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| market rumors or press reports;
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| announcements related to our share repurchase program;
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| our announcement of significant transactions;
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| actions instituted by activist shareholders or others;
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| the use by investors or analysts of third-party data (such as App Annie, comScore, and Sensor Tower) regarding our business and operating metrics which may not reflect our actual performance or financial results;
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| fluctuations in the valuation of companies perceived by investors to be comparable to us;
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| the activities, public announcements and financial performance of our commercial partners, such as Apple, Amazon, Facebook and Google;
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| fluctuations in the trading volume of our shares, or the size of our public float relative to the total number of shares of our Class A common stock that are issued and outstanding;
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| share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and
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| general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies including in response to the COVID-19 pandemic, continuing containment efforts and initiatives taken to support global economies and workers. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been the target of this type of litigation in the past. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
In addition, in April 2018, our Board of Directors authorized the 2018 Share Repurchase Program allowing us to repurchase up to an additional $200.0 million of our outstanding shares of Class A common stock. The timing and amount of any stock repurchases will be determined based on market conditions, share price and other factors. The 2018 Share Repurchase Program, which will expire
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in April 2022, does not require us to repurchase any specific number of shares of our Class A common stock, and may be modified, suspended or terminated at any time without notice. The 2018 Share Repurchase Program will be funded from existing cash on hand or other sources of financing as we may determine to be appropriate. Share repurchases under these authorizations may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 plans or by any combination of such methods. Repurchases of our Class A common stock in the open market could result in increased volatility in our stock price. There is no guarantee that we will make any share repurchases under the 2018 Share Repurchase Program or otherwise in the future.
The capped call transactions may affect the price our Class A common stock.
In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain financial institutions as counterparties. The capped call transactions initially cover, subject to customary adjustments, the number of shares of our Class A common stock initially underlying the Notes. The capped call transactions are expected to offset the potential dilution and/or offset any cash payments we make in excess of the aggregate principal amount of converted Notes, as the case may be, as a result of conversion of the Notes.
From time to time, the counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of the Notes). This activity could also cause or prevent an increase or a decrease in the market price of our Class A common stock.
Certain provisions in our charter documents and under Delaware law could limit attempts by our stockholders to replace or remove our Board of Directors or current management and limit the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing changes in our Board of Directors or management. Our certificate of incorporation and bylaws include provisions that:
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| establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors;
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| prohibit cumulative voting in the election of directors;
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| authorize “blank check” preferred stock that our Board of Directors could issue; and
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| limit the ability of stockholders to call a special stockholder meeting and to act by written consent.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
Our Class A common stock price may be volatile due to third-party data regarding our games.
Third parties, such as App Annie, comScore, and Sensor Tower publish daily data about us and other social game companies with respect to downloads, DAUs and MAUs, monthly revenue, top game charts, time spent per user and other information concerning social game usage. These metrics can be volatile, particularly for specific games, and in many cases do not accurately reflect the actual levels of usage of our games across all platforms and may not correlate to our bookings or revenue from the sale of virtual items. There is a possibility that third parties could change their methodologies for calculating these metrics in the future. To the extent that securities analysts or investors base their views of our business or prospects on such third-party data, the price of our Class A common stock may be volatile and may not reflect the performance of our business.
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If securities or industry analysts do not publish research about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our Class A common stock, to some extent, depends on the research and reports that securities or industry analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or lower their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
While we have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic, if we are unable to maintain adequate internal controls for financial reporting in the future due to the COVID-19 pandemic or any other reason, or if our auditors are unable to express an opinion as to the effectiveness of our internal controls as required pursuant to the Sarbanes-Oxley Act of 2002, investor confidence in the accuracy of our financial reports may be impacted or the market price of our Class A common stock could be negatively impacted.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified Board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform Act and Consumer Protection Act of 2010, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.
As a result of disclosure of information in our public filings with the SEC as required of a public company, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition or results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and our Board members and harm our business, financial condition or results of operations.
We have no plans to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not have any plans to pay cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
None.
ITEM 2. PROPERTIES
We lease approximately 185,000 square feet in San Francisco where we currently operate our headquarters, which has been closed since March 2020 due to the COVID-19 pandemic (for more information on the impairment loss recognized in the third quarter of 2021 related to this office building, see Note 5 – “Property and Equipment, Net” and Note 6 – “Leases” in the notes to the consolidated financial statements included herein). Our headquarters accommodates our principal executive, development, engineering, marketing, business development, human resources, finance, legal, information technology and administrative activities.
We lease additional domestic office space in California, Illinois, New York, Oregon, and Texas. We lease offices for our foreign operations in Canada, China, Finland, India, Ireland, Netherlands, Spain, Turkey and the United Kingdom. These additional domestic and international facilities total approximately 388,000 square feet, excluding properties for which we cannot reliably estimate square footage. The excluded properties include shared corporate office spaces whereby rent is determined based on the number of individuals utilizing the space over a specified period of time.
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We believe that our existing facilities are sufficient for our current needs. We believe that suitable additional or substitute space will be available as needed to accommodate changes in our operations.
ITEM 3. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see the section titled “Legal Matters’ included in Note 15 —“Commitments and Contingencies” in the notes to the consolidated financial statements, which is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A common stock has been listed on the NASDAQ Global Select Market under the symbol “ZNGA” since December 16, 2011. Prior to that time, there was no public market for our stock. In May 2018, all of our outstanding shares of Class B and Class C common stock were converted into shares of Class A common stock on a one-for-one basis.
Holders of Record
Many of our shares of Class A common stock are held by brokers and other institutions on behalf of our stockholders and accordingly, we are unable to estimate the total number of stockholders represented by these record holders. Excluding such brokers and institutions, as of December 31, 2021, there were approximately 597 stockholders of record of our Class A common stock and the closing price of our Class A common stock was $6.40 per share as reported on the NASDAQ Global Select Market.
Dividend Policy
We have never declared or paid any cash dividend on our Class A common stock. We intend to retain any future earnings and do not expect to pay dividends in the foreseeable future.
Issuer Purchases of Equity Securities
In April 2018, we authorized the 2018 Share Repurchase Program for up to $200.0 million of our outstanding Class A common stock. During 2021, no share repurchases were made and as of December 31, 2021, we had $173.8 million remaining under the 2018 Share Repurchase Program. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022.
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Stock Performance Graph
The following graph compares the cumulative total stockholder return for our Class A common stock, the Standard and Poor’s 500 Stock Index (the “S&P 500 Index”) and the NASDAQ Composite Index. The graph assumes that $100 was invested on December 31, 2016 in our Class A common stock, the S&P 500 Index and the NASDAQ Composite Index and tracks share price performance through the last trading day of each fiscal year-end through December 31, 2021. As we have not paid any dividends, our cumulative total return calculation is based solely upon stock price appreciation and not upon reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
The information furnished under the heading “Stock Performance Graph”, including the performance graph, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended or the Exchange Act, except as expressly set forth by specific reference in such a filing.
ITEM 6. [Reserved]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof.
2021 Highlights
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| Record Revenue and Bookings Performance. We delivered our best totalannual revenue and bookings performanceperformances in Zynga history, with total revenue and bookingshistory.Revenue of $2.8 billion, up 42% year-over-year. Bookings of $2.8 billion, up 24% year-over-year.✓ Record annual average mobile daily active users (DAUs) and 24% year-over-year, respectively. |
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| Record Mobile DAUs and Mobile MAUs. Our highest ever average Mobile DAUs and MAUs, with average mobile monthly active users (MAUs).Mobile DAUs of 39 million, up 41% year-over-year, and averageyear-over-year. Mobile MAUs of 184 million, up 107% year-over-year.
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Net loss of $104 million was $325 million better year-over-year and Adjusted EBITDA of $641 million increased by $374 million year-over-year. Generated strong operating cash flow | •
| In April 2021, we launched and in November 2021, we launchedworldwide on mobile platforms.
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| Acquisitions. On March 2, 2021, we acquired Echtra Games, adding a development teamtalented developers with extensive cross-platform play experience as well as proprietary cross-platform development tools and technologies. Later, onOn August 2,4, 2021, we acquired Chartboost, adding a unified advertising platform that includes a DSP as well as SSP and mediation capabilities which providescapabilities. Together, Zynga and Chartboost possess all of the elements of a complete, next generation platform: high-quality content, direct player relationships, massive reach and full-stack advertising platform. Finally, ontechnology that can be applied across Zynga’s game portfolio and Chartboost’s advertising partners. On October 5, 2021, we acquired , the hit Golf Rival franchise,fast-growing and second largest mobile golf game in the
| | BecameCertified as a Great Place to Work Established newscholarship partnerships and campus engagement with HBCUs The first class of Zynga’s rotational development program included 58% minority talent, of which included92% were converted into full time employees. Included in the2022 Bloomberg Gender Equality Index assessment by a 3rd party legal firm and for the 5th year in a row in U.S. Demonstrated DEI leadership by leveraging Zynga games to celebrate inclusion. Launchedwithgame, as well as integrations on 7 other Zynga Game Titles. 70% of Zynga Employees are members of at least one ERG, up |
| | | | | | | | Financial Performance in 2021 * | | Growth & Expansion in 2021 | | | | | world, and the development team at StarLark, adding a talented development team and establishedestablishing Zynga’s developer presence in China.China, a country with top tier technical and creative talent. | | from 30% in 2020. ERGs hosted 100+all-virtual global events in 2021; 200% increase from 2020. |
COVID-19 Update
* Financial Information and Non-GAAP Financial Measures and Other Information To supplement our Consolidated Financial Statements, which are prepared and presented in accordance with GAAP, we use certainnon-GAAP financial measures, including bookings and adjusted EBITDA. For more information about how we define and calculate thesenon-GAAP financial measures and a discussion about their use and limitations please see page 4 in our Quarterly Earnings Letter on Form8-K filed on February 9, 2022 in the section titled“Non-GAAP Financial Measures”. Management usesnon-GAAP financial measures internally in analyzing our financial results to assess operational performance and liquidity. Ournon-GAAP financial measures may be different fromnon-GAAP financial measures used by other companies. The presentation of ournon-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, our GAAP financial statements. We continuebelieve that both management and investors benefit from referring to remain focused on monitoringournon-GAAP financial measures in assessing our performance and assessingwhen planning, forecasting and analyzing future periods. We believe ournon-GAAP financial measures are useful to investors because they allow for greater transparency with respect to key financial measures we use in making operating decisions and because our investors and analysts use them to help assess the COVID-19 pandemic including prioritizinghealth of our business. We have provided reconciliations of ournon-GAAP financial measures used to the most directly comparable GAAP financial measures in the following tables. Because of the limitations of ournon-GAAP financial measures discussed in our Quarterly Earnings Letter, you should consider thenon-GAAP financial measures presented below with our GAAP financial statements. | | | | | | | | | Reconciliation of Revenue to Bookings | | | | | | | | | | | | | | | | | | | | $ | 2,800.5 | | | $ | 1,974.8 | | Change in deferred revenue | | | 15.3 | | | | 295.1 | | Other bookings adjustments | | | 10.0 | | | | — | | | | | | | | | | | | | | $ | 2,825.8 | | | $ | 2,269.9 | |
| | | | | | | | | Reconciliation of Net Income (Loss) to Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | $ | (104.2 | ) | | $ | (429.4 | ) | Provision for income taxes | | | 96.0 | | | | 24.0 | | Other (income) expense, net | | | 11.2 | | | | 16.5 | | | | | (6.4 | ) | | | (11.6 | ) | | | | 59.2 | | | | 30.3 | | Depreciation and amortization | | | 237.9 | | | | 142.1 | | Acquisition-related transaction expenses | | | 25.2 | | | | 12.5 | | Contingent consideration fair value adjustment | | | 80.0 | | | | 359.2 | | Expenses incurred from vacated lease (1) | | | 74.4 | | | | — | | Stock-based compensation expense | | | 167.2 | | | | 122.6 | | | | | | | | | | | | | | $ | 640.5 | | | $ | 266.2 | |
| (1) | Amount includes $66.8 million non-cash impairment charge related to our San Francisco office building and related leasehold improvements, property and equipment incurred in August 2021, as well as subsequent rent and other expenses (including depreciation) associated with the office building |
Our named executive officers for 2021 are: Frank Gibeau, Chief Executive Officer (CEO) James Gerard Griffin, Chief Financial Officer (CFO) Bernard Kim, President of Publishing Phuong Y. Phillips, Chief Legal Officer and Secretary (CLO)
Jeff Ryan, Chief People Officer (CPO) Matthew S. Bromberg, former Chief Operating Officer (COO) Mr. Bromberg served as our COO for a portion of 2021, and as such, is included as a named executive officer for 2021 per Securities and Exchange Commission (“SEC”) rules. Biographies for our named executive officers are set forth under the heading “Executive Officers.” Executive Compensation Philosophy, Objectives, and Design We believe that the most effective executive compensation program is one that is designed to: (i) reward the achievement of specific long-term and strategic goals, (ii) provide recognition for achievement of near-term objectives, and (iii) promote the closer alignment of executive officers’ interests with those of our stockholders. Zynga’s executive compensation program is heavily weighted towards equity, using restricted stock units (RSUs) and performance stock units (PSUs) that require both the achievement ofpre-established performance goals and continued service in order to vest. We believe that the use of long-term equity compensation aligns the interests of executive officers with the long-term interests of our employeesstockholders and players. As it relatesfocuses our executive officers on our strategic and financial goals. We also utilize short-term cash incentive bonuses to motivate execution of near-term objectives. We have acompensation philosophy, and each individual executive’s compensation is adjusted based on achievement of business objectives. We expect our executives to aggressively pursue our business objectives while also maintaining policies and practices designed to discourage excessive risk-taking behavior that may negatively impact stockholders. The Company competes for its executive and senior talent within the high growth gaming, interactive entertainment, and technology sectors, globally. The market is particularly competitive for executives with specific game industry expertise in San Francisco, Silicon Valley and throughout the world. This has been especially true over the past year. We review our executive compensation philosophy, objectives, and design at least annually, and intend to continue to adjust our approach as necessary and appropriate to assist in achieving our near-term and longer-term business objectives. Below is a summary of our key compensation governance practices. | | | | | | | | | | | | | | | | Provide a compensation mix heavily weighted towards equity to align our executives with stockholder interests | | | | | | No pension plans or executive-only benefit/retirement plans | | | Grant a substantial portion of executive equity awards with performance-based targets and vesting requirements | | | | | | No pledging or hedging of our securities (including engaging in derivative securities) | | | Maintain mandatory stock ownership guidelines for executive officers | | | | | | No excise taxgross-ups upon a change in control | | | Hold annual advisory votes on executive compensation | | | | | | No guaranteed base salary increases | | | Regularly review our executive compensation and peer group data | | | | | | No incentivizing excessive risk-taking at the expense of stockholders | | | Maintain a compensation recovery (clawback) policy in the event of a financial restatement | | | | | | | | | Use an independent compensation consultant | | | | | | | | | Maintain “double-trigger” change in control severance plans for executive officers, other than the CEO | | | | | | | | | Review the individual performance of each member of the Executive Management Team | | | | | | | | | Conduct an annual global pay equity review and remediate any gaps at the conclusion of the review | | | | | | | | | Conduct full talent and succession reviews for Compensation Committee and Board | | | | | | |
Compensation Setting Process Role of Compensation Committee to our employees,named executive officers, and provides direction to and works closely with our executive officers to enable management to implement the Compensation Committee’s decisions and align those decisions with the overall strategy. As part of risk management, the Compensation Committee evaluates Zynga’s compensation programs to strike the appropriate balance of risk and reward without encouraging excessive or inappropriate risks that would have an adverse impact on stockholders or the pursuit of short-term goals which may not serve our longer-term interests. During its discussions, the Compensation Committee included our Chief Executive Officer and Chief People Officer in mid-March 2020,meetings, and also regularly met in executive session without the Chief Executive Officer or other management present to prevent compromising its independence. The full Board reviews the performance of our global workforce transitionedCEO, and after considering the recommendations of the Compensation Committee, approves the compensation for the CEO.In determining the compensation of our named executive officers, the Compensation Committee considers various factors, including: Zynga’s performance and individual performance; Zynga’s board-approved operating plan, and the degree of difficulty in achieving the plan targets; Market data on compensation at peer companies, comparable companies and other companies we compete with for qualified talent; An individual’s current and future responsibilities, and that person’s potential impact on Zynga’s culture and performance; Our ability to remote workingcontinue to motivate and retain each executive officer; The dynamic nature of our industry and pace of change at Zynga; Negotiations with executive officers, particularly with respect to initial compensation packages; Recommendations of our Chief Executive Officer and Chief People Officer, except with respect to their own compensation; The executive officer’s existing equity awards and stock holdings; and Compensation levels of Zynga executives with similar responsibilities. Role of Compensation Consultants as we closedcompensation consultants, to assist it in carrying out its responsibilities. FW Cook, a well-known and respected compensation consulting firm that provides executive compensation advisory services to compensation committees and senior management, continued to serve as the Compensation Committee’s independent compensation consultant in 2021. FW Cook reviewed Compensation Committee materials, attended Compensation Committee meetings, reviewed Zynga’s peer group and competitive positioning of individual executives versus market, assisted the Compensation Committee as compensation issues arose, and provided recommendations on certain specific aspects of our offices,compensation programs. The Compensation Committee assessed the independence of FW Cook pursuant to, and based on the factors set forth in, the SEC’s and Nasdaq’s rules and determined that no conflicts of interests existed. FW Cook is engaged by the Compensation Committee and does not provide other services for Zynga and will not do so without any material disruptionthe consent of the Compensation Committee.. In making decisions about our executive compensation program, the Compensation Committee seeks the input of our Chief Executive Officer and Chief People Officer regarding the salaries, target bonuses and the equity to be granted to our day-to-day operations. other executive officers. The Chief Executive Officer provides periodic reviews of the performance of each of our executive officers (other than himself) to assist the Compensation Committee in its determination of compensation for such executives. No executive officer participates directly in the final deliberations or determinations regarding his or her own compensation package and the approval of the compensation for our Chief Executive Officer always is made without him present and by the full Board. We have engaged D.F. King as our proxy solicitor and advisor since 2020 to aid our shareholder engagement efforts and help make our directors and management accessible to our shareholders. From April to May 2021, ahead of the 2021 Annual Meeting of Stockholders, we sought meetings with many of our stockholders to discuss our executive compensation program and our use ofone-time equity awards granted in 2020 (“2020 Long-Term Awards”). In particular, we sought to convey our 2020 Long-Term Awards, which have a longer5-year vesting period, were intended to incentivize long-term stockholder value creation and promote retention of executive team through the next phase of the Company’s growth. Our global offices largely continuestockholder outreach covered more than 50% of our outstanding shares, based on publicly available ownership data as of December 31, 2020, and we successfully arranged meetings with 10 of our stockholders, including our 4 largest stockholders. In our outreach, we were pleased to remain closed,hear the majority of our stockholders expressed support toward the leadership of our executive team and the value creation they have achieved. We also received a range of responses regarding our executive compensation program. Several investors expressed support for our compensation policies, programs, and practices, and other investors expressed some concerns about aone-time multi-year equity program as well as some suggestions for the structuring and metrics of performance-based awards.
. At the 2021 Annual Meeting of Stockholders, we found that, in a break with past practice, a majority of stockholders who voted cast votes against the proposal, which received a 47% vote for thevote (well below our historically strong support of 92%, the average of results from 2017 to 2020). Our Compensation Committee and management met multiple times throughout 2021 and 2022 to review our executive compensation program and consider potential modifications consistent with the feedback we received from our stockholders during the 2021cycle. Throughout the annual review process, the Compensation Committee met regularly from November 2021 and consulted with its independent compensation consultant, FW Cook, on peer practices and approaches to our compensation program that would respond meaningfully to feedback from our stockholders and proxy advisers, while aligning with our global studios predominately operating remotely while we continue to assess the impact of the COVID-19 pandemic on the healthbusiness plan and safety of our employees.As it relates to our user base, towards the end of the second quarter of 2021, we observed a decline in players from cohorts that began playing certain of our games during the pandemic, as communities started to reopen and reduce their COVID-19 restrictions. Moving forward, we continue to believe the effects of the COVID-19 pandemic on society and player behavior are highly uncertain.
While we believe that we have been able to observe certain trends, we may not be able to determine the quantifiable impact specifically attributable to the COVID-19 pandemic on our results of operations and financial performance for the year ended December 31, 2021 and for future periods. See further discussion below in “Results of Operations” and Part I, Item 1A. “Risk Factors” included in this Annual Report on Form 10-K of the possible impact of the COVID-19 pandemic on our business.
Overview
We are a global leader in interactive entertainment with approximately 184 million average Mobile MAUs during 2021. We develop, market and operate social games as live services played on mobile platforms (such as Apple’s iOS and Google’s Android), social networking platforms (such as Facebook and Snapchat), Personal Computers (“PCs”), consoles (such as Nintendo Switch) and other platforms. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items (“online game revenue”) and advertising services (“advertising revenue”).compensation philosophy. We also operate a mobile programmatic advertisingworked with other external advisers to counsel management and monetization platform.
We are a pioneerthe Compensation Committee on disclosure, tax and innovator of social games and a leader in making “play” a core activity primarilyaccounting issues.
This process was well underway when on mobile devices and social networking sites. Our objective is to become the worldwide leader in play by connecting the world through games.Consistent with our free-to-play business model, a small portion of our players have historically been payers. For example, during 2021, our average Mobile MUPs represented approximately 3.8% of our average Mobile MUUs – for more information about the uses, estimates and limitations of these and other operating metrics, please see “Key Operating Metrics” below. Because the opportunity for social interactions increases as the number of players increases, we believe that maintaining and growing our overall number of players, including the number of players who may not purchase virtual items, is important to the success of our business. As a result, we believe that the number of players who choose to purchase virtual items will continue to constitute a small portion of our overall players.
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Our top three online game revenue-generating games historically have contributed to a significant portion of our revenue, though the games that represent our top three online game revenue-generating games vary over time. Our top three online game revenue-generating games accounted for 47%, 49% and 48% of our online game revenue in 2021, 2020 and 2019, respectively. In 2021, our top three online game revenue-generating games were Empires & Puzzles, Toon Blast and Merge Dragons!. With respect to advertising and other revenue, our hyper-casual games and Words With Friends games accounted for 79% and 69% of our collective advertising and other revenue in 2021 and 2020, respectively, while our Words With Friends games generated a substantial portion of our advertising and other revenue in 2019.
Proposed Merger with Take-Two
On January 9, 2022, the CompanyZynga entered into an Agreement and Plan of Merger with
Take-Two Interactive Software, Inc. and certain affiliated entities (the“Take-Two Merger Agreement”). After significant deliberation and taking into consideration multiple factors including stockholder feedback from the 2021cycle, the pay practices of our peer companies, competition for executive officers, and theTake-Two Merger Agreement with Take-Two, pursuantand pending acquisition, our Compensation Committee and Board determined it was appropriate to which,continue our existing executive compensation program. This resulted in awarding a similar mix and subject to the satisfaction or waiverdesign of the conditions set forth therein, Zynga would become a wholly-owned subsidiary of Take-Two. The closing of the Combination is subject to certain customary closing conditions, including the approval of both parties' stockholders and required regulatory approvals.For more information, see Note 16 – “Subsequent Events” in the notes to the consolidated financial statements included herein.
Acquisition of StarLark and Lvy Technology Limited (“Lvy”)
On October 5, 2021 (the “StarLark Closing Date”), the Company acquired Lvy, StarLark, the Golf Rival mobile game franchise – in which players compete in real-time player-versus-player golf matches – and related other games and certain other specified assets and liabilities in a series of related closings, in exchange for consideration of $276.0 million in cash, $40.0 million of cash that was deposited into an escrow account for a period of 15 months as security for certain indemnification obligations of the sellers and the issuance of 20,009,528 shares of Class A common stock of Zynga, valued at $145.7 million on the StarLark Closing Date.
On the StarLark Closing Date, the Company acquired Lvy and StarLark, with StarLark becoming a direct, wholly-owned subsidiary of Lvy and Lvy becoming a direct, wholly-owned subsidiary of Zynga.
As discussed below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Factors Affecting Our Performance” and “Critical Accounting Policies and Estimates—Revenue Recognition”, mobile online game revenue is recognized ratably over the estimated average playing period of payers while the associated platform fees and player acquisition costs are expensed as incurred. Accordingly, online game bookings from Golf Rival are initially deferred and recognized into revenue ratably over the estimated average playing period of payers – which contributedequity awards to our increaseexecutive officers in deferred revenue during2022 as we awarded under the fourth quarter2021 program. Individual awards reflected a rigorous review of 2021.
Acquisition of Chartboost
On August 4, 2021,performance (both company and personal objectives and key results), roles and responsibilities and competitive dynamics.
In addition in 2022, we acquired 100% of all issued and outstanding share capital of Chartboost, for total consideration of $234.6 million. The total purchase consideration included $204.9 millioncontinued to expand participation in cash, $25.0 million of cash that was deposited into an escrow account for a period of 15 months as security for certain indemnification obligations of the former Chartboost securityholders and Zynga’s replacement of unvested Chartboost stock options allowing the holders to purchase up to 1,012,388 shares of Zynga’s Class A common stock, of which $2.2 million of the total acquisition date fair value was allocated to the purchase consideration. Additionally, the total purchase consideration includes $2.5 million of deferred cash consideration. Chartboost is a mobile programmatic advertising and monetization platform, which includes a demand side platform, supply side platform and mediation capabilities. The Company expects the acquisition to meaningfully enhance its user acquisition and advertising capabilities.
Advertising Monetization and User Acquisition
In April 2021, Apple released a version update of iOS 14.5 that requires its users (and presumably users of future iOS versions), on an app-by-app basis, to explicitly opt-in to the use of identifier-for-advertising, a device identifier assignedour performance-based compensation programs by Apple to each of its devices and used by advertisers to attribute app installs to advertising campaigns, target users through user acquisition and deliver targeted ads. While we believe that we have been able to observe certain trends, including a meaningful increase in the adoption of iOS 14.5 by users, we may not be able to determine the quantifiable impact specifically attributable to the Apple version update on our results of operations and financial performance for the year ended December 31, 2021 and for future periods.
How We Generate Revenue
We operate our social games as live services that allow players to play for free. We generate revenue primarily from the sale of in-game virtual items and advertising services, which includes our mobile programmatic advertising and monetization platform. Revenue growth will continue to depend largely on our ability to attract and retain players and more effectively monetize our
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player base through the sale of in-game virtual items and advertising. We intend to do this through the launch of new games, enhancements to current games and expansion into new markets and distribution platforms.
Online game. We provide our players with the opportunity to purchase virtual items that enhance their game-playing experience. We believe players choose to pay for virtual items for the same reasons they are willing to pay for other forms of entertainment – they enjoy the additional playing time or added convenience, the ability to personalize their own game boards, the satisfaction of leveling up and the opportunity for sharing creative expressions. We believe players are more likely to purchase virtual items when they are connected to and playing with their family and friends, whether those individuals play for free or also purchase virtual items.
In 2021, our business continued generating a significant percentage of revenue and bookings through mobile platforms. In 2021, we estimate that 50% and 46%members of our revenue and 50% and 45% of our bookings were generated on Apple and Google platforms, respectively, while in 2020, we estimate that 49% and 46% of our revenue and 50% and 46% of our bookings were generated on Apple and Google platforms, respectively.senior leadership team. This information is estimated because certain payment methods we accept and certain advertising networks do not allow us to determine the platform used.
Advertising and other. Advertising revenue in our games primarily includes display advertisements, engagement advertisements and offers and branded virtual items and sponsorships. Advertising revenue also includes the net fees collected from our demand, supply and mediation advertising platforms. Other revenue primarily consists of royalties received from the licensing of our brands.
Key Metrics
We regularly review a number of metrics, including the following keyprogram uses financial and operating metrics to align pay with our OKR (objective and key result) reviews.
Furthermore, for the CEO the Board increased the PSU weighting to 63% of target equity grant value, and included additional key financial metrics related to Zynga’s 2022 total Company financial performance as well operating cash flow. In 2022 base salaries and target bonus opportunities for our Named Executive Officers were not changed from 2021. Use of Market Compensation Data As part of our Compensation Committee’s periodic review of our compensation peer group, in December 2020, our Compensation Committee, with assistance from FW Cook, approved an updated peer group to be used for 2021 compensation decisions focusing on other similarly sized consumer-facing tech businesses in the San Francisco Bay Area (and other similar competitive geographies). At the time the peer group was approved, Zynga ranked slightly below the 75th percentile of the peer group by revenue and slightly below the median of the peer group by market cap. | | | | | 2021 Compensation Peer Group | | | | | Take-Two Interactive Software, Inc. | | | | | | | | | | | | | | | | | | | | |
The following companies were removed from our peer group due to being acquired, low market cap, or business fit: GrubHub, LogMeIn, Groupon, DocuSign, Twilio, and Zendesk. The following companies were added to our peer group based on growth, location, and consumer-focus: IAC, Scientific Games, TripAdvisor, and Unity Software. We use our compensation peer group to assess the competitiveness of our executive compensation program and monitor evolving trends and practices in executive compensation programs. The Compensation Committee and FW Cook also reviewed Zynga’s overall compensation strategy compared to peers and within the increasingly competitive geography and industries within which we operate.
The table below shows how Zynga compares to the peer group used in 2021: | | | | | | | | | | | | Revenue — Latest
Disclosed Four
Quarters as of
12/31/2020 (1) | | | | | | | $ | 2,869 | | | $ | 40,214 | | | | $ | 1,387 | | | $ | 16,159 | | | | $ | 755 | | | $ | 3,872 | | | | $ | 1,975 | | | $ | 10,650 | |
Executive Compensation Program Our executive officer compensation packages for 2021 included three principal components (collectively referred to as “total direct compensation”): | | | 2021 Compensation Component | | | | | Compensate for job responsibilities, experience and performance. | 2. Performance-Based Annual Cash Bonuses | | Motivate our executive officers to achieve our short-term business and strategic goals. | 3. Equity Awards (PSUs and RSUs) | | Create alignment with stockholders and promote retention. |
Our executive compensation program is designed to align the interests of our executive officers with our shareholders and to support our business and financial strategy. We seek to provide market competitive compensation to enable Zynga to attract, motivate, and retain highly talented individuals, with deep industry and functional experience. Ourphilosophy links compensation with achievement of performance goals and long-term stockholder value. Our goal is for our compensation decisions to focus and reward our executives for increasing stockholder value through their management of our business consistent with short- and long-term operational and strategic goals. As Zynga has grown and our performance has improved, we have faced increased competition for our highly-qualified executives, which is further intensified by the unique characteristics of the gaming industry. Each year our Compensation Committee conducts a compensation review to help us understand and adapt to a competitive landscape for executive talent, to provide appropriate incentives designed to motivate and retain our management team, and to link our compensation with Company performance. During 2021, we continued to provide the majority of our CEO’s and other executives’ compensation in the form of equity compensation. We use equity awards to drive performance, support long-term retention, and to instill an ownership mentality across the team. This approach has historically received strong support from stockholders. Reductions to the annual equity grants were made in 2021 for those Executives who received the 2020 Long-Term Award (discussed in detail in last year’s proxy statement). The key features of our 2021 executive compensation program are summarized in the following table: | | | | | | | | | | | | | | | | Annual Total Direct Compensation Program | | | | | | | | | | | Provide a fixed portion of annual income to attract and retain skilled executives | | | | | 80% based on Adjusted EBITDA 20% based on Annual Bookings | | Drive achievement of annual business plan Link compensation to key drivers of shareholder value | | | | | 50% of annual award grant value (1) Earned based on 2021 operating cash flow performance | | Link compensation to stockholder value Encourage achievement of key annual financial objectives that link to long-term growth Complimentary to metrics in the annual cash bonus plan | | | | | 50% of annual award grant value(1) | | Link compensation to stockholder value Support retention and balance against excessive risk-taking |
| (1) | Percentage is an approximation based on the Compensation Committee’s target grant date value for each award, which target grant date values differ slightly from the accounting values shown in the Summary Compensation Table. For RSUs and annual PSUs, the number of stock units subject to each award was determined by dividing the Compensation Committee’s target grant date value by the30-day average closing price as of the grant date. |
2021 Named Executive Officer Pay Mix Charts(1) | (1) | Equity award values represent target amounts approved by the Compensation Committee and differ from the grant date fair value based on the Company’s methodology for converting into a number of RSUs and PSUs. Awards were converted from target value into a number of shares using the30-day average closing price as of the grant date. |
. We provide base salary as a fixed source of compensation for our executive officers, allowing them a degree of certainty with respect to their annual compensation. The Compensation Committee recognizes the importance of base salaries as an element of compensation that helps to attract and retain highly qualified executive talent. Base salaries for our named executive officers were established in their hiring offer letter, and have been subject to annual review of responsibilities and performance by the Compensation Committee (taking into consideration, among other factors, the recommendations of our Chief Executive Officer and Chief People Officer, except with respect to their own compensation). The base salaries for 2021 for our named executive officers are set forth in the table below. In March 2021, after evaluation of our executive officers’ performance, the competitiveness of their overall compensation arrangement relative to our compensation peer group, and the general recommendations of FW Cook, the Compensation Committee increased base salaries paid to Messrs. Griffin, Bromberg and Kim from $500,000 to $550,000, Ms. Phillips from $440,000 to $485,000, and Mr. Ryan from $400,000 to $440,000. The Compensation Committee did not make any changes to the 2021 base salary paid to Mr. Gibeau. | | | | | | | | | | | | | $ | 1,000,000 | | | | $ | 550,000 | | | | $ | 550,000 | | | | $ | 485,000 | | | | $ | 440,000 | | | | $ | 550,000 | |
Performance-Based Annual Cash Bonuses
Target Bonus Opportunity. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 150 | % | | $ | 1,500,000 | | | $ | 1,483,500 | | | | | 100 | % | | $ | 550,000 | | | $ | 543,950 | | | | | 100 | % | | $ | 550,000 | | | $ | 543,950 | | | | | 75 | % | | $ | 363,750 | | | $ | 359,749 | | | | | 75 | % | | $ | 330,000 | | | $ | 326,370 | | | | | 100 | % | | $ | 550,000 | | | $ | 543,950 | |
| (1) | Expressed as a percentage of such named executive officer’s base salary. |
All of our named executive officers were eligible for a performance-based annual cash bonus in 2021. After reviewing the individual’s current compensation, market data on comparative positions and our performance, the Compensation Committee decided to not make any changes to the 2021 target bonus percentages for Messrs. Griffin, Bromberg, Kim and Ryan and Ms. Phillips. The annual bonus target percentage for Mr. Gibeau was increased from 125% to 150% based on several factors, including comparisons to Zynga’s peer group and other market data, the lack of any increase to Mr. Gibeau’s base salary since his joining in 2016, and the general recommendations of FW Cook. Bonus Pool Funding and Performance Measure | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA (internal) | | | | | Actual 2021 Financial Performance | | $ | 2,780 million | | | $ | 706 million | | | | 98.9 | % | | | | | Target 2021 Financial Performance | | $ | 2,875 million | | | $ | 711 million | | | | — | | | For Reference: 2020 Actual Financial Performance | | $ | 1,910 million | | | $ | 514 million | | | | | |
Cash bonuses for 2021 were tied to performance against predetermined financial targets, consistent with ourcompensation philosophy. For purposes of funding the incentive plan, our Compensation Committee established a “bonus pool” to be funded on the basis of our actual level of achievement of (i) bookings (20% weighting) and (ii) an internal metric referred to herein as “adjusted EBITDA (internal)” (80% weighting), and set the minimum threshold for funding the “bonus pool” at 80% of target amounts. For 2021, both the target and actual amounts achieved represented higher levels than target and actual performance for 2020. For purposes of funding the bonus pool, both “bookings” and “adjusted EBITDA (internal)”, an unreported,non-GAAP financial measure, were selected as key measures we use to understand and evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.Key Financial Metrics
Revenue and Bookings.operational performance. Bookings isrepresents anon-GAAP financial measure that is equal to revenue recognized, plus or minusexcluding the changeimpact of changes in deferred revenue during the period and other adjustments. We record the sale of virtual items (i.e. online game bookings) as deferred revenue and then recognize those bookings ratably over the estimated average playing period of payers or as the virtual items are consumed. Advertising sales consisting of certain branded virtual items and sponsorships are also initially recorded to deferred revenue and then these advertising bookings are recognized ratably over the estimated life of the branded virtual item, similar to online game revenue, or over the term of the advertising arrangement, depending on the nature of the agreement. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long-term, the factors impacting our revenue and bookings are generally the same. However, in the short term, there are various factors that may cause revenue to exceed or be less than bookings in any period.
We use revenue and bookings as one measure to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that bookings are useful in evaluating“Adjusted EBITDA (internal)” is determined on a similar basis as our business, this information should be considered as supplemental in naturepublicly reported adjusted EBITDA, and is further adjusted by excluding the impact of changes in deferred revenue in the period presented and before bonus expense. For funding of our 2021 bonus pool, if the threshold goals were not intendedachieved, the participants were not eligible to be consideredearn any performance-based annual cash bonus compensation. In 2021, we achieved bookings of $2,780 million and $706 million of “adjusted EBITDA (internal)”, in isolationeach case, prior to funding the bonus pool and excluding our 2021 acquisitions of as a substitute for, or as superior to, revenue recognizedChartboost, Echtra and StarLark, which resulted in accordancean overall funding level of 98.9%. In early 2022, after consultation with U.S. GAAP. In addition, other companies,our Chief Executive Officer, who provided extensive input on each executive officer’s individual performance during 2021, including companies in our industry, may calculate bookings differently or nottheir achievement of objectives and key results, established at all, which reduces its usefulness as a comparative measure. The following table presents a reconciliation of total revenue to total bookings for eachthe beginning of the periods presented (in millions):
year, the Compensation Committee determined that the actual bonus amounts for our named executive officers should match the overall plan achievement level, and each named executive officer earned an award consistent with our company-wide financial performance of 98.9% of target. | | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Reconciliation of Revenue to Bookings: | | | | | | | | | | | | | Revenue | | $ | 2,800.5 | | | $ | 1,974.8 | | | $ | 1,321.7 | | Change in deferred revenue | | | 15.3 | | | | 295.1 | | | | 242.4 | | Other adjustments(1) | | | 10.0 | | | | — | | | | — | | Bookings | | $ | 2,825.8 | | | $ | 2,269.9 | | | $ | 1,564.1 | |
| (1)
| The other adjustments relate to certain cash receipts during the year ended December 31, 2021, with an equal obligation reflected in other non-current liabilities in our consolidated balance sheet as of December 31, 2021.
