Glu Mobile, Inc.
Annual Report 2010

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, 2010ORoo 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(State or Other Jurisdiction ofIncorporation or Organization) 91-2143667(IRS EmployerIdentification No.)45 Fremont Street, Suite 2800San Francisco, California(Address of Principal Executive Offices) 94105(Zip Code)(415) 800-6100(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. Indicate 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 oAccelerated filer oNon-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 30,2010, the last business day of the registrant’s most recently completed second fiscal quarter, as reported by The NASDAQ Global Market, wasapproximately $27,041,101. 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 15, 2011 was 53,817,591.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive proxy statement for registrant’s 2011 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within120 days after registrant’s fiscal year ended December 31, 2010 are incorporated by reference into Part III of this Annual Report on Form 10-K. TABLE OF CONTENTS PagePART I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 29 Item 2. Properties 29 Item 3. Legal Proceedings 30 Item 4. Reserved 30 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 30 Item 6. Selected Financial Data 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 54 Item 8. Financial Statements and Supplementary Data 56 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 94 Item 9A(T). Controls and Procedures 94 Item 9B. Other Information 94 PART III Item 10. Directors, Executive Officers and Corporate Governance 95 Item 11. Executive Compensation 96 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 96 Item 13. Certain Relationships and Related Transactions, and Director Independence 96 Item 14. Principal Accountant Fees and Services 96 PART IV Item 15. Exhibits and Financial Statement Schedules 96 Signatures 97 EX-10.12 EX-10.14 EX-10.17 EX-21.01 EX-23.01 EX-31.01 EX-31.02 EX-32.01 EX-32.02Table of ContentsForward 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.PART 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 users of smartphones and tablet devices who purchase our games throughdirect-to-consumer digital storefronts as well as users of feature phones served by wireless carriers and other distributors. We create gamesand related applications based on our own original brands and intellectual property as well as third-party licensed brands. Our originalgames based on our own intellectual property include Beat It!, Bonsai Blast, Brain Genius, Glyder, Gun Bros, Hero Project, Jump O’Clock, Magic Life, Stranded, Super K.O. Boxing, Toyshop Adventures and Zombie Isle. Our games based on licensed intellectualproperty include Build-a-lot, Call of Duty, Deer Hunter, Diner Dash, DJ Hero, Guitar Hero, Family Feud, Family Guy, Lord ofthe Rings, Paperboy, The Price Is Right, Transformers, Wedding Dash, Who Wants to Be a Millionaire? and World Series ofPoker. We are based in San Francisco, California and our primary international offices are located in Brazil, China, England andRussia.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,1Table of ContentsNE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and otherinformation regarding issuers that file electronically with the SEC. We make available free of charge on the Investor Relations section ofour corporate website all of the reports we file with the SEC as soon as reasonably practicable after the reports are filed. Our internetwebsite is located at www.glu.com and our investor relations website is located at www.glu.com/investors. The information on our websiteis not incorporated into this report. Copies of our 2010 Annual Report on Form 10-K may also be obtained, without charge, bycontacting Investor Relations, Glu Mobile Inc., 45 Fremont Street, Suite 2800, San Francisco, California 94105 or by calling415-800-6100.Business Developments and HighlightsSince January 1, 2010, we have taken the following actions to support our business: • We increased our focus on designing, marketing and selling games for smartphones, such as Apple’s iPhone and mobile phonesutilizing the Google’s Android operating system. We generated $9.9 million in smartphone revenues in 2010, a 127.2% increasefrom the $4.3 million in smartphone revenues we generated in 2009. In December 2010, we had approximately 12.1 millionmonthly active users of our games on smartphones based on the Apple iOS and Google Android operating systems. As ofDecember 31, 2010, we had 50.2 million cumulative installs of our games on smartphones based on the Apple iOS and GoogleAndroid operating systems, including 18.0 million installs during the fourth quarter of 2010. • We have formulated our smartphone strategy around becoming the leading publisher of social, mobile “freemium” games —games that are downloadable without an initial charge, but which enable a variety of additional features to be accessed for a fee orotherwise monetized through various advertizing and offer techniques. We released our initial five social, freemium games in thefourth quarter of 2010 and expect to release 20 to 25 additional social, freemium games during 2011. • We have initiated our Glu Partners program, which includes the following features: (1) external development of Glu content, asapproximately half of the social, freemium games that we intend to release during 2011 will be produced by third parties withwhich we have a strategic relationship, (2) extension of Glu games to other digital platforms, such as our recently announcedlaunch of Gun Bros on Facebook, hi5 and Wild Tangent, and (3) in the future, making our global distribution platformavailable to independent content developers. • We have launched the Glu Games Network distribution platform and community, which will allow us to deepen engagement inour global social gaming community as well as provide global distribution for third party-content. The Glu Games Networkincludes a standalone application for smartphones and tablets that enables consumers to sign in through multiple socialnetworks, contains a proprietary loyalty program and functions as our gaming community hub. • We have established and expanded our data analytics group, which enables us to have continually updated information regardingthe number of consumers who download and play our games, as well as detailed information regarding consumers’ engagementwith our games, including information regarding average game session length, average number of daily game sessions per user,consumers’ purchasing of virtual currency and virtual items and game level achievement. • In August 2010, we issued and sold in a private placement an aggregate of 13,495,000 shares of our common stock at $1.00 pershare and warrants exercisable to purchase up to 6,747,500 shares of our common stock at $1.50 per share for net proceeds ofapproximately $13.2 million after offering expenses (excluding any proceeds we may receive upon exercise of the warrants). InJanuary 2011, we issued and sold in an underwritten public offering an aggregate of 8,414,635 shares of our common stock at aprice to the public of $2.05 per share for net proceeds of approximately $15.9 million after underwriting discounts andcommissions and offering expenses.2Table of Contents • In December 2010, we relocated our corporate headquarters from San Mateo, California to San Francisco, California. We believethat San Francisco has become the hub of social, mobile gaming, and that having our corporate headquarters in San Franciscowill assist us in recruiting top talent to our company.The mobile games market continued to undergo meaningful changes in 2010. There has been, and we believe that there will continueto be, an acceleration in the number of smartphones being sold as consumers continue to migrate from traditional feature phones tosmartphones. In addition, since the beginning of 2010, Apple and a number of other manufacturers have introduced tablet devices, whichenable mobile game designers to create games that are optimized for larger screen sizes and designed to take advantage of the tablets’advanced capabilities and functionality. As a result of the expected continued migration of users from traditional feature phones tosmartphones, we expect our feature phone revenues, which represented a significant majority of our revenues in 2010, to continue todecrease in 2011.For us to succeed in 2011 and beyond, we believe that we must increasingly publish mobile games that are widely accepted andcommercially successful on the smartphone and tablet digital storefronts, which include Apple’s App Store, Google’s Android Market,Microsoft’s Windows Marketplace for Mobile, Palm’s App Catalog, Nokia’s Ovi Store and Research In Motion’s Blackberry AppWorld. Our strategy for increasing our revenues from smartphones and tablets involves becoming the leading publisher of social, mobilefreemium games. Our social, mobile freemium games are provided as a live service and are generally designed to be persistent throughregular content updates, which is in contrast to our premium smartphone games which consumers download for a fee and are generallynot updated. We believe this approach will enable us to build a growing, longer lasting and more direct relationship with our customers,which will assist us in our future sales and marketing efforts. We intend to have the substantial majority of these social, freemium gamesbe based upon our own intellectual property, unlike our premium smartphone games which are generally based on licensed brands; webelieve creating our own game franchises will significantly enhance our margins and long-term value. In addition, we intend to utilize asignificant portion of the net proceeds from our recent public offering to further the development of our global social gaming community,including with respect to our Glu Games Network and Glu Partners initiatives.Although we expect our revenues from smartphones and tablets to increase in 2011, we do not expect this increase to fully offset theanticipated decline in revenues from games we develop for feature phones, and therefore in 2011 we expect that our total revenues willdecline from our 2010 revenues. However, we believe that our smartphone revenues will surpass our feature phone revenues on a monthlyrun rate basis by the end of 2011 and that this transition will position us to return to overall revenue growth in the longer term.Our ProductsWe develop and publish a portfolio of casual and traditional games designed to appeal to a broad cross section of the users ofsmartphones and tablet devices who purchase our games through direct-to-consumer digital storefronts as well as users of feature phonesserved by wireless carriers and other distributors. We create games and related applications based on our own original brands andintellectual property as well as third-party licensed brands. Our original games based on our own intellectual property include Beat It!,Bonsai Blast, Brain Genius, Glyder, Gun Bros, Hero Project, Jump O’ Clock, Magic Life, Stranded, Super K.O. Boxing, ToyshopAdventures and Zombie Isle. Our games based on licensed intellectual property include Build-a-lot, Call of Duty, Deer Hunter, DinerDash, DJ Hero, Guitar Hero, Family Feud, Family Guy, Lord of the Rings, Paperboy, The Price Is Right, Transformers, WeddingDash, Who Wants to Be a Millionaire? and World Series of Poker.Consumers download our freemium games for smartphones and tablet devices through direct-to-consumer, 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. Our freemium games are provided as a live service and are generally designed tobe persistent through regular content updates, which is in contrast to our premium smartphone games which consumers download for afee and are generally not updated. Although our freemium games may be downloaded and played free of charge, consumers may elect topurchase virtual currency which can be used to acquire various items to enhance their gameplay experience — we sometimes refer to theseas in-app purchases or micro-transactions. We sell virtual currency and other virtual items to consumers at various prices ranging from$0.99 to $99.99, with the significant majority of such3Table of Contentspurchases occurring at the lower price points. With respect to our premium games for smartphones and tablets, end users purchase ourgames through the direct-to-consumer digital storefronts at prices generally ranging between $0.99 and $4.99. The digital storefrontsgenerally share with us 70% of the consumers’ payments for our games and virtual currency, which we record as revenues.In addition to in-app purchases of virtual currency and other items, we monetize our freemium games through offers and in-gameadvertising. Offers enable users to acquire virtual currency without paying cash but by instead downloading another application, whichis typically a third-party application, but could be another Glu game. We work with third parties, including Tapjoy and Flurry, toprovide these offers to the end users of our freemium games, and we receive a payment from the third-party offer provider based onconsumer downloading of these offers. We also work with third-party advertising aggregators who embed banner-type advertising in ourgames, and we receive a payment from such third-party advertising aggregators based on the number of impressions in our games.For our feature phone business, end users typically purchase our games from their wireless carrier and are billed on their monthlyphone bill. In the United States, one-time fees for unlimited use generally range between approximately $5.00 and $10.00, and prices forsubscriptions generally range between approximately $2.50 and $4.00 per month, typically varying by game and carrier. In Europe, one-time fees for unlimited use generally range between approximately $2.50 and $10.00 (at current exchange rates), and prices forsubscriptions generally range between approximately $1.50 and $4.00 per month (at current exchange rates), typically varying by gameand carrier. Prices in the Asia-Pacific and Latin America regions are generally lower than in the United States and Europe. Carriersnormally share with us 40% to 65% of their subscribers’ payments for our games, which we record as revenues.For 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 33.4% in 2010, 35.5% in 2009 and 33.5% in 2008. 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 2010, 2009 and 2008, Glu-branded originalgames accounted for approximately 21.9%, 22.5% and 25.0% of our revenues, respectively. However, we intend to have the substantialmajority of the social, freemium games that we release in 2011 and beyond be based upon our own intellectual property, and, as a result,we expect Glu-branded original games to account for a significantly increased percentage of our revenues in future periods.For more information on the revenues for the last three fiscal years by geographic areas, please see Note 12 of Notes to ConsolidatedFinancial Statements included in Item 8 of this report.Sales, Marketing and DistributionWe market and sell our games for smartphones and tablets primarily through direct-to-consumer digital storefronts. The significantmajority of our smartphone revenues have historically been derived from the Apple App Store, but no smartphone digital storefrontaccounted for more than 10% of our total revenues in any of 2010, 2009 or 2008.As part of our efforts to successfully market our games on these direct-to-consumer digital storefronts, we attempt to educate thedigital storefront owners regarding our title roadmap and seek to have our games featured or otherwise prominently placed within thedigital storefront. We believe that the featuring or prominent placement of our games is likely to result in our games achieving a greaterdegree of commercial success. We believe that a number of factors may influence the featuring or placement of a game in these digitalstorefronts, 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;4Table 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.In 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 smartphones and tablets. These initiativesinclude the following: • 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. • Paying third parties, such as Tapjoy, Flurry, FreeAppADay.com and FreeGameoftheDay.com, to encourage or incentivizeconsumers to download our games through offers or recommendations. • 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. • Launching the Glu Games Network distribution platform and community, which will allow us to create a global social gamingcommunity. The Glu Games Network includes a standalone application for smartphones and tablets that enables consumers tosign in through multiple social networks, contains a proprietary loyalty program and functions as our gaming community hub.This application replaces the “Get More Games” functionality that we previously embedded into our games, which served toinform users about, and enabled them to easily purchase, other of our games.For our feature phone business, we market and sell our games primarily through wireless carriers via placement in the “deck” ofgames and other applications that the carriers choose to make available to their feature phone customers. We also coordinate our marketingefforts with carriers and mobile handset manufacturers in the launch of new games with new handsets. We are often required to executesimultaneous and coordinated “day-and-date” game launches, which are typically used for games associated with other content platformssuch as films, television and console games.We co-market our games for feature phones with our partners, including wireless carriers, branded content owners anddirect-to-consumer companies. For example, when we create an idea for a game, we discuss the game with wireless carriers early in thedevelopment process to gain an understanding 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. In addition, we work with our wireless carriers to developmerchandising initiatives, such as pre-loading of games on handsets, often with free trials, Glu-branded game menus that offer games fortrial or sale, and pay-per-play or other alternative billing arrangements.We believe that placement of games for feature phones 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 commercialsuccess. We believe that a number 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.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 arrangement5Table 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. Wireless carriers generally control the price charged to end users for our mobile gameseither by approving or establishing the price of the games charged to their subscribers. Some of our carrier agreements also restrict ourability to change established prices. Similarly, for the significant minority of our carriers, including Verizon Wireless, when we makechanges to a pricing plan (the wholesale price and the corresponding suggested retail price based on our negotiated revenue-sharingarrangement), adjustments to the actual retail price charged to end users may not be made in a timely manner or at all, even though ourwholesale price was reduced.We currently have agreements with numerous wireless carriers and other distributors. Verizon Wireless accounted for 15.2%, 20.5%and 21.4% of our revenues in 2010, 2009 and 2008, respectively. No other carrier represented more than 10.0% of our revenues in any ofthese years. In addition, in 2010, 2009 and 2008, we derived approximately 44.1%, 49.1% and 51.4%, respectively, of our revenues fromrelationships with our top five carriers, in each year including Verizon Wireless. We expect that we will continue to generate a substantialmajority of our feature phone revenues through distribution relationships with fewer than 20 carriers for the foreseeable future.StudiosWe have four internal studios that create and develop games and other entertainment products. These studios, based inSan Francisco, California; Beijing, China; Sao Paulo, Brazil and Moscow, Russia, have the ability to design and build products fromoriginal intellectual property, based on games originated in other media such as online and game consoles, or based on other licensedbrands and intellectual property.Our game development process involves a significant amount of creativity, particularly with respect to the development of originalintellectual property franchises or games in which we license intellectual property from motion pictures or brands that are not based ongames from other media. In addition, even where we license intellectual property based on console or Internet games, our developers mustcreate games that are inspired by the game play of the original. In each of these cases, creative and technical studio expertise is necessaryto design games that appeal to end users and work well on mobile phones and tablets with their inherent limitations, such as small screensizes and control buttons.Our four studios are located on four different continents, which results in certain inherent complexities. To address these issues, wehave instituted our Glu University training program. Glu University is designed to increase interaction amongst our studio teams,including having international studio team members regularly spend time in our San Francisco headquarters. The goal of this program isto ensure that we increase the uniformity, quality and commercial success of our games. In addition, we have recently hired a VicePresident of Studios who has primary responsibility for overseeing the efforts of our international studio teams.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 expectations and preferences of consumers and the needs of our wireless carriers andother distributors. These technologies and processes include: • core development platforms; • porting tools and processes; • broad development capabilities; • application hosting; • provisioning and billing capabilities; • merchandising, monetization tools and marketing platform; and • thin client-server platform.6Table of ContentsSince the markets for our products are characterized by rapid technological change, particularly in the technical capabilities ofmobile phones and tablets, and changing end-user preferences, continuous investment is required to innovate and publish new games,regularly update our social, freemium games that are delivered as a live service, and modify existing games for distribution on newplatforms. We have instituted a number of measures that are both designed to increase the speed with which we bring our game conceptsto market as well as more quickly in the product development cycle identify and terminate game concepts that are unlikely to becommercially successful. We have historically published the majority of our games internally, and have, in certain cases, retained a third-party to support our development activities. We have also begun using a third-party 3-D rendering solution in connection with buildingour new social, freemium games.Recently, we initiated our Glu Partners program, which will provide for the external development of some of our games; we currentlyexpect that approximately half of the social, freemium games that we intend to release during 2011 will be produced by third parties withwhich we have a strategic relationship. In addition, a component of our Glu Partners strategy is to extend our successful game franchisesto other digital platforms. Our initial measure in this regard was the recent launch of Gun Bros on Facebook, hi5 and Wild Tangent, andwe expect to explore additional similar opportunities for our games in the future.As of December 31, 2010, we had 369 employees in research and development compared with 402 as of December 31, 2009.Research and development expenses were $25.2 million, $26.0 million and $32.1 million for 2010, 2009 and 2008, respectively. Weexpect 2011 spending for research and development activities to significantly increase from 2010 levels and be more similar to 2008levels, and we expect that substantially all of this spending will be utilized for creating games for smartphones and tablets, with a portionallocated for third-party development under our Glu Partners program. However, we cannot be certain that we will be able to successfullydevelop new games that satisfy end user preferences and technological changes or that any such games will achieve market acceptanceand commercial success.Data AnalyticsWe established our data analytics team in 2010 to better analyze the number of consumers who download and play our games aswell as the behavior of such consumers with respect to their gameplay. Some of the information that we regularly track and analyzeincludes the following: • Revenues; • Installations of our games by consumers; • Daily active users (DAU) of our games, or the number of unique consumers playing our games each day; • Monthly active users (MAU) of our games, or the number of unique consumers playing our games each month; • The number of minutes users are playing our games; and • The number of sessions users play our games and the average session length.All of the above information can be broken down and analyzed in a number of ways, including by platform, game title and timeperiod. In addition, for each of our games we are able to analyze the behavior of consumers with respect to their gameplay. For example,for a game like Toyshop Adventures, we are able to analyze whether players are getting stuck on a particular level and address this issueby releasing an update that includes a hint for that level. We believe that our analytics information will provide us with a competitiveadvantage and will enable us to better tailor our games to consumer preferences.Customer ServiceWe established our customer service team in 2010 as a direct result of the shift in our strategic focus towards developing social,freemium games that are provided as a live service and are regularly updated. Customer service has also become a more important facet ofour business as we continue to build relationships with our consumers.7Table of ContentsWe regard customer service as an important part of fostering customer loyalty and are committed to providing prompt responses to ourcustomers’ inquiries, which are primarily made through our corporate website or on our Facebook and Twitter pages. Examples ofservices we provide include addressing problems in recovering lost game accounts, virtual items and virtual currency. In addition, wealso investigate and address irregularities in game operation reported by players. With the growth of our daily and monthly active usersand the expansion of our social, freemium game portfolio, we expect to continue to expand the role of our customer service team in 2011and beyond.SeasonalityMany new mobile phones and tablets are released in the fourth calendar quarter to coincide with the holiday shopping season.Because many end users download our games soon after they purchase new mobile phones and tablets, we generally experience seasonalsales increases based on the holiday selling period. However, due to the time between mobile phone and tablet purchases and gamepurchases, some of this holiday impact occurs for us in our first calendar quarter. In addition, 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 are unsure ofwhether, and to what degree, our increasing concentration on social, freemium games provided as a live service will mitigate or enhancethe effects of the seasonality factors, or introduce entirely new seasonality factors.CompetitionDeveloping, publishing and selling mobile games is a highly competitive business, characterized by frequent product introductionsand rapidly emerging new platforms, technologies and distribution mechanisms, such as direct-to-consumer digital storefronts. Ourprimary competitors have historically been Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts having the largest marketshare of any company in the mobile games market. With respect to our social, freemium games that we publish for smartphones andtablets, we also compete with a number of other companies, including DeNA, which became a more formidable competitor through itsacquisition of ngmoco, and Zynga, as well as other large publishers who also create content for traditional gaming consoles and for onlineplay. In addition, given the open nature of the development and distribution for smartphones and tablets, we also compete or will competewith a vast number of small companies and individuals who are able to create and launch games and other content for these mobiledevices utilizing limited resources and with limited start-up time or expertise. Many of these smaller developers are able to offer theirgames at no cost or substantially reduce their prices to levels at which we may be unable to respond competitively and still achieveprofitability given their low overhead. As an example of the competition that we face, it has been estimated that more than 50,000 activegames were available on the Apple App Store as of March 1, 2011. The proliferation of titles in these open developer channels makes itdifficult for us to differentiate ourselves from other developers and to compete for end users who purchase content for their smartphonesand tablets without substantially increasing spending to market our products or increasing our development costs.For end users, we compete primarily on the basis of game quality, brand, customer reviews and, with respect to our premiumproducts, price. We compete for promotional and deck placement based on these factors, as well as the relationship with the digitalstorefront owner or wireless carrier, historical performance, perception of sales potential and relationships with licensors of brands andother intellectual property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions ofdevelopment quality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete forexperienced and talented 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;8Table of Contents • the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products; • larger installed customer bases from related platforms such as console gaming or social networking websites to which they canmarket and sell mobile games; • more substantial intellectual property of their own from which they can develop games without having to pay royalties; • lower labor and development costs; • greater resources to make acquisitions; • greater platform specific focus, experience and expertise; and • broader global distribution and presence.