| Revenue from Contracts with Customers | Note 3 — Revenue from Contracts with Customers
The Company generates revenue through in-app purchases within its games on smartphones and tablets, such as Apple’s iPhone and iPad and mobile devices utilizing Google’s Android operating system. Smartphone and tablet games are distributed primarily through Digital Storefronts. The Company also has relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertising providers is generated through impressions, clickthroughs, banner ads and offers.
The users can download the Company’s free-to-play games within the Digital Storefronts and pay to acquire virtual currency which can be redeemed in the game for virtual goods. The Company sells both consumable and durable virtual goods and receives reports from the Digital Storefronts, which breakdown the various purchases made from the Company’s games over a given time period. The Company reviews these reports and determines on a per-item basis whether the purchase was a consumable virtual good or a durable virtual good. Consumable goods are items that can be purchased directly by the player through the Digital Storefront and are consumed at a predetermined time or otherwise have limitations on repeated use, while durable goods are items that remain in the game for as long as the player continues to play. The Company’s revenue from consumable virtual goods has been insignificant. Revenue from durable virtual goods are generated through the purchase of virtual coins by users through a Digital Storefront. Players convert the virtual coins within the game to durable virtual goods such as furniture, clothes, players or other items to enhance their game-playing experience.
The Company adopted ASC 606 and its related amendments effective January 1, 2018 using a modified retrospective method. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
1)
Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2)
Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
3)
Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.
4)
Allocate the transaction price to performance obligations in the contract
All of the Company’s contracts have a single performance obligation. The entire transaction price is allocated to the single performance obligation.
5)
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2018:
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2018
Micro-Transactions (Over-time revenue recognition)
$
85,062
$
234,066
Advertisements (point-in-time revenue recognition)
1,916
5,705
Offers (point-in-time recognition)
12,276
30,867
Other (point-in-time recognition)
31
283
Total Revenue
$
99,285
$
270,921
The Company reports as a single segment – mobile games. In the disaggregation above, the Company categorizes revenue by type, and by over-time or point-in-time recognition.
Micro-Transactions
The Company distributes its games for smartphones and tablets to the end customer through Digital Storefronts. Within these Digital Storefronts, users can download the Company’s free-to-play games and pay to acquire virtual currency which can be redeemed in the game for virtual goods. The initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance; however, the separate election by the player to make an in-application purchase satisfies the criterion thus creating a contract under ASC 606. The Company has identified the following performance obligations in these contracts:
(1)
Ongoing game related services such as hosting of game play, storage of customer content, when and if available content updates, maintaining the virtual currency management engine, tracking gameplay statistics, matchmaking as it relates to multiple player gameplay, etc.
(2)
Obligation to the paying player to continue displaying and providing access to the purchased virtual goods within the game.
Neither of these obligations are considered distinct since the actual mobile game and the related ongoing services are both required to purchase and benefit from the related virtual goods. As such, the Company’s performance obligations represent a single combined performance obligation which is to make the game and the ongoing game related services available to the players. The transaction price, which is the amount paid for virtual currency/goods by the player, is allocated entirely to this single combined performance obligation. The Company recognizes revenue from in-application purchases of durable virtual currency/goods over the estimated average playing period of paying users. The Company’s revenue from consumable virtual goods has been insignificant over the previous two years. Based on the Company’s analysis, the estimated weighted average useful life of a paying user ranges from three to eight months.
Advertisements and Offers
The Company has relationships with certain advertising service providers for advertisements within its mobile games. Revenue from these advertising service providers is generated through impressions, clickthroughs, offers and banner ads. Offers are the type of advertisements where the players are rewarded with virtual currency for completing specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. The Company has determined the advertising buyer to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.
Other
Other revenue was immaterial for the three and nine months ended September 30, 2018.
Other Estimates and Judgments
The Company estimates revenue from Digital Storefronts and advertising service providers in the current period. Certain Digital Storefronts and advertising service providers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenue and therefore to recognize revenue during the reporting period. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates. When the Company receives the final reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any significant differences between estimated revenue and actual revenue in the reporting period when the Company determines the actual amounts. Historically, the revenue on a final revenue report has not differed significantly from the reported revenue for the period.
The Company computes its estimated average playing period of paying users at least twice each year. It has examined the playing patterns of paying users across a representative sample of its games across various genres.