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The following table presentsIn November 2021, Mr. Bromberg resigned as our Chief Operating Officer and entered into a reconciliationTransition Agreement and Release (the “Bromberg Transition Agreement”) which provided that Mr. Bromberg would continue as an employee of mobile revenueZynga through March 2022 while his duties were transferred. In approving the Bromberg Transition Agreement, the Committee considered that Mr. Bromberg would assist the Company with an orderly transition of his duties. Pursuant to mobile bookings for eachthe Bromberg Transition Agreement, and in light of Mr. Bromberg’s ongoing performance of the periods presented (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Reconciliation of Mobile Revenue to Mobile Bookings: | | | | | | | | | | | | | Mobile revenue | | $ | 2,719.0 | | | $ | 1,899.1 | | | $ | 1,247.7 | | Change in mobile deferred revenue | | | 16.3 | | | | 296.4 | | | | 245.7 | | Mobile bookings | | $ | 2,735.3 | | | $ | 2,195.5 | | | $ | 1,493.4 | |
Limitationsduties expected of Bookings
Key limitationshim during this period, Mr. Bromberg received a bonus equal to 100% of bookings are:
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| bookings do not reflect that we defer and recognize online game revenue and revenue from certain advertising transactions over the estimated average playing period of payers, the average life of branded virtual items, the term of the advertising arrangement or as virtual items are consumed, and also include other adjustments; and
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| •
| other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces their usefulness as a comparative measure.
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Because of these limitations, you should consider bookings along with other financial performance measures, including revenue, net income (loss) and our other financial results presented in accordance with U.S. GAAP.
Key Operating Metrics
We manage our business by tracking several operating metrics: “Mobile DAUs,” which measure daily active usershis expected bonus based on the overall funding of our mobile games, “Mobile MAUs,” which measure monthly active users2021 bonus pool.
Table of our mobile games, “Mobile MUUs,” which measure monthly unique users of our mobile games, “Mobile MUPs,” which measure monthly unique payers in our mobile games, and “Mobile ABPU,” which measures our average daily mobile bookings per average Mobile DAUs, each of which is recorded and estimated by our internal analytics systems. We determine these operating metrics by using internal company data based on tracking of user account activity. We also use information provided by third parties, including third party network logins provided by platform providers, to help us track whether a player logged in under two or more different user accounts is the same individual. We believe that the amounts are reasonable estimates of our user base for the applicable period of measurement and that the methodologies we employ and update from time-to-time are reasonably based on our efforts to identify trends in player behavior; however, factors relating to user activity and systems and our ability to identify and detect attempts to replicate legitimate player activity may impact these numbers.Mobile DAUs. We define Mobile DAUs as the number of individuals who played one of our mobile games during a particular day. Under this metric, an individual who plays two different mobile games on the same day is counted as two Mobile DAUs. We use information provided by third parties to help us identify individuals who play the same mobile game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile DAUs. Average Mobile DAUs for a particular period is the average of the Mobile DAUs for each day during that period. We use Mobile DAUs as a measure of mobile audience engagement.
Mobile MAUs. We define Mobile MAUs as the number of individuals who played one of our mobile games in the 30-day period ending with the measurement date. Under this metric, an individual who plays two different mobile games in the same 30-day period is counted as two Mobile MAUs. We use information provided by third parties to help us identify individuals who play the same mobile game to reduce this duplication. However, because we do not always have the third party network login data to link an individual who has played under multiple user accounts, a player may be counted as multiple Mobile MAUs. Average Mobile MAUs for a particular period is the average of the Mobile MAUs at each month-end during that period. We use Mobile MAUs as a measure of total mobile game audience size.
Mobile MUUs. We define Mobile MUUs as the number of individuals who played one or more of our mobile games, which we were able to verify were played by the same individual in the 30-day period ending with the measurement date. An individual who plays more than one of our mobile games in a given 30-day period would be counted as a single Mobile MUU to the extent we can verify that the mobile games were played by the same individual. However, because we do not always have the third party network login data necessary to link an individual who has played under multiple user accounts in a given 30-day period, an individual may be counted as multiple Mobile MUUs. Because many of our players play more than one mobile game in a given 30-day period, Mobile MUUs are always equal to or lower than Mobile MAUs in any given time period. Average Mobile MUUs for a particular period is the average of the Mobile MUUs at each month end during that period. We use Mobile MUUs as a measure of total audience reach across our network of mobile games.
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Mobile MUPs. We define Mobile MUPs as the number of individuals who made a payment in a mobile game at least once during the applicable 30-day period through a payment method for which we can quantify the number of individuals. Mobile MUPs do not include individuals who use certain payment methods for which we cannot quantify the number of unique payers. However, because we do not always have the third party network login data necessary to link an individual who has paid under multiple user accounts in a 30-day period, a player who has paid using multiple user accounts may be counted as multiple Mobile MUPs. Mobile MUPs are presented as an average of the three months in the applicable quarter. We use Mobile MUPs as a measure of the number of individuals who made payments across our network of mobile games during a 30-day period.
Mobile ABPU. We define Mobile ABPU as our total mobile bookings in a given period, divided by the number of days in that period, divided by the average Mobile DAUs during the period. We believe that Mobile ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as management. We use Mobile ABPU as a measure of overall monetization across all of our mobile players through the sale of virtual items and advertising.
Our business model around our social games is designed so that, as more players play our games, social interactions increase and the more valuable our games and our business become. All engaged players of our games help drive our bookings, online game revenue and advertising revenue. Virtual items are purchased by players who are socializing with, competing against or collaborating with other players, most of whom do not buy virtual items. Accordingly, we primarily focus on the aforementioned key operating metrics, which we believe collectively best reflect key audience metrics.
Contents . Consistent with our focus on mobile gaming platforms, we report these audience-related metrics based only on mobile platforms. We have ceased including our web-based games in these audience metrics as a result of their decreasing significance as partcompensation objectives, equity is the primary component of our overall financial and operating results and the technical challenges resulting from increased volumes of apparent player activity that we are unableexecutive compensation program because it allows us to reliably validate and de-duplicate, as these web-based games are generally more susceptible than mobile platforms to attempts to replicate legitimate player activity.In order to provide our best estimates of actual player metrics, we continually evaluate our methodologies including estimating audience metrics by applying data science techniques to identify suspicious player behavior. While we devote significant time and effort to developing player metrics, our estimates may not accurately reflect the actual amount of players in a reported period and our methodologies do not consistently identify all invalid traffic in prior reporting periods.
The table below shows average Mobile DAUs, Mobile MAUs, Mobile MUUs, Mobile MUPs and Mobile ABPU for the three and twelve months ended December 31, 2021 and 2020:
| | Three Months Ended December 31, | | | Twelve Months Ended December 31, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | | (in millions, except Mobile ABPU) | | Average Mobile DAUs(1) | | | 37 | | | | 36 | | | | 39 | | | | 27 | | Average Mobile MAUs(1) | | | 184 | | | | 134 | | | | 184 | | | | 89 | | Average Mobile MUUs(2) | | | 35 | | | | 39 | | | | 35 | | | | 41 | | Average Mobile MUPs(2) | | | 1.3 | | | | 1.5 | | | | 1.3 | | | | 1.4 | | Mobile ABPU | | $ | 0.204 | | | $ | 0.205 | | | $ | 0.194 | | | $ | 0.220 | |
| (1)
| We do not have the third party network login data to link an individual who has played under multiple user accounts for our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games (prior to the third quarter of 2021), Puzzle Combat, Merge Magic! and games acquired from Gram Games, Small Giant, Peak and StarLark and accordingly, actual average Mobile DAU and Mobile MAU may be lower than reported due to the potential duplication of these individuals.
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| (2)
| Excluded from Mobile MUUs and Mobile MUPs are players of our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games (prior to the third quarter of 2021), Puzzle Combat, Merge Magic! and games acquired from Gram Games, Small Giant, Peak and StarLark. These games are excluded to avoid potential double counting as our systems are unable to distinguish whether a player of these games is also a player of our other games during the applicable time periods.
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Average Mobile DAUs were relatively flat in the three months ended December 31, 2021 when compared to the same period of the prior year, while average Mobile MAUs increased, primarily driven by contributions from Rollic's hyper-casual portfolio.
Average Mobile MUUs decreased in the three months ended December 31, 2021 compared to the same period of the prior year, primarily driven by a decline in average Mobile MAUs from Harry Potter™: Puzzles & Spells, our Words With Friends games and our older mobile games. Average Mobile MUPs decreased in the three months ended December 31, 2021 when compared to the same period of the prior year, primarily due to a decline in payers in Zynga Poker and Harry Potter™: Puzzles & Spells, while Mobile ABPU was relatively flat.
Other Metrics
Although our management primarily focuses on the operating metrics above, we also monitor periodic trends in paying players of our games. The table below shows average monthly unique mobile online game payer bookings, average Mobile MUPs and average monthly unique mobile online game payer bookings per average Mobile MUP for the three months ended December 31, 2021 and 2020:
| | Three Months Ended December 31, | | | Twelve Months Ended December 31, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Average monthly unique mobile online game payer bookings (in millions)(1) | | $ | 68 | | | $ | 70 | | | $ | 71 | | | $ | 62 | | Average Mobile MUPs (in millions)(2) | | | 1.3 | | | | 1.5 | | | | 1.3 | | | | 1.4 | | Average monthly unique mobile online game payer bookings per average Mobile MUP(3) | | $ | 52 | | | $ | 46 | | | $ | 53 | | | $ | 45 | |
| (1)
| Average monthly unique mobile online game payer bookings represent the monthly average amount of mobile online game bookings for the applicable quarter and year that we received through payment methods for which we can quantify the number of unique payers. Accordingly, mobile online game bookings from our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games (prior to the third quarter of 2021), Puzzle Combat, Merge Magic! and our games acquired from Gram Games, Small Giant, Peak and StarLark are excluded.
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| (2)
| Excluded from average Mobile MUPs are players of our hyper-casual games (which includes the games acquired from Rollic), our mobile messenger games (prior to the third quarter of 2021), Puzzle Combat, Merge Magic!, and games acquired from Gram Games, Small Giant, Peak and StarLark. These games are excluded to avoid potential double counting as our systems are unable to distinguish whether a player of these games is also a player of our other games during the applicable time periods.
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| (3)
| Average monthly unique mobile online game payer bookings per average Mobile MUP is calculated by dividing average monthly unique mobile online game payer bookings by average Mobile MUPs.
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Average monthly unique mobile online game payer bookings decreased in the three months ended December 31, 2021 compared to the same period of the prior year, primarily from a decline from CSR Racing 2 and Harry Potter™: Puzzles & Spells, partially offset by contribution from FarmVille 3, which launched in November 2021. Average monthly unique mobile online game payer bookings per average Mobile MUP increased due to a larger decrease in average Mobile MUPs relative to the decrease in average monthly unique mobile online game payer bookings.
Although we monitor our unique mobile payer metrics, we focus on monetization, including in-game advertising, of all of our players and not just those who are payers. Accordingly, we strive to enhance content and our players’ game experience to increase our bookings and Mobile ABPU, which is a measure of overall monetization across all of our players through the sale of virtual items and advertising. Future growth in audience and engagement will depend on our ability to retain current players, attract new players, launch new games, expand into new markets and distribution platforms, and the success of our network. Our operating metrics may not correlate directly to quarterly or annual revenue or bookings trends.
Factors Affecting Our Performance
Platform agreements. Our games are primarily distributed, marketed and promoted through third parties, primarily Apple’s App Store and the Google Play Store. Virtual items for our games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our revenue, bookings and players through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for mobile devices. Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms’ terms of service and other policies with respect to us or other developers in their sole discretion, and those changes may be unfavorable to us. These platform fees are recorded as costs of revenue as incurred, while we recognize the majority of mobile online game revenue over the average playing period of payers, which generally results in costs of revenue exceeding revenue early in the life of a new or acquired game. Further, as a result of the platform fees associated with online game bookings, our mobile online game revenue generally generates lower gross margins than our advertising and other revenue. Accordingly, the overall mix between online game revenue and advertising and other revenue may impact our gross margins.
Launch of new games and release of enhancements. Our revenue and bookings results have been driven by the launch of new games and the release of fresh content and new features in existing games. Our future success depends on our ability to innovate and
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provide fresh content to keep our existing players engaged, while also engaging new and lapsed players, and launch and monetize new titles on various platforms. Although the amount of revenue and bookings we generate from an enhancement to an existing game or launch of a new game or can vary significantly, we expect our revenue and bookings to be correlated to our success in releasing engaging content and features for our existing games and the success and timely launch of our new games. Further, revenue and bookings from many of our games may decline over time after reaching a peak of popularity and player usage. As a result of this decline in the revenue and bookings of our games, our business depends on our ability to consistently release fresh content for our existing games and launch new games that achieve significant popularity and have the potential to become franchise games.
Game monetization. We generate most of our revenue and bookings from the sale of virtual items in our games. The degree to which our players choose to pay for virtual items in our games is driven by our ability to create content and virtual items that enhance the game-play experience. Our revenue, bookings and overall financial performance are affected by the number of players and the effectiveness of our monetization of players through the sale of virtual items and advertising. The percentage of paying players may increase or decrease based on a number of factors, including growth in mobile games as a percentage of total game audience, localization of content in international markets and the availability of payment options.
Investment in game development. In order to develop new games and enhance the content and features in our existing games, we must continue to invest in a significant amount of engineering and creative resources. These expenditures generally occur in advance of the launch of a new game or the release of new content, and the resulting revenue may not equal or exceed our development costs, or the game or feature may be abandoned in its entirety. In addition, we recognize the majority of online game revenue over the average playing period of payers, which generally results in expenses exceeding revenue early in the life of a new or acquired game.
Player acquisition costs. We utilize advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation. Over time, these acquisition and retention-related programs may become either less effective or costlier, negatively impacting our operating results.
Licensed branding. In addition to player acquisition costs, we utilize licensed intellectual property to grow and retain our player audience. We incur licensing fees related to the use of intellectual property within our games, and our gross margins can be affected by the mix of player purchases from games in which we own the intellectual property as compared to games in which we license certain intellectual properties. For example, we use licensed intellectual property as creative assets in games such as Game of Thrones™ Slots Casino, Harry Potter: Puzzles & Spells, Hit It Rich! Slots, Wizard of Oz Slots and Wonka’s World of Candy, and we are developing new games using licensed intellectual property for Star Wars™. While overall bookings within these games will benefit our revenue, a shift in the mix of our revenue towards such games using licensed intellectual property could decrease our gross margins.
New market development. We are investing in new distribution channels, cross-platform play, advertising networks and international markets to expand our reach and grow our business. For example, we continue to expand our game publishing internationally, including the release of Harry Potter: Puzzles & Spells in Asia during 2020. Our ability to be successful will depend on our ability to develop a successful mobile network, obtain new players and retain existing players on new and existing social networks and attract advertisers.
As we expand into new markets and distribution channels, we expect to incur headcount, marketing and other operating costs in advance of the associated revenue and bookings. Our financial performance will be impacted by our investment in these initiatives and their success.
Hiring and retaining key personnel. Our ability to compete depends in large part on our ability to hire and retain key talent in our industry and matchpromotes closer alignment of our executives’ contributions with the long-term interests of Zynga and our stockholders. We believe that key talentequity-based compensation should be designed to serve as an effective recruitment and retention tool while also motivating our executive officers to work toward corporate objectives that provide a meaningful return to our current business needs. We are continually reviewingstockholders. Since 2018, our hiring, learningapproach has been to provide equity grants annually. This allows the Compensation Committee to annually consider performance, retention, the competitive landscape, and development and total rewards programs againstevolving compensation best practices withwhen determining the goalamount and form of buildingawards. The Compensation Committee also considers our executives’ then-current total direct compensation, the compensation paid to an executive’s peers within Zynga, and retaining world class teams.the compensation paid to executives in comparable positions at other companies within our peer group. For further discussion on2021, our human capital, refergrant program consisted of two different types of equity:
Performance-Based Restricted Stock Units to Part I, Item I “Business”.Resultsreceive one share of Operations
In this section, we discussClass A common stock for each unit granted if specific performance specified by the resultsCompensation Committee are achieved and the executive remains in continued service to Zynga. The PSUs granted in 2021 require the achievement of our operations2021 operating cash flow.
Time-Based Restricted Stock Units (RSUs). for each unit granted, subject to continued service. The value of the year ended December 31, 2021 comparedRSUs is tied to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please44
refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Revenue
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Online game: | | | | | | | | | | | | | | | | | | | | | Mobile | | $ | 2,175.8 | | | $ | 1,596.6 | | | $ | 981.2 | | | | 36 | % | | | 63 | % | Other(1) | | | 73.4 | | | | 70.6 | | | | 66.1 | | | | 4 | % | | | 7 | % | Online game total | | $ | 2,249.2 | | | $ | 1,667.2 | | | $ | 1,047.3 | | | | 35 | % | | | 59 | % | Advertising and other: | | | | | | | | | | | | | | | | | | | | | Mobile | | | 543.1 | | | | 302.5 | | | | 266.5 | | | | 80 | % | | | 14 | % | Other(1) | | | 8.2 | | | | 5.1 | | | | 7.9 | | | | 61 | % | | | (35 | )% | Advertising and other total | | $ | 551.3 | | | $ | 307.6 | | | $ | 274.4 | | | | 79 | % | | | 12 | % | Total revenue | | $ | 2,800.5 | | | $ | 1,974.8 | | | $ | 1,321.7 | | | | 42 | % | | | 49 | % |
| (1)
| Includes web revenue for online game and web advertising revenue and other revenue for advertising and other.
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2021 Compared to 2020. Total revenue increased $825.7 million in 2021 as compared to 2020 while bookings increased $555.9 million in 2021 as compared to 2020.
Mobile online game revenue and other online game revenue increased $579.2 million and $2.8 million, respectively, in 2021 compared to the prior year, resulting in a total online game revenue increase of $582.0 million.
The increase in mobile online game revenue was primarily attributable to increases in mobile revenue from Toon Blast and Toy Blast, in the amounts of $308.5 million and $163.3 million, respectively, due to higher amortization of prior period deferred revenue and overall increase in bookings, as the games were acquired in July 2020. The increase was also attributable Harry Potter™: Puzzles & Spells in the amount of $107.8 million due to higher amortization of prior period deferred revenue and overall increase in bookings, as the game launched in September 2020.
During 2021, we deferred $5.9 million of online game revenue due to changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated, which did not impact our reported earnings per share. During 2020, we recognized $2.0 million of online game revenue from games that have been discontinued as there is no further performance obligation and we recognized $1.6 million of online game revenue from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue. These changes had a cumulative $0.01 per share benefit to our reported loss per share in 2020.
In the year ended December 31, 2021, Empires & Puzzles and Toon Blast were our top online revenue-generating games and comprised 20% and 17%, respectively, of our online game revenue for the period. During 2020, Empires & Puzzles and Merge Dragons! were our top online revenue-generating games and comprised 24% and 17%, respectively, of our online game revenue for the period. No other game generated more than 10% of online game revenue during either of these periods.
The estimated weighted average playing period of payers was ten months during 2021 and 2020.
Mobile advertising revenue and other advertising and other revenue increased $240.6 million and $3.1 million, respectively, in 2021 as compared to the same period of the prior year, resulting in a total advertising and other revenue increase of $243.7 million.
The increase in mobile advertising revenue was primarily due to a $140.0 million increase in mobile in-game display advertising revenue and a $100.9 million increase in revenue from mobile in-game offers, engagement advertisements and other revenue, both of which were primarily driven by the Rollic acquisition in October 2020.
International revenue as a percentage of total revenue was 39% during 2021 and 2020.
Cost of revenue
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Cost of revenue | | $ | 1,014.9 | | | $ | 811.8 | | | $ | 524.1 | | | | 25 | % | | | 55 | % |
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2021 Compared to 2020. Cost of revenue increased $203.1 million in 2021 as compared to 2020. The increase was primarily attributable to increases of $95.2 million from the amortization of intangible assets – which was largely driven by our acquisitions of Peak, Rollic, Chartboost and StarLark, $92.4 million in payment processing fees from increased bookings generated from mobile payment processors – which was predominately driven by a full year of the games acquired from Peak and Harry Potter™: Puzzles & Spells, $9.3 million in hosting costs and $4.0 million in royalty expense.
Research and development
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Research and development | | $ | 545.9 | | | $ | 713.7 | | | $ | 505.9 | | | | (24 | )% | | | 41 | % |
2021 Compared to 2020. Research and development expenses decreased $167.8 million in 2021 as compared to 2020. The decrease was primarily attributable to a $279.3 million net decrease in collective expense related to contingent consideration fair value adjustments, primarily associated with our Small Giant and Gram Games obligations. The decrease was partially offset by increases of $52.5 million in headcount-related expenses and $37.3 million in stock-based compensation expense – both of which were primarily driven by our Peak, Rollic and Chartboost acquisitions, $11.5 million related to outside services and $5.5 million from employee bonus expense associated with our Chartboost acquisition.
Sales and marketing
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Sales and marketing | | $ | 955.1 | | | $ | 683.5 | | | $ | 464.1 | | | | 40 | % | | | 47 | % |
2021 Compared to 2020. Sales and marketing expenses increased $271.6 million in 2021 as compared to 2020. The increase was primarily attributable to an increase of $248.6 million in player acquisition costs, primarily from our Peak and Rollic acquisitions, as well as the launch of Harry Potter™: Puzzles & Spells. The increase was further supplemented by increases of $9.4 million in other marketing costs, $8.0 million in headcount-related expenses, $3.1 million in stock-based compensation expense and $2.9 million from employee bonus expense associated with our Chartboost acquisition.
General and administrative
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | General and administrative | | $ | 162.0 | | | $ | 136.0 | | | $ | 99.8 | | | | 19 | % | | | 36 | % |
2021 Compared to 2020. General and administrative expenses increased $26.0 million in 2021 as compared to 2020. The increase was primarily attributable to increases of $8.5 million in headcount-related expenses, $4.5 million in acquisition-related transaction costs, $3.5 million in stock-based compensation expense, $3.5 million in information technology-related expenses and $2.4 million in legal expenses. The increase was further supplemented by lower overhead allocations out of general and administrative expenses of $2.5 million, primarily driven by the planned exit of our San Francisco office space.
Impairment related to real estate assets
| | Year Ended December 31, | | | 2021 to 2020 | | 2020 to 2019 | | | 2021 | | | 2020 | | | 2019 | | | % Change | | % Change | | | (in millions) | | | | | | Impairment related to real estate assets | | $ | 66.8 | | | $ | — | | | $ | — | | | NM | | N/A |
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2021 Compared to 2020. Impairment related to real estate assets increased $66.8 million in 2021 as compared to 2020. The increase was attributable to the impairment loss recognized associated with the Company’s right-of-use assets and property and equipment, net, recognized in connection with the planned exit of our San Francisco office space.
Interest income
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Interest income | | $ | 6.4 | | | $ | 11.6 | | | $ | 14.0 | | | | (45 | )% | | | (17 | )% |
2021 Compared to 2020. Interest income decreased $5.2 million in 2021 as compared to 2020. The decrease was primarily attributable to a lower average investment yield on our short-term investments, partially offset by a higher average amount invested in cash equivalents when compared to the prior period.
Interest expense
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Interest expense | | $ | 59.2 | | | $ | 30.3 | | | $ | 17.0 | | | | 95 | % | | | 78 | % |
2021 Compared to 2020. Interest expense increased $28.9 million in 2021 as compared to 2020. The increase was primarily attributable to an increase of $27.5 million in interest expense related to the 2026 Notes and 2024 Notes.
Other income (expense), net
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | | (in millions) | | | | | | | | | | Other income (expense), net | | $ | (11.2 | ) | | $ | (16.5 | ) | | $ | 322.5 | | | | (32 | )% | | | (105 | )% |
2021 Compared to 2020. Other income (expense), net decreased $5.3 million in 2021 as compared to 2020. The decrease was primarily attributable to a net increase of $17.0 million in net foreign exchange transaction gains, primarily associated with the remeasurement of certain intercompany loans with the Company’s foreign subsidiaries and other foreign currency fluctuations, partially offset by a current period net loss of $13.9 million associated with our non-designated hedging foreign currency forward contract derivatives.
Provision for (benefit from) income taxes
| | Year Ended December 31, | | | 2021 to 2020 | | | 2020 to 2019 | | | 2021 | | | 2020 | | | 2019 | | | % Change | | | % Change | | | (in millions) | | | | | | | | Provision for (benefit from) income taxes | | $ | 96.0 | | | $ | 24.0 | | | $ | 5.4 | | | | 300 | % | | NM |
2021 Compared to 2020. The provision for income taxes increased $72.0 million in 2021 as compared to 2020. The increase was primarily driven by statutory income of our Peak subsidiary in the current period compared to a statutory loss in the prior period, higher statutory income of our Small Giant subsidiary and an increase in Base Erosion and Anti-Abuse Tax expense. The increase was partially offset by a partial valuation allowance release from acquired Chartboost deferred tax liabilities and the prior period income tax expense of $9.4 million that did not repeat in 2021 related to Zynga’s revision of its prior tax position as a result of the Altera Corp v. Commissioner court ruling.
Deferred Tax Asset Valuation Allowance. As of December 31, 2021, the measurement of our deferred tax assets was reduced by a $235.8 million valuation allowance. In evaluating the measurement of our deferred tax assets, we consider, amongst other factors, our ability to generate future taxable income. Our recent trend in improved operating results provides additional evidence in evaluating the continued need for, and amount of, a valuation allowance and could result in the reversal of a significant amount of the valuation allowance in future periods. Specifically, if we conclude in future periods that there is sufficient positive evidence to release the valuation allowance, we could recognize a significant income tax benefit in the period such conclusion is made.
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Liquidity and Capital Resources
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | | | (in millions) | | Consolidated Statements of Cash Flows Data: | | | | | | | | | | | | | Acquisition of property and equipment | | $ | (12.5 | ) | | $ | (18.8 | ) | | $ | (23.6 | ) | Depreciation and amortization | | | 238.9 | | | | 142.1 | | | | 79.4 | | Cash flows provided by (used in) operating activities | | | 253.8 | | | | 429.2 | | | | 262.8 | | Cash flows provided by (used in) investing activities | | | (500.9 | ) | | | (87.7 | ) | | | (851.9 | ) | Cash flows provided by (used in) financing activities | | | (41.4 | ) | | | 689.8 | | | | 451.6 | |
Our principal liquidity requirements are our lease commitments, licensing and marketing commitments, hosting commitments, capital expenditure needs, including strategic purchases and acquisitions, contingent consideration payments, interest payments and principal repayments of our convertible notes and any share repurchase activity we choose to effect. We expect to finance our operations primarily through cash provided by operating activities and cash on hand. However, we cannot be certain that these sources will be sufficient to finance our operations, future growth through acquisitions or share repurchase activity, thus we may seek additional financing in the future.
As of December 31, 2021 and December 31, 2020, we had cash, cash equivalents and short and long-term investments of $1.2 billion and $1.6 billion, respectively, which generally consisted of cash, money market funds, corporate debt securities, mutual funds and foreign certificates of deposit and time deposits. Our capital expenditures are generally for leasehold improvements for our various office locations and hardware and software to support business operations. We expect capital expenditures of approximately $30.0 million to $35.0 million in 2022, gross of any expected tenant improvement reimbursements.
Under the terms of the Merger Agreement with Take-Two, we have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Combination. Outside of certain limited exceptions, we may not take, commit or agree to do certain actions without Take-Two’s consent, including, but not limited to, entering into material transactions other than in the ordinary course of business, disposing of material assets, making capital expenditures in excess of the amounts specified in the Merger Agreement, issuing additional capital stock or other equity securities, or incurring additional indebtedness. We do not believe these restrictions will prevent us from meeting our ongoing operating expenses, working capital needs or capital expenditure requirements.
Hedging Instruments
In July 2021, we started executing monthly forward contract derivatives designed to mitigate foreign currency exposures associated with two intercompany loans. We expect the derivatives to offset future foreign exchange transaction gains (losses) related to these intercompany loans.
Also, in July 2021, we executed a forward contract derivative designed to mitigate foreign exchange exposure associated with the invested capital of one of our foreign subsidiaries. We expect the derivative to offset future foreign exchange exposure in our net investment in the foreign subsidiary. The Company applied hedge accounting on the net investment forward contract.
Convertible Senior Notes and Capped Call Transactions
In December 2020, we issued $874.5 million aggregate principal amount of 0% convertible senior notes due 2026, with an initial conversion rate of 76.5404 shares of our Class A common stock (equalstock. Additionally, RSUs are scheduled to an initial conversion price of approximately $13.07 per share), subject to adjustment if certain events occur (the “2026 Notes”). In June 2019, we issued $690.0 million aggregate principal amount of 0.25% convertible senior notes due 2024, with an initial conversion rate of 120.3695 shares of our Class A common stock (equal to an initial conversion price of approximately $8.31 per share), subject to adjustment if certain events occur (the “2024 Notes”).
The 2026 Notes and 2024 Notes are senior unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to such notes; equal in right of payment to all of our existing and future liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our current or future subsidiaries (including trade payables). The indentures governing the 2026 Notes and 2024 Notes, as applicable, do not contain any financial covenants.
The 2026 Notes mature on December 15, 2026 and the 2024 Notes mature on June 1, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms respectively prior to the maturity date. The 2026 Notes do not bear regular interest, and the principal amount does not accrete. Interest is payable semiannually on the 2024 Notes in arrears on June 1 and December 1 of each
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year, beginning on December 1, 2019. The Company may not redeem the 2026 Notes or 2024 Notes prior to December 20, 2023 and June 5, 2022, respectively.
On or after those respective dates, the Company may redeem for cash all or any portion of the applicable series of 2026 Notes or 2024 Notes, at its option, if the last reported sale price of our Class A common stock has been at least 130% of the conversion price of the applicable series of the 2026 Notes or 2024 Notes for at least 20 trading days during any 30 consecutive trading-day period ending on and including the trading day immediately preceding the date when the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the applicable series of 2026 Notes or 2024 Notes to be redeemed, plus any accrued and unpaid interest or special interest, as applicable.
As of December 31, 2021, the conditions allowing holders of the 2026 Notes or 2024 Notes to convert their respective series of the 2026 Notes and 2024 Notes have not been met and therefore both the 2026 Notes and 2024 Notes are not yet convertible.
In connection with the offering of the 2026 Notes and 2024 Notes, the Company also entered into privately negotiated capped call options with certain counterparties (the “2026 Capped Calls” and “2024 Capped Calls”, respectively). The 2026 Capped Calls have an initial strike price of approximately $13.07 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes and an initial cap price of $17.42 per share, subject to certain adjustments. The 2026 Capped Calls are intended to reduce the potential economic dilution of approximately 66.9 million shares to our Class A common stock upon any conversion of the 2026 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price.
The 2024 Capped Calls have an initial strike price of approximately $8.31 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes and an initial cap price of $12.54 per share, subject to certain adjustments. The 2024 Capped Calls are intended to reduce the potential economic dilution of approximately 83.1 million shares to our Class A common stock upon any conversion of the 2024 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price.
Credit Facility and Covenants
In December 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with certain financial institutions that provides for a three-year revolving credit facility in an aggregate principal amount of up to $425.0 million and is secured by a blanket lien on the Company’s assets. The Company may borrow, repay and re-borrow funds under the 2020 Credit Agreement until December 31, 2023, at which time the 2020 Credit Agreement will terminate, and all outstanding revolving loans, together with all accrued and unpaid interest, must be repaid. The Company may use the proceeds of future borrowings under the 2020 Credit Agreement for general corporate purposes.
Under the 2020 Credit Agreement, at the Company’s option, revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.50% to 1.00%, determined based on the Company’s consolidated leverage ratio for the four most recent fiscal quarters (the “Consolidated Leverage Ratio”) or (ii) the LIBOR rate (for interest periods of one, two, three or six months) plus a margin ranging from 1.50% to 2.00%, determined based on the Company’s Consolidated Leverage Ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Bank of America, N.A.’s prime rate and (iii) the LIBOR rate for a one-month interest period plus 1.00%. The Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate ranging from 0.25% to 0.35%, determined based on the Company’s Consolidated Leverage Ratio.
As of December 31, 2021, we had no amounts outstanding under the 2020 Credit Agreement.
The 2020 Credit Agreement also requires compliance with certain covenants, all of which the Company was in compliance with as of December 31, 2021. Specifically, we are subject to the following financial covenants (certain terms used and described below are as defined and described in the 2020 Credit Agreement):
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| Consolidated Interest Coverage Ratio: The Company is obligated to maintain a minimum consolidated interest coverage ratio of 4.00 to 1.00 as of the end of each fiscal quarter. The consolidated interest coverage ratio is measured by dividing (a) our consolidated EBITDA for the applicable measurement period by (b) the cash portion of our consolidated interest charges for the applicable measurement period.
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| Consolidated Leverage Ratio: The Company is obligated to maintain a consolidated leverage ratio of up to an amount ranging from 4.00 to 1.00 to 3.50 to 1.00 as of the end of each fiscal quarter, in amounts decreasing through the term of the 2020 Credit Agreement. The consolidated leverage ratio is measured by dividing (a) our consolidated funded indebtedness as of the end of the applicable measurement period by (b) our consolidated EBITDA for the applicable measurement period.
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Share Repurchases
In April 2018, we authorized the 2018 Share Repurchase Program for up to $200.0 million of our outstanding Class A common stock. During 2021, no share repurchases were made and as of December 31, 2021, we had $173.8 million remaining under the 2018 Share Repurchase Program. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022.
Operating Activities
After our net loss of $104.2 million is adjusted to exclude certain non-cash items, operating activities provided $253.8 million of cash, cash equivalents and restricted cash during 2021. Significant non-cash, cash equivalent or restricted cash items included depreciation and amortization of $238.9 million and stock-based compensation expense of $167.2 million. Further, the non-cash expense associated with our contingent consideration obligations drove an $80.0 million increase in our operating liabilities during 2021.
The change in our operating assets and liabilities during 2021 – excluding the impact from the aforementioned increase in our contingent consideration obligations – resulted in a $229.9 million outflow of cash, cash equivalents and restricted cash, primarily due to the portion of the total acquisition-related contingent consideration payments to the former owners of Small Giant, Gram Games and Rollic included in operating activities in the amounts of $214.5 million, $59.9 million and $4.1 million, respectively, partially offset by an increase in accounts payable of $37.6 million from the timing of payments.
Investing Activities
Investing activities used $500.9 million of cash, cash equivalents and restricted cash during 2021. The primary outflow of cash, cash equivalents and restricted cash associated with investing activities was $508.3 million associated with our various 2021 acquisitions.
Financing Activities
Financing activities used $41.4 million of cash, cash equivalents and restricted cash during 2021. The primary outflow of cash, cash equivalents and restricted cash associated with financing activities relates to the portion of the total acquisition-related contingent consideration payments to the former owners of Small Giant, Rollic and Gram Games included in financing activities in the amount of $25.1 million, $15.9 million and $15.1 million, respectively.
Off-Balance Sheet Arrangements
We did not have any significant off-balance sheet arrangements during 2021, 2020 or 2019.
Contractual Obligations(1)
| | Operating Leases | | | Licensor | | | Other | | | Total | | Year ending December 31: | | (in millions) | | 2022 | | $ | 14.4 | | | $ | 12.7 | | | $ | 74.5 | | | $ | 101.6 | | 2023 | | | 23.3 | | | | 10.4 | | | | 56.6 | | | | 90.3 | | 2024 | | | 21.3 | | | | 10.0 | | | | 36.9 | | | | 68.2 | | 2025 | | | 17.4 | | | | 10.0 | | | | — | | | | 27.4 | | 2026 | | | 17.6 | | | | — | | | | — | | | | 17.6 | | Thereafter | | | 89.7 | | | | — | | | | — | | | | 89.7 | | Total | | $ | 183.7 | | | $ | 43.1 | | | $ | 168.0 | | | $ | 394.8 | |
| (1)
| The amounts represented in the table reflect our minimum cash obligations for the respective calendar years based on contractual terms, but not necessarily the periods in which they will be expensed in our consolidated statement of operations.
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Lease Commitments
Our lease commitments primarily consist of operating leases for our office facilities. We do not have any finance lease obligations, and all of our property and equipment has been purchased with cash.
In August 2021, in consideration of the changing nature of the Company’s need for office space for its workforce, the Company’s Board of Directors approved a plan to sublease the Company’s current 185,000 square foot San Francisco, California office space (the “San Francisco Office Building”), as the Company transitions to a hybrid in-office and remote employee work model. As a result of the Board of Director’s decision and the accumulation of other factors, the Company recognized a $66.8 million impairment loss during the third quarter of 2021. The impairment loss recorded during the third quarter of 2021 included $57.9 million
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related to the San Francisco Office Building right-of-use lease asset and $8.9 million related to property and equipment, net associated with the San Francisco Office Building.
In the second quarter of 2021, the Company executed a lease for office space of approximately 62,000 square feet in San Mateo, California (the “San Mateo Office Building”) over an approximate 11-year lease term (the “Office Lease Agreement”), with annual lease expense of approximately $3.0 million beginning in June 2021. The Office Lease Agreement provides the Company two separate options to extend the lease for five years each (for a total of an additional 10 years). At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend. The Company anticipates being able to occupy the San Mateo Office Building beginning in the summer of 2022, following the completion of its planned tenant improvements. Based on information and estimates as of the date of this filing, the Company anticipates total capital expenditures of approximately $25.0 million for its tenant improvements related to the San Mateo Office Building, of which $7.8 million will be reimbursable by the landlord. The landlord’s tenant improvement allowance is considered a lease incentive, and will be recognized as a reduction of lease expense ratably over the term of the lease.
Licensor and Marketing Commitments
Licensor commitments include minimum guarantee royalty payments due to licensors for use of their brands, properties and other licensed content in our games, as well as marketing commitments for specified spend related to our marketing products.
Other Commitments
Other commitments primarily include costs for hosting of data systems and other services. Excluded from other commitments is our uncertain income tax position liability of $22.0 million, which includes interest and penalties, as the Company cannot make a reasonably reliable estimate of the period of cash settlement.
Contingent Consideration Obligations
Under the original terms of the Small Giant, Gram Games and Rollic acquisitions, contingent consideration may be payable based on the achievement of certain future performance targets – and in the case of Rollic, bookings targets as well – during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. Under the terms of the Creasaur, Forgerhero and Zero Sum acquisitions by Rollic, contingent consideration may be payable based on the achievement of future bookings targets during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable (for more information on these acquisitions, see Note 7 – “Acquisitions” in the notes to the consolidated financial statements included herein).
With respect to the Creasaur, Forgerhero and Zero Sum contingent consideration obligations, the estimated fair value of the collective contingent consideration obligations was $15.3 million as of December 31, 2021, of which $4.5 million was a current liability collectively across all three obligations.
With respect to the Rollic contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic in the second quarter of 2021 to accelerate the Company’s acquisition of the remaining 20% ownership in Rollic and to set the total contingent consideration payment at $60.0 million (the “Rollic Amendment”). In the third quarter of 2021, the Company acquired the remaining 20% ownership and paid $20.0 million, with the remaining $40.0 million to be paid in the first quarter of 2022. At the date of the Rollic Amendment, the Company measured the remaining final obligation by calculating the present value of the final payments using a discount rate of 1.3%, commensurate with the remaining term. As of December 31, 2021, the estimated current liability was $39.9 million.
