2007 Plan.2007 Employee Stock Purchase PlanIn January 2007, the Company’s Board of Directors adopted, and in March 2007 the Company’s stockholders approved, the 2007Employee Stock Purchase Plan (the “2007 Purchase Plan”). The Company initially reserved 667 shares of its common stock forissuance under the 2007 Purchase Plan. On each January 1 for the first eight calendar years after the first offering date, the aggregatenumber of shares of the Company’s common stock reserved for issuance under the 2007 Purchase Plan will be increased automaticallyby the number of shares equal to 1% of the total number of outstanding shares of the Company’s common stock on the immediatelypreceding December 31, provided that the Board of Directors may reduce the amount of the increase in any particular year and providedfurther that the aggregate number of shares issued over the term of this plan may not exceed 5,333. The 2007 Purchase Plan permitseligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price atwhich 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 offeringperiod 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 ofDirectors may fix a maximum number of shares that may be purchased in the aggregate by all participants during any single offeringperiod (the “Maximum Offering Period Share Amount”). The Committee may later raise or lower the Maximum Offering Period ShareAmount. The Committee established the Maximum Offering Period Share Amount of 500 shares for the offering period that commencedon February 15, 2009 and ended on August 14, 2009, and a Maximum Offering Period Share Amount of 200 shares for each offeringperiod thereafter. The Company issued 500 shares under the 2007 Purchase Plan and received cash proceeds of $212 during the yearended December 31, 2009.As of December 31, 2009, 512 shares were available for issuance under the 2007 Purchase Plan.2008 Equity Inducement PlanIn March 2008, the Company’s Board of Directors adopted the 2008 Equity Inducement Plan (the “Inducement Plan”) to augmentthe shares available under its existing 2007 Equity Incentive Plan. The Inducement Plan did not require the approval of the Company’sstockholders. The Company initially reserved 600 shares of its common stock for grant and issuance under the Inducement Plan. OnDecember 28, 2009, the Company’s Board of Directors appointed Niccolo de Masi as the Company’s President and Chief ExecutiveOfficer and the Compensation Committee of the Company’s Board of Directors awarded him a non-qualified stock option to purchase1,250 shares of the Company’s common stock, which was issued on January 4, 2010 under the Inducement Plan. Immediately prior tothe grant of this award, the Compensation Committee amended the Inducement Plan to increase the number of shares available for grantunder the plan by 819 shares to 1,250 shares. The Company may only grant NSOs under the Inducement Plan. Grants under theInducement Plan may only be made to persons not previously an employee or director of the Company, or following a bona fide period ofnon-employment, as an inducement material to such individual’s entering into employment with the Company and to provide incentivesfor such persons to exert maximum efforts for the Company’s success. The Company may grant NSOs under the Inducement Plan atprices 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 theCompany’s common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date ofdetermination.As of December 31, 2009, 1,250 shares were reserved for future grants under the Inducement Plan. However, there were no sharesreserved for future grants under the Inducement Plan immediately after the grant of the stock option to Mr. de Masi on January 4, 2010.87Table of Contents2009 Stock Option Exchange ProgramOn April 22, 2009, the Company launched a voluntary stock option exchange program (the “Exchange Program”) pursuant towhich its eligible United States and United Kingdom employees (“Eligible Employees”) had the right to exchange all options to purchaseshares of its common stock outstanding prior to the Exchange Program launch date having an exercise price equal to or greater than $1.25per share (“Eligible Options”) granted under the Company’s 2007 Plan or 2001 Plan for new nonqualified stock options to be grantedunder the 2007 Plan (“New Options”). Eligible Options that were tendered for New Options were cancelled and returned to the 2007 Planfor re-issuance thereunder. The Company’s executive officers and directors were not eligible to participate in the Exchange Program. TheExchange Program provided that Eligible Employees would receive a New Option for each tendered Eligible Option, depending on theexercise price of the Eligible Option tendered, in accordance with the exchange ratios set forth in the table below: Exchange Ratio (New Options-forExercise Price -Eligible Options)$1.25 — $1.99 1-for-1 2.00 — 3.99 1-for-2 4.00 — 5.94 1-for-3 5.95 or greater 1-for-4 The Company completed the Exchange Program in the second quarter of 2009. Eligible Employees tendered options to purchase821 shares of common stock in exchange for replacement options to purchase 261 shares of common stock under the Company’s 2007Plan. This resulted in $15 of incremental stock-based compensation to be amortized monthly over three years. The new options have asix-year term and vest over three years in 36 equal monthly installments. The exercise price of the New Options equals the closing saleprice of the Company’s common stock of $0.78 per share as reported on The NASDAQ Global Market on May 22, 2009.88Table of ContentsStock Option ActivityThe following table summarizes the Company’s stock option activity: Options Outstanding Weighted Weighted Number Average Average Aggregate Shares of Exercise Contractual Intrinsic Available Shares Price Term (Years) Value Balances at December 31, 2006 476 2,882 5.03 Increase in authorized shares 1,766 Options granted (1,775) 1,775 9.15 Options canceled 350 (350) 9.16 Options exercised — (271) 0.84 Balances at December 31, 2007 817 4,036 6.75 Increase in authorized shares 1,471 Options granted (2,607) 2,607 3.07 Options canceled 1,226 (1,226) 6.89 Repurchase of early exercised 28 — 0.75 Options exercised — (287) 0.81 Balances at December 31, 2008 935 5,130 5.18 Increase in authorized shares 1,706 Options granted (2,211) 2,211 0.89 Options canceled 2,224 (2,224) 5.15 Options exercised — (276) 0.69 Balances at December 31, 2009 2,654 4,841 $3.49 4.52 $657 Options vested and expected to vest at December 31, 2009 4,325 $3.72 4.44 $550 Options exercisable at December 31, 2009 2,291 $5.29 3.78 $133 At December 31, 2009, the options outstanding and currently exercisable by exercise price were as follows: Options Outstanding Weighted Average Options Exercisable Remaining Weighted WeightedRange of Contractual Average AverageExercise Number Life Exercise Number ExercisePrices Outstanding (in Years) Price Exercisable Price$0.18 — $0.71 489 4.74 $0.69 5 $0.41 $0.76 — $0.78 518 5.35 0.77 129 0.77 $0.79 — $0.83 51 5.26 0.80 2 0.82 $0.89 — $0.89 542 3.55 0.89 278 0.89 $0.97 — $1.05 139 5.76 1.02 — — $1.06 — $1.06 534 5.96 1.06 — — $1.07 — $3.79 520 5.09 2.29 261 2.71 $3.90 — $4.49 580 3.63 4.09 434 4.02 $4.50 — $5.70 493 3.46 4.81 393 4.77 $5.95 — $11.88 975 4.26 9.22 789 9.45 $0.18 — $11.88 4,841 4.52 $3.49 2,291 $5.29 89Table of ContentsThe Company has computed the aggregate intrinsic value amounts disclosed in the above table based on the difference between theoriginal exercise price of the options and the fair value of the Company’s common stock of $1.15 per share at December 31, 2009. Theaggregate intrinsic value of awards exercised during the year ended December 31, 2009 and December 31, 2008 was $911 and $71,respectively.Adoption of ASC 718The Company adopted ASC 718 on January 1, 2006. Under ASC 718, the Company estimated the fair value of each option awardon the grant date using the Black-Scholes option valuation model and the weighted average assumptions noted in the following table. Year Ended December 31, 2009 2008 2007Dividend yield —% —% —%Risk-free interest rate 1.43% 2.34% 4.25%Expected term (years) 3.19 4.08 5.24 Expected volatility 59% 43% 52%The Company based expected volatility on the historical volatility of a peer group of publicly traded entities. The expected term ofoptions gave consideration to early exercises, post-vesting cancellations and the options’ contractual term, which was extended for alloptions granted subsequent to September 12, 2005 but prior to October 25, 2007 from five to ten years. Stock options granted on or afterOctober 25, 2007 have a contractual term of six years. The risk-free interest rate for the expected term of the option is based on theU.S. Treasury Constant Maturity Rate as of the date of grant. The weighted-average fair value of stock options granted during the yearended December 31, 2009, 2008 and 2007 was $0.37, $1.15 and $6.78 per share, respectively.ASC 718 requires nonpublic companies that used the minimum value method under prior guidance to apply the prospectivetransition method of ASC 718. Prior to adoption of ASC 718, the Company used the minimum value method, and it therefore has notrestated its financial results for prior periods. Under the prospective method, stock-based compensation expense for the years endedDecember 31, 2007, 2008 and 2009 includes compensation expense for (i) all new stock-based compensation awards granted afterJanuary 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of ASC 718, (ii) unmodified awardsgranted prior to but not vested as of December 31, 2005 accounted for under APB 25 and (iii) awards outstanding as of December 31,2005 that were modified after the adoption of ASC 718.The Company calculated employee stock-based compensation expense based on awards ultimately expected to vest and reduced it forestimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods ifactual forfeitures differ from those estimates.The following table summarizes the consolidated stock-based compensation expense by line items in the consolidated statement ofoperations: Year Ended December 31, 2009 2008 2007 Research and development $716 $714 $939 Sales and marketing 564 5,174 674 General and administrative 1,646 2,097 2,186 Total stock-based compensation expense $2,926 $7,985 $3,799 Consolidated net cash proceeds from option exercises were $190, $231 and $225 for the year ended December 31, 2009, 2008 and2007, respectively. The Company realized no income tax benefit from stock option exercises during the year ended December 31, 2009,2008 and 2007. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flowsrather than operating cash flows.During 2009, the Company modified option agreements held by the Company’s former Chief Executive Officer. The modificationinvolved the acceleration of the vesting of four grants totaling 118 shares of common90Table of Contentsstock. The Company recorded a charge of $24 in connection with this modification for the year ended December 31, 2009. During 2008,the Company modified one option agreement. The modification involved the acceleration of the vesting of one grant totaling 17 shares ofcommon stock. The Company recorded a charge of $8 in connection with this modification for the year ended December 31, 2008.During 2007, the Company modified one option agreement. The modification involved the acceleration of the vesting of one grant totaling1 share of common stock. The Company recorded a charge of $5 in connection with this modification for the year ended December 31,2007.At December 31, 2009, the Company had $3,519 of total unrecognized compensation expense under ASC 718, net of estimatedforfeitures, related to stock option plans that will be recognized over a weighted-average period of 2.67 years.Restricted StockDuring the year ended December 31, 2007, the Company granted 4 shares of restricted stock to a director of the Company who hadelected to receive restricted stock in lieu of an option grant. The restricted stock vested as to 50% of the shares after six months andthereafter vested pro rata monthly for the next six months. The Company did not grant any restricted stock during the years endedDecember 31, 2009 or 2008.401(k) Defined Contribution PlanThe Company sponsors a 401(k) defined contribution plan covering all employees. In December 2007, the Board of Directorsapproved the matching of employee contributions beginning in April 2008. Matching contributions to the plan are in the form of cash andat the discretion of the Company. For the year ended December 31, 2008, employer contributions under this plan were $337. TheCompany elected to indefinitely suspend matching contributions for U.S. employees