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. In addition, some of our competitors have in the pastreleased games that are nearly identical to successful games released by their competitors in an effort to confuse the market and divertusers from the competitor’s game to the copycat game. To the extent that these tactics are employed with respect to any of our games, itcould reduce our revenues that we generate from these games.We own 23 trademarks registered with the U.S. Patent and Trademark Office, including Glu, Superscape, Bonsai Blast, BrainGenius, Space Monkey, Super K.O. Boxing and our 2-D ‘g’ character logo, and have 11 trademark applications pending with theU.S. Patent and Trademark Office, including Gun Bros, Hero Project, Magic Life, Toyshop Adventures, Zombie Isle and our 3-D ‘g’character logo. We also own, or have applied to own, one or more registered trademarks in certain foreign countries, depending on therelevance of each 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, Build-a-lot, Call of Duty, Deer Hunter, Diner Dash, DJ Hero, Guitar Hero, FamilyFeud, Family Guy, Lord of the Rings, Paperboy, The Price Is Right, Transformers, Wedding Dash, Who Wants to Be aMillionaire? and World Series of Poker. Our licensors include a number of well-established video game publishers and major mediacompanies.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.9Table of ContentsGovernment 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. The Federal Trade Commission has also recently indicated that it intends to review issues related to in-app purchases,particularly with respect to games that are marketed primarily to minors. In addition, two self-regulatory bodies in the United States (theEntertainment Software Rating Board) and the European Union (Pan European Game Information) provide consumers with ratinginformation on various products such as entertainment software similar to our products based on the content (e.g., violence, sexuallyexplicit content, language). Furthermore, the Chinese government has adopted measures designed to eliminate violent or obscene content ingames. In response to these measures, some Chinese telecommunications operators have suspended billing their customers for certainmobile gaming platform services, including those services that do not contain offensive or unauthorized content, which could negativelyimpact our revenues in China. China has also adopted measures that prohibit the use of virtual currency to purchase any real world goodor 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 1, 2011, we had 384 employees, including 290 in research and product development. Of our total employees as ofMarch 1, 2011, 105 were based in the United States and Canada, 95 were based in Europe, 103 were based in Asia Pacific and 81 werebased in Latin America. Our employees in Brazil and China are represented by a labor union. We have never experienced anyemployment-related work stoppages and consider relations with our employees to be good. We believe that our future success depends inpart 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.We 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 $106.7 million in 2008, a net loss of $18.2 million in2009 and a net loss of $13.4 million in 2010. As of December 31, 2010, we had an accumulated deficit of $190.7 million. We expect toincur increased costs in order to implement additional initiatives designed to increase revenues, such as increased research anddevelopment and sales and marketing expenses related to our new games, particularly those designed for smartphones and tablets, suchas Apple’s iPhone and iPad and devices based on Google’s Android operating system. 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. In addition, our revenuesdeclined in each of 2009 and 2010 from the preceding year, and we expect that our revenues10Table of Contentswill likely decline in 2011 from 2010 levels. If we are not able to significantly increase our revenues, we will likely not be able to achieveprofitability in the future. Furthermore, during 2008, we incurred aggregate charges of approximately $77.6 million for goodwillimpairments, royalty impairments and restructuring activities, during 2009, we incurred aggregate charges of approximately $8.5 millionfor royalty impairments and restructuring activities and during 2010, we incurred aggregate charges of approximately $4.3 million forroyalty impairments and restructuring activities. As of December 31, 2010, an additional $2.5 million of prepaid royalties remained onour balance sheet that are potentially subject to future impairment. If we continue to incur these charges, it will continue to negativelyaffect our operating results and our ability to achieve profitability.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 2011, as we implemented significant cost-reductionmeasures in 2008, 2009 and 2010, making it more difficult for us to further reduce our operating expenses without a material adverseimpact on our prospects in future periods. We intend to only selectively enter into new licensing arrangements in 2011, if any, which weexpect will contribute to the anticipated reduction in our revenues from feature phones and which may adversely impact our revenues fromsmartphones and tablets to the extent that our games based on original intellectual property are not successful. With respect to our gamesbased on licensed intellectual property, we may incur impairments of prepaid royalty guarantees if our forecasts for these games are lowerthan we anticipated at the time we entered into the agreements. For example, in 2008, 2009 and 2010, we impaired $6.3 million,$6.6 million and $663,000, respectively, of certain prepaid royalties and royalty guarantees primarily due to several distributionarrangements in our Europe, Middle East and Africa region and other global development and distribution arrangements that we enteredinto in 2007 and 2008. In addition, some payments from carriers that we recognize as revenue on a cash basis may be delayedunpredictably.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 and2010. These issues may continue to negatively impact the economy and our growth. If these issues persist, or if the economy enters aprolonged period of decelerating growth or recession, our results of operations may be harmed. As a result of these and other factors, ouroperating results may not meet the expectations of investors or public market analysts who choose to follow our company. Our failure tomeet market expectations would likely result in a decline in the trading price of our common stock.In 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; • 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 or storefront featuring for our leading games and those of our competitors;11Table of Contents • 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 smartphones, as well as the rate of adoption oftablet devices; • our success in developing and monetizing social, freemium games for smartphones and tablets; • our ability to increase the daily and monthly active users of our social, freemium games that we develop for smartphones andtablets, as well as the number of minutes these users play such games; • changes in accounting rules, such as those governing recognition of revenue, including the period of time over which we recognizerevenue for in-app purchases of virtual currency and goods within certain of our games; • 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, including to the extent that smartphonedigital storefront owners impose a platform tax on our revenues derived from offers; • 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 smartphones; • changes in the mix of original and licensed games, which have varying gross margins; • the timing of successful mobile handset launches; • the timeliness and accuracy of reporting from carriers; • the seasonality of our industry; • strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments orchanges in business strategy; • 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.Our strategy to grow our business includes developing a significant number of new titles for smartphones and tablets ratherthan for feature phones, which currently comprises the substantial majority of our revenues. If we do not succeed ingenerating considerable revenues and gross margins from smartphones and tablets, our revenues, financial position andoperating results may suffer.As a result of the expected continued migration of users from traditional feature phones to smartphones, we expect our feature phonerevenues, which represented a significant majority of our revenues in 2010, to continue to decrease in 2011. For us to succeed in 2011 andbeyond, we believe that we must increasingly publish mobile games that are widely accepted and commercially successful on thesmartphone and tablet digital storefronts (such as Apple’s App Store, Google’s Android Market, Research In Motion’s Blackberry AppWorld, Palm’s App Catalog, Nokia’s Ovi Store and Microsoft’s Windows Marketplace for Mobile) as well as significantly increase ourmarketing-related expenditures in connection with the launch of our new games on these digital storefronts. Our efforts to significantlyincrease our revenues derived from games for smartphones and tablets may prove unsuccessful or, even if successful, it may take uslonger to achieve significant revenue than anticipated because, among others reasons: • the open nature of many of these digital 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 billing and provisioning capabilities of some smartphones are currently not optimized to enable users to purchase games ormake in-app purchases, which could make it difficult for users of these smartphones to12Table of Contents purchase our games or make in-app purchases and could reduce our addressable market, at least in the short term; • competitors may have substantially greater resources available to invest in development and publishing of products forsmartphones and tablets; • these digital storefronts are relatively new markets, for which we are less able to forecast with accuracy revenue levels, requiredmarketing and developments expenses, and net income or loss; • we have less experience with open storefront distribution channels than with carrier-based distribution; • the pricing and revenue models for titles on these digital storefronts are rapidly evolving (for example, the introduction of in-apppurchasing capabilities and the potential introduction of usage-based pricing for games), and has resulted, and may continue toresult, in significantly lower average selling prices for our premium games developed for smartphones as compared to gamesdeveloped for feature phones, and a lower than expected return on investment for these games; • the competitive advantage of our porting capabilities may be reduced as smartphones become more widely adopted; • many of our key licenses do not grant us the rights to develop games for the iPhone and certain other smartphones andtablets; and • 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.If we do not succeed in generating considerable revenues and gross margins from smartphones and tablets, our revenues, financialposition and operating results will suffer.If we do not achieve a sufficient return on our investment with respect to our efforts to develop social, freemium games forsmartphones and tablets, it could negatively affect our operating results.We expect that a significant portion of our development activities for smartphones and tablets in 2011 and beyond will be focused onsocial, freemium games — games that are downloadable without an initial charge, but which enable a variety of additional features to beaccessed for a fee or otherwise monetized through various advertising and offer techniques. Our efforts to develop social, freemium gamesfor smartphones and tablets may prove unsuccessful or, even if successful, may take us longer to achieve significant revenue thananticipated because, among others reasons: • we have limited experience in successfully developing and marketing social, freemium games; • our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertizing and offersmay cause us to have difficulty optimizing the monetization of our freemium games; • some of our competitors have released a significant number of social, freemium games on smartphones, and this competition willmake it more difficult for us to differentiate our games and derive significant revenues from them; • some of our competitors have substantially greater resources available to invest in the development and publishing of social,freemium games; • we intend to have the significant majority of our social, freemium games be based upon our own intellectual property rather thanwell-known licensed brands, and, as a result, we may encounter difficulties in generating sufficient consumer interest in ourgames, particularly since we historically have had limited success in generating significant revenues from games based on ourown intellectual property; • social, freemium games currently represent a significant minority of the games available on smartphones and tablets and have alimited history, and it is unclear how popular this style of game will become or their revenue potential;13Table of Contents • our strategy with respect to developing social, freemium games for smartphones assumes that a large number of consumers willdownload our games because they are free and that we will subsequently be able to effectively monetize these games via in-apppurchases. offers and advertisements; however, some smartphones charge users a fee for downloading content, and users of thesesmartphones may be reluctant to download our freemium games because of these fees, which would reduce the effectiveness ofour product strategy; • our social, freemium games may otherwise not be widely downloaded by consumers for a variety of reasons, including poorconsumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominentstorefront featuring for such games; • even if our social, freemium games are widely downloaded, we may fail to retain users of these games or optimize themonetization of these games for a variety of reasons, including poor game design or quality, gameplay issues such as gameunavailability, long load times or an unexpected termination of the game due to data server or other technical issues or our failureto effectively respond and adapt to changing user preferences through updates to our games; • we expect that approximately half of the social, freemium games that we intend to release during 2011 will be produced by thirdparties with which we have a strategic relationship, which will reduce our control over the development process and may result inproduct delays and games that do not meet our and consumer expectations regarding quality; • the Federal Trade Commission has recently indicated that it intends to review issues related to in-app purchases, particularlywith respect to games that are marketed primarily to minors, and the Federal Trade Commission might issue rules significantlyrestricting or even prohibiting in-app purchases; and • because these are effectively new products for us, we are less able to forecast with accuracy revenue levels, required marketingand development expenses, and net income or loss.If we do not achieve a sufficient return on our investment with respect to developing and selling social, freemium games, it willnegatively affect our operating results.An unexpected acceleration in the slowdown in sales of feature phones in our carrier-based business, which currentlyrepresents the significant majority of our revenues, or a decline in the average selling prices of our games sold throughwireless 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 feature phones through wireless carriers. Ourrevenues for each of 2009 and 2010 declined from the prior year due to a decrease in sales in our carrier-based business, resultingprimarily from the continuing migration of consumers from feature phones to smartphones that enable the download of applications fromsources other than a carrier’s branded e-commerce service, such as the Apple App Store and Google’s Android Market. We believe that thedecline in the sales of feature phones and the transition of consumers to smartphones will continue to accelerate and will result in anoverall decline in our revenues in 2011. In addition, due to the accelerating decline in the sales of feature phones, we intend to releasesignificantly fewer games for feature phones in future periods, which will further reduce our revenues that we derive from feature phones.The ability of smartphones and tablets to serve as a source of significant revenues is uncertain, and we will likely be unable to generatesufficient revenues from these platforms in 2011 to make up for the expected decline in sales of our games on feature phones. In addition,games sold on smartphones typically have lower average prices than our games sold on feature phones, and to the extent consumerscontinue to migrate to smartphones, it could result in lower average prices for our games sold on feature phones. Any unexpectedacceleration in the slowdown in sales of feature phones, or any reduction in the average prices of our games sold through our wirelesscarriers, could have a material adverse impact on our revenues, financial position and results of operations.14Table of ContentsThe markets in which we operate are highly competitive, and many of our competitors have significantly greater resources thanwe do.The development, distribution and sale of mobile games is a highly competitive business, characterized by frequent productintroductions and rapidly emerging new platforms, technologies and storefronts. For end users, we compete primarily on the basis ofgame quality, brand, customer reviews and, with respect to our premium products, price. We compete for promotional and deckplacement based on these factors, as well as the relationship with the digital storefront owner or wireless carrier, historical performance,perception of sales potential and relationships with licensors of brands and other intellectual property. For content and brand licensors, wecompete based on royalty and other economic terms, perceptions of development quality, porting abilities, speed of execution, distributionbreadth and relationships with carriers. We also compete for experienced and talented employees.Our primary competitors have historically been Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts having the largestmarket share of any company in the mobile games market. With respect to our social, freemium games that we publish for smartphonesand tablets, we also compete with a number of other companies, including DeNA, which became a more formidable competitor throughits acquisition of ngmoco, and Zynga, as well as other large publishers who create content for traditional gaming consoles and for onlineplay. In addition, given the open nature of the development and distribution for smartphones and tablets, we also compete or will competewith a vast number of small companies and individuals who are able to create and launch games and other content for these mobiledevices utilizing limited resources and with limited start-up time or expertise. Many of these smaller developers are able to offer theirgames at no cost or substantially reduce their prices to levels at which we may be unable to respond competitively and still achieveprofitability given their low overhead. As an example of the competition that we face, it has been estimated that more than 50,000 activegames were available on the Apple App Store as of March 1, 2011. The proliferation of titles in these open developer channels makes itdifficult for us to differentiate ourselves from other developers and to compete for end users who purchase content for their smartphoneswithout substantially increasing spending to market our products or increasing our development costs.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; • larger installed customer bases from related platforms such as console gaming or social networking websites to which they canmarket and sell mobile games; • more substantial intellectual property of their own from which they can develop games without having to pay royalties; • lower labor and development costs and better overall economies of scale; • greater resources to make acquisitions; • greater platform specific focus, experience and expertise; and • broader global distribution and presence.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.End user tastes are continually changing and are often unpredictable; if we fail to develop and publish new mobile games thatachieve market acceptance, our sales would suffer.Our business depends on developing and publishing mobile games that digital storefront owners will prominently feature or wirelesscarriers will place on their decks and that end users will buy. We must continue15Table of Contentsto invest significant resources in research and development, analytics and marketing to enhance our offering of games and introduce newgames, and we must make decisions about these matters well in advance of product release to timely implement them. Our successdepends, in part, on unpredictable and volatile factors beyond our control, including end-user preferences, competing games, new mobileplatforms and the availability of other entertainment activities. If our games and related applications do not respond to the requirements ofdigital storefront owners and carriers and the entertainment preferences of end users, or they are not brought to market in a timely andeffective manner, our business, operating results and financial condition would be harmed. Even if our games are successfullyintroduced and initially adopted, a subsequent shift in the entertainment preferences of end users could cause a decline in our games’popularity that could materially reduce our revenues and harm our business, operating results and financial condition.