With respect to the Small Giant contingent consideration obligation, during the first quarter of 2021, the Company paid $239.6 million to the former owners of Small Giant for its performance during the second annual contingent consideration period. As of December 31, 2021, the estimated fair value of the remaining contingent consideration obligation was a $242.3 million and recorded as a current liability. The Company expects to make the final contingent consideration payment in the first quarter 2022.
With respect to the Gram Games contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Gram Games in the fourth quarter of 2020 to set the final contingent consideration payment at $75.0 million. In the third quarter of 2021, the Company paid $75.0 million to settle the final contingent consideration obligation.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. These estimates and judgments have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to fully understand and evaluate our reported financial results include the following:
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| Business combinations, including subsequent remeasurement of contingent consideration obligations
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| Impairment related to real estate assets
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Revenue Recognition
We derive substantially all of our revenue from the sale of virtual items and advertising associated with our online games.
Online Game. We operate our games as live services that allow players to play for free. Within these games, however, players can purchase virtual currency to obtain virtual goods or virtual goods directly (together, defined as “virtual items” or a “virtual item”) to enhance their game-playing experience. Our identified performance obligation is to display the virtual items within the game over the estimated playing period of the paying player or until they are consumed in game play based upon the nature of the virtual item. Payment is required at time of purchase and the purchase price is a fixed amount.
Players can purchase our virtual items through various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google Play accounts and Facebook local currency payments. Payments from players for virtual items are non-refundable and relate to non-cancellable contracts that specify our obligations. Such payments are initially recorded to deferred revenue. As a result, in connection with new game launches, acquisitions of new games from third parties or during periods of increased bookings, the deferred revenue balance specific to such games will increase, sometimes significantly.
For revenue earned through mobile platforms, the transaction price is equal to the gross amount we request to be charged to our player because we are the principal in the transaction. The related platform and payment processing fees are recorded as cost of revenue in the period incurred.
For revenue earned on our web based games through Facebook, our players utilize Facebook’s local currency-based payments program to purchase virtual items in our games. For all payment transactions on the Facebook platform, Facebook remits to us 70% of the price we request to be charged to the player for each transaction, which represents the transaction price. Despite being the principal in the transaction, we recognize revenue net of the amounts retained by Facebook for platform and payment processing fees because Facebook may choose to alter our requested price, for example by offering a discount or other incentives to players playing on their platform, and we do not receive information from Facebook indicating the amount of such discounts or incentives or the actual amount paid by our players. Accordingly, we are unable to determine the gross amount paid by our players on the Facebook platform.
The satisfaction of our performance obligation is dependent on the nature of the virtual item purchased and as a result, we categorize our virtual items as follows:
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| Consumable: Consumable virtual items represent items that can be consumed by a specific player action. Common characteristics of consumable virtual items may include items that are no longer displayed on the player’s game board after a short period of time, do not provide the player any continuing benefit following consumption, or often times enable a player to perform an in-game action immediately (e.g. chips in Zynga Poker). For the sale of consumable virtual items, we recognize revenue as the items are consumed (i.e., over time), which approximates one month.
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| Durable: Durable virtual items represent items that are accessible to the player over an extended period of time (e.g. animals in FarmVille franchise). We recognize revenue from the sale of durable virtual items ratably over the estimated average playing period of payers for the applicable game (i.e., over time), which represents our best estimate of the average life of the durable virtual item.
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If we do not have the ability to differentiate between revenue attributable to consumable virtual items or durable virtual items in a specific game, we recognize revenue ratably over the estimated average playing period of payers for the applicable game. Historically, we have had sufficient data to separately account for consumable and durable virtual items for substantially all of our web games. However, for our standalone mobile games, we do not have the requisite data to separately account for consumable and durable virtual items and therefore recognize mobile online game revenue ratably over the estimated average playing period of payers.
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We expect that in future periods, there will be changes in the mix of consumable and durable virtual items offered and sold, reduced virtual item sales in some existing games, changes in estimates of the average playing period of payers and/or changes in our ability to make such estimates. When such changes occur, and in particular if more of our revenue in any period is derived from durable virtual items or the estimated average playing period of payers increases on average, the amount of revenue that we recognize in a current or future period may be reduced, perhaps significantly. Conversely, if the estimated average playing period of payers decreases on average, the amount of revenue that we recognize in a current or future period may be accelerated, perhaps significantly.
On a quarterly basis, we determine the estimated average playing period of payers by game beginning at the time of a payer’s first purchase in the respective game and ending on a date when that paying player is deemed to be no longer playing. To determine when paying players are no longer playing a given game, we analyze monthly cohorts of payers who made their first in-game payment between six and 18 months prior to the beginning of each quarter and determine whether each payer within the cohort is an active or inactive player as of the date of our analysis. To determine which payers are inactive, we analyze the dates that each payer last logged into that game. We determine a payer to be inactive once they have reached a period of inactivity for which it is probable that they will not return to a specific game. For the payers deemed inactive as of our analysis date, we analyze the dates they last logged into that game to determine the rate at which inactive payers stopped playing. Based on these dates, we then project a date at which all payers for each monthly cohort are expected to cease playing our games. We then average the time periods from first purchase date and the date the last payer is expected to cease playing the game for each of the monthly cohorts to determine the total playing period of payers for that game. To determine the estimated average playing period of payers, we then divide this total period by two. The use of this “average” approach is supported by our observations that payers typically become inactive at a relatively consistent rate for our games. If future data indicates payers do not become inactive at a relatively consistent rate, we will modify our calculations accordingly. When a new game is launched and only a limited period of payer data is available for our analysis, then we also consider other factors to determine the estimated average playing period of payers, such as the estimated average playing period of payers for other recently launched games with similar characteristics.
Advertising. We have contractual relationships with advertising networks, agencies, advertising brokers and directly with advertisers to display advertisements in our games. For all of our in-game advertising arrangements, we are the principal and our performance obligation is to provide the inventory for advertisements to be displayed in our games. For contracts made directly with advertisers, we are also obligated to serve the advertisements in our games. However, for those direct advertising arrangements, providing the advertising inventory and serving the advertisement is considered a single performance obligation, as the advertiser cannot benefit from the advertising space without its advertisements being displayed.
The pricing and terms for all our in-game advertising arrangements are governed by either a master contract or insertion order and generally stipulate payment terms as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days. The transaction price is generally the product of the number of advertising units delivered (e.g., impressions, offers completed, videos viewed, etc.) and the contractually agreed upon price per advertising unit. Further, for advertising transactions not placed directly with the advertiser, the contractually agreed upon price per advertising unit is generally based on our fixed revenue rate stated in the contract. The number of advertising units delivered is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. For a limited number of advertising network arrangements, the transaction price is determined based on a volume-tiered pricing structure, whereby the price per advertising unit in a given month is determined by the number of impressions delivered in that month. However, the uncertainty concerning the number of impressions delivered is resolved at the end of each month, therefore, eliminating any uncertainty with respect to the price per advertising unit for each reporting period.
For in-game display advertisements, in-game offers, engagement advertisements and other advertisements, our performance obligation is satisfied over the life of contract (i.e., over time), with revenue being recognized as advertising units are delivered.
For in-game sponsorships with branded virtual items, revenue is initially recorded to deferred revenue and then recognized ratably over the estimated life of the branded virtual item, which approximates the estimated average playing period of payers, or over the term of the advertising arrangement, depending on the nature of the agreement.
We also operate a software platform that facilitates transactions between advertisers and owners of digital advertising inventory (“publishers”) via programmatic auctions. The Company has contracts with both advertisers (“demand side”) and publishers (“supply side”), with the advertiser representing the Company’s customer in demand side transactions and the publisher representing the Company’s customer in a supply side transactions. The pricing and terms for all demand side and supply side arrangements are contractually governed and generally stipulate payment terms as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days.
For both demand side and supply side revenue arrangements, the Company’s performance obligation is to provide the advertiser or publisher with access to the Company’s software platform, which facilitates the placement of the advertising inventory. The Company does not control the advertising inventory, because the Company does not have the substantive ability to direct the use of, nor obtain substantially all of the remaining benefits from the advertising inventory. Further, the Company is not primarily responsible for fulfillment and does not have any inventory risk.
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The Company is an agent in both demand side and supply side transactions and presents revenue on a net basis. The transaction price is the product of the number of advertising units delivered to the end user and the contractually agreed upon price per advertising unit, less the consideration paid or payable to publishers. The number of advertising units delivered to the end user is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. Our performance obligation is satisfied over the life of contract (i.e., over time), with revenue being recognized as advertising units are delivered to the end user.
Taxes Collected from Customers. We present taxes collected from customers and remitted to governmental authorities on a net basis within our consolidated statement of operations.
Income Taxes
We account for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws at the end of the reporting period; the effect of future changes in tax laws or rates are not anticipated.If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on all available positive and negative evidence including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. In evaluating the objective evidence that the results of recent operations provide, we generally consider the trailing three years of cumulative operating income (loss). The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
The Company accounts for Global Intangible Low-Taxed Income provisions as a component of tax expense in the period in which it is subject to the rules.
We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in the provision for income tax.
Business Combinations
In accounting for acquisitions through which a set of assets and activities are transferred to the Company, we perform an initial test to determine whether substantially all of the fair value of the gross assets transferred are concentrated in a single identifiable asset or a group of similar identifiable assets, such that the acquisition would not represent a business. If the initial test does not result in substantially all of the fair value concentrated in a single or group of similar assets, we then perform a second test to evaluate whether the assets and activities transferred include inputs and substantive processes that together, significantly contribute to the ability to create outputs, which would constitute a business. If the result of the second test indicates that the acquired assets and activities constitute a business, we account for the transaction as a business combination.
For our business combinations, we allocate the purchase consideration of the acquisition, which includes the estimated acquisition date fair value of contingent consideration (if applicable) and deferred purchase consideration (if applicable), to the tangible assets, liabilities and identifiable intangible assets acquired based on each of the estimated fair values at the acquisition date. The excess of the purchase consideration over the fair values is recorded as goodwill. Determining the fair value of such items requires judgment, including estimating future cash flows or the cost to recreate an acquired asset. If actual results are lower than initial estimates, we could be required to record impairment losses in the future. Acquired intangible assets with definite lives are amortized over their estimated useful lives generally on a straight-line basis, unless evidence indicates a more appropriate method. Intangible assets with indefinite lives are not amortized but rather tested for impairment annually, or more frequently if circumstances indicate an impairment may exist.
During the one-year period beginning with the acquisition date, we may record certain purchase accounting adjustments related to the fair value of assets acquired and liabilities assumed against goodwill. After the final determination of the fair value of assets acquired or liabilities assumed, any subsequent adjustments are recorded to our consolidated statements of operations. The fair value of contingent consideration liabilities assumed from an acquisition are remeasured each reporting period after the acquisition date and the changes in the estimated fair value, if any, is recorded within operating expenses in our consolidated statement of operations each reporting period.Acquisition-related expenses are expensed as incurred.
Licenses and Royalties
We obtain licenses from third parties for use of their brands, properties and other licensed content in our games (e.g., Hit It Rich! Slots or Game of Thrones Slots Casino). Our licensing agreements typically include minimum guarantee royalty payments, which are due over the term of the agreement and are recoupable against future royalty obligations that would otherwise become payable. These advance payments are capitalized as prepaid royalties when paid and amortized once the licensed product is launched in our game. Amortization is recorded as cost of revenue and is calculated as (i) the contractual royalty rate based on actual net
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product sales as defined in the licensing agreement or (ii) the straight-line method over the remaining estimated useful life of the licensed product, whichever is greater.
Each quarter, we evaluate the recoverability of our prepaid royalties as well as any contractual commitments not yet paid to determine amounts that we deem unlikely to be recovered through product sales. To evaluate the future recoverability of prepaid royalties and guarantees, we consider the terms of the agreement, game development plans, forecasted and actual financial performance of the game as well as other qualitative factors, such as the success of similar games and similar genres published by the Company. To the extent that this evaluation indicates that the remaining prepaid and guaranteed royalty payments are not recoverable, the Company records an impairment loss in the period that impairment is indicated. Any impairment losses determined before the launch of a product are recorded as research and development, while any impairment losses determined post-launch are recorded as cost of revenue in our consolidated statement of operations.
Impairment Related to Real Estate Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. When the projected undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, the assets are adjusted to their estimated fair value and an impairment loss is recorded as a component of operating income.
Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 – “Overview and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Fluctuation Risk
At December 31, 2021, our marketable debt securities consist of money market funds, corporate debt securities and foreign certificates of deposit and time deposits. The primary objective of our investment activities is to preserve principal, ensure liquidity and maximize income without significantly increasing risk.
Our marketable debt securities represent $457.4 million of our total investments as of December 31, 2021 and are subject to market risk due to changes in prevailing interest rates that may cause their fair values to fluctuate in the future. Based on a sensitivity analysis, we have determined that a hypothetical 100 basis points increase in interest rates would have resulted in a decrease in the fair values of our investments of approximately $0.1 million as of December 31, 2021. Such losses would only be realized if we sold the investments prior to maturity.
With respect to our 2024 Notes, the annual interest rate is fixed at 0.25%, and, therefore, we do not have economic interest rate exposure. The fair value of the 2026 Notes and 2024 Notes changes when the market price of our stock fluctuates or interest rates change. However, we carry the 2026 Notes and 2024 Notes at face value less any unamortized debt discount on our balance sheet and present the fair value of the 2026 Notes and 2024 Notes for disclosure purposes only.
As there are no borrowings outstanding under the 2020 Credit Agreement, there is no interest rate fluctuation risk as of December 31, 2021. However, for any potential future borrowings under the 2020 Credit Agreement, changes in interest rates will impact interest expense on any such borrowings.
Equity Investment Risk
We record our marketable equity securities not accounted for under the equity method at fair value based on readily determinable market values, which are subject to market price volatility, and represent $45.7 million of our investments as of December 31, 2021. A hypothetical adverse price change of 10%, which could be experienced in the near term, would decrease the fair value of our marketable equity securities by $4.6 million.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses incurred outside the U.S., and intercompany loans and other monetary assets and liabilities which are denominated in currencies other than the functional currency of the Company and its subsidiaries in which these transactions are recorded. Accordingly, we are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Korean Won, Russian Ruble, and Turkish Lira. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses), including remeasurement of certain cash balances, trade accounts receivable, trade accounts payable, current liabilities and intercompany balances that are denominated in currencies other than the functional currency of the Company and its subsidiaries in which they are recorded, and we believe such a change could have a material impact on our results of operations.
The Company uses derivatives to partially offset exposure to foreign currency risk on certain intercompany loans and net investments in foreign subsidiaries. As it relates to our intercompany loans, our foreign exchange forward contracts significantly minimize, but do not entirely eliminate, the effect of foreign currency exchange rate movements on our assets and liabilities. As it relates to our investment in a certain foreign subsidiaries, our forward contract serves to offset the foreign currency translation risk from its foreign operations. If the U.S. dollar weakened by 10%, the amount recorded in cumulative translation adjustment within accumulated other comprehensive income related to our net investment hedge would have been approximately $19.2 million lower as of December 31, 2021. The hypothetical change in value recorded in accumulated other comprehensive income would be expected to offset a corresponding foreign currency translation gain or loss from our investment in foreign subsidiaries.
As our international business grows, our risks associated with foreign currency rates may become greater, and we will continue to reassess our approach to managing the risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Zynga Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Zynga Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Zynga Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item l5(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | Auditing revenue for newly launched or acquired games
| Description of the Matter
| The Company’s current deferred revenue is $748.1 million at December 31, 2021 and the Company recognized $2,249.2 million of revenue relating to online games during the year. A portion of the deferred online game revenue balance and revenue recognized was related to newly launched or acquired games. As described in Note 1- Revenue Recognition of the consolidated financial statements, for standalone mobile games, the Company recognizes mobile revenue ratably over the estimated average playing period of payers. When a new game is launched, or acquired, and only a limited period of payer data is available for the analysis of average playing periods of payers, the Company considers a number of subjective and objective factors to determine the estimated average playing period of payers, such as the estimated average playing period of payers for other active games with similar characteristics. Determining the estimated average playing period of payers requires management judgement in estimating how long paying players benefit from their purchases over the game playing experience as well as determining which games are similar for comparison purposes.
Auditing the initial estimated average playing period of payers for newly launched or acquired online games was especially challenging as there was a limited period of game-specific paying player data available, and relevant, comparable data from external sources was not readily available. Management determined the initial estimated average playing period of payers based on subjective and objective assumptions about each newly launched or acquired game’s paying player characteristics, and their similarity or dissimilarity to the Company’s other games.
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| | How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls specifically related to the Company's process to determine the initial estimated average playing period of payers.
To test the initial estimated average playing period of payers, our audit procedures included, among others, evaluating the significant assumptions used by management to determine the initial estimate. We evaluated the relevance of management's selection of comparable games as well as management's comparison of the paying player period for the newly launched or acquired game to comparable games.
| Initial accounting of acquired intangibles
| Description of the Matter
| As disclosed in Note 7 to the consolidated financial statements, the Company acquired Chartboost on August 4, 2021 for total purchase consideration of $234.6 million and StarLark on October 5, 2021 for a total purchase price consideration of $461.7 million. For Chartboost, of the total purchase consideration, $115.3 million was allocated to the fair value of identified intangible assets. For StarLark, of the total purchase consideration, $159.0 million was allocated to the fair value of identified intangible assets.
Auditing the fair values of acquired intangible assets was especially challenging due to the significant estimation uncertainty in determining the fair value of identified intangible assets. The significant assumptions used to estimate the fair values of the intangible assets included discount rates, as well as the amount and timing of cash flow projections. Each of these assumptions were highly subjective and involved significant judgment as they were based on estimates of future financial performance that could be affected by domestic and international consumer preferences, third party competition and technological innovation, among other factors.
| How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over management's review of forecasts and the assessment of the discount rate.
To test the fair value of the Company's acquired intangible assets, we read the purchase agreement and we identified and tested the significant assumptions used in the valuation models including assessing the historical accuracy of management's forecasts of its own performance, its historical accuracy in forecasting for other acquisitions, and evaluating the reasonableness of resulting forecasts for Chartboost and StarLark, compared with the historical performance of those companies, Zynga and guideline companies within the same industry. We involved our valuation specialists to assess the adequacy and relevance of the inputs and information used, the nature and basis for valuation adjustments and calculations, the appropriateness of the valuation methods and models used, and accuracy and appropriateness of the calculated outputs from such models. Additionally, our valuation specialists performed corroborative calculations of the acquired intangible asset values, which we compared to management's estimates.
| Impairment of operating lease right-of-use and related assets
| Description of the Matter
| As disclosed in Notes 5 and 6 to the consolidated financial statements, the Company recorded a loss of $66.8 million in the third quarter of the year ended December 31, 2021, as a result of the Company's transition to a hybrid in-office and remote employee work model and subsequent reassessment of the asset group related to its leased San Francisco Headquarters. In accordance with ASC 360, the Company performed a recoverability test of its identified asset group, comprised of operating lease right-of-use and other related assets, and determined that the carrying value of this asset group was not fully recoverable. As a result, the Company measured and recognized an impairment loss related to these assets representing the amount by which the carrying value exceeded the estimated fair value of these asset group.
Auditing the Company's impairment was especially challenging due to the significant estimation required by management to determine the fair value of the asset group. The Company utilized an income approach to value the asset group, which required the development of a discounted cash flow model utilizing certain key assumptions, including the projected sublease income over the remaining lease term, expected downtime prior to the commencement of future subleases, expected rent concessions offered to future tenants and discount rates that reflected the level of risk associated with these future cash flows. These assumptions have a significant effect on the estimated fair value of the asset group, and the resulting impairment loss.
| How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's processes to determine the fair value of the asset group and measure the right-of-use and other related assets impairment loss. For example, we tested the controls over the determination of the fair value of the asset group subject to impairment, including the selection of the valuation model and the determination and review of the underlying assumptions used to develop the fair value estimates.
Our testing of the Company's impairment measurement included, among other procedures, evaluating the significant assumptions used to estimate fair value. For example, we compared the sublease market rent rate, vacancy period, and tenant lease incentive assumptions used to estimate market participant cash flows to current industry and economic trends, assessed the reasonableness of the discount rates used as part of the discounted cash flow model, and recalculated management's estimate. We also involved our valuation specialists to assist in our evaluation of the significant assumptions used in the fair value estimate.
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/s/ Ernst & Young LLP
We have served as the Company's auditor since 2009.
San Jose, California
February 25, 2022
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Zynga Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Zynga Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Zynga Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include certain internal controls of Chartboost and StarLark, which are included in the 2021 consolidated financial statements of the Company and constituted 1% of consolidated revenue, operating expenses and total assets, respectively, as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also did not include an evaluation of certain internal controls over financial reporting of Chartboost and StarLark.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
February 25, 2022
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Zynga Inc.
Consolidated Balance Sheets
(In millions, except par value)
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | Assets | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 984.0 | | | $ | 1,364.4 | | Short-term investments | | | 169.0 | | | | 208.4 | | Accounts receivable, net of allowance of $0.9 at December 31, 2021 and $0.5 at December 31, 2020 | | | 242.5 | | | | 217.5 | | Restricted cash | | | 161.0 | | | | — | | Prepaid expenses | | | 56.7 | | | | 40.0 | | Other current assets | | | 35.4 | | | | 29.5 | | Total current assets | | | 1,648.6 | | | | 1,859.8 | | Long-term investments | | | — | | | | 2.0 | | Goodwill | | | 3,601.1 | | | | 3,160.8 | | Intangible assets, net | | | 900.5 | | | | 838.1 | | Property and equipment, net | | | 30.3 | | | | 39.3 | | Right-of-use assets | | | 86.4 | | | | 131.9 | | Restricted cash | | | 40.2 | | | | 136.0 | | Prepaid expenses | | | 25.0 | | | | 21.6 | | Other non-current assets | | | 26.8 | | | | 17.0 | | Total assets | | $ | 6,358.9 | | | $ | 6,206.5 | | Liabilities and stockholders’ equity | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 95.6 | | | $ | 57.2 | | Income tax payable | | | 52.2 | | | | 39.6 | | Deferred revenue | | | 748.1 | | | | 747.7 | | Operating lease liabilities | | | 17.1 | | | | 18.5 | | Other current liabilities | | | 650.4 | | | | 462.4 | | Total current liabilities | | | 1,563.4 | | | | 1,325.4 | | Convertible senior notes, net | | | 1,343.8 | | | | 1,289.9 | | Deferred revenue | | | 0.3 | | | | 0.3 | | Deferred tax liabilities, net | | | 93.8 | | | | 126.3 | | Non-current operating lease liabilities | | | 133.4 | | | | 122.0 | | Other non-current liabilities | | | 112.3 | | | | 401.1 | | Total liabilities | | | 3,247.0 | | | | 3,265.0 | | Stockholders’ equity: | | | | | | | | | Common stock, $0.00000625 par value, and additional paid-in capital - authorized shares: 2,020.5; shares outstanding: 1,130.5 shares as of December 31, 2021 and 1,081.6 as of December 31, 2020 | | | 5,625.0 | | | | 5,276.5 | | Accumulated other comprehensive income (loss) | | | (107.1 | ) | | | (50.7 | ) | Accumulated deficit | | | (2,406.0 | ) | | | (2,284.3 | ) | Total stockholders’ equity | | | 3,111.9 | | | | 2,941.5 | | Total liabilities and stockholders’ equity | | $ | 6,358.9 | | | $ | 6,206.5 | |
See accompanying notes to consolidated financial statements.
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Zynga Inc.
Consolidated Statements of Operations
(In millions, except per share data)
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Revenue: | | | | | | | | | | | | | Online game | | $ | 2,249.2 | | | $ | 1,667.2 | | | $ | 1,047.3 | | Advertising and other | | | 551.3 | | | | 307.6 | | | | 274.4 | | Total revenue | | | 2,800.5 | | | | 1,974.8 | | | | 1,321.7 | | Costs and expenses: | | | | | | | | | | | | | Cost of revenue | | | 1,014.9 | | | | 811.8 | | | | 524.1 | | Research and development | | | 545.9 | | | | 713.7 | | | | 505.9 | | Sales and marketing | | | 955.1 | | | | 683.5 | | | | 464.1 | | General and administrative | | | 162.0 | | | | 136.0 | | | | 99.8 | | Impairment related to real estate assets | | | 66.8 | | | | — | | | | — | | Total costs and expenses | | | 2,744.7 | | | | 2,345.0 | | | | 1,593.9 | | Income (loss) from operations | | | 55.8 | | | | (370.2 | ) | | | (272.2 | ) | Interest income | | | 6.4 | | | | 11.6 | | | | 14.0 | | Interest expense | | | (59.2 | ) | | | (30.3 | ) | | | (17.0 | ) | Other income (expense), net | | | (11.2 | ) | | | (16.5 | ) | | | 322.5 | | Income (loss) before income taxes | | | (8.2 | ) | | | (405.4 | ) | | | 47.3 | | Provision for (benefit from) income taxes | | | 96.0 | | | | 24.0 | | | | 5.4 | | Net income (loss) | | $ | (104.2 | ) | | $ | (429.4 | ) | | $ | 41.9 | | | | | | | | | | | | | | | Net income (loss) per share attributable to common stockholders: | | | | | | | | | | | | | Basic | | $ | (0.09 | ) | | $ | (0.42 | ) | | $ | 0.04 | | Diluted | | $ | (0.09 | ) | | $ | (0.42 | ) | | $ | 0.04 | | | | | | | | | | | | | | | Weighted average common shares used to compute net income (loss) per share attributable to common stockholders: | | | | | | | | | | | | | Basic | | | 1,099.1 | | | | 1,016.8 | | | | 938.7 | | Diluted | | | 1,099.1 | | | | 1,016.8 | | | | 974.0 | |
See accompanying notes to consolidated financial statements.
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Zynga Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Net income (loss) | | $ | (104.2 | ) | | $ | (429.4 | ) | | $ | 41.9 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | Change in foreign currency translation adjustment | | | (56.3 | ) | | | 75.3 | | | | (7.7 | ) | Net change in unrealized gains (losses) on available-for-sale marketable debt securities | | | (0.1 | ) | | | (0.1 | ) | | | 0.2 | | Other comprehensive income (loss), net of tax | | | (56.4 | ) | | | 75.2 | | | | (7.5 | ) | Comprehensive income (loss) | | $ | (160.6 | ) | | $ | (354.2 | ) | | $ | 34.4 | |
See accompanying notes to consolidated financial statements.
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Zynga Inc.
Consolidated Statements of Stockholders’ Equity
(In millions)
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Class A Common Stock | | | Additional Paid-In | | | Treasury | | | Other Comprehensive | | | Accumulated | | | Total Stockholders' | | | | Shares | | | Amount | | | Capital | | | Stock | | | Income (Loss) | | | Deficit | | | Equity | | Balances at December 31, 2018 | | | 861.1 | | | $ | — | | | $ | 3,504.7 | | | $ | — | | | $ | (118.4 | ) | | $ | (1,789.7 | ) | | $ | 1,596.6 | | Exercise of stock options and ESPP | | | 12.0 | | | | — | | | | 17.4 | | | | — | | | | — | | | | — | | | | 17.4 | | Vesting of RSUs, net of tax withholdings | | | 13.1 | | | | — | | | | — | | | | (49.5 | ) | | | — | | | | — | | | | (49.5 | ) | Acquisition-related common stock issuance | | | 63.8 | | | | — | | | | 253.9 | | | | — | | | | — | | | | — | | | | 253.9 | | Stock-based compensation expense | | | — | | | | — | | | | 81.5 | | | | — | | | | — | | | | — | | | | 81.5 | | Retirements of treasury stock | | | — | | | | — | | | | — | | | | 49.5 | | | | — | | | | (49.5 | ) | | | — | | Equity component of convertible senior notes due 2024 | | | — | | | | — | | | | 114.9 | | | | — | | | | — | | | | — | | | | 114.9 | | Purchase of capped calls related to issuance of convertible senior notes due 2024 | | | — | | | | — | | | | (73.8 | ) | | | — | | | | — | | | | — | | | | (73.8 | ) | Net income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | 41.9 | | | | 41.9 | | Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | (7.5 | ) | | | — | | | | (7.5 | ) | Balances at December 31, 2019 | | | 950.0 | | | $ | — | | | $ | 3,898.6 | | | $ | — | | | $ | (125.9 | ) | | $ | (1,797.3 | ) | | $ | 1,975.4 | | Exercise of stock options and ESPP | | | 4.5 | | | | — | | | | 16.9 | | | | — | | | | — | | | | — | | | | 16.9 | | Vesting of RSUs, net of tax withholdings | | | 10.5 | | | | — | | | | — | | | | (57.2 | ) | | | — | | | | — | | | | (57.2 | ) | Acquisition-related common stock issuance | | | 116.6 | | | | — | | | | 1,137.7 | | | | — | | | | — | | | | — | | | | 1,137.7 | | Stock-based compensation expense | | | — | | | | — | | | | 122.6 | | | | — | | | | — | | | | — | | | | 122.6 | | Retirements of treasury stock | | | — | | | | — | | | | — | | | | 57.2 | | | | — | | | | (57.2 | ) | | | — | | Equity component of convertible senior notes due 2026 | | | — | | | | — | | | | 163.7 | | | | — | | | | — | | | | — | | | | 163.7 | | Purchase of capped calls related to issuance of convertible senior notes due 2026 | | | — | | | | — | | | | (63.0 | ) | | | — | | | | — | | | | — | | | | (63.0 | ) | Adoption of ASU 2016-13 | | | — | | | | — | | | | — | | | | — | | | | — | | | | (0.4 | ) | | | (0.4 | ) | Net income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (429.4 | ) | | | (429.4 | ) | Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | 75.2 | | | | — | | | | 75.2 | | Balances at December 31, 2020 | | | 1,081.6 | | | $ | — | | | $ | 5,276.5 | | | $ | — | | | $ | (50.7 | ) | | $ | (2,284.3 | ) | | $ | 2,941.5 | | Exercise of stock options and ESPP | | | 9.4 | | | | — | | | | 33.4 | | | | — | | | | — | | | | — | | | | 33.4 | | Vesting of RSUs, net of tax withholdings | | | 19.5 | | | | — | | | | — | | | | (17.5 | ) | | | — | | | | — | | | | (17.5 | ) | Acquisition-related common stock issuance | | | 20.0 | | | | — | | | | 145.7 | | | | — | | | | — | | | | — | | | | 145.7 | | Acquisition-related stock option issuance | | | — | | | | — | | | | 2.2 | | | | — | | | | — | | | | — | | | | 2.2 | | Stock-based compensation expense | | | — | | | | — | | | | 167.2 | | | | — | | | | — | | | | — | | | | 167.2 | | Retirements of treasury stock | | | — | | | | — | | | | — | | | | 17.5 | | | | — | | | | (17.5 | ) | | | — | | Net income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (104.2 | ) | | | (104.2 | ) | Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | (56.4 | ) | | | — | | | | (56.4 | ) | Balances at December 31, 2021 | | | 1,130.5 | | | $ | — | | | $ | 5,625.0 | | | $ | — | | | $ | (107.1 | ) | | $ | (2,406.0 | ) | | $ | 3,111.9 | |
See accompanying notes to consolidated financial statements.
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Zynga Inc.
Consolidated Statements of Cash Flows
(In millions)
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Cash flows from operating activities: | | | | | | | | | | | | | Net income (loss) | | $ | (104.2 | ) | | $ | (429.4 | ) | | $ | 41.9 | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 238.9 | | | | 142.1 | | | | 79.4 | | Stock-based compensation expense | | | 167.2 | | | | 122.6 | | | | 81.5 | | (Gain) loss from sale of building, derivatives, sale of investments and other assets and foreign currency, net | | | 13.4 | | | | 16.0 | | | | (314.5 | ) | (Accretion) amortization on marketable debt securities, net | | | — | | | | (2.2 | ) | | | (4.9 | ) | Noncash lease expense | | | 16.9 | | | | 15.9 | | | | 11.2 | | Noncash interest expense | | | 53.9 | | | | 26.4 | | | | 13.2 | | Change in deferred income taxes and other | | | (49.9 | ) | | | (32.9 | ) | | | (16.8 | ) | Impairment related to real estate assets | | | 66.8 | | | | — | | | | — | | Changes in operating assets and liabilities: | | | | | | | | | | | | | Accounts receivable, net | | | (9.2 | ) | | | 4.8 | | | | (22.5 | ) | Prepaid expenses and other assets | | | (25.0 | ) | | | 9.1 | | | | (15.1 | ) | Accounts payable | | | 37.6 | | | | 5.5 | | | | (1.0 | ) | Deferred revenue | | | 17.9 | | | | 291.5 | | | | 234.7 | | Income tax payable | | | 4.7 | | | | 36.7 | | | | (10.2 | ) | Operating lease and other liabilities | | | (175.2 | ) | | | 223.1 | | | | 185.9 | | Net cash provided by (used in) operating activities | | | 253.8 | | | | 429.2 | | | | 262.8 | | Cash flows from investing activities: | | | | | | | | | | | | | Purchases of investments | | | (614.2 | ) | | | (677.1 | ) | | | (1,568.2 | ) | Maturities of investments | | | 652.3 | | | | 1,038.5 | | | | 451.5 | | Sales of investments | | | — | | | | 549.9 | | | | 44.9 | | Acquisition of property and equipment | | | (12.5 | ) | | | (18.8 | ) | | | (23.6 | ) | Proceeds from sale of building and other property and equipment, net of transaction costs | | | — | | | | 0.1 | | | | 580.6 | | Business combinations, net of cash acquired and restricted cash held in escrow | | | (508.3 | ) | | | (942.5 | ) | | | (301.8 | ) | Asset acquisitions of intangible assets | | | (4.3 | ) | | | (6.0 | ) | | | — | | Release of business combination restricted cash held in escrow | | | — | | | | (30.0 | ) | | | (35.0 | ) | Other investing activities, net | | | (13.9 | ) | | | (1.8 | ) | | | (0.3 | ) | Net cash provided by (used in) investing activities | | | (500.9 | ) | | | (87.7 | ) | | | (851.9 | ) | Cash flows from financing activities: | | | | | | | | | | | | | Proceeds from issuance of debt, net of issuance costs | | | (1.2 | ) | | | 856.7 | | | | 672.2 | | Purchase of capped calls | | | — | | | | (63.0 | ) | | | (73.8 | ) | Repayment of debt | | | — | | | | — | | | | (101.4 | ) | Taxes paid related to net share settlement of stockholders' equity awards | | | (17.5 | ) | | | (57.2 | ) | | | (49.6 | ) | Proceeds from issuance of common stock | | | 33.4 | | | | 16.9 | | | | 17.4 | | Acquisition-related contingent consideration payments | | | (56.1 | ) | | | (63.6 | ) | | | (12.9 | ) | Other financing activities, net | | | — | | | | — | | | | (0.3 | ) | Net cash provided by (used in) financing activities | | | (41.4 | ) | | | 689.8 | | | | 451.6 | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (26.7 | ) | | | 15.8 | | | | 10.8 | | | | | | | | | | | | | | | Net change in cash, cash equivalents and restricted cash | | | (315.2 | ) | | | 1,047.1 | | | | (126.7 | ) | Cash, cash equivalents and restricted cash, beginning of period | | | 1,500.4 | | | | 453.3 | | | | 580.0 | | Cash, cash equivalents and restricted cash, end of period | | $ | 1,185.2 | | | $ | 1,500.4 | | | $ | 453.3 | | | | | | | | | | | | | | | Supplemental cash flow information: | | | | | | | | | | | | | Income taxes paid | | $ | 126.2 | | | $ | 13.2 | | | $ | 22.4 | | Interest paid | | | 3.6 | | | | 1.7 | | | | 2.8 | | | | | | | | | | | | | | | Noncash investing activities: | | | | | | | | | | | | | Acquisition-related common stock issuance | | $ | 145.7 | | | $ | 1,137.7 | | | $ | 253.9 | | Acquisition-related stock option stock issuance | | | 2.2 | | | | — | | | | — | | Acquisition-related deferred purchase consideration | | | 4.6 | | | | 23.8 | | | | — | |
See accompanying notes to consolidated financial statements.
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Zynga Inc.
Notes to Consolidated Financial Statements
1. Overview and Summary of Significant Accounting Policies
Organization and Description of Business
Zynga Inc. (“Zynga,” “we” or the “Company”) is a global leader in interactive entertainment. We develop, market and operate social games as live services played on mobile platforms (such as Apple’s iOS and Google’s Android), social networking platforms (such as Facebook and Snapchat), Personal Computers (PCs), consoles (such as Nintendo’s Switch) and other platforms. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items and advertising services. We also operate a mobile programmatic advertising and monetization platform. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S. as well as various international office locations in North America, Asia and Europe.
We completed our initial public offering in December 2011 and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ZNGA.”
Proposed Merger with Take-Two
On January 9, 2022, the Company entered into an Agreement and Plan of Merger with Take-Two. Refer to Note 16 – “Subsequent Events” for further background on the combination.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the operations of the Company and its owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated average playing period of payers that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, the fair value of assets and liabilities acquired through business combinations, contingent consideration obligations, the discount rate used in measuring our operating lease liabilities, the interest rate used in calculating the present value of the initial liability component of our convertible senior notes, stock-based compensation expense and evaluation of recoverability of goodwill, intangible assets and long-lived assets and as necessary, estimates of fair value to measure impairment losses. Actual results could differ materially from those estimates.
Segments
We have 1 operating and reportable segment, which is at the consolidated entity level. The Chief Operating Decision Maker (“CODM”), our Chief Executive Officer, manages our operations on a consolidated basis for purposes of assessing performance and allocating resources.
Revenue Recognition
We derive substantially all of our revenue from the sale of virtual items and advertising associated with our online games.
Online Game. We operate our games as live services that allow players to play for free. Within these games, however, players can purchase virtual currency to obtain virtual goods or virtual goods directly (together, defined as “virtual items” or a “virtual item”) to enhance their game-playing experience. Our identified performance obligation is to display the virtual items within the game over the estimated playing period of the paying player or until they are consumed in game play based upon the nature of the virtual item. Payment is required at time of purchase and the purchase price is a fixed amount.
Players can purchase our virtual items through various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google Play accounts and Facebook local currency payments. Payments from players for virtual items are non-refundable and relate to non-cancellable contracts that specify our obligations. Such payments are initially recorded to deferred revenue.
For revenue earned through mobile platforms, the transaction price is equal to the gross amount we request to be charged to our player because we are the principal in the transaction. The related platform and payment processing fees are recorded as cost of revenue in the period incurred.
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For revenue earned on our web based games through Facebook, our players utilize Facebook’s local currency-based payments program to purchase virtual items in our games. For all payment transactions on the Facebook platform, Facebook remits to us 70% of the price we request to be charged to the player for each transaction, which represents the transaction price. Despite being the principal in the transaction, we recognize revenue net of the amounts retained by Facebook for platform and payment processing fees because Facebook may choose to alter our requested price, for example by offering a discount or other incentives to players playing on their platform, and we do not receive information from Facebook indicating the amount of such discounts or incentives or the actual amount paid by our players. Accordingly, we are unable to determine the gross amount paid by our players on the Facebook platform.
