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APP Applovin

Filed: 15 Apr 21, 4:05pm
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-253800

 

25,000,000 Shares

 

LOGO

Class A common stock

 

 

This is an initial public offering of shares of Class A common stock of Applovin Corporation. We are selling 22,500,000 shares of Class A common stock and the selling stockholder identified in this prospectus is selling an additional 2,500,000 shares of Class A common stock. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholder.

We have three classes of authorized common stock, Class A common stock, Class B common stock, and Class C common stock. The rights of the holders of Class A common stock, Class B common stock, and Class C common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible at any time into one share of Class A common stock. Shares of Class C common stock have no voting rights, except as otherwise required by law, and will convert into Class A common stock, on a share-for-share basis, following the conversion or exchange of all outstanding shares of Class B common stock into shares of Class A common stock and upon the date or time specified by the holders of a majority of the outstanding shares of Class A common stock voting as a separate class. Upon the completion of this offering, no shares of Class C common stock will be issued and outstanding.

Following the completion of this offering, all shares of Class B common stock will be held by Adam Foroughi, our co-founder, Chief Executive Officer, and the Chairperson of our board of directors; Herald Chen, our President and Chief Financial Officer, and a member of our board of directors; and KKR Denali Holdings L.P. (collectively with certain affiliates, the Class B Stockholders). Upon completion of this offering, the Class B Stockholders will collectively hold 93.4% of the voting power of our outstanding capital stock. The Class B Stockholders have entered into a voting agreement whereby all Class B common stock held by the Class B Stockholders and their respective permitted entities and permitted transferees will be voted as determined by two of Mr. Foroughi, Mr. Chen, and KKR Denali (one of which must be Mr. Foroughi). As a result, the Class B Stockholders, in particular, Mr. Foroughi, Mr. Chen, and KKR Denali, will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction.

Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price per share of our Class A common stock is $80.00.

 

 

We have been approved to list our Class A common stock on the Nasdaq Global Select Market under the symbol “APP”.

 

 

We will be treated as an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, for certain purposes until we complete this offering. As such, in this prospectus we have taken advantage of certain reduced disclosure obligations that apply to emerging growth companies regarding selected financial data and executive compensation arrangements.

Following this offering, we will be a “controlled company” within the meaning of the Nasdaq corporate governance requirements. See the sections titled “Management” and “Principal and Selling Stockholders” for additional information.

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 19 to read about factors you should consider before buying shares of our Class A common stock.

 

 

PRICE $80.00 A SHARE

 

 

 

     

Price to

Public

 

 

     

Underwriting Discounts and

Commissions(1)

 

 

     

Proceeds to

Company

 

 

     

Proceeds to Selling

Stockholder

 

 

Per Share

    $80.00     $2.096     $77.904     $77.904 

Total

    $2,000,000,000     $52,400,000     $1,752,840,000     $194,760,000 

 

(1) See the section titled “Underwriters (Conflicts of Interest)” for a description of the compensation payable to the underwriters.

At our request, the underwriters have reserved up to 5% of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program. See the section titled “Underwriters (Conflicts of Interest)—Directed Share Program” for additional information.

The selling stockholder has granted the underwriters the right to purchase up to 3,750,000 additional shares of our Class A common stock to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on April 19, 2021.

 

 

 

Morgan Stanley J.P. Morgan KKR BofA Securities Citigroup

 

 Credit Suisse   UBS Investment Bank 

 

Oppenheimer & Co. Stifel Truist Securities William Blair LionTree LUMA Securities The Raine Group

 

Blaylock Van, LLC Guzman & Company R. Seelaus & Co., LLC Roberts & Ryan

Prospectus dated April 14, 2021

 


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LOGO

APPLOVIN


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LOGO

We grow the mobile app ecosystem by enabling the success of mobile developers $1.45B 2020 REVENUE 2020 NET LOSS: $125.2M 76% REVENUE CAGR 2016-2020 6B+ INSTALLS DRIVEN ON APPLOVIN PLATFORM (1) 410M+ DAILY ACTIVE USERS REACHED (2) 3T+ MACHINE LEARNING PREDICTIONS PER DAY(3) 125+ COUNTRIES WITH DEVELOPERS LEVERAGING OUR PLATFORM (1) From July 1, 2012 - January 2021 (2) For Q4 2020. See the section titled “Business” for information on how we calculate this figure. (3) Maximum single day predictions for January 2021


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LOGO

oUR DIVERSE TEAMS AND STRATEGIC PARTNERS COPENHAGEN BERLIN SAN FRANCISCO PRAGUE TORONTO SAN MATEO PALO ALTO HERZLIYA TOKYO BAD DALLAS CYPRUS BEIJING HO CHI MINH CITY SINGAPOREINGA Helping Fostering best Providing significant developers practice sharing growth capital everywhere across studios to developers get discovered


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LOGO

AppLovin understands our business and creates great tools. Our apps are in more than 30 countries and now we’re able to automate and test campaigns across all to maximize our revenue. Rogerio Silberberg Founder, Fanatee Our business has scaled fivefold since we started partnering with AppLovin. They are a key partner in our growth. Peter Williamson CEO, AppyNation

 


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LOGO

AppLovin has helped us grow our games in new markets. With their partnership, we recently launched Project Makeover and it has already climbed to a #1 free game in the app store. Charlie Gu Founder and Chairman, Magic Tavern AppLovin has been the ideal partner for Belka. They’ve allowed us to focus on what we love doing—making the best games while increasing our revenue. Yury Mazanik Co-founder, Belka Games


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Through and including May 9, 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we nor the selling stockholder, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor the selling stockholder, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholder are offering to sell, and seeking offers to buy, our Class A common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.

For investors outside the United States: Neither we nor the selling stockholder, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock and the distribution of this prospectus outside the United States.


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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and our unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus before making an investment decision. Unless the context otherwise requires, the terms “AppLovin,” “the company,” “we,” “us,” and “our” in this prospectus refer to Applovin Corporation and its consolidated subsidiaries, and references to our “common stock” include our Class A common stock, Class B common stock, and Class C common stock.

APPLOVIN CORPORATION

Overview

Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers.

Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Since inception, our platform has driven over six billion mobile app installs for mobile app developers. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Over the past two decades, mobile apps have become integral to our lives. Mobile apps offer a wide array of applications, such as allowing users to seamlessly share ideas, make purchases, monitor health, and access entertainment. Based on data from IDC, we estimate our total market opportunity to be $189 billion in 2020, growing to $283 billion in 2024, or a 10.6% compound annual growth rate (CAGR). Growth of the mobile app ecosystem benefits mobile app users, but makes it harder for mobile app developers, and particularly independent (indie) developers, to scale and succeed in a crowded market. Most developers lack access to the marketing, monetization, and data analytics tools required to stand out among the more than 4.8 million mobile apps available on the Apple App Store and Google Play Store, according to Statista, or attract sufficient numbers of mobile app users to create and sustain a successful long-term business. Underscoring how difficult it is to create a successful mobile app, SensorTower estimates that 80% of all mobile app downloads were generated by 1% of total developers across both Apple App Store and Google Play Store in the third quarter of 2019.

The marketing and monetization challenges faced by mobile app developers are particularly acute for developers of mobile games, which is one of the largest and fastest-growing segments within the mobile app ecosystem. According to IDC, there are more than 2 billion mobile gamers worldwide—and, according to Statista, there are more than 1.3 million mobile gaming apps on the Apple App Store and Google Play Store. Mobile gaming accounts for 39% of worldwide app downloads and for 72% of all app store consumer spend by value, according to Sensor Tower.