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 establishing a direct relationship with end users who purchaseour products from direct-to-consumer channels, such as the Apple App Store and Google’s Android Market, and maintaining our existingrelationships with wireless carriers and content licensors, as well as potentially developing new such relationships. Increasing awarenessof our brand and recognition of our games will be particularly important in connection with our new strategic focus of developing social,freemium games based on our own intellectual property. Our ability to promote the Glu brand depends on our success in providing high-quality mobile games. Similarly, recognition of our games by end users depends on our ability to develop engaging games of high qualitywith attractive titles. However, our success also depends, in part, on the services and efforts of third parties, over which we have little orno control. For instance, if digital storefront owners or wireless carriers fail to provide high levels of service, our end users’ ability toaccess our games may be interrupted, which may adversely affect our brand. If end users, digital storefront owners, branded contentowners and wireless carriers do not perceive our existing games as high-quality or if we introduce new games that are not favorablyreceived by our end users, digital storefront owners and wireless carriers, then we may not succeed in building brand recognition andbrand loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our games will be costly and willinvolve extensive management time to execute successfully, particularly as we expand our efforts to increase awareness of our brand andgames among international consumers. Moreover, if a game is introduced with defects, errors or failures or unauthorized objectionablecontent or if a game has playability issues such as game unavailability, long load times or a unexpected termination of the game due todata server or other technical issues, we could experience damage to our reputation and brand, and our attractiveness to digital storefrontowners, wireless carriers, licensors, and end users might be reduced. In addition, although we have significantly increased our sales andmarketing-related expenditures in connection with the launch of our new social, freemium games, these efforts may not succeed inincreasing awareness of our brand and new games. If we fail to increase and maintain brand awareness and consumer recognition of ourgames, our potential revenues could be limited, our costs could increase and our business, operating results and financial condition couldsuffer.Inferior storefront featuring or deck placement would likely adversely impact our revenues and thus our operating results andfinancial 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.16Table of ContentsConversely, the open nature of the digital storefronts, such as the Apple App Store and Google’s Android Market, allow for vastnumbers of applications to be offered to consumers from a much wider array of competitors than in the wireless carrier channel. Thismay reduce the competitive advantage of our established network of relationships with wireless carriers. It may also require us to expendsignificantly increased amounts to generate substantial revenues on these platforms, reducing or eliminating the profitability of publishinggames for them.The open nature of many of the digital storefronts substantially increases the number of our competitors and competitive products,which makes it more difficult for us to achieve prominent placement or featuring for our games. Our failure to achieve prominentplacement or featuring for our games on the smartphone storefronts could result in our games not generating significant sales. We believethat 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.If carriers choose to give our games less favorable deck placement or if our games do not receive prominent placement on the digitalstorefronts, our games may be less successful than we anticipate, our revenues may decline and our business, operating results andfinancial condition may be materially harmed.Third parties will be developing some of our social, freemium games, and to the extent that they do not timely deliver high-quality games that meet our and consumer expectations, our business will suffer.Recently, we initiated our Glu Partners program, which will provide for the external development of some of our games; we currentlyexpect that approximately half of the social, freemium games that we intend to release during 2011 will be produced by third parties withwhich we have a strategic relationship. We have historically created and developed all of our games in our internal studios, and we do nothave any experience in outsourcing and managing the production of our game concepts by external developers. Because we will have nodirect supervision and reduced control of this external development process, it could result in development delays and games of lesserquality and that are more costly to develop than those produced by our internal studios. This may particularly be the case to the extentthat we do not provide our external developers with sufficiently detailed game development documentation, which could result in usproviding them with a number of change orders that would delay development and increase our production costs.In addition, we may lose the services of one of our external developers for a number of reasons, including that a competitor acquiresits business or signs the developer to an exclusive development arrangement, or the developer might encounter financial or otherdifficulties that cause it to go out of business, potentially prior to completing production of our games. There is also significant demandfor the services of external developers which may cause our developers to work for a competitor in the future or to renegotiate agreementswith us on terms less favorable for us. Furthermore, we have agreed to pay these external developers significant development fees and, insome cases, bonuses based on consumer reviews of the published games, and to the extent that these games are not commerciallysuccessful, we may not generate sufficient revenues to recoup our development costs or produce a sufficient return on investment, whichwould adversely 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 foreigncurrency17Table of Contentsexchange loss primarily related to the revaluation of intercompany balance sheet accounts. To date, we have not engaged in exchange ratehedging activities, and we do not expect to do so in the foreseeable future. Even if we were to implement hedging strategies to mitigate thisrisk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of theirown, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategies and potentialaccounting 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.We have depended on a small number of games for a significant portion of our revenues in recent fiscal periods. If thesegames do 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 2010, 2009 and 2008, we generated approximately 41.6%, 35.0% and 30.5% of ourrevenues, respectively, from our top ten games, but no individual game represented more than 10% of our revenues in any of thoseperiods. If our new games are not successful, our revenues could be limited and our business and operating results would suffer in boththe year of release and thereafter.We might elect not to renew our existing brand and content licenses when they expire and might not choose to obtain additionallicenses, which would negatively impact our feature phone revenues and might negatively impact our smartphone revenues tothe extent that we do not create successful games based on our own intellectual property.Revenues derived from mobile games and other applications based on or incorporating brands or other intellectual property licensedfrom third parties accounted for 78.1%, 77.5% and 75.0% of our revenues in 2010, 2009 and 2008, respectively. In 2010, revenuesderived under various licenses from our five largest licensors, Activision, Atari, Freemantle Media, Harrah’s and 2waytraffic, togetheraccounted for approximately 45.0% of our revenues. Creating games based on well-known, licensed brands has historically been criticalto the success of our feature phone business, as this helped us achieve more prominent placement on our wireless carriers decks andcontributed to greater commercial success with feature phone consumers. However, we have determined to shift our business strategytowards becoming the leading publisher of social, mobile freemium games, and we intend to have the substantial majority of these social,freemium games be based upon our own intellectual property. As a result, we will be allocating a significantly smaller amount of ouroperating budget to licensing deals and might elect not to renew our existing brand and content licenses when they expire. In addition, weintend to only selectively enter into new licensing arrangements, if any, in future periods. Our existing licenses expire at various timesduring the next several years, and our feature phone revenues will be negatively impacted to the extent that we lose the right to distributegames based on licensed content. This expected decline in our feature phone revenues could have an unexpectedly greater impact on ouroverall revenues and operating results to the extent that we are not successful in significantly increasing our revenues from gamesdeveloped for smartphones and tablets based on our own intellectual property. The most successful games that we have developed forsmartphones have historically been based on licensed brands and content, and we may encounter difficulties in generating sufficientconsumer interest and significant revenues from games based on our own intellectual property. For example, we released five social,freemium games in the fourth quarter of 2010, four of which were based on our own intellectual property and one of which was based onlicensed intellectual property. Although one of our games based on our original intellectual property, Gun Bros, had the greatestcommercial success, the other three original intellectual property games fared worse commercially than the game based on licensedintellectual property, Deer Hunter Challenge. To the extent that we do not create more original intellectual property games that have thelevel of commercial success of Gun Bros, our revenues and operating results will suffer.18Table of ContentsSystem 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 digital storefronts’, wireless carriers’ and other third-party networks to deliver games to end users and on their or otherthird parties’ billing systems to track and account for the downloading of our games. We also rely on our own servers to operate our newsocial, freemium games that are delivered as a live service, to maintain our analytics data and to deliver games on demand to end usersthrough our carriers’ networks. In addition, certain of our subscription-based games, require access over the mobile Internet to our serversto enable certain features. Any technical problem with storefronts’, carriers’, third parties’ or our billing, delivery or informationsystems, servers or communications networks could result in the inability of end users to download or play our games, prevent thecompletion of billing for a game or result in the loss of users’ virtual currency or other in-app purchases or our analytics data, or interferewith access to some aspects of our games. For example, in connection with the release of our Gun Bros game on the Apple App Store inthe fourth quarter of 2010, we experienced issues with our data servers that resulted in gameplay issues and the loss of some users’virtual assets they acquired through in-app purchases. In the event of a loss of virtual assets, we may be required to issue refunds, wemay receive negative publicity and game ratings, and we may lose users of our games, any of which would negatively affect ourbusiness. In addition, during the fourth quarter of 2010, we lost some of our analytics data, including data with respect to our daily andmonthly average users. Furthermore, from time to time, our carriers have experienced failures with their billing and delivery systems andcommunication networks, including gateway failures that reduced the provisioning capacity of their branded e-commerce system. Anysuch technical problems could cause us to lose end users or revenues or incur substantial repair costs and distract management fromoperating our business.We currently rely primarily on wireless carriers to market and distribute our games for feature phones and thus to generate asignificant portion of our revenues. The loss of or a change in any significant carrier relationship, including their creditworthiness, 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 2010, we derived approximately 44.1% of ourrevenues from relationships with five carriers, including Verizon Wireless, which accounted for 15.2% of our revenues. We expect thatwe will continue to generate a significant portion of our revenues through distribution relationships with fewer than 20 carriers in 2011. Ifany of our carriers decides not to market or distribute our games or decides to terminate, not renew or modify the terms of its agreementwith us or if there is consolidation among carriers generally, we may be unable to replace the affected agreement with acceptablealternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us. In addition, having a significantportion of our revenues concentrated among a limited number of carriers also creates a credit concentration risk for us, and in the eventthat any significant carrier were unable to fulfill its payment obligations to us, our operating results and cash position would suffer.Finally, our credit facility’s borrowing base is tied to our accounts receivable. If any of our wireless carriers were delinquent in theirpayments to us, it would reduce our borrowing base and could require us to immediately repay any borrowings outstanding related tosuch carrier. If any of these eventualities come to pass, it could materially reduce our revenues and otherwise harm our business.Changes made by wireless carriers and other distributors to their policies regarding pricing, revenue sharing, supplier status,billing and collections 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 or delay by these carriers in adjusting the retailprice 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 began imposing a data surcharge to download content on those of its customers who had nototherwise subscribed to a data plan. Such charges have, and could in the future, deter end users from purchasing our content. Inaddition, wireless carriers could renegotiate the19Table of Contentsrevenue sharing arrangement that we have in place with them to our detriment. For example in the first quarter of 2010, China Mobile, thelargest carrier in China, reduced the revenue share that we receive from our games sold on the mBox platform in approximately 15provinces in China, which has begun, and will likely continue, to negatively impact our revenues in China. Furthermore, a portion of ourrevenues is derived from subscriptions. Our wireless carriers have the ability to discontinue offering subscription pricing, without ourapproval.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 three Class A licenses that have currently been awarded by China Mobile. In order to maintain this Class A license, we mustmaintain a certain level of monthly revenues, as well as meet certain minimum download and customer satisfaction levels. If we were tolose 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 devices based on Google’s Android operating system. For many of ourwireless carriers, these smartphones are not yet directly integrated into the carrier’s provisioning infrastructure that would allow them tosell games directly to consumers, and games are instead sold through third parties, which is a more cumbersome process for consumersand results in a smaller revenue share for us. These factors could harm our business, operating results and financial condition.A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the development periodfor our games, increase our costs and cause our games to be of lower quality or to be published later than anticipated.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 Apple iPhone, Google Android,Blackberry, i-mode, Mophun, Palm, Symbian, Windows Mobile, BREW and Java platforms. It is likely that one or more of thesetechnologies will fall out of favor with handset manufacturers and wireless carriers, as transitions to different technologies and technologyplatforms have happened in the past and will occur in the future. If there is a rapid shift to a different technology platform, such as AdobeFlash or Flash Lite, or a new technology where we do not have development experience or resources, the development period for our gamesmay be lengthened, increasing our costs, and the resulting games may be of lower quality, and may be published later than anticipated. Insuch an event, our reputation, business, operating results and financial condition might 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 55.1%, 52.2% and 52.0% of our revenues in 2010, 2009 and 2008, 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 had a significant presence in Russia, in March 2008. We have internationaloffices located in a number of foreign countries including Brazil, China, England and Russia. We expect to maintain our internationalpresence, and we expect international sales to be an important component of our revenues. Risks affecting our international operationsinclude: • 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;20Table of Contents • 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 operations may be more costly than we expect. As a result of our international operations in Asia, Europe and Latin America,we must pay income tax in numerous foreign jurisdictions with complex and evolving tax laws. If we become subject to increased taxes ornew forms of taxation imposed by governmental authorities, our results of operations could be materially and adversely affected.These risks could harm our international operations, which, in turn, could materially and adversely affect our business, operatingresults and financial condition.If we fail to deliver our games at the same time as new mobile handset models and tablets are commercially introduced, oursales may suffer.Our business depends, in part, on the commercial introduction of new handset models and tablets with enhanced features, includinglarger, higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. Forexample, some companies have launched new smartphones or tablets, including Apple’s iPhone and iPad and devices based on theGoogle’s Android operating system. In addition, consumers generally purchase the majority of content, such as our games, for a newhandset or tablet within a few months of purchasing the handset or tablet. We do not control the timing of these handset and tabletlaunches. Some new handsets are sold by carriers with one or more games or other applications pre-loaded, and many end users whodownload our games do so after they purchase their new handsets to experience the new features of those handsets. Some handset andtablet manufacturers give us access to their handsets prior to commercial release. If one or more major handset or tablet manufacturerswere to cease to provide us access to new handset models prior to commercial release, we might be unable to introduce compatible versionsof our games for those handsets or tablets in coordination with their commercial release, and we might not be able to make compatibleversions for a substantial period following their commercial release. If, because we do not adequately build into our title plan the demandfor games for a particular handset or tablet or experience game launch delays, we miss the opportunity to sell games when new handsets ortablets are shipped or our end users upgrade to a new handset or tablet, our revenues would likely decline and our business, operatingresults and financial condition would likely suffer.21Table of ContentsIf 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 feature phone revenues. As handset development continues, over time anincreasing percentage of end users who already own one or more of our subscription games will likely upgrade from their existinghandsets. With some wireless carriers, end users are not able to transfer their existing subscriptions from one handset to another. Inaddition, carriers may switch to subscription billing systems that require end users to actively renew, or opt-in, each month from currentsystems that passively renew unless end users take some action to opt-out of their subscriptions, or change or cease offering subscriptionplans altogether. If our subscription revenues decrease significantly for these or other reasons, our sales would suffer and this could harmour 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 attractiveness towireless 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 designed for feature phones may be required to be ported to, or converted into separateversions for, more than 1,000 different handset models, many with different technological requirements. These include handsets withvarious combinations of underlying technologies, user interfaces, keypad layouts, screen resolutions, sound capabilities and othercarrier-specific customizations. If we fail to maintain or enhance our porting capabilities, our sales could suffer, branded content ownersmight choose not to grant us licenses and carriers might choose to give our games less desirable deck placement or not to give our gamesplacement on their decks at all.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 operating system, is longer and thus developing and porting for the advanced platforms is more costly thandeveloping and porting for games for feature phones. Since the majority of our revenues are currently derived from the sale of games forfeature phones in our carrier-based business, it is important that we maintain and enhance our porting capabilities. However, asadditional smartphone digital storefronts are developed and gain market prominence, our porting capabilities represent less of a businessadvantage for us, yet we could be required to invest considerable resource in this area to support our existing business. These additionalcosts 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 results couldsuffer.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 certain22Table of Contentslevel of achievement in the game). These features have been common in console and computer games. However, in several cases, hiddencontent or features have been included in other publishers’ products by an employee who was not authorized to do so or by an outsidedeveloper without the knowledge of the publisher. From time to time, some of this hidden content and these hidden features have containedprofanity, graphic violence and sexually explicit or otherwise objectionable material. If a game we published were found to contain hidden,objectionable content, our wireless carriers and other distributors of our games could refuse to sell it, consumers could refuse to buy it ordemand a refund of their money, and, if the game was based on licensed content, the licensor could demand that we incur significantexpense to remove the objectionable content from the game and all ported versions of the game. This could have a materially negativeimpact 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 social, freemium titles for smartphones and tablets, and replace departing employees, we must beable to identify and hire qualified personnel. Competition for qualified management, sales, engineering and other personnel can be intense,and we may not be successful in attracting and retaining such personnel. This may be particularly the case for us to the extent our stockprice remains at a depressed level, as individuals may elect to seek employment with other companies that they believe have better long-term prospects. Competitors have in the past and may in the future attempt to recruit our employees, and our management and keyemployees are not bound by agreements that could prevent them from terminating their employment at any time. We may also experiencedifficulty assimilating our newly hired personnel and they may be less effective or productive than we anticipated, which may adverselyaffect our business. In addition, we do not maintain a key-person life insurance policy on any of our officers. Our business and growthmay suffer if we are unable to hire and retain key personnel.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 had a significant presence inRussia, in March 2008 and MIG, which is based in China, in December 2007. We expect to continue to evaluate and consider a widearray of potential strategic transactions, including business combinations and acquisitions of technologies, services, products and otherassets. At any given time, we may be engaged in discussions or negotiations with respect to one or more of these types of transactions.Any of these transactions could be material to our financial condition and results of operations. The process of integrating any acquiredbusiness may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficultiesinclude: • 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.23Table of ContentsIf 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.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, 2010, we had $12.9 million of cash and cash equivalents, which does not include the $15.9 million in net proceeds thatwe received from our underwritten public offering of common stock in January 2011. In addition to our general operating expenses andprepaid and guaranteed royalty payments, we had $2.3 million that was outstanding as of December 31, 2010 under our revolving creditfacility. In addition, of our $12.9 million of cash and cash equivalents that we held as of December 31, 2010, $1.4 million was held inour China subsidiaries. To the extent we require additional working capital in our U.S. or other non-Chinese operations, it could be verydifficult to repatriate money held in our China subsidiaries due to our declining operating profits in China, and such repatriation wouldbe subject to taxation, potentially at high rates.As a result of our plans to increase our spending on sales and marketing and research and development initiatives in connection withour new social, freemium games that we will release in 2011, we expect to use a significant amount of cash in our operations in 2011 aswe seek to grow our business. If our cash and cash equivalents, together with borrowings under our credit facility, are insufficient to meetour cash requirements, we will either need to seek additional capital, potentially through an additional debt or equity financing (potentiallypursuant to our effective universal shelf registration statement), by increasing the amount available to us for borrowing under the creditfacility, procuring a new debt facility or selling some of our assets. We may not be able to raise needed cash on terms acceptable to us or atall. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, such was the case with respectto the private placement transaction we consummated in August 2010 and the underwritten public offering we effected in January 2011,particularly given our current stock price. The holders of new securities may also receive rights, preferences or privileges that are senior tothose of existing holders of our common stock, all of which is subject to the provisions of our credit facility. Additionally, we may beunable to increase the size of the credit facility or procure a new debt facility, or to do so on terms that are acceptable to us, particularly inlight of the current credit market conditions. We also may not be able to access the full $8.0 million potentially available under of ourcredit facility, as the credit facility’s borrowing base is based upon our accounts receivable; as of December 31, 2010, the maximumamount available for borrowing under the credit facility was limited to $2.5 million. If new sources of financing are required but areinsufficient or unavailable, we would be required to modify our growth and operating plans to the extent of available funding, whichwould harm our ability to grow our business. Furthermore, if we are unable to remain in compliance with the financial or other covenantscontained in the credit facility and do not obtain a waiver from the lender then, subject to applicable cure periods, any outstandingindebtedness under the credit facility could be declared immediately due and payable. This credit facility also is scheduled to expire onJune 30, 2011. We do not intend to extend the24Table of Contentsmaturity date of this credit facility, and may seek to enter into a new credit facility with the lender or a new lender; we cannot assure youthat we would be able to enter into a new facility on terms favorable to us or at all.Our business is subject to increasing regulation of content, consumer privacy, distribution and online hosting and delivery inthe 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 business, which will be increasinglyimportant to our business as we continue to market our products directly to end users and to the extent we obtain personal informationabout our customers. We currently collect information regarding the unique device identifiers (UDIDs) of our customers’ smartphonesand tablets any may in the future collect personally identifiable information regarding our customers. Any concerns about our practiceswith regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded,could damage our reputation and operating results. The rules regarding data and consumer protection laws vary by territory although theInternet recognizes no geographical boundaries. In the United States, for example, numerous federal and state laws have been introducedwhich attempt to restrict the content or distribution of games. Legislation has been adopted in several states, and proposed at the federallevel, 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. The Federal Trade Commission has also recently indicated that it intends to review issuesrelated to in-app purchases, particularly with respect to games that are marketed primarily to minors. If the Federal Trade Commissionissues rules significantly restricting or even prohibiting in-app purchases, it would significantly impact our business strategy. Inaddition, two self-regulatory bodies in the United States (the Entertainment Software Rating Board) and the European Union (PanEuropean Game Information) provide consumers with rating information on various products such as entertainment software similar toour products based on the content (for example, violence, sexually explicit content, language). Furthermore, the Chinese government hasadopted 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. Any one or more ofthese factors could harm our business by limiting the products we are able to offer to our customers, by limiting the size of the potentialmarket for our products, or by requiring costly additional differentiation between products for different territories to address varyingregulations.If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperly useour 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,some of our competitors have in the past released games that are nearly identical to successful games released by their competitors in aneffort to confuse the market and divert users from the competitor’s game to the copycat game. To the extent that these tactics are employedwith respect to any of our games, it could reduce our revenues that we generate from these games.25Table of ContentsIn 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.Third parties may sue us, including for intellectual property infringement, which, if successful, may disrupt our business andcould 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, in a dispute that we settled in July 2010, Skinit, Inc. filed a complaint against us and other defendants inwhich it sought unspecified damages, plus attorney’s fees and costs. In the event of a future successful claim against us, we might beenjoined from using our or our licensed intellectual property, we might incur significant licensing fees and we might be forced to developalternative technologies. Our failure or inability to develop non-infringing technology or games or to license the infringed or similartechnology or games on a timely basis could force us to withdraw games from the market or prevent us from introducing new games. Inaddition, even if we are able to license the infringed or similar technology or games, license fees could be substantial and the terms of theselicenses could be burdensome, which might adversely affect our operating results. We might also incur substantial expenses in defendingagainst third-party disputes, litigation or infringement claims, regardless of their merit. Successful claims against us might result insubstantial monetary liabilities, an injunction against us and might materially disrupt the conduct of our business and harm ourfinancial results.Our reported financial results could be adversely affected by changes in financial accounting standards or by the applicationof 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, including conversion to unified international accounting standards. Policiesaffecting software revenue recognition have and could further significantly affect the way we account for revenue related to our productsand services. For example, we are developing and selling games for smartphones and tablets, including social, freemium games that webegan to release in the fourth quarter of 2010, and the accounting for revenue derived from these platforms and games, particularly withregard to micro-transactions, 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, particularly those relating to the way we accountfor revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately orprevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impactthe 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,26Table of Contentsaction by the SEC, the suspension or delisting of our common stock from the NASDAQ Global Market and the inability of registeredbroker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.Maintaining and improving our financial controls and the requirements of being a public company may strain our resources,divert management’s attention and affect our ability to attract and retain qualified members for our board of directors.