in the first quarter of 2009.NOTE 12 —INCOME TAXESThe components of loss before income taxes by tax jurisdiction were as follows: Year Ended December 31, 2009 2008 2007 United States $(15,514) $(45,654) $(1,221)Foreign (520) (57,912) (2,370)Loss before income taxes $(16,034) $(103,566) $(3,591)91Table of ContentsThe components of income tax benefit/(provision) were as follows: Year Ended December 31, 2009 2008 2007 Current: Federal $— $52 $(52)State (3) 2 (20)Foreign (2,921) (3,835) 56 (2,924) (3,781) (16)Deferred: Federal — — — State — — — Foreign 764 655 281 764 655 281 Total: Federal — 52 (52)State (3) 2 (20)Foreign (2,157) (3,180) 337 $(2,160) $(3,126) $265 The difference between the actual rate and the federal statutory rate was as follows: Year Ended December 31, 2009 2008 2007Tax at federal statutory rate 34.0% 34.0% 34.0%State tax, net of federal benefit — — (0.6)Foreign rate differential 0.1 (0.1) (3.2)Research and development credit 1.5 0.3 7.7 Acquired in-process research and development 0.1 (0.4) (0.6)United Kingdom research and development refund 1.5 — (11.9)Withholding taxes (4.3) (0.4) (18.0)Goodwill impairment — (22.8) — Stock-based compensation (3.6) (3.9) — Dividend (11.3) — — Other (2.7) (0.3) 1.1 Valuation allowance (28.8) (9.4) (1.1)Effective tax rate (13.5)% (3.0)% 7.4%92Table of ContentsDeferred tax assets and liabilities consist of the following: December 31, 2009 December 31, 2008 US Foreign Total US Foreign Total Deferred tax assets: Fixed assets $447 $1,501 $1,948 $439 $1,234 $1,673 Net operating loss carryforwards 21,529 25,490 47,019 21,796 25,858 47,654 Accruals, reserves and other 1,596 215 1,811 1,104 228 1,332 Foreign tax credit 2,642 — 2,642 1,593 — 1,593 Stock-based compensation 2,166 141 2,307 1,262 249 1,511 Research and development credit 1,896 — 1,896 885 — 885 Other 3,332 26 3,358 1,560 — 1,560 Total deferred tax assets $33,608 $27,373 $60,981 $28,639 $27,569 $56,208 Deferred tax liabilities: Macrospace and iFone intangible assets $— $(243) $(243) $— $(402) $(402)MIG intangible assets — (1,780) (1,780) — (2,461) (2,461)Superscape intangible assets (2,052) (37) (2,089) (3,025) (447) (3,472)Other — (24) (24) — (14) (14)Net deferred tax assets 31,556 25,289 56,845 25,614 24,245 49,859 Less valuation allowance (31,556) (26,978) (58,534) (25,614) (26,706) (52,320)Net deferred tax liability $— $(1,689) $(1,689) $— $(2,461) $(2,461)The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries because these earnings areintended to be reinvested indefinitely. However, the Company repatriated certain distributable earnings from a subsidiary in China. Nodeferred tax asset was recognized since the Company does not believe the deferred tax asset will reverse in the foreseeable future.In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that, it is morelikely than not that its deferred tax assets will not be utilized, and has recorded a full valuation allowance against its net deferred taxassets in each of its jurisdictions except for one entity in China.At December 31, 2009, the Company has net operating loss carryforwards of approximately $55,217 and $47,216 for federal andstate tax purposes, respectively. These carryforwards will expire from 2011 to 2028. In addition, the Company has research anddevelopment tax credit carryforwards of approximately $1,604 for federal income tax purposes and $1,503 for California tax purposes.The federal research and development tax credit carryforwards will begin to expire in 2021. The California state research credit will carryforward indefinitely. The Company has approximately $2,227 of foreign tax credit carryforwards that will expire beginning in 2017, andapproximately $12 of state alternative minimum tax credits that will carryforward indefinitely. In addition, at December 31, 2009, theCompany has net operating loss carryforwards of approximately $90,996 for United Kingdom tax purposes.The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset futuretaxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes inownership as defined by Internal Revenue Code Section 382. Total net operating losses of $90,996 are available in the United Kingdom,however, of those losses $89,628 are limited and can only offset a portion of the annual combined profits in the United Kingdom untilthe net operating losses are fully utilized.93Table of ContentsA reconciliation of the total amounts of unrecognized tax benefits was as follows: Year Ended December 31, 2009 2008 2007 Beginning balance $2,406 $2,208 $575 Reductions of tax positions taken during previous years (33) (256) — Additions based on uncertain tax positions related to the current period 502 401 367 Additions based on uncertain tax positions related to prior periods 24 53 113 Additions based on uncertain tax positions related to acqusitions — — 1,153 Ending balance $2,899 $2,406 $2,208 As of December 31, 2009, approximately $90 of unrecognized tax benefits, if recognized, would impact the Company’s effective taxrate. A portion of this amount, if recognized, would adjust the Company’s deferred tax assets which are subject to valuation allowance.The Company does not anticipate any significant changes to its uncertain tax positions within the next twelve months. As ofDecember 31, 2008, approximately $93 of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate.The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Companyhas accrued $3,279 of interest and penalties on uncertain tax positions as of December 31, 2009, as compared to $3,057 as ofDecember 31, 2008. Approximately $232 of accrued interest and penalty expense related to estimated obligations for unrecognized taxbenefits was recognized during 2009.One of the Company’s subsidiaries in China has received approval as a High & New Technology Enterprise qualification from theMinistry of Science and Technology, and also as the Software Enterprise Qualification from the Ministry of Industry and InformationTechnology. These qualifications provide preferential income tax treatment which will be effected upon the approval of the Company’sapplication with the State Administration of Taxation to apply the favorable tax benefits to operations beginning January 1, 2009. In theevent that the State Administration for Taxation approves the Company’s application, certain taxes that were expensed in 2009 could berefunded and certain deferred tax assets and liabilities will be revalued.The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject toexamination by tax authorities are primarily the State of California, United States, United Kingdom and China. The Company’s federaltax return is open by statute for tax years 2001 and forward and could be subject to examination by the tax authorities. The Company’sCalifornia income tax returns are open by statute for tax years 2001 and forward. The statute of limitations for the Company’s 2007 taxreturn in the United Kingdom will close in 2010. The Company’s China income tax returns are open by statute for tax years 2002 andforward. In practice, a tax audit, examination or tax assessment notice issued by the Chinese tax authorities does not represent finalizationor closure of a tax year.NOTE 13 —SEGMENT REPORTINGASC 280, Segment Reporting (“ASC 280”), establishes standards for reporting information about operating segments. It definesoperating segments as components of an enterprise about which separate financial information is available that is evaluated regularly bythe chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. TheCompany’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financialinformation on a geographic basis, however these aggregate into one operating segment for purposes of allocating resources and evaluatingfinancial performance. Accordingly, the Company reports as a single operating segment — mobile games. It attributes revenues togeographic areas based on the country in which the carrier’s principal operations are located.94Table of ContentsThe Company generates its revenues in the following geographic regions: Year Ended December 31, 2009 2008 2007 United States of America $37,918 $43,046 $35,997 United Kingdom 2,744 4,913 6,813 China 7,676 8,883 132 Americas, excluding the USA 10,278 9,588 5,284 EMEA, excluding the United Kingdom 17,826 20,274 15,421 Other 2,902 3,063 3,220 $79,344 $89,767 $66,867 The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based onthe physical location of the assets. Property and equipment, net of accumulated depreciation and amortization, summarized by geographiclocation was as follows: Year Ended December 31, 2009 2008 2007 Americas $2,194 $3,208 $1,806 EMEA 700 790 1,146 Other 450 863 865 $3,344 $4,861 $3,817 NOTE 14 —RESTRUCTURINGRestructuring information as of December 31, 2009 was as follows: Fiscal 2009Restructuring Fiscal 2008 Restructuring Facilities Facilities Superscape Workforce Related Workforce Related Plan Total Balance as of December 31, 2007 Charges assumed as part of acquisition $— — $— — 3,768 $3,768 Charges to operations — — 989 755 — 1,744 Charges settled in cash — — (889) (312) (3,311) (4,512)Balance as of December 31, 2008 — — 100 443 457 1,000 Charges to operations 1,009 867 — — — 1,876 Non Cash Adjustments (62) (11) (73)Charges settled in cash (380) (68) (100) (443) (406) (1,397)Balance as of December 31, 2009 $629 $737 $— $— $40 $1,406 During 2008 and 2009, the Company’s management approved restructuring plans to improve the effectiveness and efficiency of itsoperating model and reduce operating expenses around the world. During the year ended December 31, 2009, the Company incurred$1,876 in restructuring charges. These charges included $1,009 of workforce related charges, comprised of severance and terminationbenefits of $657 associated with the departure of the Company’s former Chief Executive Officer, and $352 relating to employeetermination costs in the Company’s United States and United Kingdom offices. The remaining restructuring charge included $867 offacility related charges, comprised of $709 of charges associated with changes in the sublease probability assumption for the vacatedoffice 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. These amounts were partiallyoffset by a $73 non-cash adjustment, primarily relating to a write down in fixed assets associated with the restructuring of theCompany’s EMEA headquarters. During the95Table of Contentsyear ended December 31, 2008, the Company incurred $1,744 in restructuring charges. These charges included $989 related to employeeseverance and benefit arrangements due to the termination of employees in France, Hong Kong, Sweden, the United Kingdom and theUnited States and $755 related to vacated office space at the Company’s headquarters.As of December 31, 2009 the Company’s remaining restructuring liability of $1,406 was comprised of $629 of severance andbenefit payments due to the Company’s former Chief Executive Officer, which were paid in the first quarter of 2010 and $777 of facilityrelated costs that are expected to be paid over the remainder of the lease terms of one to three years. However, any changes in theassumptions used in the Company’s vacated facility accrual could result in additional charges in the future. As of December 31, 2008 theCompany’s restructuring liability of $1,000 was comprised of $100 of severance and benefit payments and $900 of facility related costs.In fiscal year 2010 and as part of the Company’s restructuring plan implemented in the first quarter of 2010, the Companyanticipates incurring approximately $475 of restructuring charges relating to employee severance and benefit arrangements associated withthe terminations of employees in China, the United Kingdom and the United StatesNOTE 15 —QUARTERLY FINANCIAL DATA (unaudited, in thousands)The following table sets forth unaudited quarterly consolidated statements of operations data for 2008 and 2009. The Companyderived this information from its unaudited consolidated financial statements, which it prepared on the same basis as its auditedconsolidated financial statements contained in this report. In its opinion, these unaudited statements include all adjustments, consistingonly of normal recurring adjustments that the Company considers necessary for a fair statement of that information when read inconjunction with the consolidated financial statements and related notes included elsewhere in this report. The operating results for anyquarter should not be considered indicative of results for any future period. For the Three Months Ended 2008 2009 March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31 (In thousands) Revenues $20,592 $23,704 $23,894 $21,577 $20,775 $19,872 $19,645 $19,052 Cost of