 

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AppLovin is critical to the success of mobile app developers, in particular mobile game developers, solving key marketing and monetization challenges. Through our technologies and scaled distribution, developers are able to manage, optimize, and analyze their marketing investments, and improve the monetization of their apps. The key elements of our solutions are delivered through the AppLovin Platform, which is comprised of AppLovin Core Technologies and AppLovin Software. In 2018, given an opportunity to scale our own apps using our Software, insights, and expertise in the mobile app ecosystem, we launched our first party content strategy, AppLovin Apps. Today, our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by twelve studios, including studios that we own (Owned Studios), and others that we partner with (Partner Studios).

The combination of our Platform and Apps forms a strategic flywheel that drives growth across our business and furthers our competitive advantages. As more developers use our Platform’s Software to market and monetize their mobile apps, we gain access to more users and more user engagement further strengthening our scaled distribution. As our distribution grows, we gain better insights for the recommendation engine in our Core Technologies, which then further enhances our Software. This continuously improving flywheel helps developers, including our own, to create and sustain successful businesses, growing both our own business and the mobile app ecosystem.

We accelerate our capabilities and enhance our strategic position in the mobile app ecosystem by actively pursuing acquisitions and partnerships for new technologies and apps. Insights that we derive from our strategic position and flywheel allow us to proactively identify attractive acquisition and partnership opportunities across the mobile app ecosystem. Since the beginning of 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships with app studios, games, and technologies. In the case of new apps added to our portfolio, we are able to deploy our Software and expertise to accelerate revenue growth, enabling us to generate strong returns on investment. We estimate that a year after joining our portfolio, Apps we acquired in 2018 and 2019 have increased their quarterly revenue over 100% on average.1 Strategic acquisitions and partnerships will continue to be a part of our growth strategy going forward. For example, in February 2021, we entered into a share purchase agreement to acquire Adjust GmbH (Adjust), a leading mobile app attribution, measurement, and analytics company in Germany, which agreement we amended and restated and then further amended in March 2021 and which transaction we expect to close in the second quarter of 2021.

Our focus on building market-leading technology, coupled with our unique approach to developing and growing our Apps portfolio, has produced a business model characterized by rapid growth and strong cash flow generation. Our revenue has grown at a 76% CAGR from 2016 to 2020. For 2020, our revenue grew 46% year-over-year from 2019, from $994.1 million in 2019 to $1.45 billion in 2020. For 2019, our revenue grew 106% year-over-year from 2018, from $483.4 million in 2018 to $994.1 million in 2019. We generated a net loss of $260.0 million in 2018, net income of $119.0 million in 2019, and a net loss of $125.9 million in 2020. We generated Adjusted EBITDA of $255.6 million, $301.2 million, and $345.5 million in 2018, 2019, and 2020, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $139.0 million, $198.5 million, and $222.9 million in 2018, 2019, and 2020, respectively. This has allowed us to reinvest in our expansion and growth. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Adjusted EBITDA” for a description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States (GAAP).

 

1 

Based on a comparison of unaudited revenue for such acquired Apps for the three months prior to the acquisition against our revenue from such Apps in the same period in the subsequent year.



 

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Industry Background

Key Trends within the Mobile App Ecosystem

 

  

The mobile app ecosystem is growing rapidly and is increasingly defining how we interact with the world. Based on data from IDC, we estimate that our market opportunity within the mobile app ecosystem will grow from $189 billion in 2020 to $283 billion in 2024, or a 10.6% CAGR.

 

  

The proliferation of accessible and affordable advanced development tools has led to lower cost and shorter development times for new apps. A broad selection of high quality, easy to use, commoditized development kits has decreased the time, capital, and expertise required to make an app.

 

  

Mobile gaming has become one of the largest and fastest-growing sectors within the mobile app ecosystem. Mobile gaming accounts for 39% of worldwide app downloads and for 72% of all app store consumer spend by value, according to Sensor Tower.

Key Challenges for Developers

Today’s app developer journey has three key steps – make, market, and monetize. The ‘make’ step has never been easier, but developers still face key challenges in marketing and monetizing their apps.

 

  

The abundance of apps today creates a discovery and marketing challenge for mobile app developers. The ease of making apps has created a highly fragmented market with over 4.8 million mobile apps available through the Apple App Store and Google Play Store, according to Statista. Even after a user downloads an app, for the average consumer in the United States that app is now just one of the nearly 100 apps on the average smartphone, according to App Annie. As a result, developers must overcome both a crowded marketplace and home screen to successfully market and monetize their apps, and this is especially difficult for indie developers.

 

  

Many developers lack access to marketing and monetization tools required to build a successful business in the mobile app ecosystem. Most mobile apps are free to install and many rely on in-game advertising and in-app purchases (IAPs) for monetization. To be successful, a developer’s app must not just be discovered but also generate user engagement to effectively sell ad inventory or create compelling content for IAPs.

Our Market Opportunity

Based on data from IDC, we estimate our total market opportunity in the mobile app ecosystem to be $189 billion. We calculated this estimate by aggregating worldwide total in-app advertising revenue of $101 billion (including gaming and non-gaming in-app display, video, and other advertising, but excluding in-app search advertising) and worldwide direct game spending of $88 billion for 2020.

How We Grow the Mobile App Ecosystem

We have built and invested in our Platform, which expands the mobile app ecosystem by solving key developer growth challenges. We deliver value to mobile app developers by helping scale their businesses and maximize their revenue through our marketing and monetization technologies and expertise. Our uniquely integrated Platform—comprised of our Core Technologies and Software—combines marketing, monetization, and analytics into a single unified technology stack.

 

  

AppLovin Core Technologies are our foundational technology infrastructure that powers our Software and, in turn, our Apps. Our Core Technologies consist of our AXON machine-



 

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learning recommendation engine, our App Graph data management layer, and our elastic cloud infrastructure. Our Core Technologies are robust, having processed over 3 petabytes of data per day on average, as many as 3 trillion predictions per day, and up to 6.5 trillion events per day in January 2021, while remaining flexible enough to rapidly adjust to our customers’ evolving needs. Our App Graph stores and manages anonymized data from hundreds of millions of mobile devices we reach every day, which our AXON engine then leverages to better predict and match each user to relevant advertising content.

 

  

AppLovin Software is a comprehensive suite of tools for developers to get their mobile apps discovered and downloaded by the right users, optimize return on marketing spend, and maximize monetization of engagement. Our Software reaches an audience of over 410 million users per day.2 Our Software is comprised of three solutions:

 

  

AppDiscovery is our marketing software solution, which matches advertiser demand with publisher supply through auctions at vast scale and microsecond-level speeds, peaking at 3.5 million requests processed per second in January 2021. AppDiscovery is powered by our AXON machine-learning recommendation engine with predictive algorithms that enable developers to match their apps to users that are more likely to download them.

 

  

MAX is our in-app bidding software that optimizes the value of an app’s advertising inventory by running a real-time competitive auction, driving more competition and higher returns for publishers.

 

  

Compass is our analytics software tool within MAX which gives developers the testing capabilities, insights, and intelligence needed to stay competitive and manage profitability.

We have also developed and invested in our AppLovin Apps. Our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games run by twelve studios with a deep bench of talented developers. These Apps are accessed by nearly 32 million users every day.2 Our diversified portfolio covers five gaming genres, the most frequent of which is casual games, and appeals to a broad global audience across different ages, genders, and locations. Our Owned Studios and Partner Studios utilize our Software to market and monetize our Apps. When using our Software, our Apps have an economic advantage, which benefits our business as a whole.