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.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 tax27Table of Contentsrate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax ratewill 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 change 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.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.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 thecontinuing 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; • 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; • any significant sales of our stock by our directors, executive officers or large stockholders, including the investors in the privateplacement transaction we completed in August 2010 whose shares have been registered for resale under the Securities Act and maybe freely sold at any time; • 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 class28Table of Contentsaction litigation has often been brought against that company. Securities class action litigation against us could result in substantial costsand divert our management’s attention and resources.Our principal stockholders, executive officers and directors have substantial control over our company, which may prevent youor other stockholders from influencing significant corporate decisions.Matthew A. Drapkin and Hany M. Nada, each of whom is a member of our board of directors, are affiliated with entities thatpreviously held substantial amounts of our common stock and purchased shares of our common stock and warrants to purchase sharesof our common stock in the private placement transaction we completed in August 2010. In addition, Mr. Drapkin and one of his partnersalso purchased shares and warrants in the private placement transaction for their own account. These persons and entities, which wecollectively refer to as the Affiliated Investors, beneficially owned approximately 16.1% of our common stock as of March 15, 2011. Inaddition, the Affiliated Investors, together with the other members of our board of directors, our executive officers and our other 5% orgreater stockholders, beneficially owned 42.9% of our common stock as of March 15, 2011. As a result, these stockholders will, if theyso choose, be able to control or substantially control all matters requiring stockholder approval. These matters include the election ofdirectors and approval of significant corporate transactions, such as a merger, consolidation, takeover or other business combinationinvolving us. These stockholders may have interests that differ from yours and may vote in a way with which you disagree and whichmay be adverse to your interests. This concentration of ownership could also adversely affect the market price of our common stock orreduce any premium over market price that an acquirer might otherwise pay.Some provisions in our certificate of incorporation, bylaws and the terms of some of our licensing and distribution agreementsand 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 19,027 square feet in San Francisco, California for our corporate headquarters, including our operations,studio and research and development facilities, pursuant to a sublease agreement that expires in November 2013. We also leaseapproximately 52,100 square feet in San Mateo, California with respect to29Table of Contentsour former corporate headquarters, pursuant to a sublease agreement that expires in July 2012; we have sublet all of this space to twotenants pursuant to sub-subleases that expire in July 2012. We lease approximately 10,600 square feet in London, England for ourprincipal European sales offices pursuant to a lease that expires in October 2011. We have an option to extend the London lease for fiveyears and a right of first refusal to lease additional space in our building. We lease approximately 15,796 square feet in Beijing, Chinafor our principal Asia Pacific offices and our China studio facilities pursuant to a lease that expires in October 2013 and two leases thatboth expire in November 2013. We lease approximately 13,429 square feet in Moscow, Russia for our Russia studio facilities pursuant toa lease that expires in November 2012. We also lease properties in Brazil, France, Italy and Spain. We believe our space is adequate forour current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of ouroperations.Item 3. Legal ProceedingsFrom time to time, we are subject to various claims, complaints and legal actions in the normal course of business. We do not believewe are party to any currently pending litigation, the outcome of which will have a material adverse effect on our operations, financialposition or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have anadverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other 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 18, 2011 was $3.66. High Low 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 Year ended December 31, 2010 First quarter $1.54 $0.85 Second quarter $1.69 $0.90 Third quarter $1.50 $1.02 Fourth quarter $2.75 $1.34 Our stock price has fluctuated and declined significantly since our initial public offering. Please see the Risk Factor — “Our stockprice has fluctuated and declined significantly since our initial public offering in March 2007, and may continue to fluctuate, may notrise and may decline further” — in Item 1A of this report.30Table 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, 2010 of the cumulative total return for an investment of $100 (and the reinvestment of dividends) inour common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index. Such returns are based on historicalresults 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 of 1934, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the SecuritiesAct, and shall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether madebefore or after the date of this report, regardless of any general incorporation language in such filing, except as shall be expressly set forthby specific reference in such filing.Equity Compensation Plan InformationThe following table sets forth certain information, as of December 31, 2010, 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; the evergreen provision for our 2007 Plan expired after the most recentincrease on January 1, 2011, while the evergreen provision for our 2007 ESPP expires after the scheduled increase on January 1, 2015. Inaddition, pursuant to a “pour over” provision in our 2007 Plan,31Table of Contentsoptions 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 Number of Available for Securities to be Weighted- Future Issuance Issued Upon Average Under Equity Exercise of Exercise Price Compensation Outstanding of Outstanding Plans (Excluding Options, Options, Securities Warrants and Warrants Reflected in Plan Category Rights and Rights Column (a)) (a) (b) (c) Equity compensation plans approved by security holders 5,548,021 $2.15 4,525,536(1)Equity compensation plans not approved by security holders 1,380,592(2) 1.51 38,653(3)Total: 6,928,613 $2.02 4,564,189(4)(1)Represents 4,109,679 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 415,857 sharesavailable for issuance under the ESPP. In addition, 307,650 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 1,337,531 shares available for issuance under the 2007 Plan and 445,844 shares available for issuance under the ESPP,which in each case were added to the respective share reserve on January 1, 2011 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. We may only grant Nonqualified StockOptions (“NSOs”) under the Inducement Plan and grants under the Inducement Plan may only be made to persons not previously anemployee or director of Glu, or following a bona fide period of non-employment, as an inducement material to such individual’s enteringinto employment with us and to provide incentives for such persons to exert maximum efforts for our success. We may grant NSOsunder the Inducement Plan at prices less than 100% of the fair value of the shares on the date of grant, at the discretion of our Board ofDirectors. The fair value of our common stock is determined by the last sale price of our stock on the NASDAQ Global Market on thedate of determination. If any option granted under the Inducement Plan expires or terminates for any reason without being exercised in full,the unexercised shares will be available for grant by us under the Inducement Plan. All outstanding NSOs are subject to adjustment forany future stock dividends, splits, combinations, or other changes in capitalization as described in the Inducement Plan. If we wereacquired and the acquiring corporation did not assume or replace the NSOs granted under the Inducement Plan, or if we were to liquidateor dissolve, all outstanding awards will expire on such terms as our Board of Directors determines.32Table of ContentsStockholdersAs of March 15, 2011, we had approximately 104 record holders of our common stock and hundreds of additional beneficialholders.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, March 2010 and February 2011, prohibits us from paying any cash dividends withoutthe prior written consent of the lender. Any future determination related to our dividend policy will be made at the discretion of our Boardof Directors.Recent Sales of Unregistered SecuritiesNot applicable.Purchases of Equity Securities by the Issuer and Affiliated PurchasersNot applicable.33Table 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, 2010 2009 2008 2007 2006 (In thousands, except per share amounts) Consolidated Statements of Operations Data: Revenues $64,345 $79,344 $89,767 $66,867 $46,166 Cost of revenues: Royalties 16,643 21,829 22,562 18,381 13,713 Impairment of prepaid royalties and guarantees 663 6,591 6,313 — 355 Amortization of intangible assets 4,226 7,092 11,309 2,201 1,777 Total cost of revenues 21,532 35,512 40,184 20,582 15,845 Gross profit 42,813 43,832 49,583 46,285 30,321 Operating expenses(1): Research and development 25,180 25,975 32,140 22,425 15,993 Sales and marketing 12,140 14,402 26,066 13,224 11,393 General and administrative 13,108 16,271 20,971 16,898 12,072 Amortization of intangible assets 205 215 261 275 616 Restructuring charge 3,629 1,876 1,744 — — 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 54,262 58,739 151,790 51,841 41,574 Loss from operations (11,449) (14,907) (102,207) (5,556) (11,253)Interest and other income (expense), net (1,265) (1,127) (1,359) 1,965 (872)Loss before income taxes and cumulative effect of change inaccounting principle (12,714) (16,034) (103,566) (3,591) (12,125)Income tax benefit (provision) (709) (2,160) (3,126) 265 (185)Net loss (13,423) (18,194) (106,692) (3,326) (12,310)Accretion to preferred stock — — — (17) (75)Deemed dividend — — — (3,130) — Net loss attributable to common stockholders $(13,423) $(18,194) $(106,692) $(6,473) $(12,385)Net loss per share attributable to common stockholders — basicand diluted loss before cumulative effect of change in accountingprinciple $(0.38) $(0.61) $(3.63) $(0.14) $(2.48)Accretion to preferred stock — — — — (0.02)Deemed dividend — — — (0.14) — Net loss per share attributable to common stockholders — basicand diluted $(0.38) $(0.61) $(3.63) $(0.28) $(2.50)Weighted average common shares outstanding 35,439 29,853 29,379 23,281 4,954 (1) Includes stock-based compensation expense as follows:Research and development $480 $716 $714 $939 $207 Sales and marketing 217 564 5,174 674 322 General and administrative 871 1,646 2,097 2,186 1,211 34Table of Contents Year Ended December 31, 2010 2009 2008 2007 2006 (In thousands) Cash and cash equivalents and short-term investments $12,863 $10,510 $19,166 $59,810 $12,573 Total assets 44,816 57,738 92,076 161,505 81,799 Current portion of long-term debt 2,288 16,379 14,000 — 4,339 Long-term debt, less current portion — — 10,125 — 724 Redeemable convertible preferred stock — — — — 76,363 Total stockholder’s equity/(deficit) $13,885 $11,693 $26,794 $129,461 $(25,185)Please see Note 2, Note 3 and Note 7 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 and elsewhere in this report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Suchstatements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are notstatements of historical fact may be deemed to be forward-looking statements. For example, the words “may,” “will,” “believe,”“anticipate,” “plan,” “expect,” “intend,” “could,” “estimate,” “continue” and similar expressions or variations are intended toidentify forward-looking statements. In this report, forward-looking statements include, without limitation, the following: • our expectations and beliefs regarding the future conduct and growth of our business; • our expectations regarding competition and our ability to compete effectively; • our expectations regarding the development of future products, including those for smartphones and tablets, as well as ourintention to shift a larger portion of our research and development expenses towards these development efforts; • our expectation that we will release 20 to 25 additional social, freemium games during 2011, of which approximately halfwill be developed by third parties pursuant to our Glu partners program; • our intention to focus our development efforts on social, freemium games and increase our use of in-game advertising,micro-transactions and other monetization techniques with respect to the games we develop for smartphones and tablets; • our expectation that the substantial majority of the social, freemium games that we are developing for smartphones will bebased on our own intellectual property; • our expectations regarding our revenues and expenses, including the expected decline in revenues from games we developfor feature phones in our traditional carrier-based business and our expectation that our smartphone revenues willsurpass our feature phone revenues on a monthly run rate basis by the end of 2011 and that this transition will position usto return to overall revenue growth in the longer term; • our assumptions regarding the impact of Recent Accounting Pronouncements applicable to us; • our assessments and estimates that determine our effective tax rate and valuation allowance; and • our belief that our cash and cash equivalents, borrowings under our revolving credit facility and cash flows fromoperations, if any, will be sufficient to meet our working capital needs, contractual obligations, debt service obligations,capital expenditure requirements and similar commitments.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, those discussed in “Risk Factors” includedin Section 1A of this report. All forward-looking statements in this document35Table of Contentsare based on information available to us as of the date hereof, and we assume no obligation to update any such forward-lookingstatements to reflect future events or circumstances.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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: • An Overview that discusses at a high level our operating results and some of the trends that affect our business; • Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and 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 2010, 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 2010 were $64.3 million, a 19% decrease from 2009, in which we reported revenues of $79.3 million. This decreasewas primarily driven by a decline in feature phones sold in the channel relating to our traditional carrier-based business, which in turnled to a decrease in the number of games that we sold. The decrease was partially related to the impact of foreign currency exchange rates,which had a greater negative impact on our revenues for 2010 compared to 2009. The decline in our feature phone revenues was primarilydue to the continued migration of users from traditional feature phones to smartphones, such as Apple’s iPhone and mobile phonesutilizing Google’s Android operating system, which offer enhanced functionality. We believe that this transition will continue to acceleratein 2011 and for the foreseeable future as consumers increasingly upgrade their phones. In addition, we intend to release fewer games forfeature phones in future periods, which will further reduce our revenues that we derive from feature phones. Because we still expect featurephone revenues to comprise the majority of our revenues for 2011, we expect an overall decline in our revenues for 2011 compared with2010.For us to succeed in 2011 and beyond, we believe that we must increasingly publish mobile games that are widely accepted andcommercially successful on the smartphone and tablet digital storefronts, which include Apple’s App Store, Google’s Android Market,Microsoft’s Windows Marketplace for Mobile, Palm’s App Catalog, Nokia’s Ovi Store and Research In Motion’s Blackberry AppWorld. Although we have experienced certain successes on these digital storefronts, particularly with respect to the Apple App Store, oursmartphone revenue only accounted for approximately 15% and 5% of our revenues for the years ended December 31, 2010 andDecember 31, 2009, respectively. Our strategy for increasing our revenues from smartphones and tablets involves becoming the leadingpublisher of social, mobile “freemium” games — games that are downloadable without an initial charge, but which enable a variety ofadditional features to be accessed for a fee or otherwise monetized through various advertising and offer techniques. Our social, freemiumgames are provided as a live service and are generally designed to be persistent through regular content updates. We believe this approachwill enable us to build and grow a longer lasting and more direct relationship with our customers, which will assist us in our future salesand marketing efforts. We intend to have the substantial majority of our social, freemium games be based upon our own intellectualproperty, which we believe will significantly enhance our margins and long-term value.36Table of ContentsAlthough we expect our revenues from smartphones and tablets to increase in 2011 as compared to 2010, we do not expect thisincrease to fully offset the anticipated decline in revenues from games we develop for feature phones, and therefore in 2011 we expect thatour total revenues will decline from our 2010 revenues. However, we believe that our smartphone revenues will surpass our feature phonerevenues on a monthly run rate basis by the end of 2011 and that this transition will position us to return to overall revenue growth in thelonger term. Significantly growing our revenues from smartphones and tablets may be challenging for us for several reasons, including:(1) the open nature of many of the smartphone and tablet storefronts substantially increases the number of our competitors andcompetitive products; (2) we have only recently concentrated our efforts on developing and marketing social, freemium games; (3) ourrelatively limited experience with respect to creating games that include micro-transaction capabilities, advertizing and offers may cause usto have difficulty optimizing the monetization of our freemium games; (4) we historically have had limited success in generatingsignificant revenues from games based on our own intellectual property rather than licensed brands; (5) our social, freemium games maynot be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffectiveor insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games; and (6) we have a limited ability toinvest 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 digital storefront owners and our licensors. Theloss of any key relationships with our digital storefront owners, carriers, other distributors or licensors could impact our revenues in thefuture.Our net loss in 2010 was $13.4 million versus a net loss of $18.2 million in 2009. This decrease was driven primarily by adecrease in costs of revenues of $14.0 million due to a decrease in overall sales and impairments of advanced royalties, a decrease inoperating expenses of $4.5 million and a decrease in income tax provision of $1.5 million, which was partially offset by a $15.0 millionreduction in revenues. The decrease in our operating expenses for the year ended December 31, 2010 compared with the year endedDecember 31, 2009 was in part due to the headcount reductions and related measures that we took in connection with the restructuringsthat we implemented in both the third quarter of 2009 and the first, second and fourth quarters of 2010. Our operating results are alsoaffected by fluctuations in foreign currency exchange rates of the currencies in which we incur meaningful operating expenses (principallythe British Pound Sterling, Chinese Renminbi, Brazilian Real and Russian Ruble) and our customers’ reporting currencies, as wetransact business in more than 70 countries in more than 20 different currencies, and these currencies fluctuated significantly in 2009and 2010.We significantly increased our spending on sales and marketing initiatives in the fourth quarter of 2010 in connection with thelaunch of our initial social, freemium titles, and we expect our sales and marketing expenditures to increase slightly from this level during2011. We also expect that our expenses to develop and port games for advanced platforms and smartphones will increase as we enhanceour existing titles and develop new titles to take advantage of the additional functionality offered by these platforms, including throughexternal development relationships. As a result of this increased spending on sales and marketing and research and developmentinitiatives, we expect to use a significant amount of cash in operations as we seek to grow our business. 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 the restructuring measures we implemented in the first, second and fourth quarters of2010, which primarily consisted of headcount reductions, will have a beneficial effect on our overall operating expenses, but will not fullyoffset the expected increases in our sales and marketing and research and development expenses in connection with our new social,freemium games, as discussed above. Our business has historically been impacted by seasonality, as many new mobile handset modelsare released in the fourth calendar quarter to coincide with the holiday shopping season. Because many end users download our gamessoon after they purchase new mobile37Table of Contentsphones and tablets, we generally experience seasonal sales increases based on the holiday selling period. However, due to the time betweenmobile phone and tablet purchases and game purchases, some of this holiday impact occurs for us in our first calendar quarter. Further,for a variety of reasons, including roaming charges for data downloads that may make purchase of our games prohibitively expensive formany end users while they are traveling, we sometimes experience seasonal sales decreases during the summer, particularly in parts ofEurope. We expect these seasonal trends to continue in the future.Cash and cash equivalents at December 31, 2010 totaled $12.9 million, an increase of $2.4 million from the balance atDecember 31, 2009. This increase was primarily due to $13.2 million of net proceeds received from the private placement of commonstock that we completed in August 2010 (the “Private Placement”), $2.2 million of cash generated from operations and $598,000 ofproceeds received from option exercises and purchases under our employees stock purchase program. These inflows were partially offsetby $10.3 million paid during 2010 with respect to the promissory notes and bonuses that we issued to the MIG shareholders that arediscussed in further detail in “Significant Transactions” below. We also repaid $2.4 million under our credit facility and paid $710,000for capital expenditures. In addition, our cash and cash equivalents balance at December 31, 2010 does not include the $15.9 million innet proceeds that we received from our underwritten public offering of common stock that we completed in January 2011, as discussed infurther detail in “Significant Transactions” below. We believe our cash and cash equivalents, together with cash flows from operationsand borrowings under our credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months.Significant TransactionsIn January, 2011, we sold in an underwritten public offering an aggregate of 8,414,635 shares of our common stock at a price to thepublic of $2.05 per share for net proceeds of approximately $15.9 million after underwriting discounts and commissions and offeringexpenses. The underwriters of this offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc.and Northland Capital Markets. We intend to utilize a significant portion of the net proceeds from this offering to further the developmentof our global social gaming community, including with respect to our Glu Games Network and Glu Partners initiatives.On August 27, 2010, we completed the Private Placement in which we issued and sold to certain investors an aggregate of13,495,000 shares of common stock at $1.00 per share and warrants exercisable to purchase up to 6,747,500 shares of common stock at$1.50 per share for initial gross proceeds of approximately $13.5 million (excluding any proceeds we may receive upon exercise of thewarrants).In December 2008, we renegotiated and extended our credit facility, and also amended the terms of the credit facility in August 2009,February 2010, March 2010 and February 2011. The credit facility, as amended, provides for borrowings of up to $8.0 million, subjectto a borrowing base equal to 80% of our eligible accounts receivable. The most recent fourth amendment to the credit facility that weentered into in February 2011 waived our default in maintaining minimum levels of earnings before interest, taxes, depreciation andamortization (“EBITDA”) specified in the loan agreement for the period beginning October 1, 2010 and ending December 31, 2010. Thisfourth amendment also removed the EBITDA financial covenant from the loan agreement in its entirety and replaced this covenant with anet cash covenant, which requires us to maintain at least $10.0 million in unrestricted cash at the lender or an affiliate of the lender, net ofany indebtedness that we owe to the lender under the Loan Agreement.