revenues: Royalties 5,488 5,399 5,753 5,920 5,813 5,667 5,302 5,047 Impairment of prepaid royalties and guarantees — 234 1,921 4,158 — 589 513 5,489 Amortization of intangible assets 1,708 3,135 3,247 3,220 2,848 1,412 1,420 1,412 Total cost of revenues 7,196 8,768 10,921 13,298 8,661 7,668 7,235 11,948 Gross profit 13,396 14,936 12,973 8,279 12,114 12,204 12,410 7,104 Operating expenses: Research and development 6,520 8,861 9,223 7,536 6,397 6,648 6,662 6,268 Sales and marketing 5,782 6,042 6,004 8,239 4,112 3,546 3,556 3,188 General and administrative 5,395 6,096 5,085 4,395 4,485 3,905 3,986 3,895 Amortization of intangible assets 68 69 67 57 51 51 58 55 Acquired in-process research and development 1,039 71 — — — — — — Impairment of goodwill — — 46,618 22,880 — — — — Restructuring charge 75 86 126 1,458 — 513 919 444 Total operating expenses 18,879 21,225 67,123 44,565 15,045 14,663 15,181 13,850 Income (loss) from operations (5,483) (6,289) (54,150) (36,286) (2,931) (2,459) (2,771) (6,746)Interest and other income (expense), net 611 (99) (1,894) 25 (807) 457 (300) (477)Loss before income taxes and minority interest (4,872) (6,388) (56,044) (36,261) (3,738) (2,002) (3,071) (7,223)Income tax benefit (provision) (1,130) (213) (822) (961) (2,019) 464 (917) 312 Net loss $(6,002) $(6,601) $(56,866) $(37,222) $(5,757) $(1,538) $(3,988) $(6,911)Net loss per share — basic and diluted $(0.21) $(0.23) $(1.93) $(1.26) $(0.19) $(0.05) $(0.13) $(0.23)96Table of ContentsNOTE 16 —SUBSEQUENT EVENTSEffective January 4, 2010, the Company’s Board of Directors appointed Niccolo de Masi to serve as President and Chief ExecutiveOfficer of the Company, replacing William J. Miller who had been serving as interim President and Chief Executive Officer since thedeparture of Greg Ballard from the Company on December 1, 2009. In addition, Mr. de Masi was also appointed as a director of theCompany effective as of January 4, 2010. Mr. Miller, who had been serving as co-Chairman of the Company’s Board of Directors alongwith Daniel L. Skaff, was named the Company’s sole Chairman of the Board effective January 4, 2010.In connection with the appointment of Niccolo de Masi as the Company’s President and Chief Executive Officer, the CompensationCommittee of the Company’s Board of Directors granted Mr. de Masi a non-qualified stock option under the Inducement Plan to purchase1,250 shares of the Company’s common stock, with a per share exercise price equal to $1.21 (the closing price of the Company’scommon stock on the January 4, 2010 grant date). The grant will vest over four years, with 25% of the total number of shares subject tothe option vesting on the one-year anniversary of the date of grant and the remainder vesting monthly thereafter. Vesting will depend on Mr.de Masi’s continued service with the Company.On February 10, 2010, the Company announced details of its global restructuring plan. The Company anticipates incurringapproximately $475 in costs associated with severance and termination benefits.On February 10, 2010, the Company entered into Amendment No. 2 to Amended and Restated Loan and Security Agreement withthe lender (the “Second Amendment”). The Second Amendment amends the financial covenant contained in the Amended and RestatedLoan and Security Agreement dated as of December 29, 2008 (the “Loan Agreement”) relating to earnings before interest, taxes,depreciation and amortization (“EBITDA”), which covenant had been previously amended pursuant to Amendment No. 1 to the LoanAgreement entered into on August 24, 2009. The Second Amendment (i) changed the measurement period for the EBITDA covenant froma rolling six-month calculation to a quarterly calculation and (ii) requires the Company to maintain minimum EBITDA requirements asdisclosed in Note 8.On March 18, 2010, the Company entered into Amendment No. 3 to Amended and Restated Loan and Security Agreement with thelender (the “Third Amendment”). The Third Amendment (i) extended the maturity date of the Loan Agreement from December 22, 2010until June 30, 2011, (ii) requires the Company to maintain minimum EBITDA requirements as disclosed in Note 8, and (iii) increasesthe interest rate for borrowings under the Loan Agreement by 0.75%; the rate was increased from the lender’s prime rate, plus 1.0%, butno less than 5.0%, to the lender’s prime rate, plus 1.75%, but no less than 5.0%.97Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A(T). Controls and ProceduresDisclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls andprocedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating thebenefits of possible controls and procedures relative to their costs.Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, ourdisclosure controls and procedures are designed to provide reasonable assurance and are effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2009 based on the guidelines established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, ourmanagement has concluded that our internal control over financial reporting was effective as of December 31, 2009 to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes inaccordance with accounting principles generally accepted in the United States.This report is not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except tothe extent that we specifically incorporate it by reference.This annual report does not include an attestation report of our independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firmpursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter endedDecember 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reportingItem 9B. OTHER INFORMATIONNone.98Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceExcept for the information about our executive officers shown below, the information required for this Item 10 is incorporated byreference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.We maintain a Code of Business Conduct and Ethics that applies to all employees, officers and directors. Our Code of BusinessConduct and Ethics is published on our website at www.glu.com/investors. We disclose amendments to certain provisions of our Code ofBusiness Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on our website.EXECUTIVE OFFICERSThe following table shows our executive officers as of March 30, 2010 and their areas of responsibility. Their biographies follow thetable.Name Age PositionNiccolo M. de Masi 29 President, Chief Executive Officer and DirectorAlessandro Galvagni 39 Senior Vice President of Global Product Development and ChiefTechnology OfficerEric R. Ludwig 40 Senior Vice President, Chief Financial Officer and AssistantSecretaryKevin S. Chou 38 Vice President, General Counsel and SecretaryThomas M. Perrault 45 Vice President, Global Human ResourcesNiccolo M. de Masi has served as our President and Chief Executive Officer and as one of our directors since January 2010. Priorto joining Glu, Mr. de Masi was the Chief Executive Officer and President of Hands-On Mobile, a mobile technology company anddeveloper and publisher of mobile entertainment, from October 2009 to December 2009, and previously served as the President of Hands-On Mobile from March 2008 to October 2009. Prior to joining Hands-On Mobile, Mr. de Masi was the Chief Executive Officer ofMonstermob Group PLC, a mobile entertainment company, from June 2006 to February 2007. Mr. de Masi joined Monstermob in 2004and, prior to becoming its Chief Executive Officer, held positions as its Managing Director and as its Chief Operating Officer where hewas responsible for formulating and implementing Monstermob’s growth and product strategy. Prior to joining Monstermob, Mr. de Masiworked in a variety of corporate finance and operational roles within the technology, media and telecommunications (TMT) sector,beginning his career with JP Morgan on both the TMT debt capital markets and mergers and acquisitions teams in London. He has alsoworked as a physicist with Siemens Solar and within the Strategic Planning and Development divisions of Technicolor. Mr. de Masiholds B.A. and M.A. degrees in Physics, and an MSci. degree in Electronic Engineering — all from Cambridge University.Alessandro Galvagni has served as our Senior Vice President of Global Product Development and Chief Technology Officer sinceJune 2007, and served as our Chief Technology Officer from September 2002 to June 2007 and also as our Senior Vice President ofProduct Development from January 2006 to June 2007. Prior to joining us, Mr. Galvagni served as an architect (pervasive division) atBEA Systems, Inc. during 2001. Previously, Mr. Galvagni served as project leader at Pumatech International, a mobile softwaretechnology company, from 1999 to 2001. Prior to that, Mr. Galvagni served in senior engineering roles with Proxinet, Inc., a mobilesoftware technology company, and at NASA Ames Research Center. Mr. Galvagni holds a B.S. in computer engineering from CaliforniaState University at San Jose and an M.S. in computer engineering from Santa Clara University.Eric R. Ludwig has served as our Senior Vice President, Chief Financial Officer and Assistant Secretary since August 2008, servedas our Vice President, Finance, Interim Chief Financial Officer and Assistant Secretary from May 2008 to August 2008, served as ourVice President, Finance and Assistant Secretary since July 2006, served as our Vice President, Finance since April 2005, and served asour Director of Finance from January 2005 to April 2005. Prior to joining us, from January 1996 to January 2005, Mr. Ludwig heldvarious positions at Instill99Table of ContentsCorporation, an on-demand supply chain software company, most recently as Chief Financial Officer, Vice President, Finance andCorporate Secretary. Prior to Instill, Mr. Ludwig was Corporate Controller at Camstar Systems, Inc., an enterprise manufacturingexecution and quality systems software company, from May 1994 to January 1996. He also worked at Price Waterhouse L.L.P. fromMay 1989 to May 1994. Mr. Ludwig holds a B.S. in commerce from Santa Clara University and is a Certified Public Accountant(inactive).Kevin S. Chou has served as our Vice President, General Counsel and Secretary since July 2006. He also served as our Interim VicePresident of Global Human Resources from May 2008 to August 2008. Prior to joining us, Mr. Chou served as Senior Counsel at Knight-Ridder, Inc., a newspaper publishing and Internet company, from August 2005 to July 2006, where he oversaw the legal functions forKnight-Ridder Digital, the company’s Internet subsidiary. From September 2002 to August 2005, he served as Associate General Counselat The Thomas Kinkade Company, an art publishing company. Mr. Chou served as General Counsel of Dialpad Communications, Inc.,an Internet telephony company, from October 2000 to March 2002. Previously, Mr. Chou was an associate at Fenwick & West LLP, a lawfirm serving technology and life sciences clients, and Orrick, Herrington & Sutcliffe, an international law firm. Mr. Chou holds a B.S.in economics from the University of California at Berkeley and a J.D. from Yale Law School.Thomas M. Perrault has served as our Vice President, Global Human Resources since August 2008. Prior to joining us,Mr. Perrault was Vice President of Human Resources for ZipRealty, Inc., a full service, on-line national real estate company, from January2007 through October 2007 where he was responsible for all aspects of the company’s human resources function. Prior to ZipRealty,Mr. Perrault was a Senior Human Resources Director with Blue Shield of California from April 2004 to December 2006, where he wasresponsible for providing generalist support to the largest business unit. Prior to Blue Shield of California, Mr. Perrault was a SeniorHuman Resources Director with Brocade Communications, a supplier of data center networking solutions, from April 2002 to March2004. Mr. Perrault has also held senior human resources positions with CoSine Communications and Silicon Graphics Inc. Mr. Perraultbegan his career as a legislative attorney for the United States Postal Service in Washington, D.C. Mr. Perrault holds a B.A. in historyand political science from Rice University and a J.D. from Duke University School of Law.Item 11. Executive CompensationThe information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2010 Annual Meetingof Stockholders.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2010 Annual Meetingof Stockholders.