The Company uses the “survival analysis” model to estimate the average playing period for paying users. This model provides for a singular approach to estimating the average playing period of paying users on a title by title basis for the Company’s diverse portfolio of games. It is a statistical model that analyzes time duration until one or more events happens and is commonly used in various industries for estimating lifespans. The Company believes this is an appropriate model to estimate the average playing period of paying users for its titles as this model statistically estimates the average playing period of each title by analyzing the historical behavior patterns of paying users.
This model requires the stratification of user data into active and inactive monetizing users on a per title basis. Active users are those who are active in the game for the past 30 days as of the evaluation date. The remaining users are considered inactive and deemed to have churned from the game. These users are treated mathematically differently in the model than those who are still active. A distribution curve is then fit to the user data to estimate the average playing period of paying users on a per title basis.
The Company has selected a threshold of 120 days from the commercial launch of a title as the minimum number of days of data required for this model. This threshold was deemed to be appropriate as the Company tested the model using lower thresholds which resulted in inconsistencies in the estimate of the average playing period of paying users. For new titles with less than 120 days of data that share similar attributes with an existing title and/or prequel titles, the average playing period is determined based on the average playing period of that existing title or prequel title, as applicable. For all other titles with less than 120 days of data, the average playing period is determined based on the average playing period of all other remaining existing titles.
While the Company believes its estimates to be reasonable based on available game player information, it may revise such estimates in the future if a titles’ user characteristics change. Any adjustments arising from changes in the estimates of the average playing period for paying users would be applied to the current quarter and prospectively on the basis that such changes are caused by new information that indicates a change in user behavior patterns compared to historical titles. Any changes in the Company’s estimates of the useful life of virtual goods in a certain title may result in revenue being recognized on a basis different from prior periods’ and may cause its operating results to fluctuate.
Principal Agent Considerations
The Company evaluated its Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if it is acting as the principal or as an agent when selling its games or when selling advertisements within its games. The Company primarily uses Digital Storefronts for distributing its smartphone games and advertising service providers for serving advertisements within its games. The Company evaluated the following factors to assess whether it controls each specified good or service before that good or service is transferred to the customer:
·
the party responsible for the fulfillment of the game or serving of advertisements;
·
the party having the discretion to set pricing with the end-users; and
·
the party having inventory risk before the specified good or service have been transferred to a customer.
Based on the evaluation of the above indicators, the Company determined that it has control of the services before they are transferred to the end-user. Thus, the Company is generally acting as a principal and is the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through its advertising service providers. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers. In situations where the price paid by the end-user of the advertising service provider is not known, the Company accounts for these transactions on a net basis.
Deferred Platform Commissions and Royalties
Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. The Company is also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and the Company plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in “Cost of revenue” in the period in which the related sales are recognized as revenue.
On the date of adoption of ASC 606, the Company had $20,446 in deferred platform commission fees of which $261 and $20, 446 was amortized in the three and nine months ended September 30, 2018, respectively. On the date of adoption of ASC 606, the Company had $3,575 in deferred royalties of which $0 and $3,575 was amortized in the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, the Company had $ 25,103 and $ 4,288 in deferred platform commission fees and deferred royalties, respectively.
Financial Statement Impact of Adopting ASC 606
The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the consolidated balance sheet as of January 1, 2018:
As
Reported
As Adjusted
December
Adjustments
January 1,
Balances
31, 2017
2018
Deferred royalties
$
4,364
$
(789)
$
3,575
Deferred revenue
$
77,403
$
(9,615)
$
67,788
Accumulated deficit
$
(436,110)
$
8,826
$
(427,284)
Sale of Offer Advertisements
Under the previous guidance, the fees received for offer advertisements were deferred and recognized over the average playing period of paying users. Under ASC 606, the sale of offer advertisements that result in users receiving virtual currency for redemption within a game is recognized at the time such advertisements are delivered and reported to the Company as the performance obligations are deemed to be satisfied when the advertisement has been displayed in the game.
Income Taxes
The adoption of ASC 606 primarily resulted in an acceleration of revenue in the three and nine months ended September 30, 2018, which in turn generated additional deferred tax liabilities that ultimately reduced the Company's net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.
Practical Expedients
We applied the following expedients available under the cumulative effect method upon adoption of ASC 606:
1.
practical expedient listed under 606-10-65-1(f)(3), and chose not to disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application i.e., January 1, 2018.
2.
practical expedient listed under 606-10-65-1(h), and chose not to restate contracts that were completed contracts as of the date of initial application i.e., January 1, 2018.