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. As a result of the attainment of revenue and operating income milestones in 2008 byMIG, we were committed to pay $20.0 million in additional38Table of Contentsconsideration to the MIG shareholders and $5.0 million of bonuses to two officers of MIG. In December 2008, we restructured the timingand nature of these payments and issued to former shareholders of MIG an aggregate of $25.0 million in promissory notes, which weredue in 2009 and 2010; we have repaid the last of the installments on these promissory notes in the fourth quarter of 2010. Due todecreases in our long-term forecasts and current market capitalization, a portion of the goodwill resulting from the MIG acquisition wasimpaired during the year ended December 31, 2008.Critical 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; • business combinations — purchase accounting; • long-lived assets; • goodwill; • stock-based compensation; and • income taxes.Revenue RecognitionWe generate revenues through the sale of our games on traditional feature phones and smartphones, such as Apple’s iPhone andmobile phones utilizing Google’s Android operating system, that offer enhanced functionality. Feature phone games are distributedprimarily through wireless carriers and we recognize revenues in accordance with FASB ASC 985-605, Software: RevenueRecognition. Smartphone games are distributed primarily through digital storefronts such as the Apple App Store and we recognizerevenues related to in-app purchases or micro-transactions in accordance with (“SAB”) No. 101, Revenue Recognition in FinancialStatements, as revised by SAB No. 104, Revenue Recognition.We 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 unable39Table of Contentsto reasonably estimate the amount of revenue to be recognized in the current period, we recognize revenues upon the receipt of a carrierrevenue report and when our portion of a game’s licensed revenues is fixed or determinable and collection is probable. To monitor thereliability of our estimates, our management, where possible, reviews the revenues by carrier and by game on a weekly basis to identifyunusual trends such as differential adoption rates by carriers or the introduction of new handsets. If we deem a carrier not to becreditworthy, we defer all revenues from the arrangement with that carrier until we receive payment and all other revenue recognitioncriteria have been met.In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, we recognize as revenues the amount thecarrier reports as payable upon the sale of our games. We have evaluated our carrier and digital storefront agreements and have determinedthat we are not the principal when selling our games. Key indicators that we evaluated to reach this determination include: • wireless subscribers directly contract with the carriers and digital storefronts, which have most of the service interaction and aregenerally viewed as the primary obligor by the subscribers; • carriers and digital storefronts generally have significant control over the types of games that they offer to their subscribers; • carriers and digital storefronts are directly responsible for billing and collecting fees from their subscribers, including theresolution of billing disputes; • carriers and digital storefronts generally pay us a fixed percentage of their revenues or a fixed fee for each game; • carriers and digital storefronts generally must approve the price of our games in advance of their sale to subscribers or providetiered pricing thresholds, and the more significant carriers generally have the ability to set the ultimate price charged to theirsubscribers; and • we have limited risks, including no inventory risk and limited credit risk.We derive a portion of our revenues through the sale of virtual items and currency on certain games downloaded for free (“freemiumgames”) through digital storefronts. We recognize revenue related to the sale of these virtual items, when persuasive evidence of anarrangement exists, the service has been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.Determining whether and when some of these criteria have been satisfied requires judgments that may have a significant impact on thetiming and amount of revenue we report in each period. For example, on the date that we sell certain premium games and virtual items andcurrency through micro-transactions within our freemium games, we have an obligation to provide additional services and incrementalunspecified digital content in the future without an additional fee. In these cases, we account for the sale of the software product as amultiple element arrangement and recognize the revenue over the estimated life of the game or virtual item, with the exception of certainconsumable virtual items which are items consumed at a predetermined time or otherwise have limitations on repeated use; these arerecognized upon full consumption of the virtual item. All other durable virtual items which are not consumed at a predetermined time orotherwise do not have a limitation on repeated use, we recognize over the estimated life of the virtual item. For these virtual items we haveconsidered the average period that game players typically play our games to arrive at our best estimates for the useful life. While we believeour estimates to be reasonable based on available game player information, we may revise such estimates in the future as our games’operation periods change. Any adjustments arising from changes in the estimates of the lives of these virtual items would be appliedprospectively on the basis that such changes are caused by new information indicating a change in the game player behavior patterns.Any changes in our estimates of useful lives of these virtual items may result in our revenues being recognized on a basis different fromprior periods’ and may cause our operating results to fluctuate.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 $562,000 as ofDecember 31, 2010. When no significant40Table of Contentsperformance remains with the licensor, we initially record each of these guarantees as an asset and as a liability at the contractual amount.We believe that the contractual amount represents the fair value of our liability. When significant performance 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 are contractually due within the next twelvemonths.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 2010, 2009 and 2008, we recorded impairment charges of $663,000, $6.6 million and$6.3 million, respectively.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.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 also provides guidance forrecognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively tobusiness combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or afterDecember 15, 2008. Although we did not enter into any business combinations during 2009 or 2010, we believe ASC 805 may have amaterial impact on our future consolidated financial statements if we were to enter into any future business combinations depending on thesize and nature of any such future transactions.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 or projected future operating results, significant changes in the manner of use of theacquired assets, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period oftime. We recognize 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 applicable, or a discounted cash flow analysis.41Table of ContentsGoodwillIn 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, 2010, weonly had goodwill attributable to the APAC reporting unit. We performed an annual impairment review as of September 30, 2010 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. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit,which could trigger impairment.42Table of ContentsStock-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 and our own historic volatility. We determined the expected term of our options based upon historical exercises,post-vesting cancellations and the options’ contractual term. We based the risk-free rate for the expected term of the option on theU.S. Treasury Constant Maturity Rate as of the grant date. We determined the forfeiture rate based upon our historical experience withoption cancellations adjusted for unusual or infrequent events.In 2010, 2009 and 2008, we recorded total employee non-cash stock-based compensation expense of $1.6 million, $2.9 million and$8.0 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, 2010 and 2009, our valuation allowance on our net deferred tax assets was $58.8 million and $58.5 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 740-10, which clarifies the accounting for uncertainty inincome taxes recognized in financial statements. ASC 740-10 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. Our policy is to recognize interest and penalties related to unrecognizedtax benefits in income tax expense. We do not expect that the amount of unrecognized tax benefits will change significantly within the next12 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.43Table of ContentsResults 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, 2010 and 2009Revenues Year Ended December 31, 2010 2009 (In thousands) Feature phone $54,475 $74,999 Smartphone 9,870 4,345 Revenues $64,345 $79,344 Our revenues decreased $15.0 million, or 18.9%, from $79.3 million in 2009 to $64.3 million in 2010. This decrease was due to a$20.5 million decline in feature phone revenue which was partially offset by a $5.5 million increase in smartphone revenue. The decreasein feature phone revenues was primarily due to the continued migration of users from feature phones to smartphones where we wereunable to capture the same market share as we have in our traditional carrier business. Foreign currency exchange rates also had a greaterpositive impact on our revenues during the year ended December 31, 2009 compared to the year ended December 31, 2010. Due to thediversification of our product portfolio, including the titles resulting from the acquisitions of MIG and Superscape, no single titlerepresented 10% or more of sales in either 2009 or 2010. International revenues decreased by $6.0 million, from $41.4 million in 2009 to$35.4 million in 2010. This was primarily related to a $3.2 million, or 15.7%, decrease in our EMEA revenues, a $1.7 million, or22.3%, decrease in our China revenues and an $893,000, or 8.7%, decrease in our Americas revenues, excluding U.S. revenues. Thedecline in our EMEA and Americas revenues, excluding U.S. revenues, was primarily due to declining sales in our feature phonebusiness. The decline in our China revenues was primarily due to $700,000 of one-time revenues recorded from an APAC customer in thefirst quarter of 2009 and a decrease in the revenue share we receive through our revenue share arrangements with China Mobile thatbecame effective in February 2010. Although we expect our revenues from smartphones and tablets to increase in 2011 as compared to2010, we do not expect this increase to fully offset the anticipated decline in revenues from games we develop for feature phones, andtherefore we expect that our total revenues will decline in 2011 as compared with 2010. However, we believe that our smartphone revenueswill surpass our feature phone revenues on a monthly run rate basis by the end of 2011 and that this transition will position us to returnto overall revenue growth in the longer term.Cost of Revenues Year Ended December 31, 2010 2009 (In thousands) Cost of revenues: Royalties $16,643 $21,829 Impairment of prepaid royalties and guarantees 663 6,591 Amortization of intangible assets 4,226 7,092 Total cost of revenues $21,532 $35,512 Revenues $64,345 $79,344 Gross margin 66.5% 55.2%Our cost of revenues decreased $14.0 million, or 39.4%, from $35.5 million in 2009 to $21.5 million in 2010. This decrease wasprimarily due to a $5.9 million decrease in impairments of prepaid royalties and guarantees due44Table of Contentsto fewer new licenses and full impairment of existing titles, a decrease of $5.2 million in royalties associated with a decline in revenue anda $2.9 million reduction in amortization for titles and content due primarily to certain intangible assets relating to MIG, Macrospace andSuperscape being fully amortized in the first and fourth quarters of 2009. Revenues attributable to games based upon branded intellectualproperty increased as a percentage of revenues from 77.5% in 2009 to 78.1% in 2010, primarily due to a decrease in sales of gamesdeveloped by MIG and Superscape based on their original intellectual property. Revenues attributable to games based upon originalintellectual property were 21.9% of our total revenues for 2010, of which nearly one-third related to MIG. We expect this percentage toincrease significantly in 2011 in connection with our strategy to develop the substantial majority of our new social, freemium gamesbased on our own intellectual property. The average royalty rate that we paid on games based on licensed intellectual property, excludingroyalty impairments, decreased from 35.5% in 2009 to 33.4% in 2010 due to decreased sales of titles with higher royalty rates. Overallroyalties, including impairment of prepaid royalties and guarantees, as a percentage of total revenues decreased from 35.8% in 2009 to27.1% in 2010.Research and Development Expenses Year Ended December 31, 2010 2009 (In thousands) Research and development expenses $25,180 $25,975 Percentage of revenues 39.1% 32.7%Our research and development expenses decreased $795,000, or 3.1%, from $26.0 million in 2009 to $25.2 million in 2010. Thedecrease in research and development costs was primarily due to a decrease in salaries and benefits of $713,000, a $571,000 decrease inoutside services costs due to a reduction in third-party costs for porting and external development and a decrease in stock-basedcompensation expense of $236,000, which was partially offset by an increase in allocated facilities and overhead costs of $825,000. Wedecreased our research and development staff from 402 employees in 2009 to 369 in 2010. As a percentage of revenues, research anddevelopment expenses increased from 32.7% in 2009 to 39.1% in 2010. Research and development expenses included $480,000 of stock-based compensation expense in 2010 and $716,000 in 2009. We anticipate that our research and development expenses will increasesignificantly in 2011 due to our expected release of 20 to 25 new social, freemium titles in 2011, approximately half of which will bedeveloped by external developers as part of our Glu Partners program and which will require significant upfront cash payment to suchdevelopers.Sales and Marketing Expenses Year EndedDecember 31, 2010 2009 (In thousands) Sales and marketing expenses $12,140 $14,402 Percentage of revenues 18.9% 18.2%Our sales and marketing expenses decreased $2.3 million, or 15.7%, from $14.4 million in 2009 to $12.1 million in 2010. Thedecrease was primarily due to a $2.1 million decrease in salaries, benefits, variable compensation and expatriate costs as we reduced oursales and marketing headcount from 67 in 2009 to 48 in 2010; this was partially the result of converting our Latin America sales andmarketing team from our employees to employees of a third-party distribution agent. We also had an $875,000 decrease in the MIGearnout expense due to lower amortization of stock-based compensation expense associated with reaching the end of the vesting terms andconditions in 2009, a $376,000 decrease in travel and entertainment expense and a $347,000 decrease in stock-based compensationexpense due to reduced headcount. This was partially offset by a $915,000 increase in consulting fees associated with converting ourLatin America sales and marketing to third-party distribution agents as discussed above and a $672,000 increase in marketingpromotions associated with the launch of our new social, freemium game titles during the fourth quarter of 2010. As a percentage ofrevenues, sales and marketing expenses increased from 18.2% in 2009 to 18.9% in 2010. Sales and marketing expenses included$217,000 of stock-based45Table of Contentscompensation expense in 2010 and $564,000 in 2009. We significantly increased our spending on sales and marketing initiatives in thefourth quarter of 2010 in connection with the launch of our initial social, freemium titles, and we expect our sales and marketingexpenditures to remain at this increased level during 2011.General and Administrative Expenses Year Ended December 31, 2010 2009 (In thousands) General and administrative expenses $13,108 $16,271 Percentage of revenues 20.4% 20.5%Our general and administrative expenses decreased $3.2 million, or 19.4%, from $16.3 million in 2009 to $13.1 million in 2010.The decrease in general and administrative expenses was primarily due to a $1.3 million decrease in allocated facility and overhead costs,a $1.2 million decrease in professional and consulting fees and a $775,000 decrease in stock-based compensation expense. Salaries andbenefits decreased by $541,000, which was offset by an $893,000 increase in variable compensation under our bonus plan. Wedecreased our general and administrative headcount from 72 in 2009 to 56 in 2010. As a percentage of revenues, general andadministrative expenses decreased from 20.5% in 2009 to 20.4% in 2010. General and administrative expenses included $871,000 ofstock-based compensation expense in 2010 and $1.6 million in 2009.Other Operating ExpensesOur restructuring charge increased from $1.9 million in 2009 to $3.6 million in 2010. This was due to an additional $1.5 millionof restructuring charges relating to employee termination costs in our United States, APAC, Latin America and United Kingdom offices.The remaining restructuring charge of $2.1 million related primarily to facility related charges resulting from the relocation of ourcorporate headquarters to San Francisco.In 2011, we anticipate incurring approximately $600,000 of restructuring charges related to employee severance and benefitarrangements associated with the terminations of employees in China, Russia and the United Kingdom and facility related charges inChina and Russia.Other Income (Expense), netInterest and other income/(expense), net, increased from a net expense of $1.1 million during 2009 to a net expense of $1.3 million in2010. This change was primarily due to a $754,000 increase in foreign currency losses related to the revaluation of certain assets andliabilities including accounts payable and accounts receivable which was partially offset by a $607,000 decrease in interest expenserelated to the lower balances outstanding on the MIG notes and borrowings under our credit facility.Income Tax Benefit (Provision)Income tax provision decreased from $2.2 million in 2009 to $709,000 in 2010 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, 2010was 5.6% compared to 13.5% in the prior year. The higher effective benefit tax rate in 2009 was mainly attributable to a decrease in pre-tax losses and 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 of46Table of Contentsour agreements with tax authorities, changes in applicable accounting rules, applicable tax laws and regulations, rulings andinterpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certaintax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollarterms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. Inaddition, 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. Duringthe third quarter of 2010, the State Administration of Taxation approved our application to apply the favorable tax benefits to operationsbeginning January 1, 2009. We revalued certain deferred tax assets and liabilities during the quarter, and certain taxes that were expensedin 2009 were refunded in 2010 and the tax benefit was recognized. However, in the event that circumstances change and we no longer meetthe requirements of our original qualification, we would need to revalue certain tax assets and liabilities.Comparison of the Years Ended December 31, 2009 and 2008Revenues Year Ended December 31, 2009 2008 (In thousands) Feature phone $74,999 $89,740 Smartphone 4,345 27 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 due to a$14.7 million decline in feature phone revenue which was partially offset by a $4.3 million increase in smartphone revenue. The decreasein feature phone revenue was primarily due to the continued migration of users from feature phones to smartphones where we were unableto capture the same market share as we have in our traditional carrier business. Foreign currency exchange rates also had a greater positiveimpact on our revenues during the year ended December 31, 2008 compared to the year ended December 31, 2009. Due to thediversification of our product portfolio, including the titles resulting from the acquisitions of MIG and Superscape, no single titlerepresented 10% or more of sales in either 2008 or 2009. International revenues decreased by $5.3 million, from $46.7 million in 2008 to$41.4 million in 2009. The decrease in international revenues was primarily a result of decreased unit sales in EMEA and China, whichwas partially offset by increased unit sales in Latin America.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%47Table of ContentsOur 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 due to increased sales of titles withhigher royalty rates. The impairment of prepaid royalties and guarantees of $6.6 million in 2009 and $6.3 million in 2008 primarilyrelated to large distribution deals in EMEA and, with respect to the 2009 charge, several global properties that have not performed nor dowe believe will perform as initially expected. Overall royalties, including impairment of prepaid royalties and guarantees, as a percentageof 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.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 2008.48Table of ContentsGeneral 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 in stock-based compensation and a $395,000 decrease in facility andoverhead costs. We increased our general and administrative headcount from 71 in 2008 to 72 in 2009, but salaries and benefitsdecreased primarily as a result of moving headcount to lower cost locations. As a percentage of revenues, general and administrativeexpenses decreased from 23.4% in 2008 to 20.5% in 2009. General and administrative expenses included $1.6 million of stock-basedcompensation expense in 2009 and $2.1 million in 2008.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 had $4.6 million of goodwill remaining as of December 31, 2009, which was 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 2008.49Table of ContentsIncome 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 attributable to a decrease in pre-taxlosses, changes in withholding taxes, dividends and non-deductible stock based compensation.Liquidity and Capital Resources Year Ended December 31, 2010 2009 2008 (In thousands) Consolidated Statement of Cash Flows Data: (Capital expenditures) $710 $838 $3,772 Cash flows provided by (used in) operating activities 2,249 1,130 (5,889)Cash flows used in investing activities (710) (838) (31,673)Cash flows (used in) provided by financing activities 1,141 (8,925) 332 Since our inception, we have incurred recurring losses and negative annual cash flows from operating activities, and we had anaccumulated deficit of $190.7 million as of December 31, 2010.Operating ActivitiesIn 2010, net cash provided by operating activities was $2.2 million, primarily due to a decrease in accounts receivable of$5.2 million due to declining sales of games for feature phones in our carrier-based business and improved cash collections, a$3.7 million decrease in our prepaid royalties, a $1.8 million increase in accrued compensation and a $1.1 million increase in accountspayable. In addition, we had adjustments for non-cash items, including amortization expense of $4.4 million, depreciation expense of$2.0 million, stock-based compensation expense of $1.6 million and impairment of prepaid royalties of $663,000. These amounts werepartially offset by a net loss of $13.4 million and a decrease in accrued royalties of $5.3 million.In 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.Investing ActivitiesOur primary investing activities have consisted of purchases and sales of short-term investments, purchases of property andequipment. We may use more cash in investing activities in 2011 for property and equipment related to supporting our infrastructure andour development and design studios. We expect to fund these investments with our existing cash and cash equivalents and our revolvingcredit facility.50Table of ContentsIn 2010, we used $710,000 of cash for investing activities resulting primarily from purchases of computer and networkingequipment, software and leasehold improvements.In 2009, we used $838,000 of cash for investing activities resulting primarily from purchases of computer and networkingequipment, software equipment and leasehold improvements.In 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.Financing ActivitiesIn 2010, net cash provided by financing activities was $1.1 million due primarily to the $13.2 million of net proceeds that wereceived from the Private Placement and $598,000 of proceeds that we received from option exercises and purchases under our employeestock purchase plan. These inflows were partially offset by the $10.3 million that we paid during 2010 with respect to the promissorynotes and bonuses that we issued to the MIG shareholders and $2.4 million that we paid down under our credit facility.In 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.Sufficiency of Current Cash and Cash EquivalentsOur cash and cash equivalents were $12.9 million as of December 31, 2010. This amount does not include the $15.9 million in netproceeds that we received from our underwritten public offering of common stock that we completed in January 2011. We expect to fundour operations and satisfy our contractual obligations for 2011 primarily through our cash and cash equivalents and borrowings underour revolving credit facility. However, as a result of our plans to increase our spending on sales and marketing and research anddevelopment initiatives in connection with our new social, freemium games that we will release in 2011, we expect to use a significantamount of cash in our operations during 2011 as we seek to grow our business. We believe our cash and cash equivalents, together withborrowings under our credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, ourcash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, the impact of foreign currencyrate changes, revenues that are lower than we currently anticipate, greater than expected operating expenses, particularly with respect to ourresearch and development and sales and marketing initiatives, usage of cash to fund our foreign operations, unanticipated limitations ortiming restrictions on our ability to access funds that are held in our non-U.S. subsidiaries.We currently have an $8.0 million credit facility, which expires on June 30, 2011. We do not intend to extend the maturity date ofthis credit facility, and may seek to enter into a new credit facility with the lender or a new lender. We cannot assure you that we will beable to enter into a new facility on terms favorable to us or at all. Our credit facility contains financial covenants and restrictions that limitour ability to draw down the entire $8.0 million. These covenants are as follows:EBITDA and Net Cash. On August 24, 2009, we entered into an amendment to our credit facility, which reduced certain of theminimum targets contained in the credit facility’s EBITDA-related covenant. On February 10, 2010 we entered into a second amendmentto the agreement. The second amendment changed the measurement period for the EBITDA covenant from a rolling six month calculationto a quarterly calculation. On March 18, 2010, we entered into a third amendment to the agreement which (1) extended the maturity date ofthe credit facility from December 22, 2010 until June 30, 2011, (2) increased the interest rate for borrowings under the credit facility by0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%, and (3) requires us to maintain, measured on a consolidated basisat the end of each periods a minimum amount of EBITDA. On February 2, 2011, we entered into51Table of Contentsa fourth amendment to our credit facility which waived our default in maintaining minimum levels of EBITDA specified in the loanagreement for the period beginning October 1, 2010 and ending December 31, 2010. The fourth amendment also removed the EBITDAfinancial covenant from the loan agreement in its entirety and replaced this covenant with a net cash covenant, which requires us tomaintain at least $10.0 million in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that we owe to thelender under the Loan Agreement.Minimum Domestic Liquidity: We must maintain at the lender an amount of cash, cash equivalents and short-term investments ofnot 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.As of December 31, 2010, we had outstanding borrowings of $2.3 million under our credit facility, which is classified as a currentliability on the December 31, 2010 balance sheet. Our failure to comply with the cash covenants in the credit facility would not onlyprohibit us from borrowing under the facility, but would also constitute a default, permitting the lender to, among other things, declareany outstanding borrowings, including all accrued interest and unpaid fees, immediately due and payable. A change in control of Glualso constitutes an event of default, permitting the lender to accelerate the indebtedness and terminate the credit facility. The credit facilityalso contains other customary events of default. Utilizing our credit facility results in debt payments that bear interest at the lender’sprime rate plus 1.75%, but no less than 5.0%, which adversely impacts our cash position and result in cash covenants that restrict ouroperations. See Note 8 of Notes to Consolidated Financial Statements included in Item 8 of this report for more information regarding ourdebt.