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2010 Annual Meetingof Stockholders.Item 14. Principal Accounting Fees and ServicesThe information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2010 Annual Meetingof Stockholders.PART IVItem 15. Exhibits and Financial Statement Schedules(a)(1) Financial Statements: The financial statements filed as part of this report are listed on the index to financial statements onpage 58.100Table of Contents(2) Financial Schedules: No separate “Valuation and Qualifying Accounts” table has been included as the required information hasbeen included in the Consolidated Financial Statements included in this report.(b) Exhibits. The exhibits listed on the Exhibit Index (following the Signatures section of this report) are included, or incorporated byreference, in this report.101Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.GLU MOBILE INC. By: /s/ Niccolo M. de MasiNiccolo M. de Masi,President and Chief Executive OfficerDate: March 31, 2010 By: /s/ Eric R. LudwigEric R. Ludwig, Senior Vice President and Chief Financial OfficerDate: March 31, 2010Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacity and on the dates indicated.Signature Title Date /s/ Niccolo M. de MasiNiccolo M. de Masi President, Chief Executive Officer and Director (Principal Executive Officer) March 31, 2010 /s/ Eric R. LudwigEric R. Ludwig Senior Vice President andChief Financial Officer (Principal Financial and Accounting Officer) March 31, 2010 /s/ William J. MillerWilliam J. Miller Chairman of the Board March 31, 2010 /s/ Ann MatherAnn Mather Director March 31, 2010 /s/ Richard A. MoranRichard A. Moran Director March 31, 2010 /s/ Hany M. NadaHany M. Nada Director March 31, 2010 /s/ A. Brooke SeawellA. Brooke Seawell Director March 31, 2010 /s/ Daniel L. SkaffDaniel L. Skaff Director March 31, 2010 /s/ Ellen F. SiminoffEllen F. Siminoff Director March 31, 2010102Table of ContentsExhibit Index Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith 2.01 Agreement and Plan of Merger, dated as of November 28,2007, by and among Glu Mobile Inc., Maverick AcquisitionCorp., Awaken Limited, Awaken (Beijing) CommunicationsTechnology Co. Ltd., Beijing Zhangzhong MIG InformationTechnology Co. Ltd., Beijing Qinwang Technology Co.Ltd., each of Wang Bin, Wang Xin and You Yanli, andWang Xin, as Representative (the “MIG Merger Agreement”). 8-K 001-33368 2.01 12/03/07 2.02 Amendment to the MIG Merger Agreement. 8-K 001-33368 2.01 12/30/08 2.03 Recommended Cash Offer by Glu Mobile Inc. forSuperscape Group plc. 8-K 001-33368 2.01 01/25/08 2.04 Form of Acceptance, Authority and Election by Glu MobileInc. for Superscape Group plc. 8-K 001-33368 2.02 01/25/08 3.01 Restated Certificate of Incorporation of Glu Mobile Inc. S-1/A 333-139493 3.02 02/14/07 3.02 Amended and Restated Bylaws of Glu Mobile Inc. 8-K 001-33368 99.01 10/28/08 4.01 Form of Registrant’s Common Stock Certificate. S-1/A 333-139493 4.01 02/14/07 4.02 Amended and Restated Investors’ Rights Agreement, dated asof March 29, 2006, by and among Glu Mobile Inc. andcertain investors of Glu Mobile Inc. and the AmendmentNo. 1 and Joinder to the Amended and Restated InvestorRights Agreement dated May 5, 2006, by and among GluMobile Inc. and certain investors of Glu Mobile Inc. S-1 333-139493 4.02 12/19/06 10.01# Form of Indemnity Agreement entered into between GluMobile Inc. and each of its directors and executive officers,effective as of June 15, 2009. 8-K 001-33368 10.01 06/15/09 10.02# 2001 Stock Option Plan, form of option grant used fromDecember 19, 2001 to May 2, 2006, form of option grantused from December 8, 2004 to May 2, 2006 and forms ofoption grant used since May 2, 2006. S-1/A 333-139493 10.02 01/22/07 10.03# 2007 Equity Incentive Plan and forms of (a) Notice of StockOption Grant, Stock Option Award Agreement and StockOption Exercise Agreement, (b) Notice of Restricted StockAward and Restricted Stock Agreement, (c) Notice of StockAppreciation Right Award and Stock Appreciation RightAward Agreement, (d) Notice of Restricted Stock UnitAward and Restricted Stock Unit Agreement and (e) Noticeof Stock Bonus Award and Stock Bonus Agreement. S-1/A 333-139493 10.03 02/16/07 10.04# 2007 Employee Stock Purchase Plan, as amended andrestated on July 1, 2009. 10-Q 001-33368 10.01 11/09/09 103Table of Contents Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith 10.05# 2008 Equity Inducement Plan, as amended and restated onDecember 28, 2009, and forms of Notice of Stock OptionGrant, Stock Option Award Agreement and Stock OptionExercise Agreement. X 10.06# Forms of Stock Option Award Agreement (ImmediatelyExercisable) and Stock Option Exercise Agreement(Immediately Exercisable) under the Glu Mobile Inc. 2007Equity Incentive Plan. 10-Q 001-33368 10.05 08/14/08 10.07# Interim CFO Retention Agreement between Glu Mobile Inc.and Eric R. Ludwig, dated as of May 9, 2008. 10-Q 001-33368 10.04 08/14/08 10.08# Form of Change of Control Severance Agreement, dated asof October 10, 2008, between Glu Mobile Inc. and each ofKevin S. Chou, Alessandro Galvagni, Eric R. Ludwig andThomas M. Perrault. 10-K 001-33368 10.08 03/13/09 10.09# Glu Mobile Inc. 2009 Executive Bonus Plan, dated as ofFebruary 25, 2009. 8-K 001-33368 10.01 03/03/09 10.10# Description of 2009 Target Bonuses under the 2009Executive Bonus Plan of Glu Mobile Inc. (contained inItem 5.02 of the Form 8-K). 8-K 001-33368 10.02 03/03/09 10.11# Glu Mobile Inc. 2010 Executive Bonus Plan 8-K 001-33368 99.01 12/22/09 10.12# Employment Agreement for Niccolo M. de Masi, datedDecember 28, 2009 8-K 001-33368 99.02 01/04/10 10.13# Change of Control Severance Agreement, dated as ofDecember 28, 2009, by and between Glu Mobile Inc. andNiccolo M. de Masi 8-K 001-33368 99.03 01/04/10 10.14# Summary of Compensation Terms of Kevin S. Chou,dated as of October 31, 2008. 10-Q 001-33368 10.02 11/14/08 10.15# Offer Letter, dated as of July 17, 2008, between Glu MobileInc. and Thomas M. Perrault. 10-Q 001-33368 10.01 11/14/08 10.16# Description of Retention Arrangements with AlessandroGalvagni and Eric R. Ludwig 10-Q 001-33368 10.03 11/09/09 10.17# Non-Employee Director Compensation Program, dated asof January 28, 2009. 10-K 001-33368 10.17 03/13/09 10.18 Lease Agreement at San Mateo Centre II and III dated as ofJanuary 23, 2003, as amended on June 26, 2003,December 5, 2003, October 11, 2004 and May 31, 2005,by and between CarrAmerica Realty, L.P. and Glu MobileInc. S-1 333-139493 10.05 12/19/06 10.19 Sublease dated as of August 22, 2007, between OracleUSA, Inc., and Glu Mobile Inc. 8-K 001-33368 10.1 08/28/07 10.20+ BREW Application License Agreement dated as ofFebruary 12, 2002 by and between Cellco Partnership(d.b.a. Verizon Wireless) and Glu Mobile Inc. S-1/A 333-139493 10.11.1 01/10/07 104Table of Contents Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith 10.21+ BREW Developer Agreement dated as of November 2,2001, as amended, by and between Qualcomm Inc. andGlu Mobile Inc. S-1/A 333-139493 10.11.2 01/10/07 10.22 Form of Warrant dated as of May 2, 2006 by and betweenPinnacle Ventures I Equity Holdings LLC and Glu MobileInc., by and between Pinnacle Ventures I Affiliates, L.P.and Glu Mobile Inc., and by and between PinnacleVentures II Equity Holdings, LLC and Glu Mobile Inc. S-1 333-139493 10.20 12/19/06 10.23 Second Amendment to Loan and Security Agreementbetween Glu Mobile Inc. and Silicon Valley Bank, datedNovember 4, 2008. 8-K 011-33368 10.01 11/04/08 10.24 Amended and Restated Loan and Security Agreement datedas of December 29, 2008, among Silicon Valley Bank, GluMobile Inc., Glu Games Inc. and Superscape Inc 8-K 001-33368 10.06 12/30/08 10.25 Amendment No. 1 to Amended and Restated Loan andSecurity Agreement by and among Glu Mobile Inc., GluGames Inc., Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 08/24/09 10.26 Amendment No. 2 to Amended and Restated Loan andSecurity Agreement by and among Glu Mobile Inc., GluGames Inc., Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 02/10/10 10.27 Amendment No. 3 to Amended and Restated Loan andSecurity Agreement by and among Glu Mobile Inc., GluGames Inc., Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 03/22/10 10.28 Form of Senior Subordinated Secured Promissory Note,between Glu Mobile Inc. and each of the formershareholders of Beijing Zhangzhong MIG InformationTechnology Co. Ltd., dated as of December 29, 2008. 8-K 001-33368 10.01 12/30/08 10.29 Secured Promissory Note in the principal amount of$2,500,000, between Beijing Zhangzhong MIG InformationTechnology Co., Ltd. and Wang Bin, dated as ofDecember 29, 2008. 8-K 001-33368 10.02 12/30/08 10.30 Secured Promissory Note in the principal amount of$2,500,000, between Beijing Zhangzhong MIG InformationTechnology Co., Ltd. and Wang Xin, dated as ofDecember 29, 2008. 8-K 001-33368 10.03 12/30/08 10.31 Security Agreement, among Glu Mobile Inc., and each ofthe former shareholders of Beijing Zhangzhong MIGInformation Technology Co. Ltd. and Wang Xin, dated asof December 29, 2008. 8-K 001-33368 10.04 12/30/08 105Table of Contents Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith 10.32 Guaranty Agreement, among Glu Mobile Inc., Wang Bin andWang Xin, dated as of December 29, 2008. 8-K 001-33368 10.05 12/30/08 21.01 List of Subsidiaries of Glu Mobile Inc. X 23.01 Consent of PricewaterhouseCoopers LLP, independentregistered public accounting firm. X 31.01 Certification of Principal Executive Officer Pursuant toSecurities Exchange Act Rule 13a-14(a). X 31.02 Certification of Principal Financial Officer Pursuant toSecurities Exchange Act Rule 13a-14(a). X 32.01 Certification of Principal Executive Officer Pursuant to18 U.S.C. Section 1350 and Securities Exchange ActRule 13a-14(a)/15d-14(a). X 32.02 Certification of Principal Financial Officer Pursuant to18 U.S.C. Section 1350 and Securities Exchange ActRule 13a-14(a)/15d-14(a). X#Indicates management compensatory plan or arrangement.+Certain portions of this exhibit have been omitted and have been filed separately with the SEC pursuant to a request for confidentialtreatment under Rule 406 of the Securities Act of 1933 and Rule 24b-2 as promulgated under the Securities Exchange Act of 1934.*This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability ofthat section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or theSecurities Exchange Act of 1934, except to the extent that Glu Mobile Inc. specifically incorporates it by reference.106Exhibit 10.05GLU MOBILE INC.2008 Equity Inducement Plan(adopted by the Committee on March 13, 2008)(as amended and restated on December 28, 2009) 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose potential contributions are importantto the success of the Company, and any Parents and Subsidiaries that exist now or in the future, by offering them an opportunity to participate in theCompany’s future performance through the grant of Awards. Capitalized terms not defined elsewhere in the text are defined in Section 19. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Section 2.3 and any other applicable provisions hereof, the total number of Shares reserved and availablefor grant and issuance pursuant to this Plan is the aggregate of (1) 600,000 Shares reserved as of the Effective Date of the Plan and (2) an additional 819,245Shares reserved as of December 28, 2009, plus Shares subject to Awards, and Shares issued upon exercise of Awards, will again be available for grant andissuance in connection with subsequent Awards under this Plan to the extent such Shares: (i) are subject to issuance upon exercise of an Option granted underthis Plan but which cease to be subject to the Option for any reason other than exercise of the Option; (ii) are subject to Awards granted under this Plan that areforfeited or are repurchased by the Company at the original issue price; (iii) are surrendered pursuant to an Exchange Program; or (iv) are subject to Awardsgranted under this Plan that otherwise terminate without such Shares being issued. Shares used to pay the exercise price of an Award or to satisfy the taxwithholding obligations related to an Award will become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out incash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. 2.2 Minimum Share Reserve. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy therequirements of all outstanding Awards granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.3 Adjustment of Shares. If the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split,subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then (a) the number of Sharesreserved for issuance and future grant under the Plan set forth in Section 2.1 and (b) the Exercise Prices of and number of Shares subject to outstandingAwards, shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with applicablesecurities laws; provided that fractions of a Share will not be issued. 