Impacts on Financial Statement Line Items
The following table compares the reported line items in the balance sheet, statement of operations and cash flows, as of and for the three and nine months ended September 30, 2018, to the amounts that the Company would have reported had the previous guidance been in effect:
As of September 30, 2018
Amounts based
As
on previous guidance
Adjustments
Reported
Balance Sheet
Deferred royalties
$
5,435
$
(1,147)
$
4,288
Total current assets
164,585
(1,147)
163,438
Total assets
311,182
(1,147)
310,035
Deferred revenue
94,380
(11,178)
83,202
Total current liabilities
140,422
(11,178)
129,244
Total liabilities
149,308
(11,178)
138,130
Accumulated deficit
(449,192)
10,031
(439,161)
Total stockholders' equity
161,874
10,031
171,905
Total liabilities and stockholders' equity
$
311,182
$
(1,147)
$
310,035
ASC 606 accelerated the recognition of revenue and royalty costs related to offer advertisements which was previously recognized over the estimated average playing period of paying players . As of September 30, 2018, the deferred revenue and deferred royalties would have been higher by $11,178 and $1,147, respectively had the previous guidance been in effect.
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
Amounts based
As
Amounts based
As
on previous guidance
Adjustments
Reported
on previous guidance
Adjustments
Reported
Statement of Operations
Revenue
$
97,705
$
1,580
$
99,285
$
269,357
$
1,564
$
270,921
Platform commissions, royalties and other
34,300
84
34,384
95,579
358
95,937
Total cost of revenue
38,467
84
38,551
102,780
358
103,138
Gross profit
59,238
1,496
60,734
166,577
1,206
167,783
Loss from operations
(1,730)
1,496
(234)
(12,062)
1,206
(10,856)
Loss before income taxes
(1,634)
1,496
(138)
(12,583)
1,206
(11,377)
Net loss
$
(1,752)
$
1,496
$
(256)
$
(13,083)
$
1,206
$
(11,877)
Net loss per common share - basic and diluted
$
(0.01)
$
(0.00)
$
(0.09)
$
(0.08)
The acceleration of revenue recognition and royalty costs related to offer advertisements under ASC 606 increased revenue and royalties by $1,580 and $84, respectively, for the three months ended September 30, 2018.
The acceleration of revenue recognition and royalty costs related to offer advertisements under ASC 606 increased revenue by $1,564 and increased royalty costs by $358, respectively, for the nine months ended September 30, 2018.
The net impact of accounting for revenue and royalties under the new guidance decreased net loss and net loss per share by $1, 496 and $0.01 per basic and diluted share, respectively, for the three months ended September 30, 2018 .
The net impact of accounting for revenue and royalties under the new guidance decreased net loss and net loss per share by $1,206 and $0.01 per basic and diluted share, respectively, for the nine months ended September 30, 2018 .
Nine Months Ended September 30, 2018
Amounts based
As
on previous guidance
Adjustments
Reported
Statement of Cash Flows
Cash flows from operating activities:
Net loss
$
(13,083)
$
1,206
$
(11,877)
Adjustments to reconcile net loss to net cash generated from operating activities:
Deferred royalties
(1,071)
358
(713)
Deferred revenue
16,978
(1,564)
15,414
Net cash generated from operating activities
$
13,409
$
—
$
13,409
The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net loss and changes in working capital balances.
Contract Balances
The following table provides information about receivables, contracts assets, and contract liabilities from contracts with customers:
September 30, 2018
At Adoption
Receivables, which are included in accounts receivable, net
$
38,008
$
34,673
Contract assets
-
-
Contract liabilities
$
83,202
$
67,788
The Company receives payments from customers based on billing terms established in the Company’s contracts. Contract asset relates to the Company’s right to consideration for its completed performance under the contract. At September 30, 2018, there were no contract assets recorded in the Company’s consolidated balance sheet. Accounts receivable are recorded when the right to consideration becomes unconditional.
Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as we perform under the contract. On the date of adoption of ASC 606, the Company had $67,788 in deferred revenue of which $ 860 and $67,788 respectively, was earned in the three and nine months ended September 30, 2018.
ASC 606 requires an entity to disclose the revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, due to changes in transaction price). Revenue recognized relating to performance obligations satisfied in prior periods was $0 for the three and nine months ended September 30, 2018.
The Company elects to use the practical expedient under 606-10-50-14 which states an entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if the following criteria are met:
1.
the performance obligation is part of a contract that has an original expected duration of one year or less; and
2.
the entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18 (right to invoice).
Since all of the Company’s contracts have an original expected duration of one year or less, the Company elects to use this practical expedient and does not disclose the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations. |