Our Strategic Flywheel

The mutually reinforcing combination of our Software’s scaled distribution, our Apps’ first-party content, and our Core Technologies’ recommendation engine creates a powerful flywheel effect that enhances each component and importantly improves our overall strategic position and capabilities. As our Software improves and is able to deliver more effective ads to more relevant users, more developers use and integrate their apps with our Software. With growth in the number of users on and engagement with our Apps and third-party apps, our App Graph gains more insights and data to feed our AXON machine-learning recommendation engine. This enables AXON to make more relevant recommendations for each user, enhancing the effectiveness of our Software in real-time. Better Software leads to more developer demand, restarting the virtuous cycle of our strategic flywheel.

 

2 

See the section titled “Business” for information on how we calculate this figure.



 

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LOGO

Higher monetization and more users more users served relevant ads more likely to download more users download relevant apps more usage and data better insights and more engagement appdiscovery marketing max monetization applovin apps & client apps infrastructure app graph axon

Our Strategic Acquisitions and Partnerships

We accelerate our technical capabilities, strategic positioning, and growth through strategic acquisitions and partnerships. We have developed a proven and repeatable process for acquiring highly sophisticated technology that enhances our Platform and for selecting and scaling our Apps global portfolio. Our acquisitions and partnerships include investments in software, such as our acquisitions of MAX Advertising Systems, Inc. (MAX) and SafeDK Mobile Ltd. (SafeDK), and game studios, such as our acquisition of PeopleFun, Inc. (PeopleFun) and partnership with Belka Games.

Since the beginning of 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships. We estimate that a year after joining our portfolio, Apps we acquired in 2018 and 2019 have increased their quarterly revenue over 100% on average.3

Benefits to Mobile App Developers

Our Platform enables mobile app developers to:

 

  

Reach and attract users at scale. Our Software reaches over 410 million users per day, enabling mobile app developers to target and find the right users for their apps worldwide. Developers are able to set their user acquisition and revenue goals to target the most relevant, highest value users.

 

  

Maximize monetization of engagement. Developers use our Software to generate incremental revenue by maximizing the monetization of their mobile app ad inventory. Our

 

3 

Based on a comparison of unaudited revenue for such acquired Apps for the three months prior to the acquisition against our revenue from such Apps in the same period in the subsequent year.



 

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tools operate at nearly instantaneous speeds and at vast scale to enhance monetization for developers while preserving the end user experience.

 

  

Leverage proprietary data and insights. Developers benefit from accessing comprehensive real-time insights through our customized user dashboards, helping them optimize campaigns, improve user engagement, and manage their return on investment. 

 

  

Automate time consuming and manual processes. Our Software automates marketing and monetization, allowing developers to focus on improving their apps rather than managing complex go-to-market processes manually.

 

  

Seamlessly adapt to industry innovation. Our cloud-based Core Technologies and Software are continuously updated as the mobile app ecosystem evolves. Developers on our Software benefit from this ongoing advancement and optimization, and are able to rapidly adapt to industry changes in marketing and monetization without losing focus on mobile app creation.

Our Strengths

 

  

Unique and improving strategic position. Our competitive advantages, overall growth, and strong financial profile are a direct result of our integrated portfolio and strategic flywheel. We leverage insights across our flywheel to optimize our strategic position and business, in particular with regard to the allocation of development resources and investments.

 

  

Proven and optimized mobile app discovery and monetization technologies. For almost a decade, we have been improving our Platform. Powered by our AXON machine-learning recommendation engine and our App Graph, we leverage deep insights and technical expertise to create powerful software platforms and a significant competitive advantage. We automate marketing and monetization, freeing developers to focus on what they do best—app development.

 

  

An advantaged approach to the mobile apps market. Our Apps leverage the strength of our Platform and expertise to achieve strong discovery and monetization, leading to a differentiated approach and business model. This advantaged approach to the mobile apps market provides the opportunity to expand into other mobile app sectors.

 

  

Highly accretive approach to strategic acquisitions and partnerships. We have a proven and repeatable playbook approach to our strategic acquisitions and partnerships. The mobile app ecosystem remains highly fragmented and provides an ongoing growth opportunity for us.

 

  

Strong business model to drive rapid growth and cash flow. Based on our integrated assets and scale, we have a strong business model that has produced rapid revenue growth and an attractive margin profile. We are able to reinvest this cash flow to fuel sustainable growth.

 

  

Founder-led business, with a proven and experienced team to execute. Our co-founder, CEO, and Chairperson, Adam Foroughi, leads a tenured management team with significant experience in the mobile app industry and scaling successful businesses.

Our Strategy for Growth

We have a comprehensive strategy to continue our growth and further enhance our market position in the mobile app ecosystem.

 

  

Existing market expansion. We have an attractive market opportunity within our growing mobile app segments and will continue to invest across our Core Technologies, Software, and Apps:

 

  

Enhance and extend machine-learning platform technologies.



 

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Expand distribution reach and software capabilities.

 

  

Grow AppLovin Apps.

 

  

New market extensions. We believe our technology and expertise are applicable to other market segments and geographies that we do not currently address:

 

  

Expand into other mobile app segments and industries.

 

  

Geographic expansion and industry partnerships.

 

  

Other performance marketing and yield marketing categories.

 

  

Pursue accretive strategic acquisitions and partnerships. We have a deep pipeline of software and app investment opportunities which we will continue to pursue.

Our Capital Structure

Following this offering, we will have three classes of common stock. Our Class A common stock, which is the stock we are offering by means of this prospectus, has one vote per share, our Class B common stock has 20 votes per share, and our Class C common stock has no voting rights, except as otherwise required by law. Upon the closing of this offering, Adam Foroughi, our co-founder, CEO, and Chairperson; Herald Chen, our President and Chief Financial Officer, and a member of our board of directors; and KKR Denali Holdings L.P. (KKR Denali) (collectively with certain affiliates, the Class B Stockholders) will together hold all of the issued and outstanding shares of our Class B common stock. Accordingly, upon the closing of this offering, the Class B Stockholders will collectively hold 93.4% of the voting power of our outstanding capital stock in the aggregate, which voting power may increase over time to the extent the Class B Stockholders exercise stock options outstanding at the time of the completion of this offering and exchange such shares for Class B common stock. If all such stock options held by the Class B Stockholders had been exercised and exchanged for shares of Class B common stock as of the date of the completion of this offering, our Class B Stockholders would collectively hold 93.5% of the voting power of our outstanding capital stock. The Class B Stockholders have entered into a voting agreement (the Voting Agreement) whereby all Class B common stock held by the Class B Stockholders and their respective permitted entities and permitted transferees will be voted as determined by two of Mr. Foroughi, Mr. Chen, and KKR Denali (one of which must be Mr. Foroughi). As a result, the Class B Stockholders, in particular, Mr. Foroughi, Mr. Chen, and KKR Denali, will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction.

Shares of our Class C common stock, which entitle the holder to zero votes per share, will not be issued and outstanding at the closing of the offering and we have no current plans to issue shares of Class C common stock. These shares will be available to be used in the future to further strategic initiatives, such as financings or acquisitions, or issue future equity awards to our service providers. Because the shares of Class C common stock have no voting rights (except as otherwise required by law), the issuance of such shares will not result in further dilution to the voting power held by the Class B Stockholders.