3. ELIGIBILITY. Awards may be granted only to persons who (a) were not previously an employee or director of the Company or any Parent orSubsidiary of the Company or (b) have completed a period of bona fide non-employment by the Company, and any Parent or Subsidiary of the Company;and then only as an incentive material to such persons entering into employment with the Company or any Parent or Subsidiary of the Company. A personeligible for an Award under this Plan may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 Committee Composition; Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to thegeneral purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out thisPlan. Notwithstanding the foregoing, the grant of any Award shall not be effective unless: (i) if the grant is made by the Board, then it must be approved by amajority of the Outside Directors on the Board; and (ii) if the grant is made by the Committee, then the Committee must be comprised solely of OutsideDirectors (except as otherwise permitted under the rules of the NASD). The Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms andconditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria),any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in eachcase on such factors as the Committee will determine; (e) determine the number of Shares or other consideration subject to Awards; (f) determine the Fair Market Value in good faith, if necessary; (g) determine whether Awards will be granted singly, in combination with, in tandem with, or as alternatives to, other Awards under this Plan or anyother incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (h) grant waivers of Plan or Award conditions; (i) determine the vesting, exercisability and payment of Awards; (j) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (k) determine whether an Award has been earned; (l) determine the terms and conditions of any, and to institute any Exchange Program; (m) reduce or waive any criteria with respect to Performance Factors; (n) adjust Performance Factors to take into account changes in law and accounting or tax rules as the Committee deems necessary or appropriate;and (o) make all other determinations necessary or advisable for the administration of this Plan.3 4.2 Committee Interpretation and Discretion. Any determination made by the Committee with respect to any Award shall be made in its sole discretion atthe time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final andbinding on the Company and all persons having an interest in any Award under the Plan. Any dispute regarding the interpretation of the Plan or any AwardAgreement shall be submitted by the Participant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final andbinding on the Company and the Participant. The Committee may delegate to one or more executive officers the authority to review and resolve disputes withrespect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on the Company and the Participant. 4.3 Section 16 of the Exchange Act. Awards granted to Insiders must be approved by two or more “non-employee directors” (as defined in the regulationspromulgated under Section 16 of the Exchange Act). 5. OPTIONS. The Committee may grant Options to Participants, which will be Nonqualified Stock Options (“NQSOs”) and will determine the numberof Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions ofthe Option, subject to the following: 5.1 Option Grant. Each Option granted under this Plan will be an NQSO. An Option may be, but need not be, awarded upon satisfaction of suchPerformance Factors during any Performance Period as are set out in advance in the Participant’s individual Award Agreement. If the Option is being earnedupon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for eachOption; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participantsmay participate simultaneously with respect to Options that are subject to different performance goals and other criteria. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, or a specifiedfuture date. The Award Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable within the times or upon the conditions as set forth in the Award Agreement governing such Option;provided, however, that no Option will be exercisable after the expiration of six (6) years from the date the Option is granted. The Committee also may providefor Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as theCommittee determines. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted. Payment for the Shares purchasedmay be made in accordance with Section 6. The Exercise Price of a NQSO may be less than one hundred percent (100%) of the Fair Market Value per Shareon the date of grant in the Committee’s discretion. 5.5 Method of Exercise. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under suchconditions as determined by the Committee and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will bedeemed exercised when the Company receives: (i) notice of exercise (in such form as the Committee may specify from time to time) from the person entitled toexercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Fullpayment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Sharesissued upon exercise of an Option will be issued in the name of the Participant. Until the Shares are issued (as4 evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividendsor any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to beissued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to thedate the Shares are issued, except as provided in Section 2.3 of the Plan. Exercising an Option in any manner will decrease the number of Shares thereafteravailable, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. 5.6 Termination. The exercise of an Option will be subject to the following (except as may be otherwise provided in an Award Agreement): (a) If the Participant is Terminated for any reason except for Cause or the Participant’s death or Disability, then the Participant may exercise suchParticipant’s Options only to the extent that such Options would have been exercisable by the Participant on the Termination Date no later than three (3) monthsafter the Termination Date (or such shorter time period or longer time period not exceeding five (5) years as may be determined by the Committee), but in anyevent no later than the expiration date of the Options. (b) If the Participant is Terminated because of the Participant’s death (or the Participant dies within three (3) months after a Termination other thanfor Cause or because of the Participant’s Disability), then the Participant’s Options may be exercised only to the extent that such Options would have beenexercisable by the Participant on the Termination Date and must be exercised by the Participant’s legal representative, or authorized assignee, no later thantwelve (12) months after the Termination Date (or such shorter time period not less than six (6) months or longer time period not exceeding five (5) years asmay be determined by the Committee), but in any event no later than the expiration date of the Options. (c) If the Participant is Terminated because of the Participant’s Disability, then the Participant’s Options may be exercised only to the extent that suchOptions would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant’s legalrepresentative or authorized assignee) no later than twelve (12) months after the Termination Date, but in any event no later than the expiration date of theOptions. (d) If the Participant is Terminated for Cause, then Participant’s Options shall expire on such Participant’s Termination Date, or at such later timeand on such conditions as are determined by the Committee, but in any event no later than the expiration date of the Options. 5.7 Limitations on Exercise. The Committee may specify a minimum number of Shares that may be purchased on any exercise of an Option, providedthat such minimum number will not prevent any Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options insubstitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under anyOption previously granted. 6. PAYMENT FOR SHARE PURCHASES. Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash or by check or, where expressly approved for theParticipant by the Committee and where permitted by law (and to the extent not otherwise set forth in the applicable Award Agreement): (a) by cancellation of indebtedness of the Company to the Participant;5 (b) by surrender of shares of the Company held by the Participant that have a Fair Market Value on the date of surrender equal to the aggregateexercise price of the Shares as to which said Award will be exercised or settled; (c) by waiver of compensation due or accrued to the Participant for services rendered or to be rendered to the Company or a Parent or Subsidiary ofthe Company; (d) by consideration received by the Company pursuant to a broker-assisted and/or same day sale (or other) cashless exercise program implementedby the Company in connection with the Plan; (e) by any combination of the foregoing; or (f) by any other method of payment as is permitted by applicable law. 7. WITHHOLDING TAXES. 7.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require theParticipant to remit to the Company an amount sufficient to satisfy applicable federal, state, local and international withholding tax requirements prior to thedelivery of Shares pursuant to exercise of any Award. Whenever payments in satisfaction of Awards granted under this Plan are to be made in cash, suchpayment will be net of an amount sufficient to satisfy applicable federal, state, local and international withholding tax requirements. 7.2 Stock Withholding. The Committee, in its sole discretion and pursuant to such procedures as it may specify from time to time, may require orpermit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Companywithhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, or (iii) delivering tothe Company already-owned Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld. The Fair Market Value of theShares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld. 8. TRANSFERABILITY. Unless determined otherwise by the Committee, an Award may not be sold, pledged, assigned, hypothecated, transferred, ordisposed of in any manner other than by will or by the laws of descent or distribution. If the Committee makes an Award transferable, such Award willcontain such additional terms and conditions as the Committee deems appropriate. All Awards shall be exercisable: (i) during the Participant’s lifetime only by(A) the Participant, or (B) the Participant’s guardian or legal representative; and (ii) after the Participant’s death, by the legal representative of the Participant’sheirs or legatees 9. PRIVILEGES OF STOCK OWNERSHIP; VOTING AND DIVIDENDS. No Participant will have any of the rights of a shareholder with respectto any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all therights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect tosuch Shares. 10. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends andother restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or anyrules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit allcertificates representing Shares, together6 with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated bythe Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing suchrestrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase ofShares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of theParticipant’s obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms ofcollateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory notenotwithstanding any pledge of the Participant’s Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required toexecute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory notemay be released from the pledge on a pro rata basis as the promissory note is paid. 12. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance withall applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automatedquotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise orother issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under thisPlan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of anyregistration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to benecessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualificationor listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability orfailure to do so. This Plan shall not take effect until the fifteen (15) day period provided pursuant to Nasdaq rule 4310(c)(17) has expired. 13. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participantany right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in anyway the right of the Company or any Parent or Subsidiary of the Company to terminate Participant’s employment or other relationship at any time. 14. CORPORATE TRANSACTIONS. 14.1 Assumption or Replacement of Awards by Successor. In the event of a Corporate Transaction any or all outstanding Awards may be assumed orreplaced by the successor corporation, which assumption or replacement shall be binding on all Participants. In the alternative, the successor corporation maysubstitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account theexisting provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant,substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor or acquiringcorporation (if any) refuses to assume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, then notwithstandingany other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board (or, theCommittee, if so designated by the Board) will determine; the Board (or, the Committee, if so designated by the Board) may, in its sole discretion, acceleratethe vesting of such Awards in connection with a Corporate Transaction. In addition, in the event such successor or acquiring corporation (if any) refuses toassume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, the Committee will notify the Participant in writing orelectronically that such Award will be exercisable for a period of time7 determined by the Committee in its sole discretion, and such Award will terminate upon the expiration of such period. Awards need not be treated similarly in aCorporate Transaction.Notwithstanding anything to the contrary in this Section 14.1, the Committee, in its sole discretion, may grant Awards that provide for acceleration upon aCorporate Transaction or in other events in the specific Award Agreements. 14.2 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by anothercompany, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution ofsuch other company’s award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to anAward granted under this Plan. 15. TERM OF PLAN. Unless earlier terminated as provided herein, this Plan will become effective on the Effective Date and will terminate ten (10) yearsfrom the date this Plan is adopted by the Committee. This Plan and all Awards granted hereunder shall be governed by and construed in accordance with thelaws of the State of Delaware. 16. AMENDMENT OR TERMINATION OF PLAN. The Board or Committee may at any time terminate or amend this Plan in any respect, including,without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board orCommittee will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval;provided further, that a Participant’s Award shall be governed by the version of this Plan then in effect at the time such Award was granted. 17. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Committee, nor any provision of this Plan, will be construed ascreating any limitations on the power of the Board or Committee to adopt such additional compensation arrangements as it may deem desirable, including,without limitation, the granting of stock awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable orapplicable only in specific cases. 18. INSIDER TRADING POLICY. Each Participant who receives an Award shall comply with any policy adopted by the Company from time to timecovering transactions in the Company’s securities by Employees, officers and/or directors of the Company. 19. DEFINITIONS. As used in this Plan, and except as elsewhere defined herein, the following terms will have the following meanings:“Award” means an Option awarded under the Plan.“Award Agreement” means, with respect to each Award, the written or electronic agreement between the Company and the Participant setting forth the termsand conditions of the Award, which shall be in substantially a form (which need not be the same for each Participant) that the Committee has from time to timeapproved, and will comply with and be subject to the terms and conditions of this Plan.“Board” means the Board of Directors of the Company.“Cause” means (a) the commission of an act of theft, embezzlement, fraud, dishonesty, (b) a breach of fiduciary duty to the Company or a Parent orSubsidiary, or (c) a failure to materially perform the customary duties of Employee’s employment.“Code” means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.“Committee” means the Compensation Committee of the Board or those persons to whom administration of the Plan, or part of the Plan, has been delegated aspermitted by law, or an “independent compensation committee” (as such term is defined for purposes of the rules of the National Association of SecuritiesDealers, Inc.).8 “Company” means Glu Mobile Inc., or any successor corporation.“Corporate Transaction” means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of theExchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representingfifty percent (50%) or more of the total voting power represented by the Company’s then-outstanding voting securities; (ii) the consummation of the sale ordisposition by the Company of all or substantially all of the Company’s assets; or (iii) the consummation of a merger or consolidation of the Company withany other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior theretocontinuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent(50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after suchmerger or consolidation.“Director” means a member of the Board.“Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code, provided, however, that the Committee in its discretion maydetermine whether a total and permanent disability exists in accordance with non-discriminatory and uniform standards adopted by the Committee from timeto time, whether temporary or permanent, partial or total, as determined by the Committee.“Effective Date” means the expiration of the fifteen (15) day waiting period following the adoption of the Plan by the Committee, as set forth in Section 12.“Employee” means any person, including Officers, employed by the Company or any Parent or Subsidiary of the Company and who meets the eligibilityrequirements as set forth in Section 3.“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.“Exercise Price” means the price at which a holder of an Award may purchase the Shares issuable upon exercise of an Award.“Exchange Program” means a program pursuant to which outstanding Awards are surrendered, cancelled or exchanged for cash, the same type of Award ora different Award (or combination thereof).“Fair Market Value” means, as of any date, the value of a share of the Company’s Common Stock determined as follows: (a) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on theprincipal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other sourceas the Board or the Committee deems reliable; (b) if such Common Stock is publicly traded but is neither listed nor admitted to trading on a national securities exchange, the average of the closingbid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable; or (c) if none of the foregoing is applicable, by the Board or the Committee in good faith.“Insider” means an officer or director of the Company or any other person whose transactions in the Company’s Common Stock are subject to Section 16 ofthe Exchange Act.“Option” means an award of an option to purchase Shares pursuant to Section 5.“Outside Director” means a Director who is not an Employee of the Company or any Parent or Subsidiary and who is an “independent” director under therules of the Nasdaq Stock Market, as may be amended from time to time.9 “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations otherthan the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the othercorporations in such chain.“Participant” means a newly hired Employee who receives an Award under this Plan at the time of his or her employment. The term “Participant” shallinclude individuals who were previously employed by the Company, or any Parent or Subsidiary of the Company, who have undergone a bona fide period ofnon-employment by the Company. The term “Participant” shall also include individuals who become Employees of the Company, or any Parent or Subsidiaryof the Company, as the result of a merger or acquisition.“Performance Factors” means the factors selected by the Committee, which may include, but are not limited to the, the following measures (whether or notin comparison to other peer companies) to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied: • Net revenue and/or net revenue growth; • Earnings per share and/or earnings per share growth; • Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth; • Operating income and/or operating income growth; • Net income and/or net income growth; • Total stockholder return and/or total stockholder return growth; • Return on equity; • Operating cash flow return on income; • Adjusted operating cash flow return on income; • Economic value added; • Individual business objectives; and • Company specific operational metrics.“Performance Period” means the period of service determined by the Committee, not to exceed five (5) years, during which years of service or performanceis to be measured for the Award.“Plan” means this Glu Mobile Inc. 2008 Equity Inducement Plan.“SEC” means the United States Securities and Exchange Commission.“Securities Act” means the United States Securities Act of 1933, as amended.“Shares” means shares of the Company’s Common Stock, as adjusted pursuant to Sections 2 and 14, and any successor security.“Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporationsother than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes ofstock in one of the other corporations in such chain.10 “Termination” or “Terminated” means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provideservices as an employee of the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in thecase of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee; provided, that such leave is for a period of not morethan 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formalpolicy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave ofabsence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Parentor Subsidiary of the Company as it may deem appropriate, except that in no event may an Award be exercised after the expiration of the term set forth in theapplicable Award Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to be employed and the effective date onwhich the Participant ceased to be so employed (the “Termination Date”).11 GLU MOBILE INC.2008 EQUITY INDUCEMENT PLANNOTICE OF STOCK OPTION GRANT Name: Address: You (the “Participant”) have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of thisNotice of Stock Option Grant (the “Notice”), the 2008 Equity Inducement Plan, as amended from time to time (the “Plan”) and the Stock OptionAward Agreement (the “Option Agreement”) attached hereto, as follows. The terms defined in the Plan shall have the same meanings in thisNotice. Grant Number Date of Grant Vesting Commencement Date Exercise Price per Share Total Number of Shares Total Exercise Price Type of Option Non-Qualified Stock Option Expiration Date Post-Termination Exercise Period: Termination for Cause = None Voluntary Termination = 3 Months Termination without Cause = 3 Months Disability = 12 Months Death = 12 MonthsVesting Schedule: Subject to the limitations set forth in this Notice, the Plan and the Option Agreement, the Option will vest and may be exercised, in whole or in part, inaccordance with the following schedule: [INSERT VESTING SCHEDULE] You acknowledge receipt of a copy of the Plan and the Option Agreement, and represent that you are familiar with the terms and provisions thereof, andhereby accept the Option subject to all of the terms and provisions hereof. You understand that your employment with the Company is for an unspecifiedduration and can be terminated at any time (i.e., is “at-will”), and that nothing in this Notice, the Stock12 Option Award Agreement or the Plan changes the at-will nature of that relationship. You acknowledge that the vesting of shares pursuant to this Notice isearned only by your continuing service as an Employee of the Company. PARTICIPANT: GLU MOBILE INC. Signature: By: Print Name: Its: Date: Date: GLU MOBILE INC.STOCK OPTION AWARD AGREEMENT2008 EQUITY INDUCEMENT PLAN Unless otherwise defined herein, the terms defined in the Company’s 2008 Equity Inducement Plan (the “Plan”) shall have the same defined meanings inthis Award Agreement (the “Agreement”). Participant has been granted an option to purchase Shares (the “Option”), subject to the terms and conditions of the Plan, the Notice of Stock Option Grant(“Notice of Grant”) and this Agreement. 