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, 2010, we were not in compliance with the EBITDA covenant, but thelender subsequently waived such non-compliance in connection with our entry into the fourth amendment to the credit facility asdescribed above.Of the $12.9 million of cash and cash equivalents that we held at December 31, 2010, approximately $1.4 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, and we repatriated an additional $1.3 million of available funds from China to the UnitedStates in August 2010. Both of these amounts were subject to withholding taxes of 5%. We do not anticipate repatriating any additionalfunds from China for the foreseeable future, as changes in our revenue share arrangement with China Mobile has significantly impactedour ability to generate meaningful cash from our China operations. In addition, given the current global economic environment and otherpotential developments outside of our control, we may be unable to utilize the funds that we hold in all of our non-U.S. accounts, whichfunds include cash and marketable securities, since the funds may be frozen by additional international regulatory actions, the accountsmay become illiquid for an indeterminate period of time or there may be other such circumstances that we are unable to predict.52Table of ContentsIn 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.If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital by selling convertibledebt, preferred stock (convertible into common stock or unconvertible) or common stock, potentially pursuant to our effective universalshelf registration statement, seeking to increase the amount available to us for borrowing under our credit facility, procuring a new debtfacility and/or selling some of our assets. We may be unable to raise additional capital through the sale of securities, or to do so on termsthat are favorable to us, particularly given current capital market and overall economic conditions. Any sale of convertible debt securitiesor additional equity securities could result in substantial dilution to our stockholders as was the case with the Private Placement and ourrecent underwritten public offering. The holders of new securities may also receive rights, preferences or privileges that are senior to thoseof existing holders of our common stock, all of which is subject to the provisions of the credit facility. Additionally, we may be unable toincrease the size of our credit facility or procure a new debt facility, or to do so on terms that are acceptable to us, particularly in light ofthe current credit market conditions. If the amount of cash that we require is greater than we anticipate, we could also be required to extendthe term of our credit facility beyond its June 30, 2011 expiration date (or replace it with an alternate loan arrangement), and resulting debtpayments thereunder could further inhibit our ability to achieve profitability in the future.Contractual ObligationsThe following table is a summary of our contractual obligations as of December 31, 2010: 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 $7,057 $3,433 $3,624 $— $— Guaranteed royalties(1) 1,617 914 703 — — Line of credit(2) 2,288 2,288 — — — (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.(2)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, 2010, the above amount hadbeen classified within current liabilities.The above table does not reflect unrecognized tax benefits and potential interest and penalties of $5.0 million which were classifiedwithin “Other long-term liabilities” on our consolidated balance sheets. As of December 31, 2010, the settlement of our income taxliabilities could not be determined; however, the liabilities are not expected to become due during 2011. Additionally in January 2011, wepaid $710,000 of taxes that had been withheld on the December 31, 2010 payment that we made to the former MIG shareholders in China.Off-Balance Sheet ArrangementsAt December 31, 2010, 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 revised53Table of Contentsguidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the fair value for theundelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual method toallocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted providedthat the revised guidance is retroactively applied to the beginning of the year of adoption. The adoption of this standard did not have amaterial impact on our consolidated financial statements.In June 2009, the FASB issued Statement 167, which amended the consolidation guidance that applies to variable interest entities(“VIE”) under ASC 810, Consolidation (“ASC 810”). The new guidance requires a qualitative approach to identifying a controllingfinancial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes theholder the primary beneficiary of the VIE. We adopted this guidance on January 1, 2010. The adoption of this statement did not have amaterial impact on our consolidated financial statements.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, 2010, wehad $2.3 million outstanding under the credit facility and our effective interest rate at that time was approximately 5.75%. We believe thata 10% 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, 2010, we had no short-term investments and substantially all $12.9 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.As of December 31, 2010 and December 31, 2009, our cash and cash equivalents were maintained by financial institutions in theUnited States, the United Kingdom, Australia, Brazil, China, Colombia, France, Germany, Hong Kong, Italy, Russia and Spain andour 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. At December 31, 2010, VerizonWireless accounted for 18.3% and Telecomunicaciones Movilnet accounted for 14.8% of total accounts receivable. At December 31, 2009,Verizon Wireless accounted for 24.1% of total accounts receivable. No other carrier represented more than 10% of our total accountsreceivable as of these dates.Foreign Currency Exchange RiskWe transact business in more than 70 countries in more than 20 different currencies, and in 2009 and 2010, 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”), Chinese Renminbi, Brazilian Real and Russian Ruble. Although recording operatingexpenses in the local currency of our54Table of Contentsforeign operations mitigates some of the exposure of foreign currency fluctuations, variances among the currencies of our customers andour foreign operations relative to the United States Dollar (“USD”) could have and have had a material impact on our results ofoperations.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 our 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.55 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 57 Consolidated Balance Sheets 58 Consolidated Statements of Operations 59 Consolidated Statements of Stockholders’ Equity 60 Consolidated Statements of Cash Flows 61 Notes to Consolidated Financial Statements 62 56Table 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 stockholders’equity and of cash flows present fairly, in all material respects, the financial position of Glu Mobile Inc. and its subsidiaries atDecember 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 21, 201157Table of ContentsGLU MOBILE INC.CONSOLIDATED BALANCE SHEETS As of December 31, 2010 2009 (In thousands, except pershare data) ASSETSCurrent assets: Cash and cash equivalents $12,863 $10,510 Accounts receivable, net 10,660 16,030 Prepaid royalties 2,468 6,738 Prepaid expenses and other 2,557 2,520 Total current assets 28,548 35,798 Property and equipment, net 2,134 3,344 Other long-term assets 574 929 Intangible assets, net 8,794 13,059 Goodwill 4,766 4,608 Total assets $44,816 $57,738 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities: Accounts payable $5,666 $4,480 Accrued liabilities 939 817 Accrued compensation 4,414 1,829 Accrued royalties 7,234 12,604 Accrued restructuring 1,689 1,406 Deferred revenues 842 914 Current portion of long-term debt 2,288 16,379 Total current liabilities 23,072 38,429 Other long-term liabilities 7,859 7,616 Total liabilities 30,931 46,045 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $0.0001 par value; 5,000 shares authorized at December 31, 2010 and 2009; no sharesissued and outstanding at December 31, 2010 and 2009 — — Common stock, $0.0001 par value: 250,000 authorized at December 31, 2010 and 2009; 44,585 and30,360 shares issued and outstanding at December 31, 2010 and 2009 4 3 Additional paid-in capital 203,464 188,078 Accumulated other comprehensive income 1,159 931 Accumulated deficit (190,742) (177,319)Total stockholders’ equity 13,885 11,693 Total liabilities and stockholders’ equity $44,816 $57,738 The accompanying notes are an integral part of these consolidated financial statements.58Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2010 2009 2008 (In thousands, except per share data) Revenues $64,345 $79,344 $89,767 Cost of revenues: Royalties 16,643 21,829 22,562 Impairment of prepaid royalties and guarantees 663 6,591 6,313 Amortization of intangible assets 4,226 7,092 11,309 Total cost of revenues 21,532 35,512 40,184 Gross profit 42,813 43,832 49,583 Operating expenses: Research and development 25,180 25,975 32,140 Sales and marketing 12,140 14,402 26,066 General and administrative 13,108 16,271 20,971 Amortization of intangible assets 205 215 261 Restructuring charge 3,629 1,876 1,744 Acquired in-process research and development — — 1,110 Impairment of goodwill — — 69,498 Total operating expenses 54,262 58,739 151,790 Loss from operations (11,449) (14,907) (102,207)Interest and other income/(expense), net: Interest income 26 94 919 Interest expense (601) (1,276) (78)Other income/(expense), net (690) 55 (2,200)Interest and other income/(expense), net (1,265) (1,127) (1,359)Loss before income taxes and minority interest (12,714) (16,034) (103,566)Income tax benefit/(provision) (709) (2,160) (3,126)Net loss $(13,423) $(18,194) $(106,692)Net loss per share — basic and diluted $(0.38) $(0.61) $(3.63)Weighted average common shares outstanding 35,439 29,853 29,379 The accompanying notes are an integral part of these consolidated financial statements.59Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Accumulated Other Total Additional Deferred Comprehensive Stockholders’ Common Stock Paid-In Stock-based Income Accumulated Equity Comprehensive Shares Amount Capital Compensation (loss) Deficit Deficit Loss (In thousands, except per share data) 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 forterminated employees — — (6) 6 — — — — Reclass of previously recorded stock-based MIGearnout 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 StockPurchase 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 forterminated 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 StockPurchase 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 Net loss — — — — — (13,423) (13,423) $(13,423)Stock-based compensation expense — — 1,568 — — — 1,568 — Vesting of early exercised options — — 2 — — — 2 — Issuance of common stock upon exercise of stock options 330 — 287 — — — 287 — Issuance of common stock upon Private Placement, net of issuance costs 13,495 1 13,218 — — — 13,219 Issuance of common stock pursuant to Employee StockPurchase Plan 400 — 311 — — — 311 — Foreign currency translation adjustment — — — — 228 — 228 228 Comprehensive loss — — — — — — — $(13,195)Balances at December 31, 2010 44,585 $4 $203,464 $— $1,159 $(190,742) $13,885 The accompanying notes are an integral part of these consolidated financial statements.60Table of ContentsGLU MOBILE INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2010 2009 2008 (In thousands) Cash flows from operating activities: Net loss $(13,423) $(18,194) $(106,692)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,975 2,330 2,756 Amortization of intangible assets 4,431 7,307 11,570 Stock-based compensation 1,568 2,926 3,669 MIG earnout expense — 875 9,591 Interest expense on debt 413 1,125 — Amortization of loan agreement costs 188 151 74 Non-cash foreign currency remeasurement (gain)/loss 699 (55) 2,901 Acquired in-process research and development — — 1,110 Impairment of goodwill — — 69,498 Impairment of prepaid royalties and guarantees 663 6,591 6,313 (Gain)/write down of auction-rate securities — — (806)Write off of fixed assets — — 411 Changes in allowance for doubtful accounts (42) 78 99 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 5,237 3,687 1,783 Prepaid royalties 3,696 6,420 (8,320)Prepaid expenses and other assets (113) 233 314 Accounts payable 1,139 (2,159) (1,825)Other accrued liabilities (1,223) (311) (499)Accrued compensation 1,839 (412) 1,258 Accrued royalties (5,278) (5,738) 3,959 Deferred revenues (70) 150 258 Accrued restructuring charge 1,055 348 (2,943)Other long-term liabilities (505) (4,222) (368)Net cash provided by/(used in) operating activities 2,249 1,130 (5,889)Cash flows from investing activities: Sale of short-term investments — — 2,800 Purchase of property and equipment (710) (838) (3,772)Acquisition of Superscape, net of cash acquired — — (30,008)Acquisition of MIG, net of cash acquired — — (693)Net cash used in investing activities (710) (838) (31,673)Cash flows from financing activities: Proceeds from line of credit 37,356 55,852 — Payments on line of credit (39,729) (51,179) — MIG loan payments (10,302) (14,000) — Proceeds from private placement, net 13,218 — — Proceeds from exercise of stock options and ESPP 598 402 231 Proceeds from exercise of stock warrants — — 101 Net cash provided by/(used in) financing activities 1,141 (8,925) 332 Effect of exchange rate changes on cash (327) (23) (1,420)Net increase/(decrease) in cash and cash equivalents 2,353 (8,656) (38,650)Cash and cash equivalents at beginning of period 10,510 19,166 57,816 Cash and cash equivalents at end of period $12,863 $10,510 $19,166 Supplemental disclosures of cash flow information Interest paid $1,349 $403 $— Income taxes paid $507 $1,438 $2,297 Supplemental disclosure of non-cash investing and financing activities 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.61Table 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.The Company has incurred recurring losses from operations since inception and had an accumulated deficit of $190,742 as ofDecember 31, 2010. For the year ended December 31, 2010, the Company incurred a loss from operations of $13,423. The Companymay incur additional operating losses and negative cash flows in the future. Failure to generate sufficient revenues, reduce spending orraise additional capital could adversely affect the Company’s ability to achieve its intended business objectives.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.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 generates revenues through the sale of games on traditional feature phones and newer smartphones, such as Apple’siPhone and mobile phones utilizing Google’s Android operating system, that offer enhanced functionality. Feature phone games aredistributed primarily through wireless carriers and revenues are recognized in accordance with FASB ASC 985-605, Software: RevenueRecognition. Smartphone games are distributed primarily through digital storefronts such as the Apple App Store and revenues related toin-app purchases or micro-transactions are recognized in accordance with (“SAB”) No. 101, Revenue Recognition in FinancialStatements, as revised by SAB No. 104, Revenue Recognition.The 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 for62Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)automatic renewal until the subscriber opts-out, while the others provide opt-in renewal. In either case, subsequent billings forsubscription licenses are generally billed monthly.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 determines the actual amounts. Historically, the revenues on the final revenue report have not differedby more than one half of 1% of the reported revenues for the period, which the Company deemed to be immaterial. Revenues earned fromcertain carriers may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be recognizedin the current period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of agame’s licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates,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 the Company deems a carrier not to be creditworthy, theCompany defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria havebeen 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 and digital storefrontagreements and has determined that it is not the principal when selling its games. Key indicators that it evaluated to reach thisdetermination include: • wireless subscribers directly contract with the carriers and digital storefronts, which have most of the service interaction and aregenerally viewed as the primary obligor by the subscribers; • carriers and digital storefronts generally have significant control over the types of games that they offer to their subscribers; • carriers and digital storefronts are directly responsible for billing and collecting fees from their subscribers, including theresolution of billing disputes; • carriers and digital storefronts generally pay the Company a fixed percentage of their revenues or a fixed fee for each game; • carriers and digital storefronts generally must approve the price of the Company’s games in advance of their sale to subscribersor provide tiered pricing thresholds, and the Company’s more significant carriers generally have the ability to set the ultimateprice charged to their subscribers; and • the Company has limited risks, including no inventory risk and limited credit risk.63Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company also derives a portion of its revenues through the sale of virtual items and currency on certain games downloaded forfree (“freemium games”) through digital storefronts such as the Apple App Store. The Company recognizes revenue related to sale ofvirtual items, when persuasive evidence of an arrangement exists, the service has been rendered, the sales price is fixed or determinable,and collectability is reasonably assured. Determining whether and when some of these criteria have been satisfied requires judgments thatmay have a significant impact on the timing and amount of revenue the Company reports in each period. For example, at the date theCompany sells certain premium games and virtual items and currency through micro-transactions within its freemium games, it has anobligation to provide additional services and incremental unspecified digital content in the future without an additional fee. In these cases,the Company accounts for the sale of the software product as a multiple element arrangement and recognizes the revenue over the estimatedlife of the game or virtual item, with the exception of certain virtual items which are items consumed at a predetermined time or otherwisehave limitations on repeated use (“consumable items”); these are recognized upon full consumption of the item. For all other virtual itemswhich are not consumed at a predetermined time or otherwise do not have a limitation on repeated use (“durable items”) (for example avirtual gun), the Company recognizes revenues from such virtual item over the estimated life of the virtual item. For these items, theCompany has considered the average period that game players typically play its games to arrive at a best estimate for the useful life. Whilethe Company believes its estimates to be reasonable based on available game player information, it may revise such estimates in the futureas the games’ operation periods change. Any adjustments arising from changes in the estimates of the lives of these virtual items would beapplied prospectively on the basis that such changes are caused by new information indicating a change in the game player behaviorpatterns. Any changes in the Company’s estimates of useful lives of these virtual items may result in revenues being recognized on a basisdifferent from prior periods’ and may cause its operating results to fluctuate.Deferred Licensing Fees and Related CostsCertain premium licensed games sold on digital storefronts such as the Apple App Store require the revenue to be deferred due toadditional services and incremental unspecified digital content to be delivered in the future without an additional fee. The Company isobligated to pay ongoing licensing fees in the form of royalties related to these games. As revenues are deferred, the related ongoinglicensing fees and costs are also deferred. The deferred licensing fees and related costs are recognized in the consolidated statements ofoperations and comprehensive income in the period in which the related sales are recognized as revenue.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.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 collectability 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.64Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The following table summarizes the revenues from customers in excess of 10% of the Company’s revenues: Year Ended December 31, 2010 2009 2008Verizon Wireless 15.2% 20.5% 21.4%At December 31, 2010, Verizon Wireless accounted for 18.3% and Telecomunicaciones Movilnet accounted for 14.8% of totalaccounts receivable. At December 31, 2009, Verizon Wireless accounted for 24.1% of total accounts receivable. No other carrierrepresented more than 10% of our total accounts receivable 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 as this Statement is not expected to have a material impact onthe 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.65Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 aminimum guaranteed liability of approximately $562 and $3,867 as of December 31, 2010 and 2009, 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 recorded impairment charges to cost of revenues of $663,$6,591 and $6,313 during the years ended December 31, 2010, 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 thatunit. For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on tostep 2. If a unit’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 intangibleassets (other than goodwill) and liabilities. This allows the Company to derive an implied fair value for the unit’s goodwill. TheCompany then compares the implied fair value of the reporting unit’s goodwill with the carrying value of the unit’s goodwill. If thecarrying amount of the unit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge would berecognized for the excess.Purchased 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 future66Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)operating results, significant changes in the manner of use of acquired assets, significant negative industry or economic trends, and asignificant decline in the Company’s stock price for a sustained period of time. The Company recognizes 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 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.Internal 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 software67Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)costs totaling approximately $117, $114 and $432 during the years ended December 31, 2010, 2009 and 2008, respectively. Theestimated useful life of costs capitalized is generally three years. During the years ended December 31, 2010, 2009 and 2008, theamortization of capitalized software costs totaled approximately $262, $421 and $683, respectively. Capitalized internal use softwaredevelopment 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 Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. SeeNote 11 for additional information, including the effects of adoption on the Company’s consolidated financial position, results ofoperations 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 after the required effective date. For options granted prior to the ASC 718 effective date that remain unvested on that date,the Company continues to recognize compensation expense under the intrinsic value method of APB 25. In addition, the Companycontinues to amortize those awards valued prior to January 1, 2006 utilizing an accelerated68Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)amortization schedule, while it expenses all options granted or modified 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 andASC 505-50.Advertising ExpensesThe Company expenses the production costs of advertising, including direct response advertising, the first time the advertisingtakes place. Advertising expense was $3,184, $1,734 and $1,870 in the years ended December 31, 2010, 2009 and 2008, 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, 2010.