The multi-class structure of our common stock is intended to ensure that, for the foreseeable future, the Class B Stockholders continue to control or significantly influence the governance of the company, which we believe will permit us to continue to prioritize our long-term goals rather than short-term results, to enhance the likelihood of stability in the composition of our board of directors and its



 

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policies, and to discourage certain types of transactions that may involve an actual or threatened acquisition of the company. See the sections titled “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

Recent Developments

Definitive Agreement to Acquire Adjust

In February 2021, we signed a share purchase agreement with Adjust, a leading mobile app attribution, measurement, and analytics company in Germany, which we amended and restated and then further amended in March 2021. We have agreed to acquire all the outstanding shares of Adjust for an estimated purchase price of approximately $1.0 billion, consisting of (i) $598.0 million in cash, subject to certain purchase price adjustments; (ii) convertible securities that are convertible into an aggregate number of shares of our Class A common stock determined by dividing $352.0 million by the volume-weighted average trading price per share of our Class A common stock over any 10 consecutive full trading day period (chosen by the stockholder representative under the share purchase agreement) within 20 trading days commencing with and following the day our Class A common stock is first traded on the Nasdaq Global Select Market; and (iii) the assumption of up to $40.0 million in the aggregate of debt, accrued interest, and fees of Adjust, in each case upon the terms and subject to the conditions of the share purchase agreement. The Adjust acquisition is subject to customary closing conditions and is expected to close in the second quarter of 2021. The acquisition of Adjust will provide us with a set of strategic SaaS mobile marketing solutions that expand our suite of innovative tools for mobile app developers. Adjust tracks over $11.0 billion of mobile media spend through its platform and has over 500 employees globally.

Risk Factors Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include the following:

 

  

We have a limited operating history, especially with respect to our Apps, which makes it difficult to evaluate our current business and future performance and the risks we may encounter.

 

  

Our results of operations are likely to fluctuate from period-to-period, which could cause the market price of our Class A common stock to decline.

 

  

The mobile app ecosystem is intensely competitive. If business clients or users prefer our competitors’ products or services over our own, our business, financial condition, and results of operations could be adversely affected.

 

  

The mobile app ecosystem is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies and business models, our business, financial condition, and results of operations could be adversely affected.

 

  

The failure to attract new business clients, the loss of clients, or a reduction in spending by these clients could adversely affect our business, financial condition, and results of operations.

 

  

If we are unable to launch or acquire new Apps and successfully monetize them, or continue to improve the experience and monetization of our existing Apps, our business, financial condition, and results of operations could be adversely affected.



 

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If we fail to retain existing users or add new users cost-effectively, or if our users decrease their level of engagement with Apps, our business, financial condition, and results of operations could be adversely affected.

 

  

We have experienced significant growth through strategic acquisitions and partnerships, and we face risks related to the integration of such acquisitions and the management of such growth.

 

  

We plan to continue to expand and diversify our operations through strategic acquisitions and partnerships. We face a number of risks related to these transactions.

 

  

We rely on third-party platforms to distribute our Apps and collect revenue, and if our ability to do so is harmed, or such third-party platforms change their policies in such a way that restricts our business, increases our expenses, or limits the information we derive from our Apps, our business, financial condition, and results of operations could be adversely affected.

 

  

The multi-class structure of our common stock and the Voting Agreement among the Class B Stockholders will have the effect of concentrating voting power with the Class B Stockholders. This will limit your ability to influence the outcome of matters submitted to our stockholders for approval, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction.

 

  

Following the completion of this offering, we will be a “controlled company” within the meaning of the Nasdaq corporate governance requirements, and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Channels for Disclosure of Information

Investors, the media, and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission (the SEC), the investor relations page on our website, press releases, public conference calls, webcasts, and our corporate blog at blog.applovin.com.

The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels.

Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

Controlled Company Status

Following this offering, our Class B Stockholders will control more than 50% of the voting power of our common stock and we will be considered a “controlled company” under the Nasdaq corporate governance requirements. As such, we are permitted to opt out of compliance with certain Nasdaq corporate governance requirements and we intend to rely on certain of such exemptions. Accordingly, stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. See the sections titled “Risk Factors—Following the completion of this offering, we will be considered a “controlled company” within the meaning of the Nasdaq corporate governance requirements, and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements,” “Management,” and “Principal and Selling Stockholders” for additional information.



 

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Corporate Information

We were incorporated under the laws of the state of Delaware in July 2011. Our principal executive offices are located at 1100 Page Mill Road, Palo Alto, California 94304, and our telephone number is (800) 839-9646. Our website address is www.applovin.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only. You should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our Class A common stock.

“AppLovin,” our logo, and our other registered or common law trademarks, service marks, or trade names appearing in this prospectus are the property of Applovin Corporation. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

JOBS Act

We will be treated as an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act) for certain purposes until the earlier of the date on which we complete this offering or December 31, 2021. As such, in this prospectus we have taken advantage of certain reduced disclosure obligations that apply to emerging growth companies regarding selected financial data and executive compensation arrangements.



 

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THE OFFERING

 

Class A common stock offered

  

By us

  

22,500,000 shares

By the selling stockholder

  

2,500,000 shares

Total

  

25,000,000 shares

Class A common stock to be outstanding after this offering

  

210,033,746 shares

Class B common stock to be outstanding after this offering

  


147,921,563 shares

Class C common stock to be outstanding after this offering

  


None

Class A, Class B, and Class C common stock to be outstanding after this offering

  

357,955,309 shares

Over-allotment option

  

The selling stockholder has granted the underwriters an option to purchase an additional 3,750,000 shares of Class A common stock. Any shares of Class A common stock purchased by the underwriters from the selling stockholder pursuant to this option shall reduce the number of shares of Class B common stock and increase the number of shares of Class A common stock outstanding after this offering.

Use of proceeds

  

We estimate that the net proceeds from our sale of shares of Class A common stock in this offering will be approximately $1.74 billion, based upon the initial public offering price of $80.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

  

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We intend to use approximately $400.0 million of the net proceeds from this offering to repay the entire outstanding amount under our revolving credit facility. Additionally, we expect to use a portion of the net proceeds to enter into strategic acquisitions and partnerships. However, other than our pending acquisition of Adjust, we do not have definitive agreements or commitments for any material acquisitions or partnerships at this time.



 

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We will not receive any proceeds from the sale of Class A common stock by the selling stockholder.

  

 

See the sections titled “Use of Proceeds” and “Underwriters (Conflicts of Interest)” for additional information.

Voting rights

  

Shares of our Class A common stock are entitled to one vote per share.

  

Shares of our Class B common stock are entitled to 20 votes per share.

  

Shares of our Class C common stock have no voting rights, except as otherwise required by law.

  

Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation. Upon the closing of this offering, the Class B Stockholders will collectively hold approximately 93.4% of the voting power of our outstanding capital stock in the aggregate. The Class B Stockholders have entered into the Voting Agreement whereby all Class B common stock held by the Class B Stockholders and their respective permitted entities and permitted transferees will be voted as determined by two of Mr. Foroughi, Mr. Chen, and KKR Denali (one of which must be Mr. Foroughi). As a result, the Class B Stockholders, in particular, Mr. Foroughi, Mr. Chen, and KKR Denali, will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction. See the sections titled “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

Directed share program

  

At our request, the underwriters have reserved up to 5% of shares offered by this prospectus for sale at the initial public offering price through a directed share program available to directors, officers, certain employees, and their friends and family members, as well as certain of our partners and clients. The sales will be administered by Morgan Stanley & Co. LLC, an underwriter in this offering, except for sales to certain Canadian participants, which will be administered by Canaccord Genuity LLC as dealer for such participants. We do not know if these parties will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same



 

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terms as the other shares of Class A common stock. Additionally, except in the case of shares purchased by any director or officer, shares purchased through the directed share program will not be subject to a lock-up restriction. See the section titled “Underwriters (Conflicts of Interest)—Directed Share Program” for additional information.