1. Vesting Rights. Subject to the applicable provisions of the Plan and this Agreement, this Option may be exercised, in whole or in part, in accordancewith the schedule set forth in the Notice of Grant. 2. Termination Period. (a) General Rule. Except as provided below, and subject to the Plan, this Option may be exercised for 3 months after termination of Participant’semployment with the Company. In no event shall this Option be exercised later than the Term/Expiration Date set forth in the Notice of Grant. (b) Death; Disability. Upon the termination of Participant’s employment with the Company by reason of his or her Disability or death, or if aParticipant dies within three months of the Termination Date, this Option may be exercised for twelve months in the case of death, and six months in the caseof Disability, after the Termination Date, provided that in no event shall this Option be exercised later than the Term/Expiration Date set forth in the Notice ofGrant. (c) Cause. Upon the termination of Participant’s employment by the Company for Cause, the Option shall expire on such date of Participant’sTermination Date. 3. Grant of Option. The Participant named in the Notice of Grant has been granted an Option for the number of Shares set forth in the Notice of Grant atthe exercise price per Share set forth in the Notice of Grant (the “Exercise Price”). In the event of a conflict between the terms and conditions of the Plan and theterms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. 4. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set forth in the Notice of Grant and theapplicable provisions of the Plan and this Agreement. In the event of Participant’s death, Disability, Termination for Cause or other Termination, theexercisability of the Option is governed by the applicable provisions of the Plan, the Notice of Stock Option Grant and this Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice (the “Exercise Notice”), which shall state the election to exercise theOption, the number of Shares in respect of which the Option is13 being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of thePlan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Companyor other person designated by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares.This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate ExercisePrice. (c) No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law andthe requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes theExercised Shares shall be considered transferred to the Participant on the date the Option is exercised with respect to such Exercised Shares. 5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of theParticipant: (a) cash; or (b) check; or (c) a “broker-assisted” or “same day sale” (as described in Section 11(d) of the Plan); or (d) other method authorized by the Company. 6. Non-Transferability of Option. This Option may not be transferred in any manner other than by will or by the laws of descent or distribution or courtorder and may be exercised during the lifetime of Participant only by the Participant. The terms of the Plan and this Agreement shall be binding upon theexecutors, administrators, heirs, successors and assigns of the Participant. 7. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only inaccordance with the Notice of Grant, the Plan and the terms of this Agreement. 8. U.S. Tax Consequences. For Participants subject to U.S. income tax, some of the federal tax consequences relating to this Option, as of the date of thisOption, are set forth below. All other Participants should consult a tax advisor for tax consequences relating to this Option in their respective jurisdiction. THISSUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE PARTICIPANTSHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. Each Option granted hereunder is intended to be a Nonqualified Stock Option (“NSO”). The Participant may incur regularfederal income tax liability upon exercise of a NSO. The Participant will be treated as having received compensation income (taxable at ordinary income taxrates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Participant isan Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Participant and pay to theapplicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exerciseand refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (b) Disposition of Shares. If the Participant holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated aslong-term capital gain for federal income tax purposes. (c) Possible Effect of Section 409A of the Code. Section 409A of the Code applies to arrangements that provide for the deferral of compensation.Generally, a stock option granted with an exercise price per share of not2 less than the “fair market value” (determined in a manner consistent with Section 409A of the Code and the regulations and other guidance promulgatedthereunder) per share on the date of grant of the stock option and with no other feature providing for the deferral of compensation will not be subject toSection 409A of the Code. However, if the exercise price of the stock option is less than such “fair market value” or the stock option has another feature for thedeferral of compensation, then if the stock option is not administered within the parameters established under Section 409A the optionholder will be subject toadditional taxes. Also, the amount deemed to be deferred compensation under Section 409A of the Code will be subject to ordinary income and employmenttaxes (in this respect the IRS has not yet indicated how it will calculate the amount of deferred compensation subject to tax and the timing and frequency oftaxation, but it seems likely that the income will be measured and taxes imposed at least on the vesting dates of the stock option). If Section 409A of the Codedoes apply to this Option, then special rules apply to the timing of making and effecting certain amendments of this Option with respect to distribution of anydeferred compensation. 9. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan, the Notice of Grant, and this Agreement constitute theentire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Companyand Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed bythe Company and Participant. This agreement is governed by Delaware law except for that body of law pertaining to conflict of laws. 10. No Rights as Employee. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent orSubsidiary of the Company, to terminate Participant’s employment, for any reason, with or without cause. By your signature and the signature of the Company’s representative on the Notice of Grant, you and the Company agree that this Option is granted underand governed by the terms and conditions of the Plan, the Notice of Grant, and this Agreement. Participant has reviewed the Plan, the Notice of Grant, andthis Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing the Notice of Grant, and fully understands allprovisions of the Plan, the Notice of Grant, and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions orinterpretations of the Committee upon any questions relating to the Plan, the Notice of Grant, and the Agreement. Participant further agrees to notify theCompany upon any change in the residence address indicated on the Notice of Grant.3 No. GLU MOBILE INC.2008 EQUITY INDUCEMENT PLANSTOCK OPTION EXERCISE AGREEMENT This Stock Option Exercise Agreement (the “Exercise Agreement”) is made and entered into as of , ___(the “Effective Date”)by and between Glu Mobile Inc., a Delaware corporation (the “Company”), and the purchaser named below (the “Purchaser”). Capitalized terms not definedherein shall have the meanings ascribed to them in the Company’s 2008 Equity Inducement Plan (the “Plan”). Purchaser: Social Security Number: Address: Total Number of Shares: Exercise Price Per Share: Type of Stock Option: Nonqualified Stock Option 1. EXERCISE OF OPTION. 1.1 Exercise. Pursuant to exercise of that certain option (the “Option”) granted to Purchaser under the Plan and subject to the terms and conditions ofthis Exercise Agreement, Purchaser hereby purchases from the Company, and the Company hereby sells to Purchaser, the Total Number of Shares set forthabove (the “Shares”) of the Company’s Common Stock, at the Exercise Price Per Share set forth above (the “Exercise Price”). As used in this ExerciseAgreement, the term “Shares” refers to the Shares purchased under this Exercise Agreement and includes all securities received (i) in replacement of theShares, (ii) as a result of stock dividends or stock splits with respect to the Shares, and (iii) all securities received in replacement of the Shares in a merger,recapitalization, reorganization or similar corporate transaction. 1.2 Title to Shares. The exact spelling of the name(s) under which Purchaser will take title to the Shares is: Purchaser desires to take title to the Shares as follows: o Individual, as separate property o Husband and wife, as community property4 o Joint Tenants o Other; please specify: 1.3 Payment. Purchaser hereby delivers payment of the Exercise Price in the manner permitted in the Stock Option Agreement as follows (check andcomplete as appropriate): o in cash (by check) in the amount of $ , receipt of which is acknowledged by the Company; o by delivery of fully-paid, nonassessable and vested shares of the Common Stock of the Company owned by Purchaser whichhave been paid for within the meaning of SEC Rule 144, (if purchased by use of a promissory note, such note has been fully paid with respectto such vested shares), or obtained by Purchaser in the open public market, and owned free and clear of all liens, claims, encumbrances orsecurity interests, valued at the current fair market value of $ per share; o through a “broker-assisted” or “same day sale” program, commitment from the Purchaser or Authorized Transferee and an NASD Dealermeeting the requirements set forth by the Company; or o through a “margin” commitment from Purchaser or Authorized Transferee and an NASD Dealer meeting the requirements of the Company’s“margin” procedures and in accordance with law. 2. DELIVERY. 2.1 Deliveries by Purchaser. Purchaser hereby delivers to the Company (i) this Exercise Agreement and (ii) the Exercise Price and payment or otherprovision for any applicable tax obligations. 2.2 Deliveries by the Company. Upon its receipt of the Exercise Price, payment or other provision for any applicable tax obligations and all thedocuments to be executed and delivered by Purchaser to the Company under Section 2.1, the Company will issue a duly executed stock certificate evidencingthe Shares in the name of Purchaser. 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to the Company that: 3.1 Agrees to Terms of the Plan. Purchaser has received a copy of the Plan and the Stock Option Agreement, has read and understands the terms ofthe Plan, the Stock Option Agreement and this Exercise Agreement, and agrees to be bound by their terms and conditions. Purchaser acknowledges that theremay be adverse tax consequences upon exercise of the Option or disposition of the Shares, and that Purchaser should consult a tax adviser prior to suchexercise or disposition. 3.2 Access to Information. Purchaser has had access to all information regarding the Company and its present and prospective business, assets,liabilities and financial condition that Purchaser reasonably considers important in making the decision to purchase the Shares, and Purchaser has had ampleopportunity to ask questions of the Company’s representatives concerning such matters and this investment. 3.3 Understanding of Risks. Purchaser has received and reviewed the Form S-8 prospectus for the Plan and Shares and is fully aware of: (i) thehighly speculative nature of the investment in the Shares; (ii) the financial hazards involved; (iii) the qualifications and backgrounds of the management of theCompany; and (iv) the tax consequences of investment in the Shares. Purchaser is capable of evaluating the merits and risks of this investment, has5 the ability to protect Purchaser’s own interests in this transaction and is financially capable of bearing a total loss of this investment. 4. COMPLIANCE WITH SECURITIES LAWS. Purchaser understands and acknowledges that the exercise of any rights to purchase any Shares isexpressly conditioned upon compliance with the Securities Act and all applicable state securities laws. Purchaser agrees to cooperate with the Company toensure compliance with such laws. 5. RESTRICTED SECURITIES. 