The satisfaction of our performance obligation is dependent on the nature of the virtual item purchased and as a result, we categorize our virtual items as follows:
| •
| Consumable: Consumable virtual items represent items that can be consumed by a specific player action. Common characteristics of consumable virtual items may include items that are no longer displayed on the player’s game board after a short period of time, do not provide the player any continuing benefit following consumption, or often times enable a player to perform an in-game action immediately (e.g. chips in Zynga Poker). For the sale of consumable virtual items, we recognize revenue as the items are consumed (i.e., over time), which approximates one month.
|
| •
| Durable: Durable virtual items represent items that are accessible to the player over an extended period of time (e.g. animals in FarmVille franchise). We recognize revenue from the sale of durable virtual items ratably over the estimated average playing period of payers for the applicable game (i.e., over time), which represents our best estimate of the average life of the durable virtual item.
|
If we do not have the ability to differentiate between revenue attributable to consumable virtual items or durable virtual items in a specific game, we recognize revenue ratably over the estimated average playing period of payers for the applicable game. Historically, we have had sufficient data to separately account for consumable and durable virtual items for substantially all of our web games. However, for our standalone mobile games, we do not have the requisite data to separately account for consumable and durable virtual items and therefore recognize mobile online game revenue ratably over the estimated average playing period of payers.
We expect that in future periods, there will be changes in the mix of consumable and durable virtual items offered and sold, reduced virtual item sales in some existing games, changes in estimates of the average playing period of payers and/or changes in our ability to make such estimates. When such changes occur, and in particular if more of our revenue in any period is derived from durable virtual items or the estimated average playing period of payers increases on average, the amount of revenue that we recognize in a current or future period may be reduced, perhaps significantly. Conversely, if the estimated average playing period of payers decreases on average, the amount of revenue that we recognize in a current or future period may be accelerated, perhaps significantly.
On a quarterly basis, we determine the estimated average playing period of payers by game beginning at the time of a payer’s first purchase in the respective game and ending on a date when that paying player is deemed to be no longer playing. To determine when paying players are no longer playing a given game, we analyze monthly cohorts of payers who made their first in-game payment between six and 18 months prior to the beginning of each quarter and determine whether each payer within the cohort is an active or inactive player as of the date of our analysis. To determine which payers are inactive, we analyze the dates that each payer last logged into that game. We determine a payer to be inactive once they have reached a period of inactivity for which it is probable that they will not return to a specific game. For the payers deemed inactive as of our analysis date, we analyze the dates they last logged into that game to determine the rate at which inactive payers stopped playing. Based on these dates, we then project a date at which all payers for each monthly cohort are expected to cease playing our games. We then average the time periods from first purchase date and the date the last payer is expected to cease playing the game for each of the monthly cohorts to determine the total playing period of payers for that game. To determine the estimated average playing period of payers, we then divide this total period by two. The use of this “average” approach is supported by our observations that payers typically become inactive at a relatively consistent rate for our games. If future data indicates payers do not become inactive at a relatively consistent rate, we will modify our calculations accordingly. When a new game is launched and only a limited period of payer data is available for our analysis, then we also consider other factors to determine the estimated average playing period of payers, such as the estimated average playing period of payers for other recently launched games with similar characteristics.
Advertising. We have contractual relationships with advertising networks, agencies, advertising brokers and directly with advertisers to display advertisements in our games. For all of our in-game advertising arrangements, we are the principal and our performance obligation is to provide the inventory for advertisements to be displayed in our games. For contracts made directly with advertisers, we are also obligated to serve the advertisements in our games. However, for those direct advertising arrangements, providing the advertising inventory and serving the advertisement is considered a single performance obligation, as the advertiser cannot benefit from the advertising space without its advertisements being displayed.
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The pricing and terms for all our in-game advertising arrangements are governed by either a master contract or insertion order and generally stipulate payment terms as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days. The transaction price is generally the product of the number of advertising units delivered (e.g., impressions, offers completed, videos viewed, etc.) and the contractually agreed upon price per advertising unit. Further, for advertising transactions not placed directly with the advertiser, the contractually agreed upon price per advertising unit is generally based on our fixed revenue rate stated in the contract. The number of advertising units delivered is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. For a limited number of advertising network arrangements, the transaction price is determined based on a volume-tiered pricing structure, whereby the price per advertising unit in a given month is determined by the number of impressions delivered in that month. However, the uncertainty concerning the number of impressions delivered is resolved at the end of each month, therefore, eliminating any uncertainty with respect to the price per advertising unit for each reporting period.
For in-game display advertisements, in-game offers, engagement advertisements and other advertisements, our performance obligation is satisfied over the life of contract (i.e., over time), with revenue being recognized as advertising units are delivered.
For in-game sponsorships with branded virtual items, revenue is initially recorded to deferred revenue and then recognized ratably over the estimated life of the branded virtual item, which approximates the estimated average playing period of payers, or over the term of the advertising arrangement, depending on the nature of the agreement.
We also operate a software platform that facilitates transactions between advertisers and owners of digital advertising inventory (“publishers”) via programmatic auctions. The Company has contracts with both advertisers (“demand side”) and publishers (“supply side”), with the advertiser representing the Company’s customer in a demand side transaction and the publisher representing the Company’s customer in a supply side transaction. The pricing and terms for all demand side and supply side arrangements are contractually governed and generally stipulate payment terms as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days.
For both demand side and supply side revenue arrangements, the Company’s performance obligation is to provide the advertiser or publisher with access to the Company’s software platform, which facilitates the placement of the advertising inventory. The Company does not control the advertising inventory, because the Company does not have the substantive ability to direct the use of, nor obtain substantially all of the remaining benefits from the advertising inventory. Further, the Company is not primarily responsible for fulfillment and does not have any inventory risk. Accordingly, the Company is an agent in both demand side and supply side transactions and presents revenue on a net basis. The transaction price is the product of the number of advertising units delivered to the end user via the software platform and the contractually agreed upon price per advertising unit, less the consideration paid or payable to publishers. The number of advertising units delivered to the end user is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. Our performance obligation is satisfied over the life of contract (i.e., over time), with revenue being recognized as advertising units are delivered to the end user.
Taxes Collected from Customers. We present taxes collected from customers and remitted to governmental authorities on a net basis within our consolidated statement of operations.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, money market funds, corporate debt and foreign certificates of deposit and time deposits with maturities of 90 days or less from the date of purchase.
Restricted Cash
Restricted cash consists of funds held in escrow in accordance with the terms of our business acquisition agreements.
Short and Long-Term Investments
Realized gains and losses for all investments are determined using the specific-identification method and are reflected as a component of other income (expense), net in the consolidated statements of operations.
Debt Securities
Short and long-term debt investments consist of corporate debt securities and foreign certificates of deposit and time deposits. Based on our intentions, all debt investments are classified as available-for-sale and are reported at fair value with unrealized gains and losses recorded as a separate component of other comprehensive income, net of income taxes.
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For debt securities in an unrealized loss position, we first consider whether we intend to or it is more likely than not that we will be required to sell the individual security prior to recovery of its amortized cost basis and if so, we adjust the carrying value of security down to its fair value, with the amount of the write-down recorded as a realized loss within other income (expense), net.
Otherwise, we determine whether a decline in fair value is attributable to a partial or full credit loss by reviewing factors such as the extent to which the fair value is less than the amortized cost basis, changes in interest rates since the purchase of the security, the financial condition of the issuer, including changes in credit ratings, the remaining payment terms of the security, as well as any adverse conditions specifically related to the security, the issuer’s industry or its geographic area. If a credit loss exists, we adjust the carrying value by recording expense within other income (expense), net equal to the amount of the credit loss, with such amount limited to the amount of the unrealized loss. Subsequent recoveries of fair value originally attributed to a credit loss are subsequently recognized as income within other income (expense), net. Finally, any unrealized loss not deemed to be attributable to a credit loss is recognized as component of other comprehensive income, net of income taxes.
NaN credit losses related to our debt investments were recognized as a component of other income (expense), net in any of the periods presented.
Equity Securities with Readily Determinable Fair Value
Short-term equity investments consist of privately held mutual funds. All equity investments are reported at fair value, with unrealized gains and losses recorded within other income (expense), net in our consolidated statement of operations.
Derivatives
Designated Hedging Derivatives - Net Investment Hedge
Certain foreign currency forward contracts are designated as net investment hedges to mitigate foreign currency risks related to the Company’s investment in certain foreign subsidiaries. Changes in the fair value of the net investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in other comprehensive income (loss) ("OCI") with the foreign currency translation adjustment and the excluded components (e.g. forward points) from the assessment of hedge effectiveness are recognized in other income (expense) on a straight-line basis over the term of the derivative contract.
Non-Designated Hedging Derivatives - Other Derivatives
Other derivatives not designated as hedging instruments consist of foreign currency forward contracts that are used as an economic offset to foreign currency risks associated with the remeasurement of certain intercompany loans. Gains and losses on these contracts are recognized in other income (expense), net in our consolidated statement of operations.
Fair Value of Financial Instruments
Our financial assets consist of cash, cash equivalents, short-term and long-term investments, derivative instruments and accounts receivable, net. Cash equivalents, short-term and long-term investments and derivative instruments are reported at fair value while accounts receivable, net are stated at the net realizable amount, which approximates fair value.
Our financial liabilities consist of accounts payable and accrued liabilities, contingent consideration obligations, deferred acquisition consideration and debt. Accounts payable and accrued liabilities are stated at the invoiced or estimated payout amount, respectively, and approximate fair value. Contingent consideration obligations and deferred acquisition consideration, which are the result of business acquisitions, are reported at the estimated fair value. Our debt is recorded at the net carrying amount, which does not approximate fair value. However, the fair value of the debt is disclosed at each reporting period – refer to Note 10 – “Debt” for further discussion.
We estimate fair value as the exit price, which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants.
The valuation techniques used to measure the fair value of the Company’s financial instruments were valued based on quoted market prices, model driven valuations using significant inputs derived from or corroborated by observable market data or other directly and indirectly inputs observable in the marketplace. We use a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Includes inputs, other than Level 1 inputs, that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs that are supported by little or no market activity.
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Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the original invoiced amount less an allowance for credit losses. In evaluating our ability to collect outstanding receivable balances and related allowance for credit losses, we consider many factors, including the age of the balance, the customer’s payment history and current creditworthiness, as well as and current and forecasted economic conditions that may affect our customers’ ability to pay. Bad debts are written off after all collection efforts have been exhausted. We do not require collateral from our customers.
Property and Equipment, Net
Property and equipment are recorded at historical cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the improvements or the lease term.
The estimated useful lives of our property and equipment are as follows:
Property and Equipment
| | Useful Life
| Computer equipment
| | 3 years
| Software
| | 2 to 3 years
| Furniture and fixtures
| | 2 years
| Leasehold improvements
| | Shorter of useful life (generally up to 7 years) or remaining lease term
|
Business Combinations
In accounting for acquisitions through which a set of assets and activities are transferred to the Company, we perform an initial test to determine whether substantially all of the fair value of the gross assets transferred are concentrated in a single identifiable asset or a group of similar identifiable assets, such that the acquisition would not represent a business. If the initial test does not result in substantially all of the fair value concentrated in a single or group of similar assets, we then perform a second test to evaluate whether the assets and activities transferred include inputs and substantive processes that together, significantly contribute to the ability to create outputs, which would constitute a business. If the result of the second test indicates that the acquired assets and activities constitute a business, we account for the transaction as a business combination.
For our business combinations, we allocate the purchase consideration of the acquisition, which includes the estimated acquisition date fair value of contingent consideration (if applicable) and deferred purchase consideration (if applicable), to the tangible assets, liabilities and identifiable intangible assets acquired based on each of the estimated fair values at the acquisition date. The excess of the purchase consideration over the fair values is recorded as goodwill. Determining the fair value of such items requires judgment, including estimating future cash flows or the cost to recreate an acquired asset. If actual results are lower than initial estimates, we could be required to record impairment losses in the future. Acquired intangible assets with definite lives are amortized over their estimated useful lives generally on a straight-line basis, unless evidence indicates a more appropriate method. Intangible assets with indefinite lives are not amortized but rather tested for impairment annually, or more frequently if circumstances indicate an impairment may exist.
During the one-year period beginning with the acquisition date, we may record certain purchase accounting adjustments related to the fair value of assets acquired and liabilities assumed against goodwill. After the final determination of the fair value of assets acquired or liabilities assumed, any subsequent adjustments are recorded to our consolidated statements of operations. The fair value of contingent consideration liabilities assumed from an acquisition are remeasured each reporting period after the acquisition date and the changes in the estimated fair value, if any, is recorded within operating expenses in our consolidated statement of operations each reporting period. Acquisition-related expenses are expensed as incurred.
Game Software Development Costs
We review internal use software development costs associated with new games or updates to existing games on a quarterly basis to determine if the costs qualify for capitalization. Our studio teams follow an agile development process, whereas the preliminary project stage remains ongoing until just prior to worldwide launch, at which time final feature selection occurs. As such, the development costs are expensed as incurred to research and development in our consolidated statement of operations. We did not capitalize any software development costs during any of the years presented.
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Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are evaluated annually for impairment, or more frequently if circumstances exist that indicate that impairment may exist. When conducting our annual goodwill impairment assessment, we perform a quantitative evaluation by comparing the estimated fair value of our single reporting unit, determined using the Company’s market capitalization as of the testing date, to its carrying value. For our annual goodwill impairment analysis performed in the fourth quarter of 2021, the result indicated that the estimated fair value of the reporting unit exceeded its carrying value. Accordingly, we concluded goodwill was not impaired.
At least annually, we test recoverability of indefinite-lived intangible assets using a qualitative approach that considers whether it is more likely than not that the fair value of the intangible asset exceeds its carrying value. If qualitative factors indicate that it is more likely than not that the indefinite-lived intangible asset is impaired, a quantitative analysis is performed and the amount of any impairment loss recorded, if any, is measured as the difference between the carrying value and the fair value of the impaired intangible asset. We concluded that indefinite-lived intangible assets were not impaired as of December 31, 2021.
Definite-Lived Intangible Assets
Definite-lived intangible assets consist of assets acquired from a prior business combination and are carried at historical cost less accumulated amortization. Amortization is generally recorded on a straight-lined basis, unless another method is deemed more appropriate, over the estimated useful lives of the assets, generally 12 to 96 months.
Impairment of Long-Lived Assets, Including Impairment Related to Real Estate Assets
Long-lived assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. When the projected undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, the assets are adjusted to their estimated fair value and an impairment loss is recorded as a component of operating income.
Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
Impairment losses could materially decrease our future net income and result in lower asset values on our balance sheet. During the year ended December 31, 2021, we recognized an impairment loss of $66.8 million related to our San Francisco Office Building right-of-use lease asset and related to property and equipment. There were 0 impairment losses recorded during the years ended December 31, 2020 or 2019.
Licenses and Royalties
We obtain licenses from third parties for use of their brands, properties and other licensed content in our games (e.g., Hit It Rich! Slots or Game of Thrones Slots Casino). Our licensing agreements typically include minimum guarantee royalty payments, which are due over the term of the agreement and are recoupable against future royalty obligations that would otherwise become payable. These advance payments are capitalized as prepaid royalties when paid and amortized once the licensed product is launched in our game. Amortization is recorded as cost of revenue and is calculated as (i) the contractual royalty rate based on actual net product sales as defined in the licensing agreement or (ii) the straight-line method over the remaining estimated useful life of the licensed product, whichever is greater.
Each quarter, we evaluate the recoverability of our prepaid royalties as well as any contractual commitments not yet paid to determine amounts that we deem unlikely to be recovered through product sales. To evaluate the future recoverability of prepaid royalties and guarantees, we consider the terms of the agreement, game development plans, forecasted and actual financial performance of the game as well as other qualitative factors, such as the success of similar games and similar genres published by the Company. To the extent that this evaluation indicates that the remaining prepaid and guaranteed royalty payments are not recoverable, the Company records an impairment loss in the period that impairment is indicated. Any impairment losses determined before the launch of a product are recorded as research and development, while any impairment losses determined post-launch are recorded as cost of revenue in our consolidated statement of operations.
Leases
Lessee Arrangements
We determine if an arrangement is a lease at contract inception. If there is an identified asset in the contract (either explicitly or implicitly) and we have control over its use, the contract is (or contains) a lease. In determining if there is an identified asset, we apply judgment in assessing whether the supplier has a substantive substitution right based on the supplier’s practical ability to substitute the
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asset and the economic benefit to do so. If it is determined that a substantive substitution right exists, the contract is not accounted for as a lease. With the respect to the servers utilized in certain of our hosting and data storage arrangements, the Company determined that a substantive substitution right existed given the location of the servers at the supplier’s premises, a lack of contractual restrictions preventing the supplier from substituting the servers throughout the period of use and the economic incentive for the supplier to substitute the servers as needed in order to efficiently handle varying levels of demand from its customers.
Our operating leases are primarily for office facilities. Certain leases include options to extend the lease for a set number of years or early terminate the lease prior to the contractually defined expiration date. We include such extension periods in the lease term only when it is reasonably certain that they will be exercised and include such periods beyond the early termination date when it is reasonably certain the early terminations will not be exercised. As of December 31, 2021 and 2020, the weighted-average remaining lease term for all of our operating leases was 8.7 years and 8.9 years, respectively.
We record right-of-use assets and current and non-current operating lease liabilities in our consolidated balance sheet for operating leases with lease terms greater than 12 months and do not to apply the balance sheet recognition requirements to leases with lease terms of 12 months or less (“short-term leases”). Additionally, we do not separate lease components from non-lease components and therefore allocate the entire consideration to the lease component(s).
Right-of-use assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments. Right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the total required fixed payments over the lease term, with the right-of-use assets further adjusted for any payments made prior to lease commencement, lease incentives received and/or initial direct costs incurred. Certain lease arrangements also include variable payments for costs such as common-area maintenance, utilities, taxes or other operating costs, which are generally based on a percentage of actual expenses incurred or a fluctuating rate which is unknown at the inception of the contract. These variable lease payments are excluded from the measurement of the right-of-use assets and lease liabilities.
In determining the present value of lease payments, we discount future lease payments using our incremental borrowing rate since the implicit rate in our various leases is unknown. The incremental borrowing rate is determined at lease commencement for each individual lease and is based on a number of factors, including relevant observable debt transactions, the current economic environment, lease term and currency in which the lease is denominated. As of December 31, 2021 and 2020, the weighted-average incremental borrowing rate for our operating leases was 4.2%.
We recognize lease expense for operating leases and short-term leases on a straight-line basis over the lease term. Variable lease payments are recognized when the underlying uncertainty is resolved, which is generally when the obligation for those costs are incurred. Operating and variable leases expenses are presented as operating expenses in the consolidated statement of operations.
Lessor Arrangements
We do not separate lease components from non-lease components and therefore allocate the entire consideration in our contracts to the lease components. All of the lease and non-lease components qualify for accounting under ASC Topic 842 Leases.
Stock-Based Compensation Expense
We recognize stock-based compensation expense for restricted stock units (“RSUs”) based on grant date fair value on a straight-line basis over the requisite service period for the entire award.
We recognize stock-based compensation expense for performance-based RSUs (“Performance RSUs”) based upon the grant date fair value on an accelerated attribution method over the requisite service period of the award. At each reporting period, the amount of stock-based compensation is determined based on the probability of achievement of pre-established thresholds or milestones for each award and if necessary, a cumulative catch-up adjustment is recorded to reflect any revised estimates regarding the probability of achievement.
We recognize stock-based compensation expense for market-based RSUs (“Market RSUs”) based upon the grand date fair value on an accelerated attribution method over the requisite service period. The estimated grant date fair value is estimated using a Monte Carlo simulation that considers the probability of achievement of pre-established thresholds for each award. The significant assumptions generally used in estimating the grant date fair value of each award include expected volatility, a risk-free interest rate ranging and an expected dividend yield. The estimated grant date fair value is not subsequently revised to consider anticipated or actual achievement of the pre-established thresholds.
We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: expected volatility of our Class A common stock, which is based on our own calculated historical rate; expected life of the option award, which we elected to calculate using the simplified method; expected dividend yield, which is 0%, as we have not paid and do not have any plans to pay dividends on our common stock; and the risk-free interest rate, which is based on
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the U.S. Treasury rate in effect at the time of grant with maturities commensurate to the stock option award’s expected life. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense for future awards may differ materially compared to awards granted previously. We record stock-based compensation expense for stock options based on the grant date fair value on a straight-line basis over the requisite service period of the award.
Stock-based compensation expense is recorded net of forfeitures as they are occur.
Income Taxes
We account for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws at the end of the reporting period; the effect of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on all available positive and negative evidence including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. In evaluating the objective evidence that the results of recent operations provide, we generally consider the trailing three years of cumulative operating income (loss). The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
The Company accounts for Global Intangible Low-Taxed Income provisions as a component of tax expense in the period in which it is subject to the rules.
We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in the provision for income tax.
Foreign Currency Transactions
Generally, the functional currency of our international subsidiaries is the local currency that the international subsidiary operates in or the U.S. dollar. We translate the financial statements of these non-U.S. dollar functional subsidiaries to U.S. dollars using the prevailing balance sheet date exchange rate for assets and liabilities and average exchange rates during the period for revenue and costs and expenses. We record translation gains and losses in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
We reflect foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to the functional currency, which includes gains and losses from the remeasurement of assets and liabilities, as a component of other income (expense), net. Foreign exchange transactions gains (losses) recorded as a component of other income (expense), net – excluding gains (losses) from non-designated hedging derivatives – totaled $(0.3) million, $(16.7) million and $0.8 million for the years ended December 31, 2021, 2020 and 2019.
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially expose us to concentrations of credit risk, consist primarily of cash, cash equivalents, short and long-term investments and accounts receivable. The Company holds cash and cash equivalents at reputable financial institutions with what it considers to be high credit quality, and such amounts may at times exceed the federally insured limits. The Company’s investment policy limits the amount of credit exposure in its portfolio by imposing credit rating minimums and limiting purchases by security type and sector.
Accounts receivable are unsecured and represent amounts due to us based on contractual obligations where an executed contract or click-through agreement exists. Apple, Google and Facebook are significant distribution, marketing, promotion and payment platforms for our games. A significant portion of our 2021, 2020 and 2019 revenue was generated from players who accessed our games through these platforms or were served advertisements in our games on behalf of advertisers. As of December 31, 2021 and December 31, 2020, of our accounts receivable, net 31% and 35%, respectively, were amounts owed to us by Apple, 29% and 34%, respectively, were amounts owed to us by Google and 5% and 8%, respectively, were amounts owed to us by Facebook.
Advertising Expense
Costs for marketing and advertising our games are primarily expensed as incurred and are included in sales and marketing expense in our consolidated statement of operations. Such costs, primarily consisting of player acquisition costs, totaled $831.7 million, $583.1 million and $377.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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Recent Accounting Pronouncements
Issued But Not Yet Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”, which simplifies the accounting for convertible instruments by reducing the number of accounting models and generally requiring that a convertible instrument be accounted for as a single liability measured at amortized cost, with no conversion feature separately recorded in equity. Similarly, no portion of issuance costs will be allocated to equity under the ASU. Further, the ASU amends the earnings per share guidance by requiring the diluted earnings per share calculation for convertible instruments to follow the if-converted method, with use of the treasury stock method no longer permitted. The ASU is effective for fiscal years beginning after December 15, 2021. The ASU allows either a modified retrospective method of transition or a fully retrospective method of transition, with any adjustments recognized as an adjustment to the opening balance of retained earnings.
The Company will adopt the ASU on January 1, 2022 using the modified retrospective method. As a result of the adoption, the Company expects to recognize a net increase to convertible senior notes, net of $196.7 million, primarily from the derecognition of the debt discount associated with the bifurcated equity component. The adoption adjustment represents a decrease to additional paid-in capital of $278.7 million from the derecognition of the bifurcated equity components and a net decrease to accumulated deficit of $82.0 million, primarily representing the cumulative interest expense previously recognized related to the accretion of the bifurcated conversion options. Further, in future periods of net income, the Company expects a dilutive impact to its reported diluted net income per share as a result of adoption, as the if-converted method requires the assumption the debt converts into equity at the beginning of the reporting period.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to this ASU, an acquirer generally recognizes contract assets acquired and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is to be applied prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted early as of an interim period, as of the beginning of the fiscal year that includes the interim period of early application). The Company is currently assessing this standard’s impact on its consolidated financial statements.
2. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table presents our revenue disaggregated by platform (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Online game: | | | | | | | | | | | | | Mobile | | $ | 2,175.8 | | | $ | 1,596.6 | | | $ | 981.2 | | Other(1) | | | 73.4 | | | | 70.6 | | | | 66.1 | | Online game total | | $ | 2,249.2 | | | $ | 1,667.2 | | | $ | 1,047.3 | | Advertising and other: | | | | | | | | | | | | | Mobile | | $ | 543.1 | | | $ | 302.5 | | | $ | 266.5 | | Other(1) | | | 8.2 | | | | 5.1 | | | | 7.9 | | Advertising and other total | | $ | 551.3 | | | $ | 307.6 | | | $ | 274.4 | | Total revenue | | $ | 2,800.5 | | | $ | 1,974.8 | | | $ | 1,321.7 | |
| (1)
| Includes web revenue for online game and web advertising revenue and other revenue for advertising and other.
|
The following table presents our revenue disaggregated based on the geographic location of our payers (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | United States | | $ | 1,700.6 | | | $ | 1,211.7 | | | $ | 826.6 | | All other countries(1) | | | 1,099.9 | | | | 763.1 | | | | 495.1 | | Total revenue | | $ | 2,800.5 | | | $ | 1,974.8 | | | $ | 1,321.7 | |
| (1)
| No foreign country exceeded 10% of our total revenue for any periods presented.
|
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The estimated weighted average playing period of payers was ten months for the years ended December 31, 2021 and 2020 and nine months for the year ended December 31, 2019.
During the year ended December 31, 2021, we deferred $5.9 million of online game revenue until the first quarter of 2022, due to changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated. This change did not impact our reported earnings per share.
During the year ended December 31, 2020, we recognized $2.0 million of online game revenue and income from operations from games that have been discontinued as there is no further performance obligation and we recognized $1.6 million of online game revenue and income from operations from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods. These changes had a cumulative $0.01 per share benefit to our reported loss per share in the year ended December 31, 2020.
During the year ended December 31, 2019, there was 0 significant impact from discontinued games or changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods.
Contract Balances
We receive payments from our customers based on the payment terms established in our contracts. Payments for online game revenue are required at time of purchase, are non-refundable and relate to non-cancellable contracts that specify our performance obligations. Such payments are initially recorded to deferred revenue and are recognized into revenue as we satisfy our performance obligations. Further, payments made by our players are collected by payment processors and remitted to us generally within 45 days of invoicing. Our right to the payments collected on our behalf is unconditional and therefore recorded as accounts receivable, net of the associated payment processing fees.
Payments for advertising arrangements, including advertising transactions through our demand side and supply side software platform, are due based on the contractually stated payment terms. The contract terms generally require payment within 30 to 60 days subsequent to the end of the month. Our right to payment from the customer is unconditional and therefore recorded as accounts receivable. Payments due to publishers are recorded as other current liabilities.
During the year ended December 31, 2021, we recognized all of the revenue that was included in the $747.7 million current deferred revenue balance as of December 31, 2020.
The increase in accounts receivable, net during the year ended December 31, 2021 was primarily driven by sales on account during the period exceeding cash collections of current and previously due amounts, which includes contributions from Chartboost and StarLark, which were acquired in August 2021 and October 2021, respectively. The increase in deferred revenue during the year ended December 31, 2021 was primarily driven by the sale of virtual items during the period exceeding revenue recognized from the satisfaction of our performance obligations, which includes contribution from StarLark.
Unsatisfied Performance Obligations
Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.
3. Financial Instruments
Debt Securities
The following tables summarize the amortized cost, gross unrealized gains and losses and fair value of our short-term and long-term debt securities as of December 31, 2021 and 2020 (in millions):
| | December 31, 2021 | | | | | | | | Gross | | | Gross | | | | | | | | Amortized | | | Unrealized | | | Unrealized | | | Aggregate | | | | Cost | | | Gains | | | Losses | | | Fair Value | | Short-term debt securities: | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | 112.0 | | | $ | — | | | $ | — | | | $ | 112.0 | | Foreign certificates of deposit and time deposits | | | 11.3 | | | | — | | | | — | | | | 11.3 | | Total | | $ | 123.3 | | | $ | — | | | $ | — | | | $ | 123.3 | |
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| | December 31, 2020 | | | | | | | | Gross | | | Gross | | | | | | | | Amortized | | | Unrealized | | | Unrealized | | | Aggregate | | | | Cost | | | Gains | | | Losses | | | Fair Value | | Short-term debt securities: | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | 152.7 | | | $ | 0.1 | | | $ | — | | | $ | 152.8 | | Foreign certificates of deposit and time deposits | | | 6.5 | | | | — | | | | — | | | | 6.5 | | Total | | $ | 159.2 | | | $ | 0.1 | | | $ | — | | | $ | 159.3 | | | | | | | | | | | | | | | | | | | Long-term debt securities: | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | 2.0 | | | $ | — | | | $ | — | | | $ | 2.0 | | Total | | $ | 2.0 | | | $ | — | | | $ | — | | | $ | 2.0 | |
Equity Securities
During the years ended December 31, 2021, 2020 and 2019, we recognized unrealized gains totaling $0.2 million, $0.3 million and $0.1 million, respectively, as a component of other income (expense), net in our consolidated statement of operations associated with our mutual fund equity investments.
Derivatives
Beginning in July 2021, we entered into derivative instruments to manage certain of our foreign exchange risks. We use foreign currency contracts to reduce the risk that our cash flows, earnings and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. The Company records all derivatives net, as either other current assets or liabilities, at fair value.
The following table summarizes the notional amounts of our outstanding derivative instruments (in millions):
| | December 31, 2021 | | Designated Hedging Derivatives: | | | | | Foreign exchange contracts | | | | | Net investment hedge | | $ | 202.5 | | | | | | | Non-Designated Hedging Derivatives: | | | | | Foreign exchange contracts | | $ | 238.0 | |
The following table shows the gains and losses on designated hedging derivatives recognized in OCI (in millions):
| | Gains (Losses) Recognized in OCI | | | | Twelve Months Ended December 31, | | | | 2021 | | Net Investment Hedging Derivatives: | | | | | Foreign exchange contracts | | | | | Amount included in the assessment of effectiveness | | $ | 9.3 | |
The following table shows the effect of derivative instruments recorded in other income (expense), net in our consolidated statements of operations (in millions):
| | Gains (Losses) Recognized in Other Income (Expense) | | | | Twelve Months Ended December 31, | | | | 2021 | | Net Investment Hedging Derivatives: | | | | | Foreign exchange contracts | | | | | Amount excluded from the assessment of effectiveness | | $ | 0.5 | | | | | | | Non-Designated Hedging Derivatives: | | | | | Foreign exchange contracts | | $ | (14.4 | ) |
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4. Fair Value Measurements
The composition of our financial assets and liabilities as of December 31, 2021 and 2020 among the three levels of the fair value hierarchy are as follows (in millions):
| | December 31, 2021 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Assets: | | | | | | | | | | | | | | | | | Cash equivalents: | | | | | | | | | | | | | | | | | Money market funds | | $ | 117.7 | | | $ | — | | | $ | — | | | $ | 117.7 | | Foreign certificates of deposit and time deposits | | | — | | | | 216.4 | | | | — | | | | 216.4 | | Short-term investments: | | | | | | | | | | | | | | | | | Corporate debt securities | | | — | | | | 112.0 | | | | — | | | | 112.0 | | Foreign certificates of deposit and time deposits | | | — | | | | 11.3 | | | | — | | | | 11.3 | | Mutual funds | | | — | | | | 45.7 | | | | — | | | | 45.7 | | Derivative assets: | | | | | | | | | | | | | | | | | Designated hedging derivatives - foreign exchange contracts(1) | | | — | | | | 9.3 | | | | — | | | | 9.3 | | Total financial assets | | $ | 117.7 | | | $ | 394.7 | | | $ | — | | | $ | 512.4 | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Derivative liabilities: | | | | | | | | | | | | | | | | | Non-designated hedging derivatives - foreign exchange contracts(1) | | $ | — | | | $ | 2.3 | | | $ | — | | | $ | 2.3 | | Contingent consideration | | | — | | | | — | | | | 257.6 | | | | 257.6 | | Total financial liabilities | | $ | — | | | $ | 2.3 | | | $ | 257.6 | | | $ | 259.9 | |
(1)Designated hedging derivatives are presented net of the non-designated hedging derivatives within other current assets in the Company’s consolidated balance sheet
| | December 31, 2020 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Assets: | | | | | | | | | | | | | | | | | Cash equivalents: | | | | | | | | | | | | | | | | | Money market funds | | $ | 611.1 | | | $ | — | | | $ | — | | | $ | 611.1 | | Corporate debt securities | | | — | | | | 313.0 | | | | — | | | | 313.0 | | Foreign certificates of deposit and time deposits | | | — | | | | 85.6 | | | | — | | | | 85.6 | | Short-term investments: | | | | | | | | | | | | | | | | | Corporate debt securities | | | — | | | | 152.8 | | | | — | | | | 152.8 | | Foreign certificates of deposit and time deposits | | | — | | | | 6.5 | | | | — | | | | 6.5 | | Mutual funds | | | — | | | | 49.1 | | | | — | | | | 49.1 | | Long-term investments: | | | | | | | | | | | | | | | | | Corporate debt securities | | | — | | | | 2.0 | | | | — | | | | 2.0 | | Total financial assets | | $ | 611.1 | | | $ | 609.0 | | | $ | — | | | $ | 1,220.1 | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Contingent consideration | | $ | — | | | $ | — | | | $ | 463.1 | | | $ | 463.1 | | Total financial liabilities | | $ | — | | | $ | — | | | $ | 463.1 | | | $ | 463.1 | |
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The following table presents the activity for the year ended December 31, 2021 related to our Level 3 liabilities (in millions):
Level 3 Liabilities: | | Total | | Contingent consideration obligation – December 31, 2020 | | $ | 463.1 | | Additions | | | 14.9 | | Fair value adjustments | | | 78.8 | | Payments | | | (239.6 | ) | Rollic contingency resolution | | | (59.6 | ) | Contingent consideration obligation – December 31, 2021 | | $ | 257.6 | |
In July 2021, the Company settled the final contingent consideration obligation for $75.0 million related to its acquisition of Gram Games in the second quarter of 2018. For the years ended December 31, 2021, 2020 and 2019, we recognized $0.9 million, $64.3 million and $57.6 million, respectively, of expense within research and development expenses in our consolidated statement of operations related to the Gram Games contingent consideration.
As of December 31, 2021, our contingent consideration obligations relate to the additional consideration payable in connection with our acquisitions of Small Giant in the first quarter of 2019 and Rollic in the fourth quarter of 2020, as well as Rollic’s acquisitions of Creasaur Teknoloji Ticaret Anonim Şirketi (“Creasaur”), Zero Sum Teknoloji Yazılım ve Pazarlama Anonim Şirketi (“Zero Sum”) and Forgerhero Yazilm Ticaret Limited Sirketi (“Forgerhero”; collectively, the “Rollic studio acquisitions”), in October 2021 (Creasaur and Zero Sum) and November 2021 (Forgerhero).
Under the original terms of the Small Giant acquisition, contingent consideration may be payable based on the achievement of certain future profitability metrics during each annual period following the acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. Under the original terms of the Rollic acquisition, contingent consideration may be payable based on the achievement of certain future bookings and profitability metrics during each annual period following the respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. For these acquisitions, we estimated the acquisition date fair value of the contingent consideration obligations using a Monte Carlo simulation. The significant unobservable inputs used in estimating these acquisition date fair value measurements were each entity’s projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers. In the first quarter of 2021, the Company executed an amendment to the Share Purchase Agreement with the former owners of Small Giant to exclude the direct profitability (which includes marketing expenses) of Puzzle Combat, which launched globally in April 2021, from the remaining performance period.
The estimated fair value of the Small Giant contingent consideration obligation decreased from $409.3 million as of December 31, 2020 to $242.3 million as of December 31, 2021. The decrease was driven by a $239.6 million payment in the first quarter of 2021 to the former owners of Small Giant for its performance during the second contingent consideration period, partially offset by the increased probability of achievement and stronger than expected performance during the remaining performance period, which ended on December 31, 2021. For the years ended December 31, 2021, 2020 and 2019, we recognized $72.6 million, $288.9 million and $144.0 million, respectively, of expense within research and development expenses in our consolidated statements of operations. The Company expects to make the final contingent consideration payment to the former owners of Small Giant in the first quarter of 2022.
With respect to the remaining Rollic contingent consideration obligation, the Company executed an amendment to the Share Purchase Agreement with the former owners of Rollic in the second quarter of 2021 to accelerate the Company’s acquisition of the remaining 20% ownership in Rollic and to set the total contingent consideration payment at $60.0 million (the “Rollic Amendment”). In July 2021, the Company acquired the remaining 20% ownership and paid $20.0 million to the former owners of Rollic, with the remaining $40.0 million to be paid in the first quarter 2022. At the date of the Rollic Amendment, the Company measured the remaining final obligation by calculating the present value of the final payments using a discount rate of 1.3%, commensurate with the remaining term. The Company accretes the obligation up to its final amount using the effective interest method.
The estimated value of the Rollic contingent consideration obligation decreased from $53.8 million as of December 31, 2020 to $39.9 million as of December 31, 2021. For each of the years ended December 31, 2021 and 2020, we recognized $6.1 million of expense within research and development expenses in our consolidated statement of operations related to the Rollic contingent consideration.
Under the terms of the Rollic studio acquisitions, contingent consideration may be payable based on the achievement of certain future bookings metrics during each annual period following each individual acquisition’s respective acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. For these acquisitions, we estimated the acquisition date fair value of the contingent consideration obligations using a discounted cash flow model. The significant unobservable inputs used in estimating these acquisition date fair value measurements were each entity’s projected performance and a risk-adjusted discount rate.
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We estimate the fair value of the Rollic studio acquisitions contingent consideration liabilities at each subsequent reporting period using a discounted cash flow model. The table below outlines the significant unobservable inputs used in estimating the fair value as of December 31, 2021, weighted by the relative fair value of each annual period’s obligation to the total obligation (in millions, except percentages):
| | December 31, 2021
| | | | Range
| | | Weighted Average
| | Annual bookings
| | $33.8 - $54.1
| | | $44.6
| | Discount rates
| | 14.0% - 14.0%
| | | 14.0%
| |
Changes in the projected performance of the acquired studios could result in a higher or lower contingent consideration obligation in the future.