Controlled company

  

Following this offering, we will be a “controlled company” within the meaning of the Nasdaq corporate governance requirements. See the sections titled “Management—Director Independence and Controlled Company Exemption” and “Principal and Selling Stockholders” for additional information.

Nasdaq trading symbol

  

“APP”

The number of shares of our Class A common stock, Class B common stock, and Class C common stock that will be outstanding after this offering is based on 185,033,746 shares of our Class A common stock, 150,421,563 shares of our Class B common stock, and no shares of our Class C common stock outstanding as of December 31, 2020, and reflects:

 

  

Class A common stock, comprised of:

 

  

155,369,596 shares of Class A common stock, reflecting an actual outstanding amount of 183,800,251 shares of Class A common stock as of December 31, 2020, less 28,430,655 shares of Class A common stock which will be exchanged for Class B common stock in the Class B Stock Exchange as defined below;

 

  

29,664,150 shares of Class F common stock that will automatically convert into an equal number of shares of Class A common stock in the Class F Conversion (as defined below), reflecting an actual outstanding amount of 42,564,150 shares of Class F common stock as of December 31, 2020, less 12,900,000 shares of Class F common stock which, following the Class F Conversion, will be exchanged for an equal number of shares of Class B common stock in the Class B Stock Exchange; and

 

  

No shares of Series A convertible preferred stock, reflecting an actual outstanding amount of 109,090,908 shares of Series A convertible preferred stock as of December 31, 2020, all of which, following the Preferred Stock Conversion (as defined below), will be exchanged for an equal number of shares of Class B common stock in the Class B Stock Exchange.

 

  

Class B common stock, comprised of 28,430,655 shares of Class A common stock, 12,900,000 shares of Class F common Stock and 109,090,908 shares of Series A convertible preferred stock, all of which, following the Capital Stock Conversions (as defined below) will be exchanged for an equal number of shares of Class B common stock immediately prior to the completion of this offering pursuant to the terms of certain exchange agreements (the Class B Stock Exchange).

The shares of our Class A common stock and Class B common stock outstanding as of December 31, 2020 exclude the following:

 

  

20,867,025 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $6.25 per share;



 

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254,200 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock granted after December 31, 2020, with a weighted-average exercise price of $27.03 per share;

 

  

7,424,256 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $11.48 per share;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of an outstanding convertible security that was issued in connection with our asset acquisition from Athena FZE;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of convertible securities to be issued in connection with our pending acquisition of Adjust;

 

  

the effect of the transactions described in the section titled “Certain Relationships and Related Party Transactions—Other Transactions;” and

 

  

47,190,000 shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

  

39,000,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Equity Incentive Plan (our 2021 Plan), which became effective prior to the completion of this offering;

 

  

390,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Partner Studio Incentive Plan (our 2021 Partner Plan), which became effective prior to the completion of this offering; and

 

  

7,800,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Employee Stock Purchase Plan (our ESPP), which became effective prior to the completion of this offering.

Our 2021 Plan and ESPP each provides for annual automatic increases in the number of shares of our Class A common stock reserved thereunder, and our 2021 Plan also provides for increases to the number of shares of Class A common stock that may be granted thereunder based on shares under our 2011 Equity Incentive Plan (our 2011 Plan) that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations, or are forfeited or otherwise repurchased by us. See the sections titled “Executive Compensation—Employee Benefit and Stock Plans,” “Description of Capital Stock—Adjust Convertible Securities,” and “Description of Capital Stock—Athena Convertible Security” for additional information.

Following the completion of this offering, and pursuant to an equity exchange right agreement entered into between us and Herald Chen (the Equity Award Exchange Agreement), Mr. Chen will have a right (but not an obligation) to require us to exchange any shares of Class A common stock received upon the exercise of options to purchase shares of Class A common stock for an equivalent number of shares of Class B common stock. We refer to this right as the Equity Award Exchange. The Equity Award Exchange applies only to equity awards granted to Mr. Chen prior to the effectiveness of the filing of our amended and restated certificate of incorporation. Subsequent to December 31, 2020, Mr. Chen exercised options to purchase 39,600 shares of Class A common stock, which shares will be exchanged for an equivalent number of shares of Class B common stock in the Class B Exchange but which are, unless otherwise specified, not included in the number of shares of Class B common stock given above or elsewhere in this prospectus. There are 2,360,400 shares of our Class A common stock subject to options held by Mr. Chen that we anticipate will be subject to the Equity Award Exchange Agreement and may be exchanged, upon exercise, for an equivalent number of shares of



 

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our Class B common stock following this offering. In the event that Mr. Chen had exchanged all shares of Class A common stock that he may acquire pursuant to options that he exercises immediately prior to this offering, then the Class B Stockholders would have held approximately 93.5% of the voting power of our capital stock in the aggregate immediately following the completion of this offering.

The number of shares above gives effect to a 1-to-3 forward stock split, which occurred on May 20, 2020 (the Forward Stock Split). Except as otherwise indicated, all information in this prospectus:

 

  

gives effect to the Forward Stock Split as if it had occurred on the date of such information;

 

  

assumes the conversion of all outstanding shares of our Class F common stock into an equal number of shares of our Class A common stock, which will occur immediately prior to the completion of this offering pursuant to the terms of our amended and restated certificate of incorporation (the Class F Conversion);

 

  

assumes the conversion of all outstanding shares of our Series A convertible preferred stock into an equal number of shares of our Class A common stock, which will occur immediately prior to the completion of this offering pursuant to the terms of our amended and restated certificate of incorporation (the Preferred Stock Conversion, and together with the Class F Conversion, the Capital Stock Conversions);

 

  

assumes the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws will each occur immediately prior to the completion of this offering;

 

  

the Class B Stock Exchange will occur immediately prior to the completion of this offering;

 

  

assumes no exercise of outstanding stock options and warrants or forfeiture of outstanding restricted stock subsequent to December 31, 2020; and

 

  

assumes no exercise by the underwriters of their over-allotment option.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. We have derived the summary consolidated statement of operations data for 2019 and 2020 and summary consolidated balance sheet data as of December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for 2018 from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and our unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus.

Consolidated Statements of Operations and Comprehensive Income (Loss) Data

 

   Year Ended December 31, 
   2018  2019  2020 
   (in thousands, except for share and per share amounts) 

Revenue

  $483,363  $994,104  $1,451,086 

Costs and expenses:

    

Cost of revenue(1)(2)

   53,758   241,274   555,578 

Sales and marketing(1)(2)

   166,799   481,781   627,796 

Research and development(1)

   16,270   44,966   180,652 

General and administrative(1)

   14,854   31,712   66,431 

Lease modification and abandonment of leasehold improvements

         7,851 

Extinguishments of acquisition-related contingent consideration

   (10,763     74,820 
  

 

 

  

 

 

  

 

 

 

Total cost and expenses

   240,918   799,733   1,513,128 
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   242,445   194,371   (62,042

Other income (expense):

    

Interest expense and loss on settlement of debt

   (484,644  (73,955  (77,873

Other income (expense), net

   1,940   5,818   4,209 
  

 

 

  

 

 

  

 

 

 

Total other income (expense)

   (482,704  (68,137  (73,664
  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   (240,259  126,234   (135,706

Provision for (benefit from) income taxes

   19,736   7,194   (9,772
  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (259,995  119,040   (125,934