5.1 No Transfer Unless Registered or Exempt. Purchaser understands that Purchaser may not transfer any Shares except when such Shares areregistered under the Securities Act or qualified under applicable state securities laws or unless, in the opinion of counsel to the Company, exemptions fromsuch registration and qualification requirements are available. Purchaser understands that only the Company may file a registration statement with the SECand that the Company is under no obligation to do so with respect to the Shares, and may withdraw any such registration statement at any time after filing.Purchaser has also been advised that exemptions from registration and qualification may not be available or may not permit Purchaser to transfer all or any ofthe Shares in the amounts or at the times proposed by Purchaser. 5.2 SEC Rule 144. If Purchaser is an “affiliate” for purposes of Rule 144 promulgated under the Securities Act, then in addition, Purchaser has beenadvised that Rule 144 requires that the Shares be held for a minimum of six (6) months, and in certain cases one (1) year, after they have been purchased andpaid for (within the meaning of Rule 144). Purchaser understands that Rule 144 may impose limitations on the volume of shares that can be sold, and mayindefinitely restrict transfer of the Shares so long as Purchaser remains an “affiliate” of the Company or if “current public information” about the Company(as defined in Rule 144) is not publicly available. 6. RIGHTS AS A STOCKHOLDER. Subject to the terms and conditions of this Exercise Agreement, Purchaser will have all of the rights of astockholder of the Company with respect to the Shares from and after the date that Shares are issued to Purchaser until such time as Purchaser disposes of theShares. 7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. 7.1 Legends. Purchaser understands and agrees that the Company will place any legends that may be required by state or U.S. Federal securities laws,the Company’s Certificate of Incorporation or Bylaws, any other agreement between Purchaser and the Company or, subject to the assent of the Company, anyagreement between Purchaser and any third party. 7.2 Stop-Transfer Instructions. Purchaser agrees that, to ensure compliance with any restrictions imposed by this Exercise Agreement, the Companymay issue appropriate “stop-transfer” instructions to its transfer agent, if any, and if the Company transfers its own securities, it may make appropriatenotations to the same effect in its own records. 7.3 Refusal to Transfer. The Company will not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred inviolation of any of the provisions of this Exercise Agreement or (ii) to treat as owner of such Shares, or to accord the right to vote or pay dividends to anypurchaser or other transferee to whom such Shares have been so transferred. 8. TAX CONSEQUENCES. PURCHASER UNDERSTANDS AND REPRESENTS: (i) THAT PURCHASER HAS REVIEWED THEPROSPECTUS PREPARED FOR THE PLAN AND CONSULTED PURCHASER’S PERSONAL TAX ADVISER IN CONNECTION WITH THEPURCHASE OR DISPOSITION OF THE SHARES AND (ii) THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE.SET FORTH BELOW IS A BRIEF SUMMARY AS OF THE DATE THE PLAN WAS ADOPTED BY THE BOARD OF SOME OF THE U.S.FEDERAL TAX CONSEQUENCES OF EXERCISE OF THE OPTION AND DISPOSITION OF THE SHARES. THIS SUMMARY IS NECESSARILYINCOMPLETE, AND THE TAX LAWS AND6 REGULATIONS ARE SUBJECT TO CHANGE. PURCHASER SHOULD CONSULT THE PROSPECTUS AND PURCHASER’S PERSONAL TAXADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. 8.1 Exercise of Nonqualified Stock Option. There may be a regular U.S. Federal income tax liability upon the exercise of the Option. Purchaser will betreated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on thedate of exercise over the Exercise Price. If Purchaser is or was an employee of the Company, the Company may be required to withhold from Purchaser’scompensation or collect from Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time ofexercise. 8.2 Disposition of Shares. The following tax consequences may apply upon disposition of the Shares. (a) Nonqualified Stock Options. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to theexercise of an NQSO, any gain realized on disposition of the Shares will be treated as long-term capital gain. (b) Withholding. The Company may be required to withhold from the Purchaser’s compensation or collect from the Purchaser and pay to theapplicable taxing authorities an amount equal to a percentage of this compensation income. 9. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the Shares will be subject to and conditioned uponcompliance by the Company and Purchaser with all applicable state and federal laws and regulations and with all applicable requirements of any stockexchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer. 10. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Agreement. No other party to this ExerciseAgreement may assign, whether voluntarily or by operation of law, any of its rights and obligations under this Exercise Agreement, except with the priorwritten consent of the Company. This Exercise Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company.Subject to the restrictions on transfer herein set forth, this Exercise Agreement will be binding upon Purchaser and Purchaser’s heirs, executors,administrators, legal representatives, successors and assigns. 11. GOVERNING LAW. This Exercise Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, withoutgiving effect to that body of laws pertaining to conflict of laws. 12. NOTICES. Any and all notices required or permitted to be given to a party pursuant to the provisions of this Exercise Agreement will be in writingand will be effective and deemed to provide such party sufficient notice under this Exercise Agreement on the earliest of the following: (i) at the time of personaldelivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business daysafter such deposit for deliveries outside of the United States, with proof of delivery from the courier requested; or (iii) three (3) business days after deposit inthe United States mail by certified mail (return receipt requested) for United States deliveries. All notices for delivery outside the United States will be sent byexpress courier. All notices not delivered personally will be sent with postage and/or other charges prepaid and properly addressed to the party to be notified atthe address set forth below the signature lines of this Exercise Agreement, or at such other address as such other party may designate by one of the indicatedmeans of notice herein to the other parties hereto. Notices to the Company will be marked “Attention: Stock Plan Administration”. 13. FURTHER ASSURANCES. The parties agree to execute such further documents and instruments and to take such further actions as may bereasonably necessary to carry out the purposes and intent of this Exercise Agreement.7 14. TITLES AND HEADINGS. The titles, captions and headings of this Exercise Agreement are included for ease of reference only and will bedisregarded in interpreting or construing this Exercise Agreement. Unless otherwise specifically stated, all references herein to “sections” will mean “sections”to this Exercise Agreement. 15. ENTIRE AGREEMENT. The Plan, the Notice, the Stock Option Agreement and this Exercise Agreement constitute the entire agreement andunderstanding of the parties with respect to the subject matter of this Exercise Agreement, and supersede all prior understandings and agreements, whether oralor written, between or among the parties hereto with respect to the specific subject matter hereof. 16. COUNTERPARTS. This Exercise Agreement may be executed in any number of counterparts, each of which when so executed and delivered will bedeemed an original, and all of which together shall constitute one and the same agreement. 17. SEVERABILITY. If any provision of this Exercise Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegalor unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such clause orprovision cannot be so enforced, such provision shall be stricken from this Exercise Agreement and the remainder of this Exercise Agreement shall be enforcedas if such invalid, illegal or unenforceable clause or provision had (to the extent not enforceable) never been contained in this Exercise Agreement.Notwithstanding the forgoing, if the value of this Exercise Agreement based upon the substantial benefit of the bargain for any party is materially impaired,which determination as made by the presiding court or arbitrator of competent jurisdiction shall be binding, then both parties agree to substitute suchprovision(s) through good faith negotiations.8 IN WITNESS WHEREOF, the Company has caused this Exercise Agreement to be executed in triplicate by its duly authorized representative andPurchaser has executed this Exercise Agreement as of the Effective Date, indicated above. GLU MOBILE INC. PURCHASER By: (Signature) (Please print name) (Please print name) (Please print title) Address: Address: Fax No.: Fax No. Phone No.: Phone No.: [Signature page to Glu Mobile Inc. Stock Option Exercise Agreement]9Exhibit 21.01GLU MOBILE INC.Subsidiaries as of March 31, 2010 State or Other Jurisdiction of Incorporation orName of Subsidiary Which Does Business As OrganizationBeijing Qinwang Technology Co. Ltd. Beijing Qinwang Technology Co. Ltd. China (PRC)Beijing Zhangzhong MIG Information Technology Co. Ltd. MIG People’s Republic Of China Glu Games Inc. Glu Games Inc. Delaware Glu Mobile Brasil Ltda Glu Mobile Brasil Ltda BrazilGlu Mobile GmbH Glu Moible GmbH GermanyGlu Mobile Limited Glu Mobile Limited Hong Kong Glu Mobile Limited Glu Mobile Limited United Kingdom Glu Mobile (Russia) Ltd. Glu Mobile (Russia) Ltd. United KingdomGlu Mobile S.A. Glu Mobile S.A. ChileGlu Mobile SARL Glu Mobile SARL FranceGlu Mobile SRL Glu Mobile SARL ItalyGlu Mobile S.L. Glu Mobile SL SpainGlu Mobile Technology (Beijing) Co. Ltd. Glu Mobile Technology (Beijing) Co.Ltd. People’s Republic Of ChinaMaverick Mobile Entertainment (Beijing) Limited Maverick MobileEntertainment (Beijing)Limited People’s Republic Of China Superscape Inc. Glu Mobile Inc. Delaware Superscape Group Limited Superscape Group Limited United KingdomWe have omitted certain subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as ofDecember 31, 2009. Exhibit 23.01CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-141487, 333- 149996 and 333-157959) of ourreport dated March 31, 2010 relating to the financial statements, which appears in Glu Mobile Inc.’s Annual Report on Form 10-K for the year ended December31, 2009./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 31, 2010 EXHIBIT 31.01CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THESECURITIES EXCHANGE ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Niccolo M. de Masi, certify that:1. I have reviewed this Annual Report on Form 10-K of Glu Mobile Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 31, 2010 /s/ Niccolo M. de Masi Niccolo M. de Masi President and Chief Executive Officer(Principal Executive Officer) EXHIBIT 31.02CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THESECURITIES EXCHANGE ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Eric R. Ludwig, certify that:1. I have reviewed this Annual Report on Form 10-K of Glu Mobile Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 31, 2010 /s/ Eric R. Ludwig Eric R. Ludwig Senior Vice President and Chief Financial Officer(Principal Financial Officer) EXHIBIT 32.01CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. §1350The undersigned, Niccolo M. de Masi, the President and Chief Executive Officer of Glu Mobile Inc. (the “Company”), pursuant to 18 U.S.C. §1350, herebycertifies that: (i) the Annual Report on Form 10-K for the period ended December 31, 2009 of the Company (the “Report”) fully complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 31, 2010 By: /s/ Niccolo M. de Masi Niccolo M. de Masi President and Chief Executive Officer(Principal Executive Officer) EXHIBIT 32.02CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO §18 U.S.C. SECTION 1350The undersigned, Eric R. Ludwig, the Senior Vice President and Chief Financial Officer of Glu Mobile Inc. (the “Company”), pursuant to 18 U.S.C. §1350,hereby certifies that: (i) the Annual Report on Form 10-K for the period ended December 31, 2009 of the Company (the “Report”) fully complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934; and. (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 31, 2010 By: /s/ Eric R. Ludwig Eric R. Ludwig Senior Vice President and Chief Financial Officer(Principal Financial Officer)

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