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.69Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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. Year Ended December 31, 2010 2009 2008 Net loss attributable to common stockholders $(13,423) $(18,194) $(106,692)Basic and diluted shares: Weighted average common shares outstanding 35,439 29,854 29,399 Weighted average unvested common shares subject to repurchase — (1) (20)Weighted average shares used to compute basic and diluted net loss per share 35,439 29,853 29,379 Net loss per share attributable to common stockholders — basic and diluted $(0.38) $(0.61) $(3.63)The following weighted average options and warrants to purchase common stock and unvested shares of common stock subject torepurchase have been excluded from the computation of diluted net loss per share of common stock for the periods presented becauseincluding them would have had an anti-dilutive effect: Year Ended December 31, 2010 2009 2008 Warrants to purchase common stock 2,435 106 119 Unvested common shares subject to repurchase — 1 20 Options to purchase common stock 6,347 4,935 4,607 8,782 5,042 4,746 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 did not have a material impact on the Company’s consolidated financial statements.In June 2009, the FASB issued Statement 167, which amended the consolidation guidance that applies to variable interest entities(“VIE”) under ASC 810, Consolidation (“ASC 810”). The new guidance requires a qualitative approach to identifying a controllingfinancial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes theholder the primary beneficiary of the VIE. The Company adopted this guidance on January 1, 2010. The adoption of this statement didnot have a material impact on the Company’s consolidated financial statements.70Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 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 to71Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the termination of 29 Superscape employees of $2,277, restructuring of facilities of $1,466 and other agreement termination fees of $25.The valuation of the identifiable intangible assets acquired was based on management’s estimates, currently available 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: December 31, 2008 Total pro forma revenues $92,480 Gross profit 50,025 Pro forma net loss (109,275)Pro forma net loss per share — basic and diluted (3.72)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 —FAIR VALUE MEASUREMENTSFair 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 money market securities. Such instruments are generally classified within Level 1 of the fair valuehierarchy. As of December 31, 2010, the Company had $12,863 in cash and cash equivalents.72Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 5 —BALANCE SHEET COMPONENTSProperty and Equipment December 31, 2010 2009 Computer equipment $4,974 $5,167 Furniture and fixtures 487 455 Software 2,919 2,742 Leasehold improvements 2,392 3,360 10,772 11,724 Less: Accumulated depreciation and amortization (8,638) (8,380) $2,134 $3,344 Depreciation and amortization for the years ended December 31, 2010, 2009 and 2008 were $1,975, $2,330 and $2,748,respectively.Accounts Receivable December 31, 2010 2009 Accounts receivable $11,164 $16,576 Less: Allowance for doubtful accounts (504) (546) $10,660 16,030 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, 2010 $546 $153 $195 $504 Year ended December 31, 2009 $468 $233 $155 $546 Year ended December 31, 2008 $368 $148 $48 $468 The Company had no significant write-offs or recoveries during the years ended December 31, 2010, 2009 and 2008.Other Long-Term Liabilities December 31, 2010 2009 Uncertain tax obligations $4,991 $4,614 Deferred income tax liability 1,170 1,736 Restructuring 773 — Other 925 1,266 $7,859 7,616 73Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 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, 2010 and 2009 were as follows: December 31, 2010 December 31, 2009 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 $13,545 $(13,545) $— $13,599 $(13,411) $188 Catalogs 1 yr 1,203 (1,203) — 1,239 (1,239) — ProvisionX Technology 6 yrs 198 (198) — 204 (168) 36 Carrier contract and related relationships 5 yrs 18,832 (10,352) 8,480 18,558 (7,149) 11,409 Licensed content 5 yrs 2,829 (2,810) 19 2,753 (1,902) 851 Service provider license 9 yrs 446 (151) 295 431 (98) 333 Trademarks 3 yrs 547 (547) — 544 (512) 32 37,600 (28,806) 8,794 37,328 (24,479) 12,849 Other intangible assets amortized to operatingexpenses: Emux Technology 6 yrs 1,283 (1,283) — 1,321 (1,111) 210 Noncompete agreement 2 yrs 562 (562) — 578 (578) — 1,845 (1,845) — 1,899 (1,689) 210 Total intangibles assets $39,445 $(30,651) $8,794 $39,227 $(26,168) $13,059 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, 2010, 2009 and 2008, the Company recorded amortization expense in theamounts of $4,226, $7,092 and $11,309, respectively, in cost of revenues. During the years ended December 31, 2010, 2009 and 2008,the Company recorded amortization expense in the amounts of $205, $215 and $261, respectively, in operating expenses. The Companyrecorded no impairment charges during the years ended December 31, 2010, 2009 and 2008.74Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2010, the total expected future amortization related to intangible assets was as follows: Amortization Included in Cost of Period Ending December 31, Revenues 2011 $2,911 2012 2,792 2013 2,722 2014 272 2015 and thereafter 97 $8,794 GoodwillThe Company attributes all of the goodwill resulting from the Macrospace acquisition to its Europe, Middle East and Africa(“EMEA”) reporting unit. The goodwill resulting from the iFone acquisition is evenly attributed to the Americas and EMEA reportingunits. The Company attributes all of the goodwill resulting from the MIG acquisition to its Asia and Pacific (“APAC”) reporting unit andall of the goodwill resulting from the Superscape acquisition to the Americas reporting unit. The goodwill allocated to the Americasreporting unit is denominated in U.S. Dollars (“USD”), the goodwill allocated to the EMEA reporting unit is denominated in PoundsSterling (“GBP”) and the goodwill allocated to the APAC reporting unit is denominated in Chinese Renminbi (“RMB”). As a result, thegoodwill attributed to the EMEA and APAC reporting units are subject to foreign currency fluctuations.Goodwill by geographic region is as follows: December 31, 2010 December 31, 2009 Americas EMEA APAC Total Americas EMEA APAC Total Balance as of January 1 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 Acquired during the year — — — — — — — — Effects of Foreign Currency Exchange — — 158 158 — — (14) (14)Balance as of period ended: — — 4,766 4,766 — — 4,608 4,608 Goodwill 24,871 25,354 24,039 74,264 24,871 25,354 23,881 74,106 Accumulated Impairment Losses (24,871) (25,354) (19,273) (69,498) (24,871) (25,354) (19,273) (69,498) $— $— $4,766 $4,766 $— $— $4,608 $4,608 In 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 of September30 or more frequently if triggering events occur.ASC 350 requires a two-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events 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 isestimated using a combination of the75Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)market approach, which utilizes comparable companies’ data, and/or the income approach, which uses discounted cash flows.The Company has three geographic segments comprised of the 1) Americas, 2) EMEA and 3) APAC regions. As of December 31,2010, the Company had goodwill attributable to the APAC reporting unit. The Company performed an annual impairment review as ofSeptember 30, 2010 as prescribed in ASC 350 and concluded that it was not at risk of failing the first step, as the fair value of the 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 method and market method. The Company has consistently utilized both methods in itsgoodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests as itbelieves both, 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 onthe Company’s market sector including its competitors. The assumptions supporting the discounted cash flow method were determinedusing the Company’s best estimates as of the date of the impairment review.In 2008, the Company recorded an aggregate goodwill impairment of $69,498 as the fair values of the Americas, APAC and 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 November2013. Rent expense for the years ended December 31, 2010, 2009 and 2008 was $2,652, $2,813 and $3,759, respectively. The terms ofthe facility 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 $379 and $440 at December 31, 2010and 2009, respectively, and was included within other long-term liabilities.At December 31, 2010, 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 2011 $3,972 $(539) $3,433 2012 2,855 (279) 2,576 2013 and thereafter 1,048 — 1,048 $7,875 $(818) $7,057 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, the76Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Company 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, 2010 were as follows: Minimum Guaranteed Period Ending December 31, Royalties 2011 $914 2012 698 2013 and thereafter 5 $1,617 These commitments are included 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 2011.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 31,2010 or 2009.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, 2010 or 2009.ContingenciesFrom time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. Forexample, the Company was 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. On April 21, 2009, Skinit filed a complaint against theCompany and other defendants, seeking unspecified damages plus attorney’s fees and costs. The complaint, filed in the Superior Courtof California in Orange County (case number 30-2009), alleged breach of contract, interference with economic relations, conspiracy andmisrepresentation of fact. On June 25, 2009, the Company filed a motion in the Superior Court in Orange County requesting an ordercompelling Skinit to arbitrate its claim against the Company and requesting that the court stay the action pending the determination of themotion and the subsequent arbitration. On July 30, 2009, the court granted the Company’s motion in its entirety and the dispute was toproceed to arbitration, which was scheduled to occur on August 9, 2010. In July 2010, the Company and Skinit entered into a settlementagreement in full settlement and77Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)discharge of all claims discussed above. This settlement did not have a significant impact on the Company’s financial statements.The 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 required that the Company pay off theremaining principal and interest in installments. As of December 31, 2010, the Company had fully repaid the Earnout Notes.The Earnout Notes were secured by a lien on substantially all of the Company’s assets and were subordinated to the Company’sobligations to the lender under the Company’s Credit Facility (as defined under the caption “Credit Facility” below), and any replacementcredit 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 would have accelerated the payment ofprincipal and interest under 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 Special Bonus Notes were guaranteed by the Company and the Company’s obligations were secured by a lien on substantiallyall of the Company’s assets. The Special Bonus Notes were subordinated to the Credit Facility and any replacement credit facility thatmeets certain conditions. The Special Bonus Notes began accruing simple interest on April 1, 2009 at the rate of 7% compoundedannually, and could have been repaid in advance without penalty. A change of control of the Company would have accelerated thepayment of principal and interest under the Earnout Notes. The Company had recorded the entire $5,000 of the Special Bonus Notes asof December 31, 2010 as the former MIG shareholders were fully vested in the special bonus.In March 2010, the Company entered into an agreement with the holders of the Earnout Notes and the Special Bonus Notes topostpone the payments that would have been due on March 31, 2010 until May 1, 2010. As of December 31, 2010, the Company hadpaid $20,674 of principal and interest to the MIG shareholders related to the Earnout Notes and $4,798 of principal and interest to theformer MIG executives related to the Special Bonus Notes. Additionally in January 2011, the Company paid $710 of taxes that had beenwithheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders in China.Credit 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 30,78Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2011 and increased the interest rate for borrowings under the Credit Facility by 0.75% to the lender’s prime rate, plus 1.75%, but no lessthan 5.0%. On February 2, 2011, the Company entered into a fourth amendment which waived the Company’s default in maintainingminimum levels of EBITDA specified in the loan agreement for the period beginning October 1, 2010 and ending December 31, 2010.Prior to this date, the Company was in compliance with all covenants under the Credit Facility. This amendment also removed theEBITDA financial covenant from the loan agreement in its entirety and replaced this covenant with a net cash covenant, which requiresthe Company to maintain at least $10,000 in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that isowed to the lender under the Loan Agreement. The Credit Facility provides for borrowings of up to $8,000, subject to a borrowing baseequal to 80% of the Company’s eligible accounts receivable. The maximum amount available for borrowing under the Credit Facility waslimited to $2,461 as of December 31, 2010. The Company’s obligations under the Credit Facility are guaranteed by certain of theCompany’s domestic and foreign subsidiaries and are secured by substantially all of the Company’s assets, including all of the capitalstock 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 a minimum domestic liquidity covenant, which requires it tomaintain at the lender an amount of cash, cash equivalents and short-term investments of not less than the greater of: (a) 20% of theCompany’s total consolidated unrestricted cash, cash equivalents and short-term investments, or (b) 15% of outstanding obligationsunder 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. To the extent an event of default occurs under the Credit Facility and the lender accelerates the indebtednessand terminates the Credit Facility, 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.79Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2010, the Company was not in compliance with all covenants of the Credit Facility, but the lender subsequentlywaived such non-compliance in connection with the Company’s entry into the fourth amendment to the Credit Facility as describedabove, and had outstanding obligations of $2,288. Based on the borrowing rates currently available to the Company with similar termsand maturities, the carrying value approximates fair value.NOTE 9 —STOCKHOLDERS’ EQUITY/(DEFICIT)Common StockAt December 31, 2010, the Company was authorized to issue 250,000 shares of common stock. As of December 31, 2010, theCompany had reserved 18,347 shares for future issuance under its stock plans and outstanding warrants.Preferred StockAt December 31, 2010, the Company was authorized to issue 5,000 shares of preferred stock.Secondary OfferingIn January 2011, the Company sold in an underwritten public offering an aggregate of 8,415 shares of its common stock at a publicoffering price of $2.05 per share for net proceeds of approximately $15,900 after underwriting discounts and commissions and offeringexpenses. The underwriters of this offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc.and Northland Capital Markets.Shelf Registration StatementIn December 2010, the Securities and Exchange Commission declared effective the Company’s shelf registration statement whichallows the Company to issue various types of debt and equity instruments, including common stock, preferred stock and warrants.Issuances under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securitiesto be issued. The ability to issue debt and equity is subject to market conditions and other factors impacting the Company’s borrowingcapacity. The Company has a $30,000 limit on the amount securities that can be issued under this shelf registration statement and hasalready utilized $17,250 of this amount pursuant to its underwritten public offering in January 2011.Private PlacementOn August 27, 2010, the Company completed the Private Placement in which it issued to the investors (i) an aggregate of13,495 shares of the Company’s common stock at $1.00 per share and (ii) warrants initially exercisable to purchase up to 6,748 sharesof the Company’s common stock at $1.50 per share (the “Warrants”), for initial proceeds of approximately $13,218 net of issuancecosts (excluding any proceeds the Company may receive upon exercise of the Warrants). Of this amount, $2,198 was allocated to thevalue of the Warrants and $11,020 was allocated to the common stock. All amounts are recorded within stockholders’ equity.Warrants to Purchase Common StockThe Warrants issued in connection with the Private Placement have an initial exercise price of $1.50 per share of common stock,can be exercised immediately, have a five-year term and provide for weighted-average anti-dilution protection in addition to customaryadjustment for dividends, reorganization and other common stock events.80Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Common stock warrants outstanding at December 31, 2010 were as follows: Number Exercise of Shares Price Outstanding Term per Under (Years) Share Warrant May 2006 7 $9.03 106 August 2010 5 1.50 6,748 6,854 Comprehensive LossComprehensive loss consists of two components, net loss and other comprehensive income/(loss). Other comprehensiveincome/(loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity but areexcluded from net income. The Company’s other comprehensive income/(loss) consists of foreign currency translation adjustments fromthose subsidiaries not using the U.S. dollar as their functional currency. Other comprehensive loss for 2010, 2009 and 2008 was$13,195, $18,433 and $107,602, respectively.NOTE 10 —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. Furthermore, the number of shares available for grant and issuance under the 2007 Plan will be increased automatically onJanuary 1 of each of 2008 through 2011 by an amount equal to 3% of the Company’s shares outstanding on the immediately precedingDecember 31, unless the Company’s Board of Directors, in its discretion, determines to make a smaller increase.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.The 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.81Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)On June 3, 2010, at the Company’s 2010 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment tothe 2007 Plan to increase the aggregate number of shares of common stock authorized for issuance under the 2007 Plan by 3,000 shares.As of December 31, 2010, 4,109 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.As of December 31, 2010, 416 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 Plan. The Inducement Plan did not require the approval of the Company’s stockholders. TheCompany initially reserved 600 shares of its common stock for grant and issuance under the Inducement Plan. On December 28, 2009,the Company’s Board of Directors appointed Niccolo de Masi as the Company’s President and Chief Executive Officer and theCompensation Committee of the Company’s Board of Directors awarded him a non-qualified stock option to purchase 1,250 shares ofthe Company’s common stock, which was issued on January 4, 2010 under the Inducement Plan. Immediately prior to the grant of thisaward, the Compensation Committee amended the Inducement Plan to increase the number of shares available for grant under the plan by819 shares to 1,250 shares. The Company may only grant NSOs under the Inducement Plan. Grants under the Inducement Plan mayonly be made to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, asan inducement material to such individual’s entering into employment with the Company and to provide incentives for such persons toexert maximum efforts for the Company’s success. The Company may grant NSOs under the Inducement Plan at prices less than 100%of the fair value of the shares on the date of grant, at the discretion of its Board of Directors. The fair value of the Company’s commonstock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination.As of December 31, 2010, 39 shares were reserved for future grants under the Inducement Plan.82Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2009 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 2007 Plan or the 2001 Plan for new nonqualified stock options to be granted under the2007 Plan (“New Options”). Eligible Options that were tendered for New Options were cancelled and returned to the 2007 Plan for re-issuance thereunder. The Company’s executive officers and directors were not eligible to participate in the Exchange Program. 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-for- Exercise Price Eligible Options) $1.25 - $1.99 1-for-1 2.00 - 3.99 1-for-2 4.00 - 5.94 1-for-3 5.95 or greater 1-for-4 The Company completed the Exchange Program in the second quarter of 2009. Eligible Employees tendered options to 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, 2009.83Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Stock Option ActivityThe following table summarizes the Company’s stock option activity: Options Outstanding Weighted Weighted Average Average Aggregate Shares Number of Exercise Contractual Intrinsic Available Shares Price Term (Years) Value 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 Increase in authorized shares 3,911 Options granted (4,841) 4,841 1.30 Options canceled 2,424 (2,424) 3.66 Options exercised — (330) 0.87 Balances at December 31, 2010 4,148 6,928 $2.02 4.70 $4,931 Options vested and expected to vest at December 31, 2010 5,509 $2.21 4.58 $3,831 Options exercisable at December 31, 2010 1,815 $3.95 3.62 $870 84Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At December 31, 2010, the options outstanding and currently exercisable by exercise price were as follows: Options Outstanding Options Exercisable Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Number Life Exercise Number Exercise Prices Outstanding (in Years) Price Exercisable Price $ 0.42 - $ 0.89 777 3.68 $0.78 453 $0.78 $ 0.97 - $ 1.14 1,029 5.05 1.07 211 1.06 $ 1.16 - $ 1.18 85 4.93 1.17 9 1.17 $ 1.19 - $ 1.19 1,030 4.69 1.19 — — $ 1.21 - $ 1.21 1,250 5.01 1.21 — — $ 1.23 - $ 1.51 832 5.35 1.35 105 1.47 $ 1.60 - $ 1.77 735 5.81 1.76 — — $ 1.83 - $ 4.81 790 3.34 4.18 665 4.28 $ 4.96 - $11.66 377 4.00 9.26 350 9.50 $11.88 - $11.88 23 5.56 11.88 22 11.88 $ 0.42 - $11.88 6,928 4.70 $2.02 1,815 $3.95 The 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 $2.07 per share at December 31, 2010. Thetotal intrinsic value of awards exercised during the years ended December 31, 2010, 2009 and 2008 was $142, $111 and $906,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, 2010 2009 2008 Dividend yield —% —% —%Risk-free interest rate 1.15% 1.43% 2.34%Expected term (years) 3.12 3.19 4.08 Expected volatility 77% 59% 43%The Company based its expected volatility on its own historic volatility and the historical volatility of a peer group of publiclytraded entities. The expected term of options gave consideration to early exercises, post-vesting cancellations and the options’ contractualterm, which was extended for all options granted subsequent to September 12, 2005 but prior to October 25, 2007 from five to ten years.Stock options granted on or after October 25, 2007 have a contractual term of six years. The risk-free interest rate for the expected term ofthe option is based on the U.S. Treasury Constant Maturity Rate as of the date of grant. The weighted-average fair value of stock optionsgranted during the year ended December 31, 2010, 2009 and 2008 was $0.67 and $0.37 and $1.15 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-85Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)based compensation expense for the years ended December 31, 2008, 2009 and 2010 includes compensation expense for (i) all new stock-based compensation awards granted after January 1, 2006 based on the grant-date fair value estimated in accordance with the provisionsof ASC 718, (ii) unmodified awards granted 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, 2010 2009 2008 Research and development $480 $716 $714 Sales and marketing 217 564 5,174 General and administrative 871 1,646 2,097 Total stock-based compensation expense $1,568 $2,926 $7,985 Consolidated net cash proceeds from option exercises were $287, $190 and $231 for the year ended December 31, 2010, 2009 and2008, respectively. The Company realized no income tax benefit from stock option exercises during the year ended December 31, 2010,2009 and 2008. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flowsrather than operating cash flows.At December 31, 2010, the Company had $2,649 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 3.16 years.Restricted StockThe Company did not grant any restricted stock during the years ended December 31, 2010 or 2009.401(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 11 —INCOME TAXESThe components of loss before income taxes by tax jurisdiction were as follows: Year Ended December 31, 2010 2009 2008 United States $(14,527) $(15,514) $(45,654)Foreign 1,813 (520) (57,912)Loss before income taxes $(12,714) $(16,034) $(103,566)86Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of income tax provision were as follows: Year Ended December 31, Current: 2010 2009 2008 Federal $— $— $52 State (3) (3) 2 Foreign (1,311) (2,921) (3,835) (1,314) (2,924) (3,781)Deferred: Federal — — — State — — — Foreign 605 764 655 605 764 655 Total: Federal — — 52 State (3) (3) 2 Foreign (706) (2,157) (3,180) $(709) $(2,160) $(3,126)The difference between the actual rate and the federal statutory rate was as follows: Year Ended December 31, 2010 2009 2008 Tax at federal statutory rate 34.0% 34.0% 34.0%State tax, net of federal benefit — — — Foreign rate differential 0.4 0.1 (0.1)Research and development credit 1.5 1.5 0.3 Acquired in-process research and development 0.3 0.1 (0.4)United Kingdom research and development refund 1.1 1.5 — Withholding taxes (3.7) (4.3) (0.4)Goodwill impairment — — (22.8)Stock-based compensation (1.0) (3.6) (3.9)Dividend — (11.3) — Other (0.1) (2.7) (0.3)Valuation allowance (38.1) (28.8) (9.4)Effective tax rate (5.6)% (13.5)% (3.0)%87Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Deferred tax assets and liabilities consist of the following: December 31, 2010 December 31, 2009 US Foreign Total US Foreign Total Deferred tax assets: Fixed assets $— $1,516 $1,516 $447 $1,501 $1,948 Net operating loss carryforwards 25,665 18,013 43,678 21,529 25,490 47,019 Accruals, reserves and other 2,432 93 2,525 1,596 215 1,811 Foreign tax credit 5,221 — 5,221 2,642 — 2,642 Stock-based compensation 1,580 75 1,655 2,166 141 2,307 Research and development credit 1,948 — 1,948 1,896 — 1,896 Other 3,517 11 3,528 3,332 26 3,358 Total deferred tax assets $40,363 $19,708 $60,071 $33,608 $27,373 $60,981 Deferred tax liabilities: Macrospace and iFone intangible assets $— $(76) $(76) $— $(243) $(243)MIG intangible assets — (1,242) (1,242) — (1,780) (1,780)Superscape intangible assets — — — (2,052) (37) (2,089)Fixed assets (1,075) — (1,075) — — — Other — (10) (10) — (24) (24)Net deferred tax assets 39,288 18,380 57,668 31,556 25,289 56,845 Less valuation allowance (39,288) (19,496) (58,784) (31,556) (26,978) (58,534)Net deferred tax liability $— $(1,116) $(1,116) $— $(1,689) $(1,689)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, 2010, the Company has net operating loss carryforwards of approximately $65,539 and $57,967 for federal andstate tax purposes, respectively. These carryforwards will expire from 2011 to 2030. In addition, the Company has research anddevelopment tax credit carryforwards of approximately $1,995 for federal income tax purposes and $1,914 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 $5,213 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, 2010, theCompany has net operating loss carryforwards of approximately $66,481 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 $66,481 are available in the United Kingdom,however, of those losses $66,364 are limited and88Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)can only offset a portion of the annual combined profits in the United Kingdom until the net operating losses are fully utilized.A reconciliation of the total amounts of unrecognized tax benefits was as follows: Year Ended December 31, 2010 2009 2008 Beginning balance $2,899 $2,406 $2,208 Reductions of tax positions taken during previous years (49) (33) (256)Additions based on uncertain tax positions related to the current period 417 502 401 Additions based on uncertain tax positions related to prior periods 59 24 53 Ending balance $3,326 $2,899 $2,406 As of December 31, 2010, approximately $73 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, 2009, approximately $90 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 $3,630 of interest and penalties on uncertain tax positions as of December 31, 2010, as compared to $3,279 as ofDecember 31, 2009. Approximately $239 of accrued interest and penalty expense related to estimated obligations for unrecognized taxbenefits was recognized during 2010.One of the Company’s subsidiaries in China has received the High & New Technology Enterprise qualification from the Ministry ofScience and Technology, and also the Software Enterprise Qualification from the Ministry of Industry and Information Technology.During the third quarter of 2010, the State Administration of Taxation approved the Company’s application to apply the favorable taxbenefits to operations beginning January 1, 2009. The Company has revalued certain deferred tax assets and liabilities during the quarter,and certain taxes that were expensed in 2009 were refunded in 2010, and the tax benefit was recognized. However, in the event thatcircumstances change and the Company no longer meets the requirements of the original qualification, the Company would need torevalue certain deferred tax assets and liabilities.