(Loss) attributable to noncontrolling interest

         (747
  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to AppLovin shareholders

   (259,995  119,040   (125,187
  

 

 

  

 

 

  

 

 

 

Less: Income attributable to participating securities

      (42,664   
  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to common stock—Basic

   (259,995  76,376   (125,187
  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to common stock—Diluted

  $(259,995 $76,561  $(125,187
  

 

 

  

 

 

  

 

 

 


 

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   Year Ended December 31, 
   2018  2019   2020 
   (in thousands, except for share and per share amounts) 

Net income (loss) per share attributable to common stockholders:(3)

     
  

 

 

  

 

 

   

 

 

 

Basic

  $(1.37 $0.36   $(0.58
  

 

 

  

 

 

   

 

 

 

Diluted

  $(1.37 $0.36   $(0.58
  

 

 

  

 

 

   

 

 

 

Weighted average common shares used to compute net income (loss) per share attributable to common stockholders:(3)

     

Basic

   189,533,630   210,937,147    214,936,545 
  

 

 

  

 

 

   

 

 

 

Diluted

   189,533,630   212,365,429    214,936,545 
  

 

 

  

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders (unaudited):(3)

     

Basic

     $(0.39
  

 

 

 

Diluted

     $(0.39
  

 

 

 

Pro forma weighted average common shares used to compute net income (loss) per share attributable to common stockholders (unaudited):(3)

     

Basic

      324,102,590 
  

 

 

 

Diluted

      324,102,590 
  

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

   Year Ended December 31, 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $517   $124   $982 

Sales and marketing

   2,582    1,922    10,668 

Research and development

   1,009    5,009    36,852 

General and administrative

   1,357    3,167    13,885 
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $  5,465   $  10,222   $62,387 
  

 

 

   

 

 

   

 

 

 

 

(2)

Includes amortization expense related to acquired intangibles as follows:

 

   Year Ended December 31, 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $7,932   $  74,787   $228,339 

Sales and marketing

   495    7,641    11,587 
  

 

 

   

 

 

   

 

 

 

Total amortization expense related to acquired intangibles

  $  8,427   $82,428   $239,926 
  

 

 

   

 

 

   

 

 

 

 

(3)

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical net income (loss) per share and the number of shares used in the computation of the per share amounts. Unaudited pro forma basic net loss per share attributable to common stockholders is computed to give effect to the automatic conversion of all outstanding shares of our preferred stock into 109,090,908 shares of Class A common stock and the automatic conversion of the convertible security issued in connection with a strategic partnership with Athena FZE (see Note 6 to our consolidated financial statements included in this prospectus) into 625,000 shares of common stock at $64.00 per share, which is the initial public offering price per share multiplied by 0.8, weighted for the part of the year when the convertible security was outstanding.



 

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Consolidated Balance Sheet Data

 

   As of December 31, 2020 
   Actual  Pro Forma(1)  Pro Forma as
Adjusted(2)
 
   (in thousands) 

Cash and cash equivalents

  $317,235  $863,741  $
2,211,326
 

Working capital(3)

   64,942   608,349   1,956,821 

Total assets

   2,154,593   2,701,099   4,045,052 

Total debt

   1,599,200   2,165,498   1,765,498 

Convertible preferred stock

   399,589       

Accumulated deficit

   (1,012,400  (1,032,192  (1,032,192

Total stockholders’ equity (deficit)

   (158,545  (178,337  1,566,503 

 

(1)

The pro forma column in the consolidated balance sheet data table above reflects (i) the Capital Stock Conversions, as if such conversions had occurred on December 31, 2020, (ii) the Class B Exchange, as if such exchange had occurred on December 31, 2020, (iii) the increase in our senior secured term loan facility by $300.0 million in February 2021, as if such transaction had occurred on December 31, 2020, (iv) the borrowing of an additional $250.0 million under our revolving credit facility in March 2021, as if such transaction had occurred on December 31, 2020, and (v) the filing and effectiveness of our amended and restated certificate of incorporation that will become effective immediately prior to the completion of this offering.

(2)

The pro forma as adjusted column in the balance sheet data table above gives effect to (i) the pro forma adjustments set forth above, (ii) the sale and issuance by us of 22,500,000 shares of our Class A common stock in this offering, based upon the initial public offering price of $80.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us (with respect to these offering expenses, $2.7 million had been paid at December 31, 2020 and $0.9 million had been accrued as of December 31, 2020), and (iii) the application of the estimated net proceeds from this offering, as described in the section titled “Use of Proceeds.”

(3)

Working capital is defined as current assets less current liabilities.

Non-GAAP Financial Measures

We review a number of operating and financial metrics, including the following financial measures that were not prepared in accordance with GAAP to evaluate our business. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

 

   Year Ended December 31, 
   2018  2019  2020 
   (in thousands, except percentages) 

Net income (loss)

  $(259,995 $119,040  $(125,934

Adjusted EBITDA

  $        255,618  $        301,197  $        345,495 

Net income (loss) margin

   (53.8)%   12.0  (8.7)% 

Adjusted EBITDA margin

   52.9  30.3  23.8

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a description of Adjusted EBITDA and Adjusted EBTIDA margin and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and our unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus before making a decision to invest in our Class A common stock. Our business, financial condition, results of operations, or prospects could also be adversely affected by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Industry

We have a limited operating history, especially with respect to our AppLovin Apps, which makes it difficult to evaluate our current business and future performance and the risks we may encounter.

Our limited operating history, especially with respect to our AppLovin Apps, which we launched in 2018, may make it difficult to evaluate our current business and our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the mobile app ecosystem, including our ability to:

 

  

accurately forecast our revenue and plan our operating expenses;

 

  

attract new and retain existing business clients using AppLovin Software and users of our Apps;

 

  

successfully compete with current and future competitors, some of whom are also our clients;

 

  

successfully expand our business in existing markets and enter new markets and geographies;

 

  

successfully execute strategic acquisitions and partnerships;

 

  

develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased usage, as well as the deployment of new features and services;

 

  

comply with existing and new laws and regulations applicable to our business;

 

  

anticipate and respond to macroeconomic changes and changes in the markets in which we operate;

 

  

establish and maintain our brand and reputation;

 

  

adapt to rapidly evolving trends in the ways businesses and consumers interact with technology;

 

  

effectively manage our rapid growth;

 

  

avoid interruptions or disruptions in our AppLovin Core Technologies, Software, or Apps; and

 

  

hire, integrate, and retain key personnel.

Further, because we have limited historical financial data, including limited data regarding the integration of our strategic acquisitions and partnerships, and operate in a rapidly evolving market, any

 

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financial planning and forecasting, including predictions about our future revenue and expenses, may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations. If we fail to address the risks and uncertainties that we face, including those described elsewhere in this “Risk Factors” section, our business, financial condition, and results of operations could be adversely affected.

Our results of operations are likely to fluctuate from period-to-period, which could cause the market price of our Class A common stock to decline.