The estimated fair value of the Rollic studio acquisitions contingent consideration obligations increased from $14.9 million as of their respective acquisition dates to $15.3 million as of December 31, 2021. The increases were driven by the increased probability of achievement during the remaining performance periods. For the year ended December 31, 2021, we recognized $0.4 million of expense within research and development expenses in our consolidated statements of operations related to the Rollic studio acquisitions.
5. Property and Equipment, Net
During the third quarter of 2021, the Company recognized an impairment loss related to its leasehold improvements, computer equipment and furniture and fixtures in the amounts of $7.5 million, $0.7 million and $0.7 million, respectively. Following the impairment, the adjusted carrying amount of the impacted assets represent their new cost basis. Refer to Note 6 – “Leases” for further background on the impairment loss.
Property and equipment, net consist of the following (in millions):
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | Computer equipment | | $ | 34.1 | | | $ | 30.4 | | Software | | | 36.4 | | | | 35.1 | | Furniture and fixtures | | | 8.0 | | | | 10.6 | | Leasehold improvements | | | 23.1 | | | | 30.8 | | Total property and equipment, gross | | $ | 101.6 | | | $ | 106.9 | | Less: Accumulated depreciation | | | (71.3 | ) | | | (67.6 | ) | Total property and equipment, net | | $ | 30.3 | | | $ | 39.3 | |
The following represents our property and equipment, net by location (in millions):
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | United States | | $ | 12.2 | | | $ | 23.4 | | Turkey | | | 8.7 | | | | 7.7 | | India | | | 3.8 | | | | 4.3 | | United Kingdom | | | 3.1 | | | | 3.0 | | All other countries(1) | | | 2.5 | | | | 0.9 | | Total property and equipment, net | | $ | 30.3 | | | $ | 39.3 | |
(1)No other foreign country exceeded 10% of our total property and equipment, net for any periods presented.
On July 1, 2019, the Company sold its owned office building located in San Francisco, California, including related land and all preexisting leases between the Company and third-party tenants of the building, to a third-party buyer for net proceeds of approximately $580.5 million (the “Building Sale”). In connection with the Building Sale, the Company de-recognized the related land, building and building improvements and all lessor related assets and liabilities, which resulted in a net gain of $314.2 million within other income (expense), net in our consolidated statement of operations during the year ended December 31, 2019.
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6. Leases
In August 2021, in consideration of the changing nature of the Company’s need for office space for its workforce, the Company’s Board of Directors approved a plan to sublease the Company’s current 185,000 square foot San Francisco, California office space (the “San Francisco Office Building”), as the Company transitions to a hybrid in-office and remote employee work environment. As a result of the Board of Directors’ decision and the accumulation of other factors, the Company recognized a $66.8 million impairment loss during the third quarter of 2021. The impairment loss recorded included $57.9 million related to the San Francisco Office Building right-of-use lease asset and $8.9 million related to property and equipment, net associated with the San Francisco Office Building (collectively, the “San Francisco Office Asset Group”).
The fair value of the San Francisco Office Asset Group was estimated using a risk-adjusted, discounted cash flow model with Level 3 inputs. The significant assumptions used in estimating the fair value included the projected sublease income over the remaining lease term, expected downtime prior to the commencement of future subleases, expected rent concessions offered to future tenants and discount rates that reflected the level of risk associated with these future cash flows.
In the second quarter of 2021, the Company executed a lease for office space of approximately 62,000 square feet in San Mateo, California (the “San Mateo Office Building”) over an approximate 11-year lease term (the “Office Lease Agreement”), with annual lease expense of approximately $3.0 million beginning in June 2021. The Office Lease Agreement provides the Company two separate options to extend the lease for five years each (for a total of an additional 10 years). At lease inception, the Company determined it was not reasonably certain to exercise any of the options to extend.
The components of lease expense were as follows (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Operating lease expense | | $ | 23.0 | | | $ | 22.1 | | | $ | 15.1 | | Variable lease expense | | | 8.2 | | | | 7.9 | | | | 4.6 | | Total lease expense(1) | | $ | 31.2 | | | $ | 30.0 | | | $ | 19.7 | |
| (1)
| The expense associated with short-term leases with a lease term greater than one month was not material for the years ended December 31, 2021, 2020 and 2019.
|
Supplemental cash and noncash information related to operating leases, excluding any transition adjustments, was as follows (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Fixed operating lease payments | | $ | 25.4 | | | $ | 22.9 | | | $ | 16.7 | | Right-of-use assets obtained in exchange for operating lease liabilities (noncash) | | | 29.4 | | | | 11.5 | | | | 138.9 | |
As of December 31, 2021, future lease payments related to our operating leases were as follows (in millions):
Year ending December 31: | | Operating Leases | | 2022 | | $ | 14.4 | | 2023 | | | 23.3 | | 2024 | | | 21.3 | | 2025 | | | 17.4 | | 2026 | | | 17.6 | | Thereafter | | | 89.7 | | Total lease payments | | | 183.7 | | Less: Imputed interest | | | (33.2 | ) | Total lease liability balance | | $ | 150.5 | |
We do not have any leases that have not yet commenced that create significant rights and obligations as of December 31, 2021.
7. Acquisitions
Acquisitions of Creasaur, Zero Sum and Forgerhero
On October 26, October 27 and November 4, 2021, the Company’s subsidiary, Rollic executed a series of unrelated acquisitions to acquire 90% of all issued and outstanding share capital of Creasaur, Zero Sum and Forgerhero, respectively, in order to optimize its
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published game cost structure, for total combined purchase consideration of $12.5 million. All 3 acquired entities are Turkey-based and develop hyper-casual mobile games. The remaining 10% ownership in each acquired entity will be acquired ratably for potential additional consideration payable annually based upon the achievement of specified bookings metrics by each entity, during each of the three years following each respective acquisition date. The equity rights and privileges of the remaining shareholders lack the traditional rights and privileges associated with equity ownership and accordingly, each transaction was accounted for as if the Company acquired 100% of each entity on the acquisition date. Any future payments associated with our required acquisition of the remaining 10% of each entity represent a contingent consideration obligation. The Company records changes in the fair value of the contingent consideration obligations within our consolidated statement of operations in each subsequent reporting period after the acquisition dates as they occur (see Note 4 – “Fair Value Measurements” for further discussion on this estimate).
On the respective acquisition dates, Rollic paid a combined total of $12.5 million to the former owners of the acquired entities, of which $1.4 million settled pre-acquisition advanced profit share payments made to each entity under their pre-existing profit sharing arrangements with Rollic. Additionally, the total purchase consideration for the acquisition of Zero Sum included $0.6 million of deferred cash consideration (the “Zero Sum Deferred Cash Consideration”).
The following table summarizes the combined acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired from all three acquired entities (in millions):
| | Combined Estimated Purchase Price Allocation | | Cash | | $ 0.7 | | Other current assets | | 0.2 | | Intangible assets: | | | | | Developed technology, useful life of 1 year | | | 3.8 | | | Goodwill | | | 23.7 | | Property and equipment | | | 0.1 | | Total assets acquired | | | 28.5 | | Other current liabilities | | | (0.2 | ) | Deferred tax liabilities, net | | | (0.9 | ) | Total liabilities | | | (1.1 | ) | Total purchase consideration | | $ | 27.4 | | | | | | | Contingent consideration payable | | | (14.9 | ) | Total cash consideration(1) | | $ | 12.5 | |
| (1)
| The amount shown represents the total cash paid at closing for each respective acquisition, including the Zero Sum Deferred Cash Consideration.
|
Certain amounts noted above are preliminary and subject to change during the respective measurement period (up to one year from the acquisition date) as we obtain additional information for the preliminary fair value estimates of the assets acquired and liabilities assumed. The primary preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities assumed, identifiable intangible assets, income and non-income based taxes, contingent consideration payable and residual goodwill.
Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
Acquisition of Beijing StarLark Technology Co., Ltd. (“StarLark”) and Lvy Technology Limited (“Lvy”)
On October 5, 2021 (the “StarLark Closing Date”), the Company acquired Lvy and StarLark, Chinese joint-stock companies, as well as the Golf Rival mobile game franchise and related other games as well as certain other specified assets and liabilities (collectively, the “StarLark Acquisition”) in a series of related closings, to expand our live services portfolio and new game pipeline, in exchange for total consideration of $461.7 million. The total purchase consideration included $276.0 million in cash, $40.0 million of cash that was deposited into an escrow account for a period of 15 months as security for certain indemnification obligations of the sellers and the issuance of 20,009,528 shares of Zynga’s Class A Common Stock, valued at $145.7 million on the StarLark Closing Date. Pursuant to the StarLark Agreement, on the StarLark Closing Date, the Company acquired Lvy and StarLark, with StarLark becoming a direct, wholly-owned subsidiary of Lvy and Lvy becoming a direct, wholly-owned subsidiary of Zynga.
In connection with the transaction, the Company also executed noncompetition agreements with certain sellers and retained StarLark employees for terms ranging from one to three years following the acquisition date. However, the acquisition date estimated fair value of the noncompetition agreements was not material.
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The following table summarizes the acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired through the StarLark Acquisition (in millions):
| | Estimated Purchase Price Allocation | | Cash | | $1.2 | | Intangible assets: | | | | | Developed technology, useful life of 4 years | | | 126.0 | | | Trade names, useful life of 6 years | | | 33.0 | | Goodwill | | | 301.3 | | Right-of-use assets | | | 0.5 | | Other non-current assets | | | 0.1 | | Total assets acquired | | | 462.1 | | Operating lease liabilities | | | (0.3 | ) | Non-current operating lease liabilities | | | (0.1 | ) | Total liabilities | | | (0.4 | ) | Total purchase consideration | | $ | 461.7 | | | | | | | Fair value of Class A Zynga Common Stock issued(1) | | | (145.7 | ) | Total cash consideration, including cash held in escrow | | $ | 316.0 | |
| (1)
| The fair value of the Zynga’s Class A Common Stock is estimated based on the total shares issued of 20,009,528 and the closing stock price of Zynga’s Common A stock on October 5, 2021 of $7.28 per share.
|
Certain amounts noted above are preliminary and subject to change during the respective measurement period (up to one year from the acquisition date) as we obtain additional information for the preliminary fair value estimates of the assets acquired and liabilities assumed. The primary preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities assumed, identifiable intangible assets, income and non-income based taxes and residual goodwill.
The fair value of the intangible assets was determined using a risk-adjusted, discounted cash flow model. The weighted-average amortization period of the acquired intangible assets was 4.4 years at acquisition.
Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
The results of operations from StarLark have been included in our consolidated statement of operations since the date of acquisition. Transaction costs incurred by the Company in connection with the StarLark Acquisition include professional fees and totaled $2.4 million during the year ended December 31, 2021 and were recorded within general and administrative expenses, in our consolidated statements of operations.
Acquisition of Chartboost, Inc. (“Chartboost”)
On August 4, 2021, the Company acquired 100% of all issued and outstanding share capital of Chartboost, to acquire Chartboost’s mobile programmatic advertising and monetization platform and enhance Zynga’s user acquisition and advertising capabilities, for total consideration of $234.6 million. The total purchase consideration included $204.9 million in cash, $25.0 million of cash that was deposited into an escrow account for a period of 15 months as security for certain indemnification obligations of the former Chartboost securityholders (the “Chartboost Escrow Consideration”) and Zynga’s replacement of unvested Chartboost stock options (the “Zynga Replacement Stock Options”). The Zynga Replacement Stock Options allow the option holders to purchase up to 1,012,388 shares of Zynga’s Class A common stock, of which $2.2 million of the total acquisition date fair value was allocated to the purchase consideration. Additionally, the total purchase consideration included $2.5 million of deferred cash consideration (the “Chartboost Deferred Cash Consideration”).
In connection with the transaction, the Chartboost employees were awarded cash bonuses totaling $19.3 million, inclusive of payroll-related taxes. These employee bonuses were determined to primarily benefit the combined Zynga and Chartboost entity and were recognized by the Company separate from the business combination. One of the Chartboost employee bonuses included a two-year post-acquisition service period and is recognized as expense on a straight-line basis over the two-year period following the acquisition date. The remaining Chartboost employee bonuses were expensed immediately following the acquisition as there were no post-acquisition retention periods. The Chartboost employee bonuses are recognized as a component of research and development,
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sales and marketing or general and administrative expenses in our consolidated statements of operations based upon the respective employee’s job responsibilities.
The following table summarizes the acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired from Chartboost (in millions):
| | Estimated Purchase Price Allocation | | Cash | | $ | 12.2 | | Restricted cash | | | 0.4 | | Accounts receivable | | | 19.4 | | Prepaid expenses | | | 0.6 | | Other current assets | | | 2.6 | | Intangible assets: | | | | | Developed technology, useful life of 5 years | | | 99.8 | | Trade names, useful life of 8 years | | | 12.8 | | Customer relationships, useful life of 4 years | | | 2.7 | | Goodwill | | | 131.2 | | Property and equipment | | | 0.2 | | Right-of-use assets | | | 0.5 | | Other non-current assets | | | 0.1 | | Total assets acquired | | | 282.5 | | | | | | | Accounts payable | | | (1.4 | ) | Income taxes payable | | | (0.1 | ) | Operating lease liabilities | | | (0.4 | ) | Other current liabilities | | | (31.0 | ) | Deferred tax liabilities, net | | | (14.4 | ) | Non-current operating lease liabilities | | | (0.1 | ) | Other non-current liabilities | | | (0.5 | ) | Total liabilities | | | (47.9 | ) | Total purchase price consideration | | $ | 234.6 | | | | | | | Fair value of Zynga Replacement Stock Options allocated to purchase consideration (1) | | | (2.2 | ) | Total cash consideration (2) | | $ | 232.4 | |
| (1)
| The fair value of the Zynga Replacement Stock Options allocated to purchase consideration was determined by calculating the acquisition-date fair value of the replaced unvested Chartboost stock options, multiplied by the ratio of the pre-combination service period to the total service period for the Zynga Replacement Stock Option. The fair value of the unvested Chartboost stock options was estimated using the Black-Scholes option-pricing model. The fair value of the Zynga Replacement Stock Options, less the value allocated to the purchase consideration, represents post-combination stock-based compensation expense. Refer to Note 12 – “Stockholders’ Equity” for further discussion.
|
| (2)
| The amount shown represents the cash paid at closing (which includes the Chartboost Escrow Consideration), as well the Chartboost Deferred Cash Consideration.
|
Certain amounts noted above are preliminary and subject to change during the respective measurement period (up to one year from the acquisition date) as we obtain additional information for the preliminary fair value estimates of the assets acquired and liabilities assumed. The primary preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities assumed, identifiable intangible assets, income and non-income based taxes and residual goodwill.
The fair value of the intangible assets was determined using a risk-adjusted, discounted cash flow model. The weighted-average amortization period of the acquired intangible assets was 5.3 years at acquisition.
Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
The results of operations from Chartboost have been included in our consolidated statement of operations since the date of acquisition. Transaction costs incurred by the Company in connection with the Chartboost acquisition include professional fees and Chartboost employee bonuses. Transaction costs incurred during the year ended December 31, 2021, were $15.8 million, of which $5.4 million, $2.8 million and $7.6 million were recorded within research and development, sales and marketing and general and administrative expenses, respectively, in our consolidated statements of operations.
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Acquisition of Uncosoft Yazılım Anonim Şirketi (“Uncosoft”)
On April 21, 2021, the Company’s subsidiary, Rollic, acquired 100% of all issued and outstanding share capital of Uncosoft, a Turkey joint stock company, in order to optimize its published game cost structure, for total purchase consideration of $10.5 million. On the acquisition date, Rollic paid a total of $12.5 million to the former owners of Uncosoft, of which $2.0 million settled a pre-acquisition contractual obligation for amounts owed to Uncosoft under Rollic and Uncosoft’s pre-existing profit sharing arrangement.
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Uncosoft (in millions):
| | Estimated Purchase Price Allocation | | Cash | | $ | 0.1 | | Intangible assets: | | | | | Developed technology, useful life of 1 year | | | 1.8 | | Goodwill | | | 9.0 | | Total assets acquired | | | 10.9 | | Deferred tax liabilities | | | (0.4 | ) | Total liabilities | | | (0.4 | ) | Total cash consideration | | $ | 10.5 | |
Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
Acquisition of Echtra Games, Inc.
On March 2, 2021, the Company acquired 100% of all issued and outstanding share capital of Echtra Games, Inc. (“Echtra”), to expand our cross-platform game development tools, technologies and experience, for total purchase consideration of $21.1 million. The total purchase consideration included $19.6 million in cash and $1.5 million of unrestricted cash that was retained for a period of 12 months as security for general representations and warranties (the “Holdback Consideration”).
The following table summarizes the acquisition date fair value of the assets, including intangible assets, and related goodwill acquired from Echtra (in millions):
| | Estimated Purchase Price Allocation | | Prepaid expenses | | $ | 0.1 | | Intangible assets: | | | | | Developed technology, useful life of 10 years | | | 10.7 | | Goodwill | | | 10.3 | | Total assets acquired | | | 21.1 | | Total cash consideration, including Holdback Consideration | | $ | 21.1 | |
The fair value of the developed technology intangible asset was determined using a cost to recreate approach. Goodwill, which is deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
Rollic Acquisition
On October 1, 2020, the Company acquired 80% of all issued and outstanding share capital of Rollic, a Turkey joint stock company, to expand our live services portfolio and new game pipeline, for total purchase consideration of $228.2 million. At the acquisition date, the remaining 20% was to be acquired ratably for potential additional consideration payable annually based upon the achievement of specified bookings and profitability metrics by Rollic during each of the three years following the acquisition date. The equity rights and privileges of the remaining Rollic shareholders lacked the traditional rights and privileges associated with equity ownership and accordingly, the transaction was accounted for as if the Company acquired 100% of Rollic on the acquisition date. Any future payments associated with our required acquisition of the remaining 20% represent a contingent consideration obligation.
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The total purchase consideration included $164.5 million in cash, $16.0 million of cash that was deposited into an escrow account for a period of 18 months as security for general representations and warranties and contingent consideration valued at of $47.7 million at the acquisition date. The Company records changes in the fair value of the contingent consideration within our consolidated statement of operations in each subsequent reporting period after the acquisition date as they occur (see Note 4 – “Fair Value Measurements” for further discussion on this estimate).
In connection with the transaction, the Company also executed noncompetition agreements with certain members of Rollic’s management for terms ranging from two to four years following the acquisition date. However, the acquisition date estimated fair value of the noncompetition agreements was not material.
The following table summarizes the acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired from Rollic (in millions):
| | Estimated Purchase Price Allocation | | Cash | | $ | 13.5 | | Accounts receivable | | | 15.7 | | Prepaid expenses | | | 2.5 | | Other current assets | | | 1.9 | | Intangible assets: | | | | | Developed technology, weighted average useful life of 6 years | | | 38.5 | | Third-party developer relationships, useful life of 4 years | | | 42.0 | | Trade name, useful life of 7 years | | | 22.0 | | Goodwill | | | 131.5 | | Property and equipment | | | 0.3 | | Right-of-use assets | | | 0.1 | | Total assets acquired | | | 268.0 | | Accounts payable | | | (9.1 | ) | Income taxes payable | | | (1.9 | ) | Operating lease liabilities | | | (0.1 | ) | Other current liabilities | | | (7.9 | ) | Deferred tax liabilities, net | | | (20.8 | ) | Total liabilities | | | (39.8 | ) | Total purchase price consideration | | $ | 228.2 | | | | | | | Non-current contingent consideration payable | | | (47.7 | ) | Total cash consideration, including cash held in escrow | | $ | 180.5 | |
The fair value of the acquired intangible assets were determined using risk-adjusted, discounted cash flow models. The weighted-average amortization period of the acquired intangible assets was 5.6 years at acquisition.
Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
The results of operations from Rollic have been included in our consolidated statement of operations since the date of acquisition.
Peak Acquisition
On July 1, 2020 (the “Peak Closing Date”), we acquired 100% of all issued and outstanding share capital of Peak, a Turkey joint stock company, to expand our live services portfolio and new game pipeline, for total purchase consideration of $2.1 billion. The total purchase consideration included $802.3 million in cash, $120.0 million of cash that was deposited into an escrow account for a period of 18 months as security for general representations and warranties (the “Peak Escrow Consideration”) and 116,564,861 shares of Zynga’s Class A Common Stock valued at $1.1 billion at the acquisition date. Additionally, the total purchase consideration included the acquisition date fair value of $30.9 million of cash that was retained by the Company for a period of 66 months following the Peak Closing Date as security for tax-related indemnification obligations from the prior owners of Peak (the “Peak Deferred Consideration”). The present value of the Peak Deferred Consideration was estimated at $23.8 million on the acquisition date.
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In connection with the transaction, the Company also executed noncompetition agreements with certain members of Peak’s management for a term of five years following the acquisition date. However, the acquisition date estimated fair value of the noncompetition agreements was not material.
The following table summarizes the acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired from Peak (in millions):
| | Estimated Purchase Price Allocation | | Cash | | $ | 10.8 | | Accounts receivable | | | 64.3 | | Prepaid expenses | | | 1.7 | | Other current assets | | | 12.6 | | Intangible assets: | | | | | Developed technology, useful life of 5 years | | | 495.0 | | Trade names, useful life of 7 years | | | 115.0 | | Domain names, weighted average useful life of 14 years | | | 4.6 | | Goodwill | | | 1,513.7 | | Property and equipment | | | 6.8 | | Right-of-use assets | | | 9.7 | | Other non-current assets | | | 0.5 | | Total assets acquired | | | 2,234.7 | | Accounts payable | | | (14.2 | ) | Operating lease liabilities | | | (2.2 | ) | Other current liabilities | | | (16.7 | ) | Deferred tax liabilities, net | | | (108.4 | ) | Non-current operating lease liabilities | | | (7.5 | ) | Other non-current liabilities | | | (1.9 | ) | Total liabilities | | | (150.9 | ) | Total purchase price consideration | | $ | 2,083.8 | | | | | | | Fair value of Zynga common stock issued(1) | | | (1,137.7 | ) | Total cash consideration, including cash held in escrow(2) | | $ | 946.1 | |
| (1)
| The fair value of the Class A Zynga Common Stock is estimated based on the total shares issued of 116,564,861 and the closing stock price of Class A Zynga Common Stock on July 1, 2020 of $9.76 per share.
|
| (2)
| The amount shown represents the cash paid at closing (which includes the Peak Escrow Consideration) as well as present value of the Peak Deferred Consideration, which was estimated as $23.8 million at the acquisition date using a discount rate commensurate with the term of the Deferred Consideration of 4.9%.
|
The fair value of the acquired intangible assets were determined using risk-adjusted, discounted cash flow models. The weighted-average amortization period of the acquired intangible assets was 5.4 years at acquisition.
Goodwill, which is non-deductible for tax purposes, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
The results of operations from Peak have been included in our consolidated statement of operations since the date of acquisition.
8. Goodwill and Intangible Assets, Net
The following table presents the changes to goodwill from December 31, 2019 to December 31, 2021 (in millions):
| | Goodwill | | Balance as of December 31, 2019(1) | | $ | 1,460.9 | | Additions | | | 1,645.2 | | Foreign currency translation adjustments(2) | | | 54.7 | | Balance as of December 31, 2020(1) | | $ | 3,160.8 | | Additions | | | 475.5 | | Foreign currency translation adjustments(2) | | | (35.2 | ) | Balance as of December 31, 2021(1) | | $ | 3,601.1 | |
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| (1)
| There are 0 accumulated impairment losses at the beginning or end of any period presented.
|
| (2)
| The change is primarily related to translation adjustments on goodwill associated with the acquisitions of Small Giant and NaturalMotion, which have functional currencies denominated in the Euro and British Pound, respectively.
|
The details of our acquisition-related intangible assets as of December 31, 2021 and 2020 are as follows (in millions):
| | December 31, 2021 | | | | Gross Carrying | | | Accumulated | | | Net Book | | | | Value | | | Amortization | | | Value | | Developed technology | | $ | 1,206.2 | | | $ | (525.3 | ) | | $ | 680.9 | | Trademarks, branding and domain names | | | 251.8 | | | | (63.5 | ) | | | 188.3 | | Developer and customer relationships | | | 44.7 | | | | (13.4 | ) | | | 31.3 | | Total | | $ | 1,502.7 | | | $ | (602.2 | ) | | $ | 900.5 | |
| | December 31, 2020 | | | | Gross Carrying | | | Accumulated | | | Net Book | | | | Value | | | Amortization | | | Value | | Developed technology | | $ | 972.2 | | | $ | (346.5 | ) | | $ | 625.7 | | Trademarks, branding and domain names | | | 208.5 | | | | (35.5 | ) | | | 173.0 | | Third-party developer relationships | | | 42.0 | | | | (2.6 | ) | | | 39.4 | | Noncompetition agreements | | | 8.4 | | | | (8.4 | ) | | | — | | Total | | $ | 1,231.1 | | | $ | (393.0 | ) | | $ | 838.1 | |
Our trademarks, branding and domain names intangible assets include $6.1 million of indefinite-lived intangible assets as of December 31, 2021 and December 31, 2020. The remaining assets were, and continue to be, amortized on a straight-line basis. Amortization expense related to intangible assets for the year ended December 31, 2021, 2020 and 2019 was $225.2 million, $130.0 million and $67.0 million, respectively.
As of December 31, 2021, the weighted-average remaining useful lives of our acquired intangible assets are 3.6 years for developed technology, 5.6 years for trademarks, branding, and domain names, 2.8 years for developer and customer relationships and 4.0 years in total, for all acquired intangible assets.
As of December 31, 2021, future amortization expense related to our intangible assets is expected to be recognized as follows (in millions):
Year ending December 31: | | | | | 2022 | | $ | 253.9 | | 2023 | | | 235.7 | | 2024 | | | 198.8 | | 2025 | | | 131.8 | | 2026 | | | 44.6 | | Thereafter | | | 29.6 | | Total | | $ | 894.4 | |
9. Income Taxes
Income (loss) before income taxes consists of the following for the periods shown below (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | United States | | $ | (267.7 | ) | | $ | (443.5 | ) | | $ | 155.9 | | International | | | 259.5 | | | | 38.1 | | | | (108.6 | ) | Total | | $ | (8.2 | ) | | $ | (405.4 | ) | | $ | 47.3 | |
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The provision for (benefit from) income taxes consists of the following for the periods shown below (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Current tax expense (benefit): | | | | | | | | | | | | | Federal | | $ | 11.6 | | | $ | 9.0 | | | $ | 11.6 | | State | | | 0.4 | | | | 2.5 | | | | 5.4 | | Foreign | | | 131.9 | | | | 52.2 | | | | 7.7 | | Total current tax expense (benefit) | | $ | 143.9 | | | $ | 63.7 | | | $ | 24.7 | | Deferred tax expense (benefit): | | | | | | | | | | | | | Federal | | $ | (6.4 | ) | | $ | 4.5 | | | $ | 0.1 | | State | | | 2.1 | | | | 2.3 | | | | 0.5 | | Foreign | | | (43.6 | ) | | | (46.5 | ) | | | (19.9 | ) | Total deferred tax expense (benefit) | | $ | (47.9 | ) | | $ | (39.7 | ) | | $ | (19.3 | ) | Provision for (benefit from) income taxes | | $ | 96.0 | | | $ | 24.0 | | | $ | 5.4 | |
On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued an opinion in Altera Corp v. Commissioner (the “Altera matter”), reversing a prior 2015 U.S. Tax Court decision. Specifically, the Ninth Circuit ruled in favor of the Commissioner, validating U.S. Treasury regulations that require parties to a qualified cost-sharing arrangement to include stock-based compensation in the cost pool. On June 22, 2020, the U.S. Supreme Court denied hearing a petition to review the Ninth Circuit’s ruling. The Company is not a named party in the Altera matter, but as a result of the ruling, Zynga’s prior tax position of not including stock-based compensation expenses in its cost share with its affiliates was revised. This resulted in the recognition of a one-time current federal and state tax expense totaling $9.4 million, which was recognized as a provision for income taxes during the year ended December 31, 2020. The full tax liability associated with the Altera matter was partially offset by the use of deferred tax credit carryforward assets, which equally reduced the Company’s valuation allowance against its deferred tax assets.
The reconciliation of federal statutory income tax provision (benefit) to our effective income tax provision is as follows (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Expected provision for (benefit from) income taxes at U.S. federal statutory rate(1) | | $ | (1.7 | ) | | $ | (85.1 | ) | | $ | 9.9 | | Income (loss) taxed at foreign rates | | | 37.7 | | | | (0.6 | ) | | | 10.3 | | Change in valuation allowance | | | 32.3 | | | | 20.7 | | | | (56.2 | ) | Contingent consideration | | | 16.7 | | | | 75.4 | | | | 42.3 | | Base Erosion and Anti-Abuse Tax (“BEAT”) obligation | | | 10.0 | | | | 1.8 | | | | — | | Officer's compensation limitation | | | 8.9 | | | | 8.5 | | | | 5.2 | | State income taxes, net of federal benefit | | | 2.5 | | | | 4.7 | | | | 4.7 | | Acquisition costs | | | 2.1 | | | | 2.1 | | | | 1.2 | | Tax reserve for uncertain tax positions | | | — | | | | 8.7 | | | | 3.2 | | Stock-based compensation | | | (14.0 | ) | | | (11.0 | ) | | | (15.7 | ) | Other | | | 1.5 | | | | (1.2 | ) | | | 0.5 | | Actual provision for (benefit from) income taxes | | $ | 96.0 | | | $ | 24.0 | | | $ | 5.4 | |
| (1)
| For the purpose of the reconciliation above, the U.S. federal statutory rate was 21% for all years presented.
|
We have not provided U.S. income taxes or foreign withholding taxes on the undistributed earnings of our profitable foreign subsidiaries as of December 31, 2021 because we intend to permanently reinvest such earnings in foreign operations. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2021 and 2020, the cumulative amount of earnings upon which income taxes have not been provided is approximately $386.3 million and $139.1 million, respectively.
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Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to be reversed. Our deferred tax assets and liabilities are as follows (in millions):
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | Deferred tax assets: | | | | | | | | | Tax credit carryforwards | | $ | 103.1 | | | $ | 92.8 | | Net operating loss carryforwards | | | 76.0 | | | | 46.2 | | Deferred revenue | | | 57.1 | | | | 42.9 | | Acquired intangible assets | | | 42.3 | | | | 40.7 | | Operating lease liabilities | | | 38.0 | | | | 33.9 | | Accrued expenses | | | 16.9 | | | | 20.3 | | Stock-based compensation | | | 14.1 | | | | 14.6 | | Interest expense limitation | | | 11.3 | | | | — | | Other accrued compensation | | | 7.5 | | | | 7.8 | | State taxes | | | 2.1 | | | | 1.6 | | Charitable contributions | | | 1.3 | | | | 0.8 | | Other | | | 4.1 | | | | 4.4 | | Total deferred tax assets | | $ | 373.8 | | | $ | 306.0 | | Less: Valuation allowance | | | (235.8 | ) | | | (187.8 | ) | Deferred tax assets, net of valuation allowance | | $ | 138.0 | | | $ | 118.2 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Acquired intangible assets | | $ | (150.5 | ) | | $ | (160.2 | ) | Convertible debt | | | (27.6 | ) | | | (33.4 | ) | Goodwill | | | (24.0 | ) | | | (13.9 | ) | Right-of-use assets | | | (21.9 | ) | | | (32.9 | ) | Other | | | (5.2 | ) | | | (2.7 | ) | Total deferred tax liabilities | | $ | (229.2 | ) | | $ | (243.1 | ) | Net deferred taxes | | $ | (91.2 | ) | | $ | (124.9 | ) |
In the third quarter of 2020, we completed an intra-entity transfer of certain intellectual property rights back to the U.S. in order to better align their ownership with how our business currently and is expected to operate. The transaction did not result in additional income tax expense or benefit during the year ended December 31, 2020. However, as a result of the transaction, we recognized a deferred tax asset of $26.1 million, that was equally offset by a valuation allowance.
Due to our history of net operating losses, we believe it is more likely than not that certain federal, state and foreign deferred tax assets will not be realized in future periods as of December 31, 2021. The increase in the valuation allowance during the year ended December 31, 2021 is primarily related to U.S. federal and state net operating losses generated.
Net operating loss and tax credit carryforwards as of December 31, 2021 are as follows (in millions):
| | Amount | | | Expiration Years | Net operating losses, federal | | $ | 232.3 | | | 2027 - indefinite | Net operating losses, state | | | 32.6 | | | 2025 - 2042 | Tax credits, federal | | | 91.6 | | | 2031 - 2041 | Tax credits, state | | | 104.0 | | | 2026 - indefinite |
The federal and state net operating loss carryforwards and tax credits are subject to various annual limitations under Section 382 and 383, respectively, of the Internal Revenue Code and similar state provisions.
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The following table reflects changes in the gross unrecognized tax benefits (in millions):
| | Gross Unrecognized Tax Benefits | | Gross balance as of December 31, 2018 | | $ | 164.0 | | Additions based on tax positions related to 2019 | | | 5.8 | | Additions for tax positions of prior years | | | 1.9 | | Decreases related to expiration of prior year tax positions | | | (0.3 | ) | Gross balance as of December 31, 2019 | | $ | 171.4 | | Additions based on tax positions related to 2020 | | | 4.8 | | Additions for tax positions of prior years | | | (28.0 | ) | Decreases related to expiration of prior year tax positions | | | (1.8 | ) | Gross balance as of December 31, 2020 | | $ | 146.4 | | Additions based on tax positions related to 2021 | | | 4.0 | | Decreases related to expiration of prior year tax positions | | | (3.7 | ) | Gross balance as of December 31, 2021 | | $ | 146.7 | |
We classify uncertain tax positions as non-current unrecognized tax liabilities unless expected to be paid within one year or otherwise directly related to an existing deferred tax asset, in which case the uncertain tax position is recorded as an offset to the asset on the consolidated balance sheet. As of December 31, 2021, $126.6 million of our gross unrecognized tax benefits were recorded as a reduction of the related deferred tax assets and the remaining $20.1 million of our gross unrecognized tax benefits were recorded as non-current liabilities in our consolidated balance sheets.
If the balance of gross unrecognized tax benefits of $146.7 million as of December 31, 2021 was realized, this would have resulted in a tax benefit of $20.1 million within our provision for income taxes at such time. If the balance of gross unrecognized tax benefits of $146.4 million as of December 31, 2020 was realized, this would have resulted in a tax benefit of $23.4 million within our provision of income taxes at such time.
During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations. The amount of interest and penalties recorded to the consolidated statements of operations during 2021, 2020 and 2019, was $0.6 million, $0.3 million and $0.2 million, respectively, and the amount of interest and penalties accrued as of December 31, 2021 and 2020 was $1.9 million and $1.4 million, respectively.
We file income tax returns in the U.S. federal jurisdiction, many U.S. state jurisdictions and certain foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the U.S., United Kingdom, Ireland, Finland and Turkey. We are subject to examination in these jurisdictions for all years since our inception in 2007. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. The timing of the resolution, settlement and closure of any income tax audits is highly uncertain, and we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. It is possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months.
10. Debt
Convertible Senior Notes
On December 17, 2020, we issued $874.5 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the “2026 Notes”) including the initial purchasers’ full exercise of their option to purchase an additional $112.5 million principal amount of the 2026 Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act of 1933. The net proceeds from the issuance of the 2026 Notes was $856.8 million after deducting transaction costs.
On June 14, 2019, we issued $690.0 million aggregate principal amount of 0.25% Convertible Senior Notes due 2024 (the “2024 Notes”), including the initial purchasers’ full exercise of their option to purchase an additional $90.0 million principal amount of the 2024 Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act of 1933. The net proceeds from the issuance of the 2024 Notes was $672.2 million after deducting transaction costs.
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The 2026 Notes and 2024 Notes are each governed by an indenture between us, as the issuer, and Wells Fargo Bank, National Association, as trustee. The 2026 Notes and 2024 Notes are senior unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to such notes; equal in right of payment to all of our existing and future liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our current or future subsidiaries (including trade payables). The indentures governing the 2026 Notes and 2024 Notes, as applicable, do not contain any financial covenants.
The 2026 Notes and 2024 Notes mature on December 15, 2026 and June 1, 2024, respectively, unless earlier converted, redeemed or repurchased in accordance with their terms respectively prior to the maturity date. The 2026 Notes do not bear regular interest, and the principal amount does not accrete, while interest is payable semiannually on the 2024 Notes in arrears on June 1 and December 1 of each year.
The 2026 Notes have an initial conversion rate of 76.5404 shares of our Class A common stock per $1,000 principal amount of 2026 Notes, which is equal to an initial conversion price of approximately $13.07 per share of our Class A common stock, subject to adjustment if certain events occur. The 2024 Notes have an initial conversion rate of 120.3695 shares of our Class A common stock per $1,000 principal amount of 2024 Notes, which is equal to an initial conversion price of approximately $8.31 per share of our Class A common stock, subject to adjustment if certain events occur. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert its 2026 Notes or 2024 Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the indentures, holders of the 2026 Notes and 2024 Notes may require us to repurchase for cash all or a portion of their respective 2026 Notes or 2024 Notes at a purchase price equal to 100% of the principal amount of the 2026 Notes and 2024 Notes plus accrued and unpaid interest.
Prior to the close of business on the business day immediately preceding September 15, 2026 with respect to the 2026 Notes and March 1, 2024 with respect to the 2024 Notes, the 2026 Notes and 2024 Notes will be convertible only under the following circumstances:
| •
| during any calendar quarter, if the last reported sale price of our Class A common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the applicable series of the 2026 Notes or 2024 Notes on each applicable trading day;
|
| •
| during the five business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of each applicable series of the 2026 Notes or 2024 Notes for such trading day was less than 98% of the product of the last reported sale price of our Class A common stock and the conversion rate of each applicable series of the 2026 Notes or 2024 Notes on each such trading day;
|
| •
| if we call the 2026 Notes or 2024 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
|
| •
| upon the occurrence of specified corporate events described in the respective indentures.
|
On or after the dates specified above, holders of the 2026 Notes and 2024 Notes may convert all or any portion of their 2026 Notes and 2024 Notes regardless of the foregoing conditions. Upon any conversion, holders will receive cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
The Company may not redeem the 2026 Notes or 2024 Notes prior to December 20, 2023 and June 5, 2022, respectively. On or after those respective dates, the Company may redeem for cash all or any portion of the applicable series of the 2026 Notes or 2024 Notes, at its option, if the last reported sale price of our Class A common stock has been at least 130% of the conversion price of the applicable series of the 2026 Notes or 2024 Notes for at least 20 trading days during any 30 consecutive trading-day period ending on and including the trading day immediately preceding the date when the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the applicable series of the 2026 Notes or 2024 Notes to be redeemed, plus any accrued and unpaid interest or special interest, as applicable.
As of December 31, 2021, the conditions allowing holders of the 2026 Notes or 2024 Notes to convert their respective series of the 2026 Notes and 2024 Notes have not been met and therefore both the 2026 Notes and 2024 Notes are not yet convertible.
We separately accounted for the liability and equity components of the 2026 Notes and 2024 Notes. We determined the initial carrying amount of the $707.4 million liability component of the 2026 Notes by calculating the present value of the cash flows using an effective interest rate of 3.5%. We determined the initial carrying amount of the $572.0 million liability component of the 2024 Notes by calculating the present value of the cash flows using an effective interest rate of 4.1%. The effective interest rates were
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determined based on non-convertible debt offerings, of similar sizes and terms, by companies with similar credit ratings and other observable market data (Level 2 inputs).
The amount of the equity component, representing the conversion option, was $167.1 million for the 2026 Notes and $118.0 million for the 2024 Notes and was calculated by deducting the initial carrying value of the liability component from the principal amount of the 2026 Notes and 2024 Notes, respectively. This difference represents a debt discount that is amortized to interest expense over the 6-year and 5-year contractual periods of the 2026 Notes and 2024 Notes, respectively, using the effective interest rate method. The equity components are not subsequently remeasured as long as they continue to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the respective series of the 2026 Notes and 2024 Notes to the liability and equity components using the same proportions as the initial carrying value of the respective series of the 2026 Notes and 2024 Notes. The respective transaction costs are then amortized to interest expense using the effective interest method over the terms of the respective series of 2026 Notes and 2024 Notes. Transaction costs initially attributable to the liability component of the 2026 Notes and 2024 Notes were $14.3 million and $14.8 million, respectively, while transaction costs attributable to the equity component of the 2026 Notes and 2024 Notes were $3.4 million and $3.1 million, respectively. The transaction costs attributable to the equity component are accounted for consistently with the equity component of the 2026 Notes and 2024 Notes.
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of December 31, 2021 were as follows (in millions):
| | | | | | | | | | | | | | | 2024 Notes | | | 2026 Notes | | | Total | | Liability component: | | | | | | | | | | | | | Principal | | $ | 690.0 | | | $ | 874.5 | | | $ | 1,564.5 | | Unamortized debt discount | | | (60.5 | ) | | | (140.6 | ) | | | (201.1 | ) | Unamortized transaction costs | | | (7.6 | ) | | | (12.0 | ) | | | (19.6 | ) | Net carrying amount | | $ | 621.9 | | | $ | 721.9 | | | $ | 1,343.8 | | | | | | | | | | | | | | | Equity component, net of transaction costs | | $ | 114.9 | | | $ | 163.7 | | | $ | 278.6 | |
The net carrying amount of the liability and equity components of the 2026 Notes and 2024 Notes as of December 31, 2020 were as follows (in millions):
| | | | | | | | | | | | | | | 2024 Notes | | | 2026 Notes | | | Total | | Liability component: | | | | | | | | | | | | | Principal | | $ | 690.0 | | | $ | 874.5 | | | $ | 1,564.5 | | Unamortized debt discount | | | (83.8 | ) | | | (166.1 | ) | | | (249.9 | ) | Unamortized transaction costs | | | (10.5 | ) | | | (14.2 | ) | | | (24.7 | ) | Net carrying amount | | $ | 595.7 | | | $ | 694.2 | | | $ | 1,289.9 | | | | | | | | | | | | | | | Equity component, net of transaction costs | | $ | 114.9 | | | $ | 163.7 | | | $ | 278.6 | |
Interest expense recognized related to the 2026 Notes and 2024 Notes was as follows (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Contractual interest expense | | $ | 1.7 | | | $ | 1.7 | | | $ | 0.9 | | Amortization of debt discount | | | 48.7 | | | | 23.5 | | | | 11.8 | | Amortization of transaction costs | | | 5.2 | | | | 2.9 | | | | 1.5 | | Total | | $ | 55.6 | | | $ | 28.1 | | | $ | 14.2 | |
As of December 31, 2021, the estimated fair value of the 2026 Notes and 2024 Notes was $807.3 million and $745.6 million, respectively. We estimated the fair value based on the quoted market prices in an inactive market on the last trading day of the reporting period, which are considered Level 2 inputs.
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Capped Call Transactions
In connection with the offering of the 2026 Notes and 2024 Notes, the Company entered into privately negotiated capped call options with certain counterparties (the “2026 Capped Calls” and “2024 Capped Calls”, respectively). The 2026 Capped Calls have an initial strike price of approximately $13.07 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes and an initial cap price of $17.42 per share, subject to certain adjustments. The 2026 Capped Calls are intended to reduce the potential economic dilution of approximately 66.9 million shares to our Class A common stock upon any conversion of the 2026 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price. The cost of $63.0 million incurred in connection with the 2026 Capped Calls was recorded as a reduction to additional paid-in capital.
The 2024 Capped Calls have an initial strike price of approximately $8.31 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes and an initial cap price of $12.54 per share, subject to certain adjustments. The 2024 Capped Calls are intended to reduce the potential economic dilution of approximately 83.1 million shares to our Class A common stock upon any conversion of the 2024 Notes and/or offset any cash payments we make in excess of the principal amount of converted notes with such reduction and/or offset, as the case may be, subject to a maximum based on the cap price. The cost of $73.8 million incurred in connection with the 2024 Capped Calls was recorded as a reduction to additional paid-in capital.
As both the 2026 Capped Calls and 2024 Capped Calls are considered indexed to our own stock and are equity classified, therefore they are recorded in stockholders’ equity and are not accounted for as derivatives.
Convertible Senior Notes and Capped Call Transactions – Impact on Earnings per Share
The Company computes the potentially dilutive impact of the shares of Class A common stock related to the 2026 Notes and 2024 Notes using the treasury stock method, as we intend and have the ability to settle the principal amount of the 2026 Notes and 2024 Notes in cash upon conversion. However, the 66.9 million shares initially underlying the conversion option of the 2026 Notes and the 83.1 million shares initially underlying the conversion option of the 2024 Notes do not have an impact on our diluted earnings per share unless the average market price of our Class A common stock exceeds the respective conversion price of the 2026 Notes and 2024 Notes during a period of net income.
The 2026 Capped Calls and 2024 Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
Credit Facility
In December 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with certain financial institutions that provides for a three-year revolving credit facility in an aggregate principal amount of up to $425.0 million and is secured by a blanket lien on the Company’s assets. The Company may borrow, repay and re-borrow funds under the 2020 Credit Agreement until December 31, 2023, at which time the 2020 Credit Agreement will terminate, and all outstanding revolving loans, together with all accrued and unpaid interest, must be repaid. The Company may use the proceeds of future borrowings under the 2020 Credit Agreement for general corporate purposes.
Under the 2020 Credit Agreement, at the Company’s option, revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.50% to 1.00%, determined based on the Company’s consolidated leverage ratio for the four most recent fiscal quarters (the “Consolidated Leverage Ratio”) or (ii) the LIBOR rate (for interest periods of one, two, three or six months) plus a margin ranging from 1.50% to 2.00%, determined based on the Company’s Consolidated Leverage Ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Bank of America, N.A.’s prime rate and (iii) the LIBOR rate for a one-month interest period plus 1.00%. The Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate ranging from 0.25% to 0.35%, determined based on the Company’s Consolidated Leverage Ratio.
As of December 31, 2021, we had 0 amounts outstanding under the 2020 Credit Agreement.
Upon execution of the 2020 Credit Agreement, debt issuance costs of $1.4 million were capitalized and are amortized on a straight-line basis over the three-year term of the Credit Agreement, with the expense recorded to interest expense in our consolidated statement of operations.
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11. Other Current and Non-Current Liabilities
Other current liabilities consist of the following (in millions):
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | Contingent consideration obligation | | $ | 286.7 | | | $ | 323.6 | | Accrued payable from acquisitions | | | 161.0 | | | | — | | Accrued accounts payable | | | 81.1 | | | | 58.1 | | Accrued compensation liability | | | 61.9 | | | | 61.7 | | Value-added taxes payable | | | 7.3 | | | | 6.4 | | Other current liabilities | | | 52.4 | | | | 12.6 | | Total other current liabilities | | $ | 650.4 | | | $ | 462.4 | |
Our accrued compensation liability represents employee bonus and other payroll withholding expenses, while other current liabilities include various expenses that we accrue for sales and other taxes, customer deposits, accrued vendor expenses and deferred consideration payable from acquisitions.
Other non-current liabilities consist of the following (in millions):
| | December 31, | | | December 31, | | | | 2021 | | | 2020 | | Accrued payable from acquisitions | | $ | 40.0 | | | $ | 136.0 | | Deferred consideration payable | | | 26.0 | | | | 24.4 | | Uncertain tax positions, including interest and penalties | | | 22.0 | | | | 24.8 | | Contingent consideration obligation | | | 10.8 | | | | 213.6 | | Other non-current liabilities | | | 13.5 | | | | 2.3 | | Total other non-current liabilities | | $ | 112.3 | | | $ | 401.1 | |
12. Stockholders’ Equity and Other Employee Benefits
Common Stock
Our three classes of common stock are Class A, Class B and Class C common stock. On May 2, 2018, our founder, Mark Pincus, elected to convert certain outstanding shares of Class B common stock and all outstanding shares of Class C common stock controlled by Mr. Pincus and an affiliated investment entity into an equivalent number of shares of Class A common stock. As a result of Mr. Pincus’ conversion, the remaining shares of Class B common stock represented less than 10% of the total voting power of all Zynga stockholders and, accordingly, each remaining outstanding share of Class B common stock automatically converted into 1 share of Class A common stock. Each Zynga stockholder now has 1 vote per share on all matters subject to stockholder vote. Following the conversion, 0 shares of Class B or Class C common stock are outstanding.
The following are the rights and privileges of our classes of common stock:
Dividends. The holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in the amounts which our Board of Directors may determine.
Voting Rights. Holders of our Class A common stock are entitled to 1 vote per share.
Liquidation. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders would be distributable ratably among the holders of our Class A common stock.
Preemptive or Similar Rights. None of our common stock is entitled to preemptive rights or subject to redemption.
Conversion. Our Class A common stock is not convertible into any other shares of our capital stock. The Class B and Class C common stock converted into Class A common stock may not be reissued.
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Stock Repurchases
In April 2018, a share repurchase program was authorized for up to $200.0 million of our outstanding Class A common stock (the “2018 Share Repurchase Program”). The timing and amount of any stock repurchase will be determined based on market conditions, share price and other factors. The program does not require us to repurchase any specific number of shares of our Class A common stock and may be modified, suspended or terminated at any time without notice. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022 and will be funded from existing cash on hand or other sources of funding as the Company may determine to be appropriate. Share repurchases under these authorizations may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 plans or by any combination of such methods.
As of December 31, 2021, we had $173.8 million remaining under the 2018 Share Repurchase Program. The 2018 Share Repurchase Program is authorized to remain in effect until April 2022.
All of our previous stock repurchases were made through open market purchases under Rule 10b5-1 plans and subsequently retired.
Equity Incentive Plans and Stock-Based Compensation Expense
In 2007, we adopted the 2007 Equity Incentive Plan (the “2007 Plan”) for the purpose of granting stock options and RSUs to employees, directors and non-employees. Concurrent with the effectiveness of our initial public offering on December 15, 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”), and all remaining common shares reserved for future grant or issuance under the 2007 Plan were added to the 2011 Plan. The 2011 Plan was adopted for purposes of granting stock options and RSUs to employees, directors and non-employees. The number of shares of our Class A common stock reserved for future issuance under our 2011 Plan automatically increased on January 1 of each year, beginning on January 1, 2012, and continued through January 1, 2021, by 4% of the total number of shares of our capital stock outstanding as of December 31 of the preceding calendar year or such lesser number of shares that may be determined by the Company’s Board of Directors.
We recorded stock-based compensation expense related to grants of employee stock options, RSUs and performance and market-based awards in our consolidated statements of operations as follows (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Cost of revenue | | $ | 2.8 | | | $ | 2.0 | | | $ | 1.5 | | Research and development | | | 110.7 | | | | 73.4 | | | | 47.0 | | Sales and marketing | | | 17.8 | | | | 14.7 | | | | 11.3 | | General and administrative | | | 35.9 | | | | 32.5 | | | | 21.7 | | Total stock-based compensation expense | | $ | 167.2 | | | $ | 122.6 | | | $ | 81.5 | |
Stock Option Activity
All stock options granted under the 2011 Plan generally vest over four to fivemultiple years, with 25% to 20% vesting after one year and the remainder vesting monthly thereafter over 36 to 48 months, respectively. The stock options have a contract term of 10 years and the related expense is determined using the Black-Scholes option pricing model on the date of grant.
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The following table shows stock option activity for the year ended December 31, 2021 (in millions, except weighted-average exercise price and weighted-average contractual term):
| | Outstanding Options | | | | Stock Options | | | Weighted- Average Exercise Price | | | Aggregate Intrinsic Value of Stock Options Outstanding | | | Weighted- Average Contractual Term (in years) | | Balance as of December 31, 2020 | | | 30.1 | | | $ | 3.46 | | | $ | 193.1 | | | | 6.43 | | Granted | | | 1.0 | | | | 2.93 | | | | | | | | | | Forfeited, expired and cancelled | | | (0.4 | ) | | | 5.27 | | | | | | | | | | Exercised | | | (8.0 | ) | | | 3.01 | | | | | | | | | | Balance as of December 31, 2021 | | | 22.7 | | | $ | 3.56 | | | $ | 64.9 | | | | 5.71 | | As of December 31, 2021 | | | | | | | | | | | | | | | | | Exercisable options | | | 18.9 | | | $ | 3.30 | | | $ | 58.5 | | | | 5.23 | | Vested and expected to vest | | | 22.7 | | | $ | 3.56 | | | $ | 64.9 | | | | 5.71 | |
The following table presents the weighted-average grant date fair value and related assumptions used to estimate the fair value of our stock options:
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Expected term, in years | | | 6 | | | | 6 | | | | 6 | | Risk-free interest rates | | | 0.7 | % | | | 0.8 | % | | | 2.5 | % | Expected volatility | | | 34 | % | | | 36 | % | | | 43 | % | Dividend yield | | | — | | | | 0 | | | | 0 | | Weighted-average estimated fair value of stock options granted(1) | | $ | 7.21 | | | $ | 2.35 | | | $ | 2.41 | |
| (1)
| Of the total the weighted-average estimated fair value of the Zynga Replacement Stock options, $5.10 was allocated to the post-combination value.
|
The aggregate intrinsic value of stock options exercised during the year ended December 31, 2021, 2020 and 2019 was $65.3 million, $12.4 million and $44.9 million, respectively. The total grant date fair value of options that vested during the year ended December 31, 2021, 2020 and 2019 was $11.9 million, $13.1 million and $9.5 million, respectively.
As of December 31, 2021, total unrecognized stock-based compensation expense of $8.9 million related to unvested stock options is expected to be recognized over a weighted-average recognition period of approximately 1.6 years.
RSU Activity
RSUs are granted to eligible employees under the 2011 Plan. In general, RSU awards vest in annual or quarterly installments over a period of four years, are subject to the employee’s continuing service to us and do not have an expiration date. The cost of RSUs is determined using the fair value of our common stock on the date of grant.
The following table shows a summary of RSU activity for the year ended December 31, 2021, which includes performance and market-based awards (in millions, except weighted-average grant date fair value):
| | Outstanding RSUs | | | | | | | | Weighted- | | | | | | | | | | | | Average Grant Date | | | Aggregate Intrinsic | | | | | | | | Fair Value | | | Value of | | | | Shares | | | (per share) | | | Unvested RSUs | | Unvested as of December 31, 2020 | | | 64.5 | | | $ | 7.43 | | | $ | 636.0 | | Granted | | | 27.7 | | | | 9.51 | | | | | | Vested | | | (21.8 | ) | | | 6.51 | | | | | | Forfeited | | | (8.0 | ) | | | 7.36 | | | | | | Unvested as of December 31, 2021 | | | 62.4 | | | $ | 8.68 | | | $ | 399.4 | |
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As of December 31, 2021, total unamortized stock-based compensation expense relating to RSUs amounted to $491.6 million over a weighted-average recognition period of approximately 3.3 years.
Performance RSUs
On March 15, 2021, the Company granted performance-based awards to certain executives (the “2021 Performance RSUs”). The number of shares earned ranged from 0% to 150% of the 1.2 million target number of shares granted, depending on an adjusted operating cash flow metric for the year ended December 31, 2021 relative to pre-established thresholds. Based on actual performance for the year ended December 31, 2021, shares were earned at 100% achievement, with 25% vesting on the one year anniversary of the March 15, 2021 grant date and the remaining quarterly thereafter, subject to continued service by the employees.
Outside of the 2021 Performance RSUs, certain employees are eligible to receive Performance RSUs, which areZynga through each vesting date. RSU awards typically vest over a four-year period, vesting in 1/16th quarterly installments (generally subject in each case to performancecontinued service with Zynga).
The Board and time-based vesting requirements. The target number of shares of the Performance RSUs are adjusted based on our business performance measured against the performance goals approved by the Compensation Committee atplan to continue the dateannual grant program with appropriate adjustments to grant levels, reflecting the prior issuance of employmentthe Long-Term Awards in 2020. For 2021 Awards specifically, Messrs. Gibeau, Griffin, Bromberg, and Kim, equity grants were reduced, consistent with the Company. Generally, ifapproach we described in adopting our 2020 Long-Term compensation program. Additional long-term programs are not anticipated at this time and it is the intention of our Board to continue to incorporate strong performance criteriaelements into executive compensation plans, consistent with operational, growth and strategic goals. Taking into consideration feedback from our shareholders in response to our 2020 annual shareholder meeting, the amount of performance-based equity awards was increased to 50% PSUs and 50% RSUs. The PSUs are satisfied, 25%measured over aone-year performance period against achievement of the award will vest immediately or soon after with the remaining vesting ratably for each quarter or six month periods thereafter.During the years ended December 31, 2021, 2020 and 2019, we recorded $6.2 million, $2.8 million and $1.2 million, respectively, of stock-based compensation expensefinancial goals related to Performance RSUs.
Market RSUs
On March 15, 2020, the Company granted Market RSUs to certain executive officers, with two separate prescribed measurement periods. Both prescribed measurement periods began on the grant date, with the first prescribed measurement period ending on December 31,Zynga’s 2021 (the “Two-Year Market RSUs”) and the second period ending on December 31, 2022 (the “Three-Year Market RSUs”).operating cash flow; actual performance is discussed in further detail below. The number of RSUsPSUs earned (if any) will rangeranges from 0% to 150% of the target number of shares,shown below, depending on actual financial performance relative to the
pre-established goal. In addition to attaining the operating cash flow goal, the executive generally must remain in continued service with Zynga to actually vest in any PSUs, with 25% vesting after one year and the balance vesting in equal quarterly installments over the following three years. The RSUs vest over four years, subject to continued employment. The following table provides summary information regarding the grants made to each executive. Each of the awards will subject to additional terms contained in Zynga’s 2011 equity plan and in the applicable award agreement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Shares
Subject to Award | | | Target Value of
RSU Award(1) | | | Target Number of
Shares Subject
to Award | | | Target Value of
PSU Award(1) | | | | | | | | 251,371 | | | $ | 2,750,000 | | | | 251,371 | | | $ | 2,750,000 | | | $ | 5,500,000 | | | | | 137,111 | | | | 1,500,000 | | | | 137,111 | | | | 1,500,000 | | | | 3,000,000 | | | | | 137,111 | | | | 1,500,000 | | | | 137,111 | | | | 1,500,000 | | | | 3,000,000 | | | | | 148,537 | | | | 1,625,000 | | | | 148,537 | | | | 1,625,000 | | | | 3,300,000 | | | | | 137,111 | | | | 1,500,000 | | | | 137,111 | | | | 1,500,000 | | | | 3,000,000 | | | | | 137,111 | | | | 1,500,000 | | | | 137,111 | | | | 1,500,000 | | | | 3,000,000 | |
| (1) | Equity award values represent target amounts approved by the Compensation Committee and differ from the grant date fair value disclosed in the executive compensation tables (and determined based on accounting rules) based on the Company’s methodology for converting into a number of RSUs and PSUs. Awards were converted from target value into a number of shares using the30-day average closing price as of the grant date for RSUs and annual PSUs. |
In connection with a change in control, unvested 2021 Awards would accelerate and vest only if the officer were to experience a qualifying termination of employment. Importantly, vesting of the PSUs on a qualifying termination of employment generally will depend on actual performance versus thepre-established goals. The Board and the Committee believed that this feature requiring goal attainment even upon a qualifying termination of employment was an important feature of the 2021 equity program. More information is provided below under the heading “Executive Compensation Tables—Potential Payments upon Termination or Change in Control”. Earning of Annual PSUs based on Annual Operating Cash Flow The performance period for the PSUs granted in 2021 required achievement of specific tierscertain levels of operating cash flow for 2021. The Committee determined the use of aone-year performance period was appropriate for driving performance in our dynamic industry, which involves continuous innovation of existing franchises and launches of new titles, and the previously granted 2020 Long-Term PSU awards which continue to cover a performance period through December 2023. Based on the Company’s achievement of operating cash flow (adjusted) for 2021 of $245.6 million, the Compensation Committee certified these PSUs as earned and eligible to vest at 100.2% of the target number of PSUs for each of our named executive officers. PSUs earned based on performance remain subject to an employment-based vesting requirement that provides for vesting over a four-year period from the grant date. Thus, approximately 75% of the earned PSUs remain unvested as of the date of this disclosure. First Half of 2020 Long-Term PSUs based on Relative Total Shareholder Return Not Earned The PSUs granted as part of the 2020 Long-Term Awards require the achievement of goals for Zynga’s total shareholder return (“TSR”) relativeTSR as compared to the TSR of the companies comprisingin the S&P MidCap 400 Index (“Index”). Additional detail regarding these awards was disclosed in last year’s proxy statement. Relative TSR performance forone-half of these PSUs granted is measured over atwo-year performance period with the other half measured over a three-year performance period. Based on the Company’s achievement of relative TSR versus the Index over atwo-year period (ending December 31, 2021), the Compensation Committee determined these PSUs were not earned. On January 9, 2022, Zynga entered into the Merger Agreement, as described above. After significant deliberation and taking into consideration multiple factors including stockholder feedback from the 2021cycle, the pay practices of our peer companies, competition for executive officers, and theTake-Two Merger Agreement and pending acquisition our Compensation Committee and Board determined it was appropriate to continue our existing executive compensation program. This resulted in awarding a similar mix and design of equity awards to our executive officers in 2022 as we awarded under the 2021 program. Individual awards reflected a rigorous review of performance (both company and personal objectives and key results), roles and responsibilities and competitive dynamics. In addition in 2022, we continued to expand participation in our performance-based compensation programs by including additional members of our senior leadership team. This program uses financial and operating metrics to align pay with our OKR (objective and key result) reviews. Furthermore, for the CEO the Board increased the PSU weighting to 63% of target equity grant value, and included additional key financial metrics related to Zynga’s 2022 total Company financial performance as well operating cash flow. In 2022 base salaries and target bonus opportunities for our Named Executive Officers were not changed from 2021. Other Compensation Information . Each of our named executive officers has an offer letter which sets forth (i) that employment is on an“at-will” basis, (ii) the initial salary, target bonus, and equity awards for such named executive officer, and (iii) any severance benefits payable under certain circumstances. We have no long-term employment agreements with our named executive officers. The details of the offer letters for our named executive officers are disclosed under the heading “Executive Compensation—Compensation Discussion and Analysis,” the compensation tables, and the related narrative disclosure contained in this Amendment. Corporate Housing and Commuting Benefit Post-Employment Compensation. at-will and provide for initial salary and equity awards, as well as benefits upon various terminations. Any payments or benefits upon a termination are subject to a release of claims and restrictive covenants, and we do not provide Section 280Ggross-up payments for our named executive officers.
In 2018, in connection with the Compensation Committee’s regular review of evolving governance and market practices, we amended the Company’spre-IPO Change in Control Severance Benefits Plan to, among other things, remove single-trigger accelerated vesting of equity awards on a change in control and instead to provide that all severance payments and benefits under the plan will be payable only upon a double-trigger qualifying termination of employment in connection with a change in control. We believe that the amendments to our Change in Control Severance Benefits Plan bring the plan more in line with market practices. Pursuant to Mr. Gibeau’s offer letter, he will receive certain single-trigger benefits upon a change in control as discussed below under the heading “Executive Compensation Tables—Potential Payments upon Termination or Change in Control.” For a summary of the material terms and conditions of the severance and change in control agreements in effect as of December 31, 2021, see the information under the heading “Executive Compensation Tables—Potential Payments upon Termination or Change in Control.” We provide standard health, dental, vision, life, and disability insurance benefits to our executive officers, on the same terms and conditions as provided to all other eligible employees. Our executive officers may also participate in our broad-based 401(k) plan, which includes a company match up to 3% of an employee’s eligible salary. The company match is fully vested at the time of the match. We believe these benefits are consistent with the broad-based employee benefits provided at the companies with whom we compete for talent and therefore are important to attracting and retaining qualified employees. Executive Stock Ownership Guidelines. Compensation Recovery Policies. Prohibitions on Hedging, Pledging, and Margining. Accounting and Tax Deductibility Treatment Compensation Risk Assessment Our Compensation Committee, together with its independent Compensation Consultant, assesses and considers potential risks when reviewing and approving our compensation policies and practices for our executive officers and our employees. We have designed our compensation programs, including our incentive plans, with features to address potential risks while rewarding participants for achieving financial and strategic objectives through prudent judgement and appropriate risk taking. In addition, we maintain stock ownership guidelines applicable to our named executive officers, an executive compensation recovery policy, as well as policies against hedging or pledging company securities, which together mitigate excessive risk-taking. We believe that our compensation policies and practices, taken as a whole, are not reasonably likely to have a material adverse impact on our business or our financial condition.
Report of the Compensation Committee The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Amendment. Based on this review and discussion, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this Amendment to our Annual Report on Form10-K for the fiscal year ended December 31, 2021. | | | The Compensation Committee of Board | Janice M. Roberts (Chair) | | |
The information contained in the Report of the Compensation Committee shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that it is specifically incorporated by reference into a document filed under the Securities Act of 1933 or the Exchange Act. Executive Compensation Tables Summary Compensation Table The following table summarizes information regarding the compensation awarded to, earned by, or paid to, our named executive officers during 2021, 2020, and 2019. All dollar amounts are rounded to the nearest whole dollar amount. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | | $ | 1,000,000 | | | $ | — | | | $ | 5,168,188 | | | $ | — | | | $ | 1,483,500 | | | $ | 1,250 | | | $ | 7,652,938 | | | | | 2020 | | | $ | 1,000,000 | | | $ | — | | | $ | 28,290,020 | | | $ | 1,249,998 | | | $ | 1,462,500 | | | $ | 1,250 | | | $ | 32,003,768 | | | | | 2019 | | | $ | 1,000,000 | | | $ | — | | | $ | 4,680,025 | | | $ | 4,373,546 | | | $ | 1,625,000 | | | $ | 1,250 | | | $ | 11,679,821 | | | | | 2021 | | | $ | 541,667 | | | $ | — | | | $ | 2,819,002 | | | $ | — | | | $ | 543,950 | | | $ | 8,700 | | | $ | 3,913,319 | | | | | 2020 | | | $ | 500,000 | | | $ | — | | | $ | 12,730,498 | | | $ | 562,498 | | | $ | 585,000 | | | $ | 8,550 | | | $ | 14,386,547 | | | | | 2019 | | | $ | 500,000 | | | $ | — | | | $ | 1,872,009 | | | $ | 1,749,419 | | | $ | 650,000 | | | $ | 8,400 | | | $ | 4,779,828 | | | | | 2021 | | | $ | 541,667 | | | $ | — | | | $ | 2,819,002 | | | $ | — | | | $ | 543,950 | | | $ | 8,700 | | | $ | 3,913,319 | | | | | 2020 | | | $ | 500,000 | | | $ | — | | | $ | 12,730,498 | | | $ | 562,498 | | | $ | 585,000 | | | $ | 118,151 | (6) | | $ | 14,496,147 | | | | | 2019 | | | $ | 500,000 | | | $ | — | | | $ | 1,872,009 | | | $ | 1,749,419 | | | $ | 650,000 | | | $ | 153,113 | (7) | | $ | 4,924,541 | | | | | 2021 | | | $ | 477,500 | | | $ | — | | | $ | 3,053,921 | | | $ | — | | | $ | 359,749 | | | $ | 8,700 | | | $ | 3,899,870 | | | | | 2020 | | | $ | 438,333 | | | $ | — | | | $ | 1,457,703 | | | $ | 499,998 | | | $ | 386,000 | | | $ | 8,550 | | | $ | 2,790,584 | | | | | 2019 | | | $ | 425,000 | | | $ | — | | | $ | 936,002 | | | $ | 874,708 | | | $ | 419,250 | | | $ | 8,400 | | | $ | 2,663,360 | | | | | 2021 | | | $ | 433,333 | | | $ | — | | | $ | 2,819,002 | | | $ | — | | | $ | 326,370 | | | $ | 1,000 | | | $ | 3,579,705 | | | | | 2020 | | | $ | 395,833 | | | $ | — | | | $ | 1,166,169 | | | $ | 399,998 | | | $ | 351,000 | | | $ | 938 | | | $ | 2,313,938 | | | | | 2019 | | | $ | 370,833 | | | $ | — | | | $ | 748,804 | | | $ | 699,767 | | | $ | 365,625 | | | $ | 875 | | | $ | 2,185,904 | | | | | 2021 | | | $ | 541,667 | | | $ | — | | | $ | 2,819,002 | | | $ | — | | | $ | 543,950 | | | $ | 8,700 | | | $ | 3,913,319 | | | | | 2020 | | | $ | 500,000 | | | $ | — | | | $ | 12,730,498 | | | $ | 562,498 | | | $ | 585,000 | | | $ | 8,550 | | | $ | 14,386,547 | | | | | 2019 | | | $ | 500,000 | | | $ | — | | | $ | 1,872,009 | | | $ | 1,749,419 | | | $ | 650,000 | | | $ | 8,400 | | | $ | 4,779,828 | |
| (1) | This column reflects the grant date fair value of the granted stock awards, calculated in accordance with FASB ASC Topic 718 for stock-based compensation transactions. For a discussion of the valuation of the granted stock awards, see Notes to Consolidated Financial Statements at Note 12, “Stockholders’ Equity and Other Employee Benefits” in our 2021 Annual Report. For performance-based restricted stock unit (PSU) awards, amounts reflect the target performance, unless the Board has already determined the actual achievement. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the granted stock awards or the sale of the shares underlying the granted stock awards. |
| (2) | This column represents the grant date fair value of stock options, calculated in accordance with FASB ASC Topic 718 for stock-based compensation transactions. For additional information on the valuation assumptions, see Notes to Consolidated Financial Statements at Note 12, “Stockholders’ Equity and Other Employee Benefits” in our 2021 Annual Report. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the stock options, the exercise of stock options, or the sale of the shares underlying such stock options. |
| (3) | This column represents amounts earned and payable under our company-wide bonus plans. |
| (4) | This column does not include any imputed income with respect to group life, health, hospitalization, or medical reimbursement plans as Zynga’s plans (i) do not discriminate in favor of the named executive officers in scope, terms, or operation and (ii) are available generally to all salaried employees of Zynga. In addition to items further described below, the amounts in this column represent the amount of 401(k) plan match contributions made by Zynga. |
| (5) | Amounts may not total due to the impact of rounding. |
| (6) | Consists of (i) $93,710, which represents the value of corporate housing in San Francisco, (ii) $14,491, which represents the value of the commuter benefits provided to Mr. Kim in connection with his employment and (iii) $1,400, which represents certain home office expenses, in each case inclusive of any taxgross-up provided to Mr. Kim. |
| (7) | Consists of (i) $110,713, which represents the value of corporate housing in San Francisco and (ii) $34,000, which represents the value of the commuter benefits provided to Mr. Kim in connection with his employment, in each case inclusive of any taxgross-up provided to Mr. Kim. |
Grants ofPlan-Based Awards The following table shows all plan-based awards granted to the named executive officers during 2021. The equity awards granted during 2021 identified in the following table are also reported in “Outstanding Equity Awards.” All dollar amounts are rounded to the nearest whole dollar amount. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated future payouts under non-equity incentive plan awards (1) | | | Estimated future payouts under
equity incentive plan awards | | | All other stock
awards:
Number of
shares of stock
or units | | | Value of Stock and Option Awards (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 251,371 | | | $ | 2,584,094 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 201,096 | | | | 251,371 | | | | 377,056 | | | | — | | | $ | 2,584,094 | | | | | — | | | $ | 750,000 | | | $ | 1,500,000 | | | $ | 3,000,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 137,111 | | | $ | 1,409,501 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 109,688 | | | | 137,111 | | | | 205,666 | | | | — | | | $ | 1,409,501 | | | | | — | | | $ | 275,000 | | | $ | 550,000 | | | $ | 1,100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 137,111 | | | $ | 1,409,501 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 109,688 | | | | 137,111 | | | | 205,666 | | | | — | | | $ | 1,409,501 | | | | | — | | | $ | 275,000 | | | $ | 550,000 | | | $ | 1,100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 148,537 | | | $ | 1,526,960 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 118,829 | | | | 148,537 | | | | 222,805 | | | | — | | | $ | 1,526,960 | | | | | — | | | $ | 181,875 | | | $ | 363,750 | | | $ | 727,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 137,111 | | | $ | 1,409,501 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 109,688 | | | | 137,111 | | | | 205,666 | | | | — | | | $ | 1,409,501 | | | | | — | | | $ | 165,000 | | | $ | 330,000 | | | $ | 660,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | 3/15/2021 | (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 137,111 | | | $ | 1,409,501 | | | | | 3/15/2021 | (4) | | | — | | | | — | | | | — | | | | 109,688 | | | | 137,111 | | | | 205,666 | | | | — | | | $ | 1,409,501 | | | | | — | | | $ | 275,000 | | | $ | 550,000 | | | $ | 1,100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| (1) | Amounts shown in these columns represent the range of possible cash payouts for each named executive officer under our 2021 bonus plan, as determined by the Board and the Compensation Committee for fiscal 2021. Please see the discussion in the “executive compensation program components” section of the “compensation discussion and analysis” above. |
| (2) | This column reflects the grant date fair value of the granted RSUs and PSUs, calculated in accordance with FASB ASC Topic 718 for stock-based compensation transactions. For a discussion of the valuation of the granted RSUs and PSUs, see Notes to Consolidated Financial Statements at Note 12, “Stockholders’ Equity and Other Employee Benefits” in our 2021 Annual Report. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the granted RSUs and PSUs or the sale of the shares underlying the granted RSUs and PSUs. |
| (3) | Represents time-based RSUs that vest as follows: 25% of the stock options/RSUs vest on March 15, 2021, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (4) | Represents PSUs that would vest, if at all, as follows: 25% of any earnings PSUs would vest on March 15, 2022, with an additional 6.25% of the earned PSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
Outstanding Equity Awards The following table presents information regarding outstanding equity awards held by our named executive officers as of December 31, 2021. Dollar amounts, except exercise prices, are rounded to the nearest whole dollar. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Securities
Underlying Unexercised Options
Exercisable | | | Number of Securities
Underlying
Unexercised Options
Unexercisable | | | | | | | | | Shares or Units
of Stock That | | | Market Value of
Shares or Units
of Stock That
Have Not Vested | | | | | 3,907,333 | (2) | | | — | | | $ | 2.28 | | | | 3/3/2026 | | | | — | | | $ | — | | | | | 2,180,821 | (3) | | | 311,546 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 1,248,055 | (4) | | | 567,297 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 232,712 | (5) | | | 299,202 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 136,774 | (3) | | $ | 875,354 | | | | | — | | | | — | | | $ | — | | | | — | | | | 272,347 | (4) | | $ | 1,743,021 | | | | | — | | | | — | | | $ | — | | | | — | | | | 208,642 | (5) | | $ | 1,335,309 | | | | | — | | | | — | | | $ | — | | | | — | | | | 1,418,768 | (6) | | $ | 9,080,115 | | | | | — | | | | — | | | $ | — | | | | — | | | | 125,184 | (7) | | $ | 801,178 | | | | | — | | | | — | | | $ | — | | | | — | | | | 927,800 | (8) | | $ | 5,937,920 | | | | | — | | | | — | | | $ | — | | | | — | | | | 251,371 | (9) | | $ | 1,608,774 | | | | | — | | | | — | | | $ | — | | | | — | | | | 251,873 | (10) | | $ | 1,611,987 | | | | | 2,000,000 | (11) | | | — | | | $ | 2.85 | | | | 10/14/2026 | | | | — | | | $ | — | | | | | 954,108 | (3) | | | 136,302 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 499,222 | (4) | | | 226,919 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 104,720 | (5) | | | 134,641 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 59,839 | (3) | | $ | 382,970 | | | | | — | | | | — | | | $ | — | | | | — | | | | 108,939 | (4) | | $ | 697,210 | | | | | — | | | | — | | | $ | — | | | | — | | | | 93,888 | (5) | | $ | 600,883 | | | | | — | | | | — | | | $ | — | | | | — | | | | 751,112 | (12) | | $ | 4,807,117 | | | | | — | | | | — | | | $ | — | | | | — | | | | 56,331 | (7) | | $ | 360,518 | | | | | — | | | | — | | | $ | — | | | | — | | | | 417,510 | (8) | | $ | 2,672,064 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,111 | (9) | | $ | 877,510 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,385 | (10) | | $ | 879,264 | | | | | 4,500,000 | (13) | | | — | | | $ | 2.64 | | | | 6/15/2026 | | | | — | | | $ | — | | | | | 954,108 | (3) | | | 136,302 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 499,222 | (4) | | | 226,919 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 104,720 | (5) | | | 134,641 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 59,839 | (3) | | $ | 382,970 | | | | | — | | | | — | | | $ | — | | | | — | | | | 108,939 | (4) | | $ | 697,210 | | | | | — | | | | — | | | $ | — | | | | — | | | | 93,888 | (5) | | $ | 600,883 | | | | | — | | | | — | | | $ | — | | | | — | | | | 676,001 | (14) | | $ | 4,326,406 | | | | | — | | | | — | | | $ | — | | | | — | | | | 56,331 | (7) | | $ | 360,518 | | | | | — | | | | — | | | $ | — | | | | — | | | | 417,510 | (8) | | $ | 2,672,064 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,111 | (9) | | $ | 877,510 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,385 | (10) | | $ | 879,264 | | | | | 250,000 | (15) | | | — | | | $ | 3.83 | | | | 10/14/2027 | | | | — | | | $ | — | | | | | 204,451 | (3) | | | 29,208 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 249,610 | (4) | | | 113,460 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 93,085 | (5) | | | 119,680 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 12,823 | (3) | | $ | 82,067 | | | | | — | | | | — | | | $ | — | | | | — | | | | 54,469 | (4) | | $ | 348,602 | | | | | — | | | | — | | | $ | — | | | | — | | | | 83,456 | (5) | | $ | 534,118 | | | | | — | | | | — | | | $ | — | | | | — | | | | 50,072 | (7) | | $ | 320,461 | | | | | — | | | | — | | | $ | — | | | | — | | | | 148,537 | (9) | | $ | 950,637 | | | | | — | | | | — | | | $ | — | | | | — | | | | 148,834 | (10) | | $ | 952,538 | | | | | 78,125 | (16) | | | — | (16) | | $ | 4.04 | | | | 10/14/2027 | | | | — | | | $ | — | | | | | 23,366 | (3) | | | 15,578 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 90,768 | (4) | | | 90,767 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 74,468 | (5) | | | 95,744 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 6,839 | (3) | | $ | 43,770 | | | | | — | | | | — | | | $ | — | | | | — | | | | 43,575 | (4) | | $ | 278,880 | | | | | — | | | | — | | | $ | — | | | | — | | | | 66,765 | (5) | | $ | 427,296 | | | | | — | | | | — | | | $ | — | | | | — | | | | 40,060 | (7) | | $ | 256,384 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,111 | (9) | | $ | 877,510 | | | | | — | | | | — | | | $ | — | | | | — | | | | 137,385 | (10) | | $ | 879,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Securities
Underlying Unexercised Options
Exercisable | | | Number of Securities
Underlying
Unexercised Options
Unexercisable | | | | | | | | | Shares or Units
of Stock That | | | Market Value of
Shares or Units
of Stock That
Have Not Vested | | | | | — | | | | 68,151 | (3) | | $ | 3.48 | | | | 3/28/2028 | | | | — | | | $ | — | | | | | 45,384 | (4) | | | 181,535 | (4) | | $ | 5.37 | | | | 3/15/2029 | | | | — | | | $ | — | | | | | 104,720 | (5) | | | 119,681 | (5) | | $ | 6.55 | | | | 3/15/2030 | | | | — | | | $ | — | | | | | — | | | | — | | | $ | — | | | | — | | | | 29,920 | (3) | | $ | 382,970 | | | | | — | | | | — | | | $ | — | | | | — | | | | 87,151 | (4) | | $ | 697,210 | | | | | — | | | | — | | | $ | — | | | | — | | | | 83,456 | (5) | | $ | 600,883 | | | | | — | | | | — | | | $ | — | | | | — | | | | 676,001 | ( 17) | | $ | 4,566,758 | | | | | — | | | | — | | | $ | — | | | | — | | | | 50,072 | (7) | | $ | 360,518 | | | | | — | | | | — | | | $ | — | | | | — | | | | 102,833 | (9) | | $ | 877,510 | | | | | — | | | | — | | | $ | — | | | | — | | | | 103,038 | ( 10) | | $ | 879,264 | |
| (1) | Represents the market value of the shares underlying the granted RSUs as of December 31, 2021, based on the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021. |
| (2) | Represents time-based stock options that vest as follows: 5% of the stock options vested on June 15, 2016, with an additional 5% of the stock options vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (3) | Represents time-based stock options/RSUs that vest as follows: 25% of the stock options/RSUs vested on April 15, 2019, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (4) | Represents time-based stock options/RSUs that vest as follows: 25% of the stock options/RSUs vested on March 15, 2020, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (5) | Represents time-based stock options/RSUs that vest as follows: 25% of the stock options/RSUs vest on March 15, 2021, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (6) | Represents time-based RSUs that vest as follows: 5% of the RSUs vest on June 15, 2021, with an additional 5% of the RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (7) | Represents PSUs, based on actual achievement as determined by the Board following the 2020 fiscal year, that vest as follows: 25% of the PSUs vest on March 15, 2021, with an additional 6.25% of the PSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (8) | Represents PSUs that vest based upon the Company’s total relative stockholder return through December 31, 2022, any shares that vest would vest as follows: 1/3 of the PSUs vest on March 15, 2023, March 15, 2024 and March 15, 2025. PSUs reflect achievement of 100% of the target performance milestone, the actual number of shares subject to the award, if any, may range from80-150% of the target amount. |
| (9) | Represents time-based RSUs that vest as follows: 25% of the stock options/RSUs vest on March 15, 2022, with an additional 6.25% of the RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (10) | Represents PSUs, based on actual achievement as determined by the Board following the 2021 fiscal year, that vest as follows: 25% of the PSUs vest on March 15, 2022, with an additional 6.25% of the PSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (11) | Represents time-based stock options that vest as follows: 20% of the stock options vest on October 15, 2018, with an additional 5% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (12) | Represents time-based RSUs that vest as follows: 5% of the RSUs vest on January 15, 2022, with an additional 5% of the RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (13) | Represents time-based stock options that vest as follows: 20% of the stock options vest on June 15, 2018, with an additional 5% of the stock options vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (14) | Represents time-based RSUs that vest as follows: 5% of the RSUs vest on September 15, 2021, with an additional 5% of the RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (15) | Represents time-based stock options/RSUs that vest as follows: 25% of the stock options/RSUs vest on October 15, 2018, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (16) | Represents time-based stock options/RSUs that vest as follows: 25% of the stock options/RSUs vest on December 15, 2018, with an additional 6.25% of the stock options/RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
| (17) | Represents time-based RSUs that vest as follows: 5% of the RSUs vest on November 15, 2021, with an additional 5% of the RSUs vesting quarterly thereafter until fully vested, subject to continued service to Zynga through each vesting date. |
Stock Option Exercises and Stock Vested The following table shows information regarding stock options that were exercised and RSUs (including PSUs) that vested with respect to our named executive officers during 2021. All dollar amounts are rounded to the nearest whole dollar amount. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,550 | | | $ | 164,400 | | | | | | | | 1,406,370 | | | $ | 13,191,487 | | | | | | | | | | | 1,000,000 | | | $ | 6,920,000 | | | | | | | | 623,669 | | | $ | 5,856,137 | | | | | | | | | | | 500,000 | | | $ | 4,538,272 | | | | | | | | 648,780 | | | $ | 6,129,312 | | | | | | | | | | | — | | | $ | — | | | | | | | | 360,578 | | | $ | 3,387,461 | | | | | | | | | | | 15,577 | | | $ | 132,405 | | | | | | | | 356,623 | | | $ | 3,192,240 | | | | | | | | | | | 6,005,946 | | | $ | 27,247,025 | | | | | | | | 736,225 | | | $ | 7,045,053 | |
| (1) | The value realized equals the difference between the fair market value of the Class A common stock underlying the options on the exercise date and the exercise price of the underlying options multiplied by the number of options exercised. |
| (2) | The value realized equals the fair market value of the Class A common stock underlying the RSUs on the vesting date multiplied by the number of RSUs that vested. |
We do not have any defined benefit pension plans for our executive officers. Certain jurisdictions in which we have operations require that we make pension contributions to our employees. Non-Qualified Deferred CompensationWe do not offer anynon-qualified deferred compensation plans for our executive officers. Potential Payments Upon Termination or Change in Control Pursuant to the offer letters entered into with our named executive officers, (i) if Zynga terminates such named executive officer’s employment without cause, (ii) if such named executive officer resigns in a constructive termination, or (iii) in the case of Mr. Gibeau, his employment ceases due to his death or disability (each as described in the applicable offer letter), subject to such named executive officer’s execution andnon-revocation of a release of claims against Zynga and such named executive officer’s continued compliance with certain restrictive covenants, Zynga will pay such named executive officer the following severance benefits: | (x) | a separation payment equal to one times (1.0x) such named executive officer’s annual salary plus such named executive officer’s target bonus for the year in which the termination occurred, with such bonuspro-rated for the number of days such named executive officer worked for Zynga in such year (paid in a lump sum), |
| (y) | accelerated vesting of such named executive officer’s time-based equity awards that would have vested in the one year period following such termination, and |
| (z) | in the event of a termination without cause or resignation in a constructive termination, COBRA premiums for up to 12 months following termination. |
If the severance payments constitute an “excess parachute payment” within the meaning of Section 280G of the Code, Zynga is not required to provide reimbursement for any excise taxes imposed. The performance-based equity awards granted to our named executive officers generally are not subject to the severance treatment of the above offer letters and instead contain specific provisions that condition accelerated vesting (if any) on actual performance versus thepre-established operating cash flow or TSR goals. The Board and the Compensation Committee specifically intended that vesting of these awards generally should depend on actual goal achievement, even in a qualifying termination of employment. In the case of the PSUs that have been measured and earned based on achievement of
performance goals, for a qualifying termination of employment by the Company without cause or by the executive with good reason (as defined in the award agreements), the continued service-based requirement will be waived in certain circumstances. In other words, any accelerated vesting still depends on goal achievement. Similarly, for the PSUs that are earned based on achievement of Zynga’s TSR versus the TSR of the companies in the S&P MidCap 400 Index, the continued service-based requirement may be waived for a qualifying termination of employment, but the number of shares that may vest (if any) still depends on Zynga’s relative TSR versus the companies in the index. If the TSR performance period still is ongoing at the time of the qualifying termination of employment, there generally is no ability to earn the PSUs unless either (a) a change in control occurs within 3 months after termination of employment (in which case the change in control rules below generally will apply), or (b) if the performance period end date is within 1 year after the qualifying termination, the terminated executive may be eligible for partial vesting to the extent that the TSR performance goal is achieved at the end of that performance period, all as described in the applicable award agreements. In connection with Mr. Bromberg’s resignation as our Chief Operating Officer in November 2021, Mr. Bromberg waived the severance and acceleration benefits contained in his offer letter and the Change in Control Plan (as defined below). The following table sets forth estimates of the benefits that our named executive officers would have received in the event of a termination without cause or a resignation in a constructive termination or a termination due to death or disability, in each case not in connection with a change in control (assuming the termination occurred on December 31, 2021). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination in connection with Death or Disability | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,500,000 | | | $ | 8,142,089 | | | $ | 10,642,089 | | | | | | | $ | 2,500,000 | | | $ | 27,490 | | | $ | 8,142,089 | | | $ | 10,669,580 | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 1,100,000 | | | $ | 27,490 | | | $ | 3,683,024 | | | $ | 4,810,515 | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 1,100,000 | | | $ | 27,490 | | | $ | 3,683,031 | | | $ | 4,810,521 | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 848,750 | | | $ | 27,490 | | | $ | 1,752,199 | | | $ | 2,628,440 | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 770,000 | | | $ | 27,490 | | | $ | 1,459,608 | | | $ | 2,257,099 | | | | | |
| (1) | Represents (i) for accelerated RSUs, the market value of the shares underlying the accelerated RSUs as of December 31, 2021, based on the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021, (ii) for accelerated PSUs, the market value of the shares underlying the accelerated PSUs as of December 31, 2021, based on the actual performance achievement as of December 31, 2021 and the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and (iii) for accelerated stock options, the positive spread, if any, between the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and the applicable stock option exercise price. PSUs reflect achievement of 100% of the target performance milestone, unless actual achievement has been certified by the Board, the actual number of shares subject to the award, if any, may range from80-150% of the target amount. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the granted RSUs, PSUs and stock options, the exercise of the granted stock options or the sale of the shares underlying the granted RSUs, PSUs and stock options. |
| (2) | Amounts may not total due to the impact of rounding. |
| (3) | Assumes that the named executive officer elected to receive full COBRA premiums for him or herself and all eligible family members/dependents for the applicable post-termination period. |
Each of our executive officers, other than with respect to Mr. Gibeau, our Chief Executive Officer, is a participant in the Zynga Inc. Change in Control Severance Benefit Plan (the “Change in Control Plan”). Upon a change in control, each then-current participant who suffers a qualifying termination (meaning any termination by Zynga other than for cause or any voluntary termination with good reason, in each case as defined in the Change in Control Plan) within 3 months before or 18 months after a change in control will receive, in exchange for a release of claims: | (x) | a separation payment equal to one times (1.0x) such named executive officer’s annual salary plus such named executive officer’s target bonus for the year in which the termination occurred, |
| (y) | accelerated vesting of any unvested time-based equity awards, and |
| (z) | COBRA premiums for up to 12 months following termination. |
The Change in Control Plan also provides for accelerated vesting of performance-based equity awards at target, unless otherwise specified in the applicable equity award agreement. The Change in Control Plan is not applicable to the performance-based equity awards granted to our named executive officers as those awards instead contain specific change in control
provisions that base vesting on actual performance through a date before the change in control. The Change in Control Plan is designed to provide an internally consistent and equitable standard of accelerated vesting benefits, triggers, and conditions for our more senior level employees. We believe that apre-existing plan like the Change in Control Plan will allow our executive officers to focus on continuing normal business operations and the success of a potential business combination that may not be in their personal best interests, and to maintain a balanced perspective in making overall business decisions during a potentially uncertain period. We believe the size and terms of the benefits provide an appropriate balance between the costs and benefits to stockholders. We also believe these benefits are consistent with the benefits offered by companies with whom we compete for talent, and so allow us to recruit and retain key executive talent. Pursuant to Mr. Gibeau’s offer letter, upon a change in control, 25% of Mr. Gibeau’s unvested equity awards will accelerate and vest, except that this acceleration will not apply to the performance-based equity awards that we granted to Mr. Gibeau as vesting of those awards instead will depend on actual performance through a date before the change in control. In the event of a change in control where the successor corporation does not assume Mr. Gibeau’s equity awards or substitute Mr. Gibeau’s equity awards for substantially similar awards with the same or a more favorable vesting schedule (“Replacement Equity”), then all of Mr. Gibeau’s equity awards will accelerate and vest in full. Additionally, (i) if Zynga terminates Mr. Gibeau’s employment without cause or (ii) if Mr. Gibeau resigns in a constructive termination (each as described in Mr. Gibeau’s respective offer letter), in either case during the30-day period immediately preceding a change in control or the18-month period following a change in control, subject to Mr. Gibeau’s execution andnon-revocation of a release of claims against Zynga and his continued compliance with certain restrictive covenants, Zynga will pay Mr. Gibeau the following severance benefits: (w) a separation payment equal to two times the sum of Mr. Gibeau’s annual base salary and his target bonus for the year in which the termination occurred (paid in a lump sum), (x) a separation payment equal to Mr. Gibeau’s target bonus for the year in which the termination occurred, with such bonuspro-rated for the number of days Mr. Gibeau worked for Zynga in such year (paid in a lump sum), (y) accelerated vesting of all of Mr. Gibeau’s unvested time-based equity awards, and (z) COBRA premiums for up to 18 months following termination. If the severance payments constitute an “excess parachute payment” within the meaning of Section 280G of the Code, Zynga is not required to provide reimbursement for any excise taxes imposed. The above change in control treatment is not applicable to the performance-based equity awards granted to Mr. Gibeau, as explained in the next paragraph. The performance-based equity awards granted by us contain specific change in control provisions that base vesting (if any) on actual performance through a date before the change in control and generally also require continued employment following the change in control. We believe that basing vesting on actual goal achievement, even in a change in control, shows our intent to make these awards truly performance-based. In the case of the PSUs that were earned based on achievement of certain levels of operating cash flow for 2021, if a change in control had occurred in 2021, the performance period would have been shortened to end on the fiscal quarter end date immediately preceding the change in control and the operating cash flow goal would have been prorated based on the percentage of the original fiscal year performance period that was completed. Similarly, for the PSUs that are earned based on achievement of Zynga’s TSR versus the TSR of the companies in the S&P MidCap 400 Index, the performance period will be shortened to a date within 15 days before the change in control, and earning of the awards otherwise still will depend on Zynga’s TSR versus the TSR of the companies in the S&P MidCap 400 Index over the prescribed measurement periods. If Zynga’s TSR is negative during any measurement period,shortened performance period. Both types of PSUs generally require the number of RSUs earned is capped at 100% of the target number of shares for that prescribed measurement period. Based on actual performance, no shares were earned relatedexecutive to the Two-Year Market RSUs.Any shares earned related to the Three-Year Market RSUs will vestcontinue in three equal annual increments, beginning on March 15 of the yearemployment following the conclusionchange in control, with actual vesting of each prescribed measurement period, subject to continued serviceany earned PSUs occurring in accordance with the original multi-year service-based vesting schedule. Accelerated vesting is provided of PSUs earned by goal achievement if the executive incurs a qualifying termination of employment by the executives. The target number of shares totaled 2.2 million each for the Two-Year Market RSUs and the Three-Year Market RSUs, for a total of 4.4 million target shares.
The estimated per share grant date fair value of the Two-Year Market RSUs and Three-Year Market RSUs was $7.37 and $7.41, respectively. The significant assumptions used in estimating the grant date fair value of each award included an expected volatility of 27%, a risk-free interest rate ranging from 0.5% to 0.6% and an expected dividend yield of zero. During the years ended December 31, 2021 and 2020, we recorded $6.6 million and $8.0 million of stock-based compensation expense related to the Market RSUs, respectively.
2011 Employee Stock Purchase Plan
Our 2011 Employee Stock Purchase Plan (“2011 ESPP”), was approved by our Board of Directors in September 2011 and by our stockholders in November 2011 and amended in August 2012. The number of shares of our Class A common stock reserved for future issuance under our 2011 ESPP automatically increased on January 1 of each year, beginning on January 1, 2012, and continuing through January 1, 2021,Company without cause or by the lesser of 2% of the total number of shares of our capital stock outstandingexecutive with good reason, all as of December 31 of the preceding calendar year, 25,000,000 shares or the number of shares that may be determined by the Company’s Board of Directors.
Our 2011 ESPP permits participants to purchase shares of our Class A common stock through payroll deductions up to 15% of their earnings, subject to a maximum of 5,000 shares available for purchase on any purchase date. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of our Class A common stock on the first day of an offering or on the date of purchase. The ESPP offers two purchase dates within each annual period, resulting in a six-month and twelve-month look-back. Additionally, the ESPP contains an automatic reset feature after the first six months of each annual period, such that if the fair market value of our Class A common stock has decreased from the original offering date, the offering will automatically terminate and all participants will be re-enrolledspecified in the new, lower-priced offering. Participants may end their participation at any time during an offering and will be refunded their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment.
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As of December 31, 2021, there were $5.2 million of employee contributions withheld by the Company. During the year ended December 31, 2021, 2020 and 2019, the Company recognized $6.1 million, $3.6 million and $3.4 million of stock-based compensation expense related to the 2011 ESPP.
Employee Savings Plan
We have a defined contribution plan, which is qualified under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 70% of their eligible compensation, or the statutory limit, whichever is lower. In 2021, 2020 and 2019, we contributed 1 dollar for each dollar a participant contributed, with a maximum contribution of 3% of each employee’s eligible compensation, subject to a maximum total contribution mandated by the IRS. The total expense for this savings plan was $8.2 million, $6.5 million and $5.8 million in the year ended December 31, 2021, 2020 and 2019, respectively.
Common Stock Reserved for Future Issuance
As of December 31, 2021, we had reserved shares of common stock for future issuance as follows (in millions):
respective award agreements. | | December 31, 2021
| | Stock options outstanding
| | | 22.7
| | RSUs outstanding
| | | 62.4
| | 2011 Equity Incentive Plan
| | | 166.0
| | 2011 Employee Stock Purchase Plan
| | | 159.8
| | Total
| | | 410.9
| |
13. Accumulated Other Comprehensive Income (Loss)
The following table showssets forth estimates of the benefits that Mr. Gibeau would have received in the event of a summarychange of control (assuming the change in control occurred on December 31, 2021) without any change in Mr. Gibeau’s employment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Without Replacement
Equity | | | | | | | Equity Acceleration
($) (1) | | | | | | Equity Acceleration
($) (1) | | | | | | | $ | 6,121,922 | | | | | | | $ | 24,487,688 | | | | | |
| (1) | Represents (i) for accelerated RSUs and PSUs, the market value of the shares underlying the accelerated RSUs and PSUs as of December 31, 2021, based on the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and (ii) for accelerated stock options, the positive spread, if any, between the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and the applicable stock option exercise price. PSUs reflect achievement of 100% of the target performance milestone, unless actual achievement has been certified by the Board, the actual number of shares subject to the award, if any, may range from80-150% of the target amount. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the granted RSUs, PSUs and stock options, the exercise of the granted stock options or the sale of the shares underlying the granted RSUs, PSUs and stock options. |
The following table sets forth estimates of the benefits that our named executive officers would have received in the event of a termination without cause or a resignation in a constructive termination in connection with a change of control (assuming the change in control and the termination occurred on December 31, 2021). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity Acceleration
($) (2) | | | | | | | $ | 6,500,000 | | | $ | 41,236 | | | $ | 24,487,688 | | | $ | 31,028,923 | | | | $ | 1,100,000 | | | $ | 27,490 | | | $ | 11,909,264 | | | $ | 13,036,755 | | | | $ | 1,100,000 | | | $ | 27,490 | | | $ | 11,428,554 | | | $ | 12,556,044 | | | | $ | 848,750 | | | $ | 27,490 | | | $ | 3,390,574 | | | $ | 4,266,814 | | | | $ | 770,000 | | | $ | 27,490 | | | $ | 2,902,082 | | | $ | 3,699,572 | |
| (1) | Assumes that the named executive officer elected to receive full COBRA premiums for him or herself and all eligible family members/dependents for the applicable post-termination period. |
| (2) | Represents (i) for accelerated RSUs and PSUs, the market value of the shares underlying the accelerated RSUs and PSUs as of December 31, 2021, based on the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and (ii) for accelerated stock options, the positive spread, if any, between the closing price of our Class A common stock, as reported on the Nasdaq Global Select Market, of $6.40 per share on December 31, 2021 and the applicable stock option exercise price. PSUs reflect achievement of 100% of the target performance milestone, unless actual achievement has been certified by the Board, the actual number of shares subject to the award, if any, may range from80-150% of the target amount. These amounts do not reflect whether the named executive officer has actually realized or will realize a financial benefit from the awards upon the vesting of the granted RSUs, PSUs and stock options, the exercise of the granted stock options or the sale of the shares underlying the RSUs and PSUs. |
| (3) | Pursuant to the named executive officer’s offer letter, if the severance benefits that such named executive officer would receive with respect to a termination other than in connection with a change in control (as described under the heading “Executive Compensation Tables—Potential Payments upon Termination or Change inControl—Non-Change in Control”) are greater than the severance benefits such named executive officer would receive under the Change in Control Plan, then such named executive officer will receive thenon-change in control severance benefits in lieu of any benefits otherwise payable to such named executive officer under the Change in Control Plan. This table shows the benefits payable to the named executive officer under the Change in Control Plan as such benefits are greater than the benefits payable to the named executive officer under the named executive officer’s offer letter if the change in control and the termination occurred on December 31, 2021. |
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Frank Gibeau, our CEO: For fiscal year 2021, our last completed fiscal year: the median of the annual total compensation of all employees of our company (other than our CEO), was $98,781; and the annual total compensation of our CEO, as reported in the Summary Compensation Table presented elsewhere in this proxy statement, was $7,652,938. For fiscal year 2021, the ratio of the annual total compensation of Mr. Gibeau, our CEO, to the median of the annual total compensation of employees was 77 to 1. This pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of RegulationS-K. Consistent with Instruction 2 to Item 402(u) of RegulationS-K, we may identify our median employee for purposes of providing pay ratio disclosure once every three years and calculate and disclose total compensation for that employee each year; provided that, during the last completed fiscal year, there has been no change in the employee population or employee compensation arrangements that we reasonably believe would result in a significant change to our pay ratio disclosure. We have reviewed the changes in accumulated other comprehensive income (loss) by component from December 31, 2019our employee population and employee compensatory arrangements for fiscal year 2021 and have determined that there have been no changes that would significantly impact our 2020 pay ratio disclosure and require us to December 31, 2021 (in millions): | | Foreign Currency Translation | | | Unrealized Gains (Losses) on Available- For-Sale Marketable Debt Securities | | | Total | | Balance as of December 31, 2019 | | $ | (126.1 | ) | | $ | 0.2 | | | $ | (125.9 | ) | Other comprehensive income (loss) before reclassifications | | | 75.3 | | | | (0.1 | ) | | | 75.2 | | Amounts reclassified from accumulated other comprehensive income (loss) | | | — | | | | — | | | | — | | Net other comprehensive income (loss), net of tax | | | 75.3 | | | | (0.1 | ) | | | 75.2 | | Balance as of December 31, 2020 | | $ | (50.8 | ) | | $ | 0.1 | | | $ | (50.7 | ) | Other comprehensive income (loss) before reclassifications | | | (56.3 | ) | | | (0.1 | ) | | | (56.4 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | | | — | | | | — | | | | — | | Net other comprehensive income (loss), net of tax | | | (56.3 | ) | | | (0.1 | ) | | | (56.4 | ) | Balance as of December 31, 2021 | | $ | (107.1 | ) | | $ | — | | | $ | (107.1 | ) |
14. Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive securities. In computing diluted net income (loss) per share, net income (loss) attributable to common shareholders is re-allocated to reflect the potential impact of dilutive securities, including stock options, unvested RSUs, unvested performance and market-based RSUs, ESPP withholdings and convertible debt instruments. For periods in whichidentify a new median employee. As a result, we have generated a net loss or there is no income attributable to common stockholders,
re-identified the same median employee as we do not include dilutive securitiesdid in our calculation of diluted net income (loss) per share, as2020 CEO pay ratio disclosure. For our fiscal year 2020 pay ratio disclosure, to identify the impact of these awards is anti-dilutive.99
The following tables set forth the computation of basic and diluted net income (loss) per share of common stock (in millions, except per share data):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | | | Class A | | | Class A | | | Class A | | Basic | | | | | | | | | | | | | Net income (loss) attributable to common stockholders | | $ | (104.2 | ) | | $ | (429.4 | ) | | $ | 41.9 | | Weighted-average common shares outstanding | | | 1,099.1 | | | | 1,016.8 | | | | 938.7 | | Net income (loss) per share attributable to common stockholders | | $ | (0.09 | ) | | $ | (0.42 | ) | | $ | 0.04 | | Diluted | | | | | | | | | | | | | Net income (loss) attributable to common stockholders – basic | | $ | (104.2 | ) | | $ | (429.4 | ) | | $ | 41.9 | | Weighted-average common shares outstanding – basic | | | 1,099.1 | | | | 1,016.8 | | | | 938.7 | | Weighted-average effect of dilutive securities: | | | | | | | | | | | | | Stock options and employee stock purchase plan | | | — | | | | — | | | | 13.0 | | RSUs | | | — | | | | — | | | | 22.3 | | Weighted-average common shares outstanding – diluted | | | 1,099.1 | | | | 1,016.8 | | | | 974.0 | | Net income (loss) per share attributable to common stockholders – diluted | | $ | (0.09 | ) | | $ | (0.42 | ) | | $ | 0.04 | |
The following weighted-average employee equity awards and convertible debt instruments were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in millions):
| | Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Stock options and employee stock purchase plan | | | 28.8 | | | | 31.3 | | | | 3.7 | | RSUs (including performance and market-based awards) | | | 64.9 | | | | 56.6 | | | | 0.6 | | Convertible senior notes | | | 8.2 | | | | — | | | | — | | Total | | | 101.9 | | | | 87.9 | | | | 4.3 | |
15. Commitments and Contingencies
The amounts represented in the tables below reflect our minimum cash obligations for the respective calendar years based on contractual terms, but not necessarily the periods in which these costs will be expensed in the Company’s consolidated statement of operations.
Licensor and Marketing Commitments
We have entered into several contracts with licensors that contain minimum contractual royalty and marketing commitments that may not be dependent on any deliverables. As of December 31, 2021, future minimum contractual royalty payments due to licensors and associated marketing commitments for the licensed products are as follows (in millions):
Year ending December 31: | | | | | 2022 | | $ | 12.7 | | 2023 | | | 10.4 | | 2024 | | | 10.0 | | 2025 | | | 10.0 | | Thereafter | | | — | | Total | | $ | 43.1 | |
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Other Purchase Commitments
We have entered into several contracts primarily for hosting of data systems and other services. As of December 31, 2021, future minimum purchase commitments that have initial or remaining non-cancelable terms are as follows (in millions):
Year ending December 31: | | | | | 2022 | | $ | 74.5 | | 2023 | | | 56.6 | | 2024 | | | 36.9 | | Thereafter | | | — | | Total | | $ | 168.0 | |
Excluded from tables above is our uncertain income tax position liability of $22.0 million, which includes interest and penalties, as the Company cannot make a reasonably reliable estimatemedian of the periodannual total compensation of cash settlement.
Legal Matters
The Company is involved in legal and regulatory proceedings on an ongoing basis. Some of these proceedings are in early stages and may seek an indeterminate amount of damages. If the Company believes that a loss arising from such matters is probable and can be reasonably estimated, the Company accrues the estimated liability in its financial statements. If only a range of estimated losses can be determined, the Company accrues an amount within the range that, in its judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, the Company accrues the low end of the range. For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, the Company discloses such an estimate, if material. If such a loss or range of losses is not reasonably estimable, the Company discloses that fact. In assessing the materiality of a proceeding, the Company evaluates, among other factors, the amount of monetary damages claimed,all our employees, as well as to determine the potential impact of non-monetary remedies sought by plaintiffs that may require changes to business practices in a manner that could have a material adverse impact on the Company’s business. Legal expenses are recognized as incurred.
On September 12, 2019, the Company announced that an incident had occurred that may have involved player data (the “Data Incident”). Upon our discoveryannual total compensation of the Data Incident, an investigation immediately commenced“median employee,” the methodology and advisorsthe material assumptions, adjustments, and third-party forensics firmsestimates that we used were retainedas follows:
We selected October 1, 2020, (which is a date within the last 3 months of fiscal year 2020), as the date upon which we would identify the median employee.
As of October 1, 2020, our employee population consisted of 2,192 individuals (other than our CEO), including employees in the United States, Canada, Finland, Ireland, Turkey, the United Kingdom, and India. All 2,192 of these employees were included when identifying our “median employee”. To identify the “median employee” from our employee population we used payroll and equity plan records for all active employees as of October 1, 2020 (the “compensation measure”). | ○ | | The compensation measure included the following: (i) the individual’s annual base salary for 2020, as in effect on October 1, 2020, (ii) if the individual was a participant in our corporate bonus plan, the individual’s target bonus percentage for 2020 (assuming payout at 100% of target), and (iii) the value of the individual’s stock that vested from January 1, 2020 through December 31, 2020. |
| ○ | | Certain employees (including our advertising and direct sales teams) do not participate in our corporate bonus plan and do not have an individual target bonus percentage. For these individuals, we calculated their bonus amount based on actual bonuses earned in 2020. |
| ○ | | For temporary employees, we used actual base salary, plus any bonus or stock paid. |
Amounts paid in foreign currency were converted into United States dollars using exchange rates in effect in our payroll system as of October 1, 2020. With respect to assist. The investigation revealed that, during the third quarter of 2019, outside hackers illegally accessed certain player account information and other Zynga information, and that no financial information was accessed. The Company has provided notifications to players, investors, regulators and other third parties, where we believe notice was required or appropriate. The Company has exchanged correspondence with certain regulators as a resultannual total compensation of the incident. The Company has also received“median employee,” we identified and has responded to data subject access requests from certain European Union players of Zynga’s games.Since March 3, 2020, five consumer class action complaints have been filed in connection withcalculated the Data Incident in federal court. On March 3, 2020, two plaintiffs – minor “I.C.” (acting through his parent Nasim Chaudhri) and Amy Gitre – filed a class action complaint arising out of the Data Incident (the “Chaudhri complaint”), generally alleging that Zynga failed to reasonably safeguard certain player information, including names, email addresses, and passwords (among other items); failed to provide them with timely notification of the breach; and made misleading representations concerning the safety and security of plaintiffs’ personal information. Plaintiffs allege claims against Zynga under several state law theories, including negligence, intrusion upon seclusion, failure to comply with data breach notification statutes, and unjust enrichment, and they seek injunctive relief and damages. Zynga filed a motion to compel arbitration and arbitration-related discovery on May 8, 2020.
On March 23, 2020, plaintiffs Carol Johnson and Lisa Thomas filed a second class action complaint in the Northern District of California federal court (the “Johnson complaint”). Similar to the Chaudhri complaint, the Johnson plaintiffs – residents of Missouri and Wisconsin – assert Zynga failed to adequately protect certain player information, including names, email addresses, and passwords (among other items). Plaintiffs contend that, despite Zynga’s representations in its privacy policy that sensitive player information would be adequately protected, plaintiffs’ passwords were stored using inadequate hashing methods or in plain text. Plaintiffs allege that the lack of adequate security measures caused them harm as a result of the Data Incident, and they assert numerous various claims against Zynga, including claims for negligence, negligence per se, unjust enrichment, declaratory relief, breach of confidence, breach of contract and implied contract, violations of California’s Unfair Competition Law (“UCL”, CGL 17200, et seq.), and state-specific violations of Missouri’s Merchandising Practices Act and Wisconsin’s Deceptive Trade Practices Act. Plaintiffs seek damages, as well as declaratory and injunctive relief. On May 26, 2020, Zynga filed a motion to compel arbitration and arbitration-related discovery.
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On April 15, 2020, plaintiffs Joseph Martinez IV and Daniel Petro, residents of Colorado and Iowa, filed a third class action complaint in the Northern District of California (the “Martinez complaint”). Plaintiffs allege they are longtime Zynga players who were affected by the Data Incident. Similar to the Chaudhri and Johnson plaintiffs, the Martinez plaintiffs generally allege that Zynga failed to adequately store and protect or otherwise secure certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated and improper password encryption methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. Like the Johnson and Chaudhri plaintiffs, the Martinez plaintiffs assert claims for negligence, negligence per se, and unjust enrichment, as well as contractual claims, and claims for relief under multiple state consumer protection statutes. Additionally, the Martinez plaintiffs also assert misrepresentation and omission claims under California’s false advertising law and the California Consumer Legal Remedies Act. Plaintiffs seek injunctive and monetary relief on behalf of a nationwide class. Zynga responded to the Martinez complaint by filing a motion to compel arbitration on June 19, 2020.
On June 9, 2020 plaintiffs James Oeste and Marissa Oeste, both residents of Maryland, filed a fourth class action complaint in the Northern District of Maryland (the “Oeste complaint”). Plaintiffs allege they were Zynga players who were affected by the Data Incident. Similar to all the foregoing plaintiffs, the Oeste plaintiffs seek to represent a nationwide class and generally allege that Zynga failed to adequately or reasonably protect certain player information, including names, email addresses, and passwords (among other items); that Zynga used outdated or improper password hashing methods; that Zynga failed to adequately provide notice of the Data Incident; and that they have been harmed as a result of the Data Incident. The Oeste plaintiffs assert claims for contractual breach, negligence, negligence per se, invasion of privacy, and claims for relief under California consumer protection and unfair competition statutes. Zynga responded to the complaint on August 31, 2020, with a motion to transfer the action to the Northern District of California. On May 5, 2021, the court granted Zynga’s motion to transfer, and the case was transferred to the Northern District of California. The California district court has consolidated Oeste proceedings in connection with the other already pending cases before the court.
On August 13, 2020, plaintiff Christopher Rosiak filed a fifth class action in the Northern District of California (the “Rosiak complaint”). Plaintiff alleges similar and analogous claims to those in the Martinez (and others) actions pending in the Northern District, alleging that he suffered harm as a result of Zynga’s data breach. Plaintiff Rosiak alleges multiple state law claims, including contract-based claims, negligence, and violation of California’s unfair competition, false advertising, and consumer protection statutes.
On January 6, 2021, the Northern California district court issued an order in three of the above actions—Chaudhri, Johnson, and Martinez—denying Zynga’s motions to compel arbitration without prejudice, and granting an alternative request for preliminary arbitration-related discovery that Zynga had made in connection with its motions. Plaintiffs were ordered to provide Zynga with plaintiffs’ identifying information. Following a status hearing before the court as to all actions pending before it, plaintiffs filed an amended and consolidated complaint in connection with the Chaudhri, Johnson, and Martinez complaints, as well as in connection with the Rosiak complaint. The amended and consolidated complaint was filed in the Northern District of California on March 12, 2021.
In response to the amended and consolidated complaint, on April 21, 2021, the Company filed renewed motions to compel arbitration in connection with the claims alleged by three of the individual named plaintiffs in the Chaudhri, Johnson, and Martinez actions. On the same date, the Company also filed a motion to dismiss claims alleged by all remaining plaintiffs in those actions, and in the Rosiak action. Following oral argument held by the court on July 27, 2021, the court granted Zynga’s motion to compel arbitration and granted the motion to dismiss with leave to amend. Plaintiffs filed their second amended consolidated complaint on August 27, 2021. Zynga filed a responsive motion to dismiss the amended complaint on September 20, 2021. A hearing on the motion scheduled for October 26, 2021 was vacated, to be reset as necessary. Zynga is awaiting either a rescheduled hearing or the court’s decision on the motion.
On March 2, 2021, a class-action lawsuit (the “Bourgeois complaint”) was filed in the Superior Court of Quebec, in the province of Montreal, Canada. The lawsuit, which was subsequently amended via an amended application on October 15, 2021, was filed by named plaintiff Gabriel Bourgeois, who purchased loot box items in connection with his use of the Marvel Strike Force and Pokemon Go! electronic and online games (plaintiff does not allege that he purchased a loot box in connection with any Zynga games). Plaintiff alleges that Zynga and multiple other gaming defendants have unlawfully developed, own, and operate an unlicensed gaming system, through the use of loot boxes in connection with their games. Plaintiff asserts that defendants have unlawfully offered loot boxes to the public in connection with their games; failed to properly disclose the odds of winning in connection with loot boxes; and failed to employ appropriate safeguards surrounding minors’ ability to purchase loot boxes. The specific Zynga games at issue—which plaintiff does not claim to have played—include CSR Racing 2, Empires & Puzzles, FarmVille: Country Escape and Dawn of Titans. Plaintiff collectively asserts that by offering loot boxes, all defendants have violated the Criminal Code of Canada provisions that regulate gaming; the Competition Act of Canada; and various individual consumer protection laws of the individual Canadian provinces. Plaintiff seeks monetary damages in the form of compensatory and punitive damages, on his own behalf and that of a nationwide Canadian class.
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On April 12, 2021, IGT and IGT Canada Solutions ULC (“IGT”) served Zynga with a lawsuit in the Western District of Texas federal court (the “IGT complaint”), accusing the Company of infringing United States Patent Nos. 8,708,791; 9,159,189; 7,168,089; 7,303,473; 8,795,064; and 8,266,212. The complaint alleges that the following games and certain features contained within them infringe on the IGT patents: Zynga Poker, Words With Friends, FarmVille and Zynga social slots games, including specifically, Hit It Rich! Slots. On June 16, 2021, Zynga filed a partial motion to dismiss or strike plaintiff’s claims; and in the alternative, for a more definitive statement. IGT filed its opposition brief on June 30, 2021, and Zynga filed its reply on July 7, 2021. The parties are awaiting a hearing on the motion. On September 28, 2021, the court adopted discovery and scheduling deadlines that include a dispositive motion deadline of October 26, 2022, and an anticipated trial date of February 6, 2023.
On February 24, 2022, a putative class action complaint was filed in the U.S. District Court for the Western District of Washington by plaintiffs Tonda Ferrando and Dex Marzano, both of whom purport to be Washington residents, on behalf of a Washington class of individuals who made purchases in the Company’s online social casino games, including Hit it Rich!, Black Diamond Casino, Wizard of Oz Slots, Willy Wonka Slots, and Game of Thrones™ Slots Casino. The complaint alleges that those games violate Washington state laws. Zynga and plaintiffs have agreed to formal mediation.
The Company intends to defend itself vigorously against all claims asserted. At this time, the Company is unable to reasonably estimate the loss or range of loss, if any, arising from any of the above-referenced matters.
The Company is, at various times, also party to various other legal proceedings, claims and/or regulatory inquiries not previously discussed which arise in the ordinary course of business. In addition, the Company may receive notifications alleging infringement of patent or other intellectual property rights. Adverse results in any such litigation, legal proceedings or claims may include awards of substantial monetary damages, expensive legal fees, costly royalty or licensing agreements, or orders preventing us from offering certain games, features, or services, and may also result in changes in the Company’s business practices, which could result in additional costs or a loss of revenue and could otherwise harm the Company’s business. Although the resultselements of such litigation cannot be predicted with certainty, the Company believes that the amount or range of reasonably possible losses related to such pending or threatened litigation will not have a material adverse effect on its business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.
16. Subsequent Events
Proposed Merger with Take-Two
On January 9, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Take-Two Interactive Software, Inc. and two of its wholly-owned subsidiaries (“Take-Two”), pursuant to which, and subject to the satisfaction or waiver of the conditions set forth therein, Zynga would become a wholly-owned subsidiary of Take-Two (the “Combination”). The Combination is intended to qualify as a tax-free reorganizationemployee’s compensation for U.S. federal income tax purposes.
As a result of the Combination, each issued and outstanding share of Zynga’s Class A Common Stock, other than dissenting shares and treasury shares, will be converted into a number of shares of Take-Two’s common stock (the “Stock Consideration”), equal to the Exchange Ratio (as defined below), and the right to receive $3.50 in cash.
The “Exchange Ratio” will be the following: (i) if the Take-Two Common Stock Price (as defined below) is an amount greater than $181.88, then the Exchange Ratio is 0.0350; (ii) if the Take-Two Common Stock Price is an amount greater than or equal to $156.50 but less than or equal to $181.88, then the Exchange Ratio is an amount equal to the quotient (rounded to five decimal places) obtained by dividing (a) $6.36 by (b) the Take-Two Common Stock Price; and (iii) if the Take-Two Common Stock Price is less than $156.50, then the Exchange Ratio is 0.0406. “Take-Two Common Stock Price” will be the volume-weighted average sales price per share of Take-Two Common Stock on the Nasdaq Global Select Market for the consecutive period beginning at 9:30 a.m. New York time on the twenty-third trading day immediately preceding the closing date of the Combination and concluding at 4:00 p.m. New York time on the third trading day immediately preceding such closing date.
The Merger Agreement also provides that at the effective time of the Combination (the “Effective Time”), (i) issued and outstanding options to purchase Zynga Common Stock will be assumed by Take-Two and automatically converted into options exercisable for shares of Take-Two Common Stock (the “Converted Options”), (ii) each issued and outstanding restricted stock unit award covering Zynga Common Stock will be assumed by Take-Two and automatically converted into a Take-Two restricted share unit award covering shares of Take-Two Common Stock (the “Converted RSUs”), and (iii) each issued and outstanding performance stock unit award covering Zynga Common Stock will be assumed by Take-Two and automatically converted into a Take-Two restricted share unit award covering a number of shares of Take-Two Common Stock determined based on the number of shares of Zynga Common Stock subject to the award immediately prior to the Effective Time as determinedfiscal year 2020 in accordance with the requirements of the applicable Zynga award agreement (the “Converted PSUs” and, together Item 402(c)(2)(x) of Regulation
S-K (with the Converted Options, and the Converted RSUs, the “Converted Awards”)amounts paid in foreign currency converted into United States dollars using exchange rates in effect in our payroll system as of December 31, 2020), resulting in each case with the numberannual total compensation of shares (and exercise price, with$98,781. With respect to Converted Options) adjusted based on an exchangethe annual total compensation for the CEO for the fiscal year 2021 pay ratio, that is intended to maintainwe used the intrinsic value of the award immediately prior to the103
Effective Time. Following the Effective Time, the Converted Awards will vest based on continued service and will continue to be governed by substantially the same terms and conditions as were applicable to the corresponding Zynga equity awards immediately prior to the Effective Time.
Pursuant to the terms of a “go-shop” provisionamount reported in the Merger Agreement, during the period beginning on the date of the Merger Agreement and ending on February 24, 2022 (such period, the “Go-Shop Period”), Zynga may (i) solicit, propose or facilitate the making of alternative acquisition proposals from third parties; (ii) provide non-public information to third parties in connection with alternative acquisition proposals; and (iii) participate in discussions and negotiations with third parties regarding alternative acquisition proposals. The Go-Shop Period concluded on February 24, 2022. Zynga and Take-Two have agreed that, commencing at 12:01 a.m. (New York time) on February 25, 2022 (in the case of Zynga), and commencing upon the execution of the Merger Agreement (in the case of Take-Two), Zynga and Take-Two will be subject to “no-shop” restrictions and will not, subject to certain exceptions set forth in the Merger Agreement, (i) solicit or knowingly encourage inquiries or proposals relating to alternative acquisition transactions or (ii) engage in discussions or negotiations regarding, or provide any non-public information to third parties in connection with, alternative acquisition proposals. In addition, each of Zynga and Take-Two have agreed that, subject to certain exceptions, its board of directors will not withdraw its respective recommendations to their respective stockholders in favor of the approval and adoption of Merger Agreement and the Combination (in the case of Zynga), or the approval of the issuance of the Stock Consideration and the adoption of the Take-Two Charter Amendment (as defined below) (in the case of Take-Two).
The closing of the Combination is subject to certain conditions, including (i) the approval and adoption of the Merger Agreement and the Combination by Zynga’s stockholders, (ii) the approval of the issuance of the Stock Consideration and the adoption of an amendment to Take-Two’s Amended and Restated Certificate of Incorporation increasing the number of authorized shares of Take-Two Common Stock (the “Take-Two Charter Amendment”) by Take-Two’s stockholders, (iii) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance under the antitrust laws of certain non-United States jurisdictions, (iv) there having not occurred a material adverse effect on the other party, (v) the effectiveness of a registration statement on Form S-4 with respect to shares of Take-Two Common Stock to be issued in the Merger and (vi) other customary conditions.
Either Zynga or Take-Two may terminate the Merger Agreement if, among certain other circumstances, (i) the Combination has not become effective on or before January 9, 2023 or (ii) Zynga’s stockholders fail to approve and adopt the Merger Agreement and the Combination, or Take-Two’s stockholders fail to approve the issuance of the Stock Consideration and/or the adoption of the Take-Two Charter Amendment. Zynga may terminate the Merger Agreement in certain additional circumstances, including: (a) to allow Zynga to enter into a definitive agreement for an alternative business combination proposal that constitutes a “superior proposal,” or (b) if Take-Two’s board of directors withdraws or adversely changes its recommendation to Take-Two’s stockholders in favor of the approval of the issuance of the Stock Consideration or the adoption of the Take-Two Charter Amendment. Take-Two may terminate the Merger Agreement in certain additional circumstances, including if Zynga’s board of directors withdraws or adversely changes its recommendation to Zynga’s stockholders in favor of the approval and adoption of the Merger Agreement and the Combination.
The Merger Agreement provides for the payment of a “termination fee” upon the termination of the Merger Agreement in specified circumstances, including if the Merger Agreement is terminated by either Take-Two or Zynga as a result of an adverse change in the recommendation of the other party’s board of directors. In the event that Zynga terminates the Merger Agreement following an adverse change in the recommendation of Take-Two’s board of directors, Take-Two would be required to pay to Zynga a termination fee of $550.0 million. In the event that Take-Two terminates the Merger Agreement following an adverse change in the recommendation of Zynga’s board of directors, Zynga would be required to pay to Take-Two a termination fee of $550.0 million. In addition, Zynga is required to pay to Take-Two a termination fee of $550 million if Zynga terminates the Merger Agreement to enter into a definitive agreement for an alternative acquisition proposal for Zynga that constitutes a “superior proposal,” as defined in the Merger Agreement. If the Merger Agreement is terminated because Zynga’s stockholders fail to approve the adoption of the Merger Agreement and the Combination, and Take-Two’s stockholders approve the issuance of the Stock Consideration and the adoption of the Take-Two Charter Amendment, Zynga will be required to pay Take-Two an expense reimbursement of $50.0 million. If the Merger Agreement is terminated because Take-Two’s stockholders fail to approve the issuance of the Stock Consideration and the adoption of the Take-Two Charter Amendment, and Zynga’s stockholders approve the adoption of the Merger Agreement and the Combination, Take-Two will be required to pay to Zynga an expense reimbursement of $50.0 million.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation“Total” column of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. 2021 Summary Compensation Table.
Equity Compensation Plan Information The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure thatfollowing table provides certain information, required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, aswith respect to all of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as definedZynga’s equity compensation plans in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021. Management reviewed the results of its assessment with our Audit Committee. The effectiveness of our internal control over financial reportingeffect as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 under the caption “Report of Independent Registered Public Accounting Firm” which is incorporated herein by reference.
We acquired Chartboost, Inc. and Beijing StarLark Technology Co., Ltd. on August 4, 2021 and October 5, 2021, respectively. As permitted by SEC guidance, we excluded certain internal controls over financial reporting related to these entities from our assessment(which consist of the effectiveness2007 Equity Incentive Plan, the 2011 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan). No warrants are outstanding under any of internal control over financial reportingthe foregoing plans. All of our equity compensation plans that were in effect as of December 31, 2021. Combined revenue, operating expenses and total assets subject to these entities’ internal control over financial reporting that are excluded from our assessment2021 were adopted with the approval of the effectivenessZynga’s security holders.
| | | | | | | | | | | | | | | | | | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b)(1) | | | Number of
securities
remaining available
for issuance under
equity
compensation | | | | | | Equity compensation plans approved by security holders | | | 89,328,936 | | | $ | 3.59 | | | | 313,575,912 | | | | | | Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | | | | | | | 89,328,936 | | | $ | 3.59 | | | | 313,575,912 | |
| (1) | The calculation of the weighted-average exercise price of the outstanding stock options and rights excludes the shares of common stock included in column (a) that are issuable upon the vesting of then-outstanding RSUs because RSUs have no exercise price. |
| (2) | Excludes securities reflected in column (a). |
| (3) | Includes 153,761,774 and 159,814,138 shares of Class A common stock available for issuance under the 2011 Equity Incentive Plan, based on performance-based awards being earned at target levels, and the 2011 Employee Stock Purchase Plan, respectively. There are no further shares available for issuance under the 2007 Equity Incentive Plan. |
Table of internal control over financial reporting constituted approximately 1% of consolidated revenue, operating expenses and total assets, respectively, excluding acquisition method fair value adjustments, as of and for the year ended December 31, 2021.Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be included in Part III of this Annual Report on Form 10-K will be provided in an amendment to this Form 10-K in accordance with General Instruction G(3) to Form 10-K.
Our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available on our website (www.zynga.com) under “Corporate Governance.” We will provide a copy of these documents to any person, without charge, upon request, by writing to us at Zynga Inc., Investor Relations Department, 699 Eighth Street, San Francisco, California 94103. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our website at the address and the location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be included in Part III of this Annual Report on Form 10-K will be provided in an amendment to this Form 10-K in accordance with General Instruction G(3) to Form 10-K.
Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information requiredregarding the beneficial ownership of Zynga’s common stock as of March 31, 2022 (except as otherwise noted below) by: (i) each of our directors and any nominee for director; (ii) each of our named executive officers; (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be includedbeneficial owners of more than five percent of our Class A common stock. Except as specified in Part IIIthe following sentence, beneficial ownership is determined according to the rules of this Annual Report on Form 10-K willthe SEC and generally means that (i) shares subject to stock options currently exercisable or exercisable within 60 days of March 31, 2022 and (ii) RSUs vesting within 60 days of March 31, 2022 deemed to be providedoutstanding for computing the percentage ownership of the stockholder holding those stock options and RSUs but not for any other stockholder. Unless otherwise indicated, the address of each beneficial owner listed in an amendment to this Form 10-K in accordance with General Instruction G(3) to Form 10-K.the table below is c/o Zynga Inc., 699 8 th Street, San Francisco, CA 94103. | | | | | | | | | | | | | | Shares Beneficially Owned(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 97,405,497 | | | | 8.6% | | | | | Artisan Partners Limited Partnership (3) | | | 75,843,131 | | | | 6.7% | | | | | T. Rowe Price Associates, Inc. (4) | | | 60,541,952 | | | | 5.3% | | | | | Named Executive Officers and Directors: | | | | | | | | | | | | | | | 55,277,047 | | | | 4.9% | | | | | | | | 9,754,559 | | | | * | | | | | | | | 4,499,706 | | | | * | | | | | | | | 7,458,610 | | | | * | | | | | | | | 1,284,029 | | | | * | | | | | | | | 1,204,084 | | | | * | | | | | | | | 425,737 | | | | * | | | | | | | | 234,046 | | | | * | | | | | William “Bing” Gordon (13) | | | 1,318,913 | | | | * | | | | | Louis J. Lavigne, Jr. (14) | | | 284,064 | | | | * | | | | | | | | 233,872 | | | | * | | | | | | | | 233,872 | | | | * | | | | | | | | 220,572 | | | | * | | | | | | | | 40,857 | | | | * | | | | | All executive officers and directors as a group (14 persons) (18) | | | 81,445,768 | | | | 7.0% | |
| (*) | Represents beneficial ownership of less than one percent of the applicable class of outstanding common stock. |
| (1) | This table is based upon information supplied by our named executive officers, directors, and principal stockholders and Schedules 13D and Schedules 13G, if any, filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, Zynga believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable ownership percentages are based on 1,137,275,859 shares of our Class A common stock outstanding as of March 31, 2022, adjusted as required by rules promulgated by the SEC. |
| (2) | Based on a Schedule 13G amendment filed with the SEC on February 10, 2022 by The Vanguard Group (“Vanguard”). In such Schedule 13G amendment, Vanguard indicates it is the beneficial owner of 97,405,497 shares of Class A common stock, has shared voting power over 537,504 shares of Class A common stock, has sole dispositive power over 95,993,263 shares of Class A common stock, and has shared dispositive power over 1,412,234 shares of Class A common stock. In such Schedule 13G amendment, Vanguard lists its address as 100 Vanguard Blvd., Malvern, PA 19355. |
| (3) | Based on a Schedule 13G amendment filed with the SEC on February 4, 2022 by Artisan Partners Limited Partnership (“APLP”). In such Schedule 13G amendment, APLP indicates it is the beneficial owner of 75,843,131 shares of Class A common stock, has shared voting power over 67,852,483 shares of Class A common stock, and has shared dispositive power over 75,843,131 shares of Class A common stock. In such Schedule 13G amendment, APLP notes that it is an investment adviser registered under section 203 the Investment Company Act of 1940, the shares reported have been acquired on behalf of discretionary clients of APLP, people other than APLP are entitled to |
| receive all dividends from, and proceeds from the sale of, the shares, and none of those persons to the knowledge of APLP, Artisan Partners Holdings LP, Artisan Partners Asset Management Inc., or Artisan Investments GP LLC has an economic interest in more than 5% of the class. In such Schedule 13G amendment, APLP lists its address as 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202. |
| (4) | Based on a Schedule 13G filed with the SEC on February 14, 2022 by T. Rowe Price Associates, Inc. (“T. Rowe”). In such Schedule 13G, T. Rowe indicates it is the beneficial owner of 60,541,952 shares of Class A common stock, has sole voting power over 21,566,226 shares of Class A common stock, and has sole dispositive power over 60,541,952 shares of Class A common stock. In such Schedule 13G, T. Rowe notes that it is an investment adviser registered under section 203 the Investment Company Act of 1940, it does not serve as a custodian of the assets of any of its clients, the ultimate power to direct the receipt of dividends paid with respect to, and the proceeds from the sale of, the shares is vested in its clients which it serves as investment adviser, and not more than 5% of the Class A common stock is owned by any one client subject to its investment advice. In such Schedule 13G, T. Rowe lists its address as 100 E. Pratt Street, Baltimore, MD 21202. |
| (5) | Consists of (i) 250,555 shares of Class A common stock held directly by Mr. Pincus; (ii) 30,145,532 shares of Class A common stock held directly by The 4D Revocable Trust, of which Mr. Pincus serves as trustee; (iii) 24,625,912 shares of Class A common stock held directly by Ogden Enterprises LLC, of which Mr. Pincus serves as manager; and (iv) 249,500 shares of Class A common stock held directly by the Pincus Family Fund, of which Mr. Pincus serves as trustee. |
| (6) | Consists of (i) 3,071 shares of Class A common stock held directly by Mr. Gibeau; (ii) 1,655,930 shares of Class A common stock held directly by the Frank Donald Gibeau Trust u/a dtd 12/13/2019, of which Mr. Gibeau serves as trustee; (iii) 8,027,171 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022, and (iv) 68,387 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (7) | Consists of (i) 677,535 shares of Class A common stock; (ii) 3,754,696 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022, and (iii) 67,475 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (8) | Consists of (i) 1,173,994 shares of Class A common stock; (ii) 6,254,696 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022, and (iii) 29,920 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (9) | Consists of (i) 415,274 shares of Class A common stock; (ii) 862,343 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022, and (iii) 6,412 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (10) | Consists of (i) 985,829 shares of Zynga common stock held by Mr. Bromberg according to his last report on U.S. Securities Exchange and Commission Form 4, which was filed on October 19, 2021, and (ii) 218,255 shares of Zynga common stock issuable upon exercise of stock options that are vested and exercisable as of March 31, 2022. Not reported here are 60,344 shares of Zynga common stock issuable upon exercise of stock options and 107,104 shares of Zynga common stock issuable upon vesting of restricted stock units, in each case within 60 days of March 31, 2022 subject to Mr. Bromberg’s satisfaction of the terms and conditions of Mr. Bromberg’s Transition Agreement and Release with Zynga. |
| (11) | Consists of (i) 111,221 shares of Class A common stock; (ii) 311,096 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022, (iii) 3,420 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (12) | Consists of (i) 228,498 shares of Class A common stock; and (ii) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (13) | Consists of (i) 1,313,365 shares of Class A common stock; and (ii) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (14) | Consists of (i) 278,516 shares of Class A common stock held directly by The Louis J. Lavigne, Jr. Survivor’s Trust UAD 05/17/11, of which Mr. Lavigne serves as trustee; and (ii) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (15) | Consists of (i) 228,324 shares of Class A common stock; and (ii) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (16) | Consists of (i) 35,298 shares of Class A common stock; (ii) 88,087 shares of Class A common stock held by the D&E Living Trust, of which Mrs. Siminoff and her spouse serve asco-trustees and retain voting and dispositive power; (iii) 91,639 shares of Class A common stock held by the EFS 2020 Irrevocable Trust, of which Mrs. Siminoff serves as trustee and retains voting and dispositive power; and (iv) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (17) | Consists of (i) 35,309 shares of Class A common stock; and (ii) 5,548 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. |
| (18) | Consists of (i) 62,012,523 shares of Class A common stock; (ii) 19,210,002 shares of Class A common stock issuable upon exercise of stock options that are vested and exercisable within 60 days of March 31, 2022; and (iii) 223,243 shares of Class A common stock issuable upon vesting of RSUs within 60 days of March 31, 2022. Does not include any shares of Class A common stock beneficially owned by Mr. Bromberg described in note (10) above. Mr. Bromberg resigned as Chief Operating Officer of Zynga on November 5, 2021 and his employment with Zynga ended on March 31, 2022. He is considered a named executive officer for purposes of this disclosure but is not currently an executive officer of Zynga. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required
We have adopted a written policy regarding transactions between us and our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock, and any members of the immediate family of any of the foregoing persons. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $100,000 and such person would have a direct or indirect interest must first be included in Part IIIpresented to the Audit Committee for review, consideration, and approval. If the related party is, or is associated with, a member of this Annual Report on Form 10-K willthe Audit Committee, the transaction must be provided in an amendmentreviewed and approved by another independent body of the Board, such as the Compensation Committee, which Committee also reviews and approves executive officer employment arrangements. Related Persons Transactions During the Year During 2021, we did not enter into any new transactions with related persons or their related entities subject to the requirements of Item 404 ofRegulation S-K. Pursuant to a director nomination letter with Mr. Pincus entered into as of May 2, 2018, our Board and Nominating and Corporate Governance Committee agreed to, subject to the exercise of their fiduciary duties, nominate Mr. Pincus for election as a director at each applicable election of directors. In consideration of our obligations pursuant to this Form 10-Kletter, Mr. Pincus has been nominated for election. For more information, see “Proposal 1—Election of Directors—Nominees.” Pursuant to a consulting services agreement with Mr. Gordon entered into as of May 11, 2018, we made certain compensatory payments to Mr. Gordon, as described under the heading“Non-Employee Director Compensation.” Pursuant to a transition agreement and release with Mr. Bromberg entered into as of November 5, 2021, Mr. Bromberg has continued serving as an employee of the Company while transitioning his duties. No additional compensation, accelerated equity vesting or severance was provided to Mr. Bromberg for his continued services. Each of these transactions was previously approved in accordance with General Instruction G(3)the policy and procedures described above. Certain of our directors and executive officers have adopted written plans, known as Rule10b5-1 plans, in which they will contract with a broker to Form 10-K.buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction from them. The director or executive officer may amend or terminate the plan in specified circumstances. Our directors and executive officers are required to conduct all sale transactions under a Rule10b5-1 plan.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The informationfollowing table represents aggregate fees (in thousands) billed to Zynga for 2021 and 2020, by Ernst & Young, Zynga’s principal accountant. All fees described werepre-approved by the Audit Committee. | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,130 | | | $ | 4,650 | | | | | | | $ | — | | | $ | 1,000 | | | | | | | $ | 70 | | | $ | 54 | | | | | | | $ | 205 | | | $ | 875 | | | | | | | $ | 7 | | | $ | 7 | | | | | | | $ | 4,412 | | | $ | 6,586 | |
| (1) | Includes the aggregate fees related to the audits of our annual consolidated financial statements and effectiveness of internal controls over financial reporting, the reviews of our interim financial statements and services rendered in connection with the filing of our registration statements on FormS-3 and FormS-8, comfort letters and fees related to accounting consultation and statutory audit services for certain of our foreign subsidiaries. |
| (2) | Includes historical audit relating to an acquired entity. |
| (3) | Includes preparation and review of various tax filings. |
| (4) | Includes advising on international tax structure and various other tax issues. |
Pre-Approval Policies and ProceduresThe Audit Committee has adopted a policy and procedures for thepre-approval of audit andnon-audit services rendered by Zynga’s independent registered public accounting firm, Ernst & Young.Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual, explicit,basis before the independent auditor is engaged to provide each service. Thepre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to the full Audit Committee at its next scheduled meeting. The Audit Committee has determined that the rendering of the services other than audit services by Ernst & Young is compatible with maintaining the principal accountant’s independence. Report of the Audit Committee The Audit Committee represents and assists the Board in overseeing the financial reporting process and the integrity of the Company’s financial statements. The Audit Committee is responsible for the appointment, compensation and retention of the independent accountants,pre-approving the services they will perform, and assessing their performance. The Audit Committee of the Board is comprised of fournon-employee directors. At the time of approval of this report, the members of the Audit Committee are Noel B. Watson, Jr., as Chair, Louis J. Lavigne, Jr., Carol G. Mills, and Ellen F. Siminoff. The Board has determined that each Audit Committee member is an independent director and meets the requirements and financial literacy standards of the Nasdaq listing standards. The Audit Committee operates under a written charter, most recently amended in December 2019. Among its other functions, the Audit Committee has direct responsibility for the appointment, compensation, retention and oversight of the work of the Company’s independent registered public accounting firm (“independent auditors”), selecting the lead engagement partner (which most recently occurred in 2018), and for reviewing the performance of the independent auditors and the Company’s internal audit function. Management has the responsibility of preparing the Company’s financial statements and periodic reports, and it is the responsibility of the independent auditors to audit those financial statements. The Audit Committee’s responsibility is to monitor and oversee these processes. The Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2021 with management of the Company and the independent auditors, Ernst & Young. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be includeddiscussed by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee has also discussed with the independent auditors the overall scope and plans for their annual audit and reviewed the results of that audit with management and the independent auditors.
The Audit Committee has also received the written disclosures and the letter from the independent auditors required by applicable requirements of the PCAOB regarding the independent auditors’ communications with the Audit Committee concerning independence. The Audit Committee discussed with the independent auditors their independence and considered whether thenon-audit services provided by the independent auditors are compatible with maintaining their independence. In determining whether to recommend that the stockholders ratify the selection of Ernst & Young as Zynga’s independent auditors for 2022, management and the Audit Committee engaged in Part IIIa review of Ernst & Young. In that review, the Audit Committee considered the continued independence of Ernst & Young, its industry knowledge and reputation, the quality of the audit and its services, its knowledge of the Company, its global presence relative to the Company’s business, the length of its tenure as the Company’s independent auditors and the benefits of such tenure, and PCAOB inspection reports. Based on this review, the Audit Committee concluded that Ernst & Young is independent and that it is in the best interest of the Company and its investors to appoint Ernst & Young to serve as the Company’s independent auditors for 2022. The Audit Committee has discussed with the independent auditors, with and without management present, their evaluations of the Company’s internal accounting controls and the overall quality of the Company’s financial reporting. Based on the Audit Committee’s discussions with management and the independent auditors, and the Audit Committee’s review of the Company’s audited financial statements, representations of management and the report of the independent auditors to the Audit Committee, the Audit Committee recommended that the Board include the audited financial statements in the Company’s Annual Report on Form 10-K will for the fiscal year ended December 31, 2021 filed with the SEC. | | | The Audit Committee of the Board | | Noel B. Watson, Jr. (Chair) | | | |
The information contained in the Report of the Audit Committee shall not be provideddeemed to be “soliciting material” or “filed” or incorporated by reference in an amendmentfuture filings with the SEC, or subject to this Form 10-K in accordance with General Instruction G(3)the liabilities of Section 18 of the Exchange Act, except to Form 10-K.106
the extent that it is specifically incorporated by reference into a document filed under the Securities Act of 1933 or the Exchange Act.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: 1. | Consolidated Financial Statements: See Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form the Original10-K. |
2. | Financial Statements Schedule: |
Schedule II: Valuation and Qualifying Accounts (in millions)qualifying accounts were omitted as the required disclosures are included in the OriginalAllowance for Credit Losses and Reserve for Uncollectible Advances | | Balance at Beginning of Year(1) | | | Charges to Expense | | | Write-Offs, Net of Recoveries | | | Balance at End of Year | | Year Ended December 31, 2021 | | $ | 0.5 | | | $ | 0.4 | | | $ | — | | | $ | 0.9 | | Year Ended December 31, 2020 | | | 0.4 | | | | 0.1 | | | | — | | | | 0.5 | | Year Ended December 31, 2019 | | | 2.7 | | | | 0.1 | | | | (2.8 | ) | | | — | |
| (1)
| The beginning balance for the year ended December 31, 2020 reflects the $0.4 million allowance for credit loss associated with our adoption of ASU 2016-13 on January 1, 2020.
|
All other schedules have been omitted because they are not required, not applicable, or the required information is otherwise included. included in the Original10-K. 3. | Exhibits: The exhibits required to be filed by Item 15 are set forth in, and filed with or incorporated by reference in, the “Exhibit Index” of the Original10-K. The attached list of exhibits in the “Exhibit Index” sets forth the additional exhibits required to be filed with this Amendment and is incorporated herein by reference in response to this item. |
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2.6† | | Amendment and Restatement Agreement dated 30 June 2021 between Zynga Inc. as Purchaser and those persons set out in Schedule 1 as the Sellers relating to the Share Sale and Purchase Agreement dated 4 August 2020 as later amended on 1 October 2020 for the sale and purchase of the entire issued share capital of Rollic Games Oyun Yazılım ve Pazarlama Anonim Şirketi | | 10-Q | | 001-35375 | | 2.1 | | 8/6/2021 | | | 2.7† | | Agreement and Plan of Merger, dated as of May 4, 2021, by and among the Registrant, Chartboost, Inc., Carnation MergeCo Inc., and Shareholder Representative Services LLC, as representative | | 8-K | | 001-35375 | | 2.1 | | 5/6/2021 | | | 2.8† | | Master Business Transfer Agreement, dated as of August 3, 2021, by and among the Registrant, Beijing Fotoable Technology Limited, Funjoy Technology Limited, Beijing Guoren Interactive Technology Co., Ltd., Shanghai Xianke Guanchen Management Center, Shanghai Lanfeng Tuoyuan Management Center (Limited Partnership), Lvy Technology Limited and Beijing StarLark Technology Co., Ltd. | | 8-K | | 001-35375 | | 2.1 | | 11/9/2021 | | | 2.9 | | Agreement and Plan of Merger, dated as of January 9, 2022, by and among Take-Two Interactive Software, Inc., Zynga Inc., Zebra MS I, Inc., and Zebra MS II, Inc. | | 8-K | | 001-35375 | | 2.1 | | 1/10/2022 | | | 3.1 | | Seventeenth Amended and Restated Certificate of Incorporation of Zynga Inc. | | 8-K | | 001-35375 | | 3.1 | | 6/11/2014 | | | 3.2 | | Fifth Amended and Restated Bylaws of Zynga Inc. | | 10-K | | 001-35375 | | 3.2 | | 2/26/2021 | | | 3.3 | | First Amendment to Fifth Amended and Restated Bylaws of Zynga Inc. | | 8-K | | 001-35375 | | 3.1 | | 1/10/2022 | | | 4.1 | | Form of Zynga Inc. Class A Common Stock Certificate | | S-1/A | | 333-175298 | | 4.1 | | 11/4/2011 | | | 4.2 | | Indenture, dated June 14, 2019, between Zynga Inc. and Wells Fargo Bank, National Association | | 8-K | | 001-35375 | | 4.1 | | 6/14/2019 | | | 4.3 | | Form of 0.25% Convertible Senior Note due 2024 (included in Exhibit 4.2) | | 8-K | | 001-35375 | | 4.1 | | 6/14/2019 | | | 4.4 | | Indenture, dated December 17, 2020, between Zynga Inc. and Wells Fargo Bank, National Association | | 8-K | | 001-35375 | | 4.1 | | 12/17/2020 | | | 4.5 | | Form of 0% Convertible Senior Note due 2026 (included in Exhibit 4.4) | | 8-K | | 001-35375 | | 4.1 | | 12/17/2020 | | | 4.6 | | Description of Securities | | 10-K | | 001-35375 | | 4.4 | | 2/28/2020 | | | 10.2+ | | Zynga Inc. 2007 Equity Incentive Plan, as Amended and Restated on August 21, 2018 | | 8-K | | 001-35375 | | 10.2 | | 8/27/2018 | | | 10.3+ | | Forms of Stock Option Agreement and Stock Option Exercise Agreement under 2007 Equity Incentive Plan | | S-1/A | | 333-175298 | | 10.3 | | 11/17/2011 | | | 10.4+ | | Forms of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under 2007 Equity Incentive Plan | | S-1/A | | 333-175298 | | 10.26 | | 11/17/2011 | | | 10.5+ | | Zynga Inc. 2011 Equity Incentive Plan, as Amended and Restated on August 21, 2018 | | 8-K | | 001-35375 | | 10.3 | | 8/27/2018 | | | 10.6+ | | Forms of Stock Option Grant Notice and Option Agreement under 2011 Equity Incentive Plan | | S-1/A | | 333-175298 | | 10.5 | | 11/17/2011 | | | 10.7+ | | Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under 2011 Equity Incentive Plan | | 10-Q | | 001-35375 | | 10.3 | | 5/8/2012 | | |
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10.8+ | | Form of 2011 Equity Incentive Plan Performance Cash Award Agreement | | 8-K | | 001-35375 | | 10.1 | | 4/4/2013 | | | 10.9+ | | Zynga Inc. 2011 Employee Stock Purchase Plan, as amended on August 15, 2012 | | S-8 | | 333-206185 | | 4.6 | | 8/7/2015 | | | 10.10+ | | Chartboost, Inc. 2012 Stock Plan and Form of Agreement | | S-8 | | 333-258591 | | 99.1 | | 8/6/2021 | | | 10.11+ | | Form of Indemnification Agreement made by and between Zynga Inc. and each of its directors and executive officers | | S-1/A | | 333-175298 | | 10.6 | | 11/17/2011 | | | 10.12+ | | Zynga Inc. Non-Employee Director Compensation Policy | | | | | | | | | | X | 10.13+ | | Zynga Inc. Change in Control Severance Benefit Plan, as Amended and Restated on August 21, 2018 | | 8-K | | 001-35375 | | 10.1 | | 8/27/2018 | | | 10.14+ | | Offer Letter, between Zynga Inc. and Frank Gibeau, as Amended and Restated effective as of August 23, 2018 | | 8-K | | 001-35375 | | 10.4 | | 8/27/2018 | | | 10.15+ | | Offer Letter, between Zynga Inc. and Matthew Bromberg | | 10-Q | | 001-35375 | | 101 | | 8/5/2016 | | | 10.16+ | | Transition Agreement and Release by and between Matthew Bromberg and Zynga Inc. | | | | | | | | | | X | 10.17+ | | Offer Letter between Zynga Inc. and Bernard Kim | | 10-Q | | 001-35375 | | 10.2 | | 8/5/2016 | | | 10.18+ | | Offer letter between Zynga Inc. and James Gerard Griffin | | 8-K | | 001-35375 | | 10.1 | | 9/30/2016 | | | 10.19+ | | Offer letter between Zynga Inc. and Phuong Phillips | | 10-Q | | 001-35375 | | 10.1 | | 11/8/2017 | | | 10.20+ | | Offer letter between Zynga Inc. and Jeffrey Ryan | | 10-K | | 001-35375 | | 10.19 | | 2/28/2019 | | | 10.21+ | | Appointment Letter between Zynga Inc. and Amy Rawlings | | 10-Q | | 001-35375 | | 10.2 | | 8/6/2021 | | | 10.22+ | | Director Nomination Letter | | 8-K | | 001-35375 | | 10.1 | | 5/2/2018 | | | 10.23+ | | Consulting Services Agreement between Zynga Inc. and William B. Gordon, dated as of May 11, 2018 | | 10-Q | | 001-35375 | | 10.2 | | 8/3/2018 | | | 10.24† | | Agreement of Purchase and Sale, dated as of May 24, 2019, by and between Big Dog Holdings LLC, a subsidiary of the registrant, and BCP-CG 650 Property LLC | | 8-K | | 001-35375 | | 10.1 | | 5/28/2019 | | | 10.25† | | Form of Office Lease, by and between Zynga Inc., as tenant, and BCP-CG 650 Property LLC, as landlord | | 8-K | | 001-35375 | | 10.1 | | 5/28/2019 | | | 10.26 | | Purchase Agreement, dated June 11, 2019, by and among Zynga Inc. and Morgan Stanley & Co. LLC and BofA Securities, Inc., as representatives of the several initial purchasers named in Schedule I thereto | | 8-K | | 001-35375 | | 10.1 | | 6/14/2019 | | | 10.27 | | Form of Capped Call Confirmation relating to the 0.25% Convertible Senior Notes due 2024 | | 8-K | | 001-35375 | | 10.2 | | 6/14/2019 | | | 10.28 | | Purchase Agreement, dated December 14, 2020, by and among Zynga Inc. and Morgan Stanley & Co. LLC, BofA Securities, Inc., J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, as representatives of the several initial purchasers named in Schedule I thereto | | 8-K | | 001-35375 | | 10.1 | | 12/17/2020 | | | 10.29 | | Form of Capped Call Confirmation relating to the 0% Convertible Senior Notes due 2026 | | 8-K | | 001-35375 | | 10.2 | | 12/17/2020 | | | 10.30 | | Credit Agreement, dated as of December 11, 2020, by and among Zynga Inc., as borrower, certain financial institutions, as lenders, and Bank of America, N.A., as administrative agent for such lenders | | 8-K | | 001-35375 | | 10.1 | | 12/11/2020 | | | 10.31 | | First Amendment dated as of May 28, 2021 to the Credit Agreement, dated as of December 11, 2020, by and among Zynga Inc., as borrower, certain financial institutions, as lenders, and Bank of America, N.A., as administrative agent for such lenders | | 10-Q | | 001-35375 | | 10.1 | | 8/8/2021 | | |
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+
| Indicates management contract or compensatory plan.
| | | | | | | | | | | | | | | | | | | |
•
* | The certifications attached as Exhibit 32.1 accompany this Amendment No. 1 to the Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to its Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on February 25,April 4, 2022. ZYNGA INC.
| | | | | | By:
| | | | | | | Chief Executive Officer (On behalf of Registrant)
| | | | By:
| | /s/ James Gerard Griffin
| | | James Gerard Griffin
Chief Financial Officer
(On behalf of Registrant)
| | | | By:
| | /s/ Amy M. Rawlings
| | | Amy M. Rawlings
Chief Accounting Officer
(On behalf of Registrant)
| | | |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James Gerard Griffin and Phuong Y. Phillips, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-Kreport has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:indicated.Signature
| | Title
| | Date
| | | | | | /s/ Mark Pincus
| | | | | | | February 25,April 4, 2022
| Mark Pincus | | | | | | | | Chief Executive Officer and Director (Principal Executive Officer) | | February 25,April 4, 2022
| Frank Gibeau | | | | | | | | (Principal Financial Officer) | | February 25,April 4, 2022
| James Gerard Griffin | | | | | | | | (Principal Accounting Officer) | | February 25,April 4, 2022
| Amy M. Rawlings | | | | | | /s/
| | | | April 4, 2022 | | Regina E. Dugan | | Director
| | February 25, 2022
| Regina E. Dugan
| | | | | | | April 4, 2022 | /s/ William “Bing” Gordon
| | Director
| | February 25, 2022
| William “Bing” Gordon
| | | | | | | April 4, 2022 | /s/ Louis J. Lavigne, Jr.
| | Director
| | February 25, 2022
| Louis J. Lavigne, Jr.
| | | | | | | April 4, 2022 | /s/ Carol G. Mills
| | Director
| | February 25, 2022
| Carol G. Mills
| | | | | | | April 4, 2022 | /s/ Janice M. Roberts
| | Director
| | February 25, 2022
| Janice M. Roberts
| | | | | | | April 4, 2022 | /s/ Ellen F. Siminoff
| | Director
| | February 25, 2022
| Ellen F. Siminoff
| | | | | | | April 4, 2022 | /s/ Noel B. Watson
| | Director
| | February 25, 2022
| Noel B. Watson
| | | | | | | | | | | | |
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|