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 2008 taxreturn in the United Kingdom will close in 2011. The Company’s China income tax returns are open by statute for tax years 2005 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 12 —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 evaluatingfinancial89Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)performance. Accordingly, the Company reports as a single operating segment — mobile games. It attributes revenues to geographic areasbased on the country in which the carrier’s principal operations are located.A breakdown of the Company’s total sales to customers in the feature phone and smartphone markets is shown below: Year Ended December 31, 2010 2009 2008 Feature phone $54,475 $74,999 $89,740 Smartphone 9,870 4,345 27 $64,345 $79,344 $89,767 The Company generates its revenues in the following geographic regions: Year Ended December 31, 2010 2009 2008 United States of America $28,909 $37,918 $43,046 China 5,962 7,676 8,883 Americas, excluding the USA 9,385 10,278 9,588 EMEA 17,332 20,570 25,187 Other 2,757 2,902 3,063 $64,345 $79,344 $89,767 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, 2010 2009 2008 Americas $1,013 $2,194 $3,208 EMEA 714 700 790 Other 407 450 863 $2,134 $3,344 $4,861 90Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 13 —RESTRUCTURINGRestructuring information as of December 31, 2010 was as follows: Restructuring 2010 2009 2008 Facilities Facilities Facilities Superscape Workforce Related Workforce Related Workforce Related Plan Total Balance as of January 1, 2009 $— $— $— $— $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 Charges to operations 1,540 1,854 — 235 — — — 3,629 Non Cash Adjustments — (269) — — — — (3) (272)Charges settled in cash (1,244) — (629) (414) — — (14) (2,301)Balance as of December 31, 2010 $296 $1,585 $— $558 $— $— $23 $2,462 During 2008, 2009 and 2010, the Company’s management approved restructuring plans to improve the effectiveness and efficiencyof its operating model and reduce operating expenses around the world. The 2010 restructuring plan included $1,540 of restructuringcharges relating to employee termination costs in the Company’s United States, APAC, Latin America and United Kingdom offices. Theremaining restructuring charge of $1,854 related primarily to facility related charges resulting from the relocation of the Company’scorporate headquarters to San Francisco. These amounts were partially offset by a $269 non-cash adjustment, primarily relating to awrite down in fixed assets associated with the restructuring of the Company’s former United Sates headquarters. Since the inception ofthe 2009 restructuring plan through December 31, 2010, the Company incurred $2,111 in restructuring charges. These charges included$1,009 of workforce related charges, comprised of severance and termination benefits of $657 associated with the departure of theCompany’s former Chief Executive Officer, and $352 relating to employee termination costs in the Company’s United States and UnitedKingdom offices. The remaining restructuring charge included $1,102 of facility related charges, comprised of $944 of chargesassociated with changes in the sublease probability assumption for the vacated office space in the Company’s United States headquartersand an additional restructuring charge of $158 net of sublease income, resulting from vacating a portion of the Company’s EMEAheadquarters based in the United Kingdom. These amounts were partially offset by a $62 non-cash adjustment, primarily relating to awrite down in fixed assets associated with the restructuring of the Company’s EMEA headquarters. Since the inception of the 2008restructuring plan through December 31, 2010, the Company incurred $1,744 in restructuring charges. These charges included $989related to employee severance and benefit arrangements due to the termination of employees in France, Hong Kong, Sweden, the UnitedKingdom and the United States and $755 related to vacated office space at the Company’s headquarters. The Company does not expectto incur any additional charges under the 2009 and 2008 restructuring plans.As of December 31, 2010, the Company’s remaining restructuring liability of $2,462 was comprised of $296 of severance andbenefits payments due to former executives, which are due to be paid during 2011, and $2,166 of facility related costs that are expectedto be paid over the remainder of the lease terms of one to two years. However, any changes in the assumptions used in the Company’svacated facility accrual could result in additional charges in the future. As of December 31, 2010, approximately $773 of facility costsincluded in the above table were classified as other long-term liabilities. As of December 31, 2009, the Company’s remaining restructuringliability of $1,406 was comprised of $629 of severance and benefit payments due to the Company’s former Chief Executive Officer,which were paid in the first quarter of 2010, and $777 of facility related costs.91Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In 2011, the Company anticipates incurring approximately $600 of restructuring charges related to employee severance and benefitarrangements associated with the terminations of employees in China, Russia and the United Kingdom and facility related charges inChina and Russia.NOTE 14 —QUARTERLY FINANCIAL DATA (unaudited, in thousands)The following table sets forth unaudited quarterly consolidated statements of operations data for 2009 and 2010. 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 2009 2010 March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31 (In thousands) Revenues $20,775 $19,872 $19,645 $19,052 $17,289 $15,952 $15,468 $15,636 Cost of revenues: Royalties 5,813 5,667 5,302 5,047 4,691 4,280 3,934 3,738 Impairment of prepaid royalties and guarantees — 589 513(a) 5,489 — 663 — — Amortization of intangible assets 2,848 1,412 1,420 1,412 1,228 1,006 1,009 983 Total cost of revenues 8,661 7,668 7,235 11,948 5,919 5,949 4,943 4,721 Gross profit 12,114 12,204 12,410 7,104 11,370 10,003 10,525 10,915 Operating expenses: Research and development 6,397 6,648 6,662 6,268 6,661 6,229 5,858 6,432 Sales and marketing 4,112 3,546 3,556 3,188 2,971 2,437 2,692(C) 4,040 General and administrative 4,485 3,905 3,986 3,895 3,813 3,052 3,107 3,136 Amortization of intangible assets 51 51 58 55 55 52 53 45 Restructuring charge — 513 919 444 594 693 — 2,342 Total operating expenses 15,045 14,663 15,181 13,850 14,094 12,463 11,710 15,995 Income (loss) from operations (2,931) (2,459) (2,771) (6,746) (2,724) (2,460) (1,185) (5,080)Interest and other income (expense), net (807) 457 (300) (477) (631) (560) 86 (160)Loss before income taxes and minority interest (3,738) (2,002) (3,071) (7,223) (3,355) (3,020) (1,099) (5,240)Income tax benefit (provision) (2,019) 464 (917)(b) 312 (301) (198) (504)(d) 294 Net loss $(5,757) $(1,538) $(3,988) $(6,911) $(3,656) $(3,218) $(1,603) $(4,946)Net loss per share — basic and diluted $(0.19) $(0.05) $(0.13) $(0.23) $(0.12) $(0.10) $(0.04) $(0.11)(a)The impairment of prepaid royalties and guarantees of $5,489 recorded in the fourth quarter of 2009 was primarily related to largedistribution deals in EMEA and several global properties that did not perform as expected.(b)The income tax benefit of $312 in the fourth quarter of 2009 was primarily related to inter-period tax allocations recorded in theprevious quarters of 2009.(c)Sales and marketing expense of $4,040 in the fourth quarter of 2010 was related to increased marketing promotions costs associatedwith the launch of freemium game titles during the period.92Table of ContentsGLU MOBILE INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(d)The income tax benefit of $294 in the fourth quarter of 2010 was primarily related to the China State Administration of Taxationapproval of the Company’s application to apply the favorable tax benefits to operations beginning January 1, 2009. The Companythus revalued certain deferred tax assets and liabilities during the quarter, and certain taxes that were expensed in 2009 wererefunded in 2010 and the tax benefit was recognized.NOTE 15 —SUBSEQUENT EVENTSOn February 2, 2011, the Company entered into a fourth amendment to the Credit Facility which waives the Company’s default inmaintaining minimum levels of EBITDA specified in the loan agreement for the period beginning October 1, 2010 and endingDecember 31, 2010. Prior to this date, the Company was in compliance with all covenants under the Credit Facility. This amendment alsoremoved the EBITDA financial covenants from the loan agreement in its entirety and replaced these covenants with a net cash covenant,which requires the Company to maintain at least $10,000 in unrestricted cash at the lender or an affiliate of the lender, net of anyindebtedness that is owed to the lender under the Loan Agreement.In January 2011, the Company sold in an underwritten public offering an aggregate of 8,415 shares of its common stock for netproceeds of approximately $15,900 after underwriting discounts and commissions and offering expenses (see Note 9).93Table 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, 2010, 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, 2010 based on the guidelines established in Internal Control — Integrated Framework issued bythe 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, 2010 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 the Dodd-Frank Wall Street Reform and Consumer Protection Act, whereas non-accelerated filers are exempt from Sarbanes-Oxley internal control audit requirements.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, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reportingItem 9B. OTHER INFORMATIONNone.94Table 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 2011 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 Glu’s executive officers as of March 1, 2011 and their areas of responsibility. Their biographies followthe table.Name Age PositionNiccolo M. de Masi 30 President, Chief Executive Officer and DirectorEric R. Ludwig 41 Senior Vice President, Chief Financial Officer, Chief AdministrativeOfficer and Assistant SecretaryKal Iyer 41 Senior Vice President, Research and DevelopmentGiancarlo Mori 54 Chief Creative OfficerNiccolo 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.Eric R. Ludwig has served as our Senior Vice President, Chief Financial Officer and Assistant Secretary since August 2008, hasserved as our Chief Administrative Officer since September 2010, served as our Vice President, Finance, Interim Chief Financial Officerand Assistant Secretary from May 2008 to August 2008, served as our Vice President, Finance and Assistant Secretary since July 2006,served as our Vice President, Finance since April 2005, and served as our Director of Finance from January 2005 to April 2005. Prior tojoining us, from January 1996 to January 2005, Mr. Ludwig held various positions at Instill Corporation, an on-demand supply chainsoftware company, most recently as Chief Financial Officer, Vice President, Finance and Corporate Secretary. Prior to Instill, Mr. Ludwigwas Corporate Controller at Camstar Systems, Inc., an enterprise manufacturing execution and quality systems software company, fromMay 1994 to January 1996. He also worked at Price Waterhouse L.L.P. from May 1989 to May 1994. Mr. Ludwig holds a B.S. incommerce from Santa Clara University and is a Certified Public Accountant (inactive).Kal Iyer has served as our Senior Vice President, Research and Development since July 2010. Mr. Iyer joined Glu in 2003 and hasheld increasingly senior positions in Glu’s research, development and engineering organization. Prior to joining us, Mr. Iyer worked atPumatech International where he architected and built the95Table of Contentsinfrastructure for mobile browsing. Prior to Pumatech, Mr. Iyer consulted for several Fortune 500 companies. Mr. Iyer holds a B.S. inmathematics from Jabalpur University, India.Giancarlo Mori has served as our Chief Creative Officer since August 2010. Prior to joining us, Mr. Mori served as the Senior VicePresident, Development at Skyrockit, a mobile entertainment agency, from February 2010 to June 2010. Prior to that, Mr. Mori served asthe Senior Vice President, Interactive at Animal Logic, a digital visual effects company, from May 2008 to December 2009. Previously,Mr. Mori worked as an executive consultant to a number of game/entertainment/new media startups from December 2007 to May 2008.Prior to that, Mr. Mori served as the Vice President of Production, North American Studios at Activision, Inc. from August 2004 toDecember 2007 where he led the development of numerous titles based on original intellectual property as well as established franchises.Mr. Mori holds an MSc. from the University of Florence.Item 11. Executive CompensationThe information required for this Item is incorporated by reference from our Proxy Statement to be filed for our 2011 AnnualMeeting of 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 2011 AnnualMeeting of 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 2011 AnnualMeeting of 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 2011 AnnualMeeting of 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 52.(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.96Table 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 21, 2011 By: /s/ Eric R. LudwigEric R. Ludwig,Senior Vice President, Chief Financial Officer and ChiefAdministrative OfficerDate: March 21, 2011Pursuant 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 21, 2011 /s/ Eric R. LudwigEric R. Ludwig Senior Vice President, Chief FinancialOfficerand Chief Administrative Officer (PrincipalFinancial and Accounting Officer) March 21, 2011 /s/ William J. MillerWilliam J. Miller Chairman of the Board March 21, 2011 /s/ Matthew A. DrapkinMatthew A. Drapkin Director March 21, 2011 /s/ Ann MatherAnn Mather Director March 21, 201197Table of ContentsSignature Title Date /s/ Hany M. NadaHany M. Nada Director March 21, 2011 /s/ A. Brooke SeawellA. Brooke Seawell Director March 21, 2011 /s/ Ellen F. SiminoffEllen F. Siminoff Director March 21, 2011 /s/ Benjamin T. Smith, IVBenjamin T. Smith, IV Director March 21, 201198Table of ContentsExhibit Index Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith2.01 Agreement and Plan of Merger, dated as of November 28, 2007, byand among Glu Mobile Inc., Maverick Acquisition Corp., AwakenLimited, Awaken (Beijing) Communications Technology Co. Ltd.,Beijing Zhangzhong MIG Information Technology Co. Ltd., BeijingQinwang Technology Co. Ltd., each of Wang Bin, Wang Xin andYou Yanli, and Wang Xin, as Representative (the “MIG MergerAgreement”). 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. for Superscape Groupplc. 8-K 001-33368 2.01 01/25/08 2.04 Form of Acceptance, Authority and Election by Glu Mobile Inc. forSuperscape 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 as ofMarch 29, 2006, by and among Glu Mobile Inc. and certaininvestors of Glu Mobile Inc. and the Amendment No. 1 and Joinderto the Amended and Restated Investor Rights Agreement datedMay 5, 2006, by and among Glu Mobile Inc. and certain investors ofGlu Mobile Inc. S-1 333-139493 4.02 12/19/06 10.01 Form of Indemnity Agreement entered into between Glu Mobile Inc.and each of its directors and executive officers, effective as ofJune 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 grant usedfrom December 8, 2004 to May 2, 2006 and forms of option grantused since May 2, 2006. S-1/A 333-139493 10.02 01/22/07 10.03(A)# 2007 Equity Incentive Plan, as amended. 10-Q 001-33368 10.02 08/09/10 10.03(B)# For the 2007 Equity Incentive Plan, forms of (a) Notice of StockOption Grant, Stock Option Award Agreement and Stock OptionExercise Agreement, (b) Notice of Restricted Stock Award andRestricted Stock Agreement, (c) Notice of Stock Appreciation RightAward and Stock Appreciation Right Award Agreement, (d) Noticeof Restricted Stock Unit Award and Restricted Stock UnitAgreement and (e) Notice of Stock Bonus Award and Stock BonusAgreement. S-1/A 333-139493 10.03 02/16/07 10.04# 2007 Employee Stock Purchase Plan, as amended and restated onJuly 1, 2009. 10-Q 001-33368 10.01 11/09/09 10.05# 2008 Equity Inducement Plan, as amended and restated onDecember 28, 2009, and forms of Notice of Stock Option Grant,Stock Option Award Agreement and Stock Option ExerciseAgreement. 10-K 001-33368 10.05 03/31/10 100Table of Contents Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith10.06# Forms of Stock Option Award Agreement (Immediately Exercisable)and Stock Option Exercise Agreement (Immediately Exercisable)under the Glu Mobile Inc. 2007 Equity Incentive Plan. 10-Q 001-33368 10.05 08/14/08 10.07# Form of Change of Control Severance Agreement, dated as ofOctober 10, 2008, between Glu Mobile Inc. and each of Kevin S.Chou, Alessandro Galvagni, Eric R. Ludwig and Thomas M.Perrault. 10-K 001-33368 10.08 03/13/09 10.08# Glu Mobile Inc. 2010 Executive Bonus Plan. 8-K 001-33368 99.01 08/03/10 10.09# Glu Mobile Inc. 2011 Executive Bonus Plan. 8-K 001-33368 99.03 02/07/11 10.10# Employment Agreement for Niccolo M. de Masi, datedDecember 28, 2009. 8-K 001-33368 99.02 01/04/10 10.11# Change of Control Severance Agreement, dated as ofDecember 28, 2009, by and between Glu Mobile Inc. and NiccoloM. de Masi. 8-K 001-33368 99.03 01/04/10 10.12# Summary of Compensation Terms of Eric R. Ludwig. X10.13# Summary of Compensation Terms of Kal Iyer. 10-Q 001-33368 10.06 11/10/10 10.14# Summary of Compensation Terms of Giancarlo Mori. X10.15# Transitional Employment Agreement, dated as of September 28,2010, by and between Glu Mobile Inc. and Kevin S. Chou. 8-K 001-33368 99.04 10/04/10 10.16# Description of Retention Arrangements with Alessandro Galvagniand Eric R. Ludwig. 10-Q 001-33368 10.03 11/09/09 10.17# Non-Employee Director Compensation Program. X10.18 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 betweenCarrAmerica Realty, L.P. and Glu Mobile Inc. S-1 333-139493 10.05 12/19/06 10.19 Sublease dated as of August 22, 2007, between Oracle USA, Inc.,and Glu Mobile Inc. 8-K 001-33368 10.1 08/28/07 10.20 Sub-sublease, dated as of September 29, 2010, by and betweenAppirio, Inc. and Glu Mobile Inc. 8-K 001-33368 99.03 10/04/10 10.21 Sublease, dated as of September 29, 2010, by and betweenBlackRock Institutional Trust Company and Glu Mobile Inc. 8-K 001-33368 99.01 10/04/10 10.22 First Amendment to Sublease, dated as of September 29, 2010, byand between BlackRock Institutional Trust Company and GluMobile Inc. 8-K 001-33368 99.02 10/04/10 10.23+ BREW Application License Agreement dated as of February 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 10.24+ BREW Developer Agreement dated as of November 2, 2001, asamended, by and between Qualcomm Inc. and Glu Mobile Inc. S-1/A 333-139493 10.11.2 01/10/07 10.25 Form of Warrant dated as of May 2, 2006 by and between PinnacleVentures I Equity Holdings LLC and Glu Mobile Inc., by andbetween Pinnacle Ventures I Affiliates, L.P. and Glu Mobile Inc., andby and between Pinnacle Ventures II Equity Holdings, LLC and GluMobile Inc. S-1 333-139493 10.20 12/19/06 101Table of Contents Incorporated by ReferenceExhibit Filing FiledNumber Exhibit Description Form File No. Exhibit Date Herewith10.26 Purchase Agreement, dated as of June 30, 2010, by and betweenGlu Mobile Inc. and certain PIPE investors. 8-K 001-33368 99.01 07/06/10 10.27 Form of Warrant by and between Glu Mobile Inc. and certain PIPEinvestors. 8-K 001-33368 4.01 07/06/10 10.28 Form of Registration Rights Agreement by and between Glu MobileInc. and certain PIPE investors. 8-K 001-33368 4.02 07/06/10 10.29 Second Amendment to Loan and Security Agreement between GluMobile Inc. and Silicon Valley Bank, dated November 4, 2008. 8-K 001-33368 10.01 11/04/08 10.30 Amended and Restated Loan and Security Agreement dated as ofDecember 29, 2008, among Silicon Valley Bank, Glu Mobile Inc.,Glu Games Inc. and Superscape Inc 8-K 001-33368 10.06 12/30/08 10.31 Amendment No. 1 to Amended and Restated Loan and SecurityAgreement by and among Glu Mobile Inc., Glu Games Inc.,Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 08/24/09 10.32 Amendment No. 2 to Amended and Restated Loan and SecurityAgreement by and among Glu Mobile Inc., Glu Games Inc.,Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 02/10/10 10.33 Amendment No. 3 to Amended and Restated Loan and SecurityAgreement by and among Glu Mobile Inc., Glu Games Inc.,Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 03/22/10 10.34 Amendment No. 4 and Limited Waiver to Amended and RestatedLoan and Security Agreement by and among Glu Mobile Inc., GluGames Inc., Superscape Inc. and Silicon Valley Bank 8-K 001-33368 99.01 02/07/11 21.01 List of Subsidiaries of Glu Mobile Inc. X23.01 Consent of PricewaterhouseCoopers LLP, independent registeredpublic accounting firm. X31.01 Certification of Principal Executive Officer Pursuant to SecuritiesExchange Act Rule 13a-14(a). X31.02 Certification of Principal Financial Officer Pursuant to SecuritiesExchange Act Rule 13a-14(a). X32.01 Certification of Principal Executive Officer Pursuant to 18 U.S.C.Section 1350 and Securities Exchange Act Rule 13a-14(a)/15d-14(a). X32.02 Certification of Principal Financial Officer Pursuant to 18 U.S.C.Section 1350 and Securities Exchange Act Rule 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 of 1934, or otherwise subject to theliability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Actof 1933 or the Securities Exchange Act of 1934, except to the extent that Glu Mobile Inc. specifically incorporates it by reference.102Exhibit 10.12GLU MOBILE INC.SUMMARY OF COMPENSATION TERMSERIC R. LUDWIGThe following is a summary of the compensation terms for Eric R. Ludwig, our Senior Vice President, Chief Financial Officer and Chief AdministrativeOfficer: Annual Salary: $275,000 Target Cash Bonus: 60% of base salary Bonus Plan Participation: Glu Mobile 2011 Executive Bonus PlanExhibit 10.14GLU MOBILE INC.SUMMARY OF COMPENSATION TERMSGIANCARLO MORIThe following is a summary of the compensation terms for Giancarlo Mori, our Chief Creative Officer: Annual Salary: $225,000 Target Cash Bonus: 40% of base salary Bonus Plan Participation: Glu Mobile 2011 Executive Bonus PlanExhibit 10.17GLU MOBILE INC.SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM(As Amended on October 21, 2010)On January 28, 2009, our Board of Directors adopted, and October 21, 2010 our Board amended, the following program with respect to the compensation ofour non-employee directors:Cash Compensation Annual Retainer Fee: $20,000 Chairman of the Board Fee: $15,000 Annual Committee Fees: Audit Committee Chair $15,000 Audit Committee Member (other than Chair) $5,000 Compensation Committee Chair $15,000 Compensation Committee Member (other than Chair) $5,000 Nominating and Governance Committee Chair $5,000 Nominating and Governance Committee Member (other than Chair) $5,000 All cash compensation will be paid in quarterly installments based upon continuing service. We will also reimburse our directors for reasonable expenses inconnection with attendance at Board and committee meetings.Equity CompensationEach year at about the time of our annual meeting of stockholders, each non-employee director will receive an additional equity award of, at that director’sdiscretion, either 16,667 shares of restricted stock or an option to purchase 50,000 shares of our common stock. In either case the award will vest pro ratamonthly over one year. About the time he or she joins the Board of Directors, each new non-employee director will receive an initial equity award of, at thatdirector’s discretion, either (a) a grant of 20,000 shares of restricted stock or (b) an option to purchase 60,000 shares of our common stock. In either case theaward will vest as to 16 2/3% of the shares after six months and thereafter vest pro rata monthly over the next 30 months.Exhibit 21.01GLU MOBILE INC.Subsidiaries as of March 21, 2011 State or Other Jurisdiction of Incorporation orName of Subsidiary Which Does Business As Organization Beijing Qinwang Technology Co. Ltd. Beijing Qinwang Technology Co. Ltd. People’s Republic Of China 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 Brazil Glu Mobile GmbH Glu Mobile GmbH Germany Glu Mobile Limited Glu Mobile Limited Hong Kong Glu Mobile Limited Glu Mobile Limited United Kingdom Glu Mobile LLC Glu Mobile LLC Delaware Glu Mobile (Russia) Ltd. Glu Mobile (Russia) Ltd. United Kingdom Glu Mobile S.A. Glu Mobile S.A. Chile Glu Mobile SARL Glu Mobile SARL France Glu Mobile SRL Glu Mobile SARL Italy Glu Mobile S.L. Glu Mobile SL Spain Glu Mobile Technology (Beijing) Co. Ltd. Glu Mobile Technology (Beijing) Co. Ltd. People’s Republic Of China Maverick Mobile Entertainment (Beijing) Limited Maverick MobileEntertainment (Beijing) Limited People’s Republic Of ChinaWe have omitted certain subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as ofDecember 31, 2010.Exhibit 23.01CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-141487, 333-149996, 333-157959 and 333-165813)of Glu Mobile Inc. of our report dated March 21, 2011 relating to the financial statements, which appears in Glu Mobile Inc.’s Annual Report on Form 10-Kfor the year ended December 31, 2010./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 21, 2010Exhibit 31.01CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THE SECURITIESEXCHANGE 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 21, 2011 /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 21, 2011 /s/ Eric R. Ludwig Eric R. Ludwig Senior Vice President, Chief Financial Officer and Chief Administrative 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, 2010 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 21, 2011 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, Chief Financial Officer and Chief Administrative 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, 2010 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 21, 2011 By: /s/ Eric R. Ludwig Eric R. Ludwig Senior Vice President, Chief Financial Officer and Chief Administrative Officer(Principal Financial Officer) 

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