Our results of operations have fluctuated in the past and are likely to fluctuate significantly from quarter-to-quarter and year-to-year in the future for a variety of reasons, many of which are outside of our control and difficult to predict. As a result, you should not rely upon our historical results of operations as indicators of future performance. Numerous factors can influence our results of operations, including:

 

  

our ability to maintain and grow our business client and user bases;

 

  

changes to our Core Technologies, Software, Apps, or other offerings, or the development and introduction of new Software or development of new mobile apps by our studios or our competitors;

 

  

changes to the policies or practices of companies or governmental agencies that determine access to third-party platforms, such as the Apple App Store and the Google Play Store, or to our Software, Apps, website, or the internet generally;

 

  

changes to the policies or practices of third-party platforms, such as the Apple App Store and the Google Play Store, including with respect to Apple’s Identifier for Advertisers (IDFA), which helps advertisers assess the effectiveness of their advertising efforts, and with respect to transparency regarding data processing;

 

  

the diversification and growth of revenue sources beyond our current Software and Apps;

 

  

the actions of our competitors, both with respect to their own offerings and, to the extent such competitors are also our clients, with respect to their use of our Software;

 

  

costs and expenses related to the strategic acquisitions and partnerships, including costs related to integrating mobile gaming studios or other companies that we acquire, as well as costs and expenses related to the development of our Core Technologies, Software, or Apps;

 

  

our ability to achieve or maintain profitability;

 

  

increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

  

system failures or outages, or actual or perceived breaches of security or privacy, and the costs associated with preventing, responding to, or remediating any such outages or breaches;

 

  

changes in the legislative or regulatory environment, including with respect to privacy and data protection, or actions by governments or regulators, including fines, orders, or consent decrees;

 

  

charges associated with impairment of any assets on our balance sheet or changes in our expected estimated useful life of property and equipment and intangible assets;

 

  

adverse litigation judgments, settlements, or other litigation-related costs and the fees associated with investigating and defending claims;

 

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changes in the legislative or regulatory environment, such as with respect to privacy;

 

  

the overall tax rate for our business, which may be affected by the mix of income we earn in the United States and in jurisdictions with comparatively lower tax rates;

 

  

the impact of changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued and may significantly affect the effective tax rate of that period;

 

  

the application of new or changing financial accounting standards or practices; and

 

  

changes in regional or global business or macroeconomic conditions, including as a result of the COVID-19 pandemic, which may impact the other factors described above.

In particular, it is difficult to predict if, when, or how quickly newly-launched Software may begin to generate revenue or decline in popularity. Further, we cannot be certain if a new App will become popular amongst users and generate revenue. The success of our business depends in part on our ability to develop and enhance our Software and consistently and timely launch new Apps. It is difficult for us to predict with certainty when we will expand our Software suite or launch a new App as we may require longer development schedules or soft launch periods to meet our quality standards and expectations. If our business clients do not adopt our new Software offerings, or develop or further invest in their own competing alternatives, or if we are unable to successfully launch or acquire new Apps or maintain or improve existing Apps, our business and results of operations could be adversely affected. Fluctuations in our results of operations may cause such results to fall below our financial guidance or the expectations of analysts or investors, which could cause the market price of our Class A common stock to decline.

The mobile app ecosystem is intensely competitive. If business clients or users prefer our competitors’ products or services over our own, our business, financial condition, and results of operations could be adversely affected.

We face significant competition in the mobile app ecosystem. We offer a suite of solutions for developers to get their mobile apps discovered and downloaded by the right users, optimize return on marketing spend, and maximize the monetization of their engagement. We collect revenue from business clients for fees paid by mobile app advertisers, including developers, that use our Software and from the sale of advertising inventory of our Apps. Advertisers often engage with several advertising platforms and networks to purchase advertisements on mobile apps and developers often engage with multiple tools to market and monetize their apps. Accordingly, we face significant competition from traditional, online and mobile businesses that provide ad networks and platforms, mobile apps and games, media, and other services for advertisers to reach relevant audiences. We also face competition from providers of developer tools that enable developers to reach their audiences or manage or optimize their advertising campaigns. These companies vary in size and include Facebook, Google, Twitter, and Unity Software as well as various private companies. Several of these companies, including Facebook, Google, and Unity Software, are also our partners and Enterprise Clients.4 Additionally, our studios build many of our Apps using the development kits offered by Unity Software. Clients who are also competitors may decide to invest in their own offerings rather than continue to use our Software or advertise on our Apps.

Additionally, we also compete with businesses that develop online and mobile games and other mobile apps, which vary in size and include companies such as Activision Blizzard, Tencent, and Zynga, as well as other public and private companies. Many of these companies are also our partners and clients. As we expand our global operations and mobile app offerings, we increasingly face

 

4 

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of how we define Enterprise Clients.

 

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competition from high-profile companies with significant online presences that may introduce new or expanded offerings, such as Apple, Facebook, Google, Microsoft, and Snap. In addition, other large companies that to date have not actively focused on mobile apps or gaming may decide to develop mobile apps or gaming offerings, such as Amazon’s recently introduced games platform, or partner with other developers. Some of these current and potential competitors have significantly greater resources that can be used to develop, acquire, or brand additional mobile apps or gaming alternatives, and may have more diversified revenue sources than we do and therefore may be less severely affected by changes in consumer preferences, regulations, or other developments that may impact our business or industry.

Further, as there are relatively low barriers to entry to develop and publish a mobile app, we expect new competitors to enter the market and existing competitors to allocate more resources towards developing and marketing competing games and apps. Because our mobile games are free to play, our Apps compete primarily on the basis of user experience rather than price. The proliferation of apps makes it difficult for us to differentiate ourselves from our competitors and compete for users and the success of our Apps will depend in part on our Software continuing to provide effective marketing and monetization tools.

We also face competition for advertising spending and for the discretionary spending, leisure time, and attention of our users from game platforms such as personal computer and console games, and other leisure time activities, such as television, movies, music, sports, and the internet. In addition, non-game applications for mobile devices, such as social media and messaging, television, movies, music, dating, and sports, have become increasingly popular, making the overall mobile app ecosystem highly fragmented and making it more difficult for any mobile app to differentiate itself. Our future growth depends in part on the overall health of the mobile app ecosystem and in particular, mobile gaming. Increasing competition could result in decreases in our App users, increased user acquisition costs, lower engagement with our Apps, and loss of key personnel, all of which could adversely affect our business, financial condition, or results of operations.

Some of our current and potential competitors may be domiciled in different countries and subject to political, legal, and regulatory regimes that enable them to compete more effectively than us, particularly outside of the United States. Some of our current and potential competitors may have greater resources, more diversified revenue streams, better technological or data analytics capabilities, or stronger brands or competitive positions in certain product segments, geographic regions, or user demographics than we do. If business clients or users prefer our competitors’ products or services over our own, or if our competitors are better able to adapt to changes in the preferences of advertisers or users, regulations, or other developments, our business, financial condition, and results of operations could be adversely affected.

The mobile app ecosystem is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies and business models, our business, financial condition, and results of operations could be adversely affected.

Technology changes rapidly in the mobile app ecosystem. Our future success depends in part on our ability to adapt to trends and to innovate. To attract new business clients and users and increase revenue from our current business clients and users, we will need to enhance and improve our Core Technologies, Software, and Apps. Enhancements of our existing technology and offerings, and new offerings, may not be introduced in a timely or cost-effective manner and may contain errors or defects.

Our business also currently depends in part on the growth and evolution of the internet, especially mobile internet-enabled devices. The number of people using mobile internet-enabled devices has increased rapidly over time, and we expect that this trend will continue. However, the mobile app ecosystem may not grow in the way we anticipate. We must continually anticipate and adapt to

 

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emerging technologies to stay competitive. As the technological infrastructure for internet access improves and evolves, consumers will be presented with more opportunities to access apps and play games on a variety of devices and platforms and to experience other leisure activities that may compete with mobile apps. Forecasting the financial impact of these emerging technologies and business models is inherently uncertain and volatile. If we decide to support a new technology or business model in the future, it may require partnering with a new platform, technology, or business partner, which may be on terms that are less favorable to us than those for traditional technologies or business models.

To invest in a new technology or expand our offerings, we must invest financial resources and management attention. We may invest significant resources in a new offering or in a strategic acquisition or partnership, which could prove unsuccessful or prevent us from directing these resources towards other opportunities. We may never recover the often-substantial up-front costs of developing and marketing emerging technologies or business models, or recover the opportunity cost of diverting management and financial resources. Further, our competitors may adopt an emerging technology or business model more quickly or effectively than we do, creating products that are technologically superior to ours or attract more users than ours.

If, on the other hand, we do not continue to enhance our Core Technologies, Software, or Apps, or do not appropriately allocate our resources amongst opportunities, or we otherwise elect not to pursue new business models that achieve significant commercial success, we may face adverse consequences. For example, we do not currently offer our Apps on all devices or all gaming platforms. If the devices on which our Apps are available decline in popularity or become obsolete faster than anticipated, or if new platforms emerge other than those on which our games are offered, we could experience a decline in revenue and in our number of App users, and we may not achieve the anticipated return on our development efforts. It may take significant time and expenditures to shift product development resources to new technologies, and it may be more difficult to compete against existing products incorporating such technologies. If new technologies render mobile devices obsolete or we are unable to successfully adapt to and appropriately allocate our resources amongst current and new technologies, our business, financial condition, and results of operations could be adversely affected.

The failure to attract new business clients, the loss of clients, or a reduction in spending by these clients could adversely affect our business, financial condition, and results of operations.

A significant portion of our revenue is Business Revenue.5 We collect Business Revenue from advertisers spending on our Software and Apps. Business Revenue from our Software, which is mostly from AppDiscovery, is generated from our advertisers, typically on a performance-based, cost-per-install basis, then shared with our advertising publishers, typically on a cost per impression model. Business Revenue generated from our Apps comes from advertisers that purchase ad inventory from our diverse portfolio of mobile games. As is common in the mobile app ecosystem and in the advertising industry, our business clients do not have long-term advertising commitments with us. Our success depends in part on our ability to satisfy our advertising partners.

Business Revenue could also be impacted by a number of other factors, including:

 

  

our ability to attract and retain business clients;

 

  

our ability to improve the effectiveness and predictability of our advertising and matching algorithms;

 

5 

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our Business Revenue.

 

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our ability to maintain or increase advertiser demand and third-party publisher supply, the quantity, or quality of advertisements shown to users, or our pricing of advertisements;

  

our ability to continue to increase user access to and engagement with our Apps;

 

  

mobile app changes or inventory management decisions we may make that change the size, format, frequency, or relative prominence of advertisements displayed on our Apps;

 

  

our ability to recruit, train, and retain personnel to support continued growth of our Platform;

 

  

our ability to establish and maintain our brand and reputation;

 

  

loss of market share to our competitors, including if competitors offer lower priced, more integrated, or otherwise more effective products;

 

  

the development and success of technologies designed to block the display of advertisements or block our ad measurement tools, which have in the past impacted and may in the future impact our business, or technologies that make it easier for users to opt out of behavioral targeting;

 

  

the availability, accuracy, utility, and security of analytics and measurement solutions offered by us or third parties that demonstrate the value of our Software to advertisers, developers and publishers, or our ability to further improve such tools;

 

  

government actions or legislative, regulatory, or other legal developments relating to advertising, including developments that may impact our ability to deliver, target, or measure the effectiveness of advertising;

 

  

changes that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes to policies by mobile operating system and third-party platform providers, and the degree to which users opt out of certain types of ad targeting as a result of changes and controls implemented in connection with such policy changes and with the E.U. General Data Protection Regulation (the GDPR), ePrivacy Directive, the California Consumer Privacy Act (the CCPA), and the Children’s Online Privacy Protection Act (the COPPA);

 

  

decisions by business clients to reduce their advertising due to concerns about legal liability or uncertainty regarding their own legal and compliance obligations, or due to negative publicity, regardless of its accuracy, involving us, our user data practices, advertising metrics or tools, our Software or Apps, or other companies in our industry; and

 

  

the impact of macroeconomic conditions, including the impact of the COVID-19 pandemic and responses thereto, and seasonality, whether in the advertising industry in general, or among specific types of advertisers or within particular geographies.

From time to time, certain of these factors have adversely affected our revenue to varying degrees. The occurrence of any of these or other factors in the future could result in a reduction in demand for our Software and use of our Apps, which may reduce the prices we receive for our advertisements or cause business clients to stop advertising with us altogether, either of which would adversely affect our business and results of operations. The failure to attract new business clients, loss of business clients, or reduction in spending by business clients could adversely affect our business, financial condition, and results of operations.

If we are unable to launch or acquire new Apps and successfully monetize them, or continue to improve the experience and monetization of our existing Apps, our business, financial condition, and results of operations could be adversely affected.

Our business depends in part on launching or acquiring, and continuing to service, mobile apps that users will download and spend time and money using. We have devoted and we expect to

 

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continue to devote substantial resources to the research, development, analytics, and marketing of our Apps. Our development and marketing efforts are focused on improving the experience of our existing Apps, developing new Apps, and successfully monetizing our Apps. Our Apps generate revenue primarily through the sale of advertising, a substantial portion of which comes from other mobile gaming clients, and IAPs. For Apps distributed through third-party platforms, we are required to share a portion of the proceeds from in-game sales with the platform providers, which share may be subject to changes or increases over time. In order to achieve and maintain our profitability, we need to generate sufficient revenue from our existing and new Apps to offset our ongoing development, marketing, and other operating expenses.

Successfully monetizing our Apps is difficult and requires that we deliver user experiences that a sufficient number of users will pay for through IAPs or we are able to otherwise sufficiently monetize our Apps, including by serving in-app advertising. The success of our Apps depends in part on unpredictable and volatile factors beyond our control including user preferences, competing apps, new third-party platforms, and the availability of other entertainment experiences. If our Apps do not meet user expectations or if they are not brought to market in a timely and effective manner, our business and results of operations could be adversely affected.

In addition, our ability to successfully launch or acquire Apps and their ability to achieve commercial success will depend in part on our ability to:

 

  

effectively market our Apps to existing and new users;

 

  

achieve a positive return on investment from our marketing and user acquisition costs or achieve organic user growth;

 

  

adapt to changing trends, user preferences, new technologies, and new feature sets for mobile and other devices, including determining whether to invest in development for any new technologies, and achieve a positive return on the costs associated with such adaptation;

 

  

continue to adapt mobile app feature sets for an increasingly diverse set of mobile devices, including various operating systems and specifications, limited bandwidth, and varying processing power and screen sizes;

 

  

achieve and maintain successful user engagement and effectively monetize our Apps;

 

  

develop mobile games that can build upon or become franchise games and expand and enhance our mobile games after their initial releases;

 

  

develop Apps other than mobile games;

 

  

identify and execute strategic acquisitions and partnerships;

 

  

attract advertisers to advertise on our Apps;

 

  

partner with third-party platforms and obtain featuring opportunities;

 

  

compete successfully against a large and growing number of competitors;

 

  

accurately forecast the timing and expense of our operations, including mobile app and feature development, marketing, and user acquisition;

 

  

minimize and quickly resolve bugs or outages;

 

  

acquire, or invest in, and successfully integrate high quality mobile app companies or technologies; and

 

  

retain and motivate talented and experienced developers and other key personnel from such acquisitions and investments.

 

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These and other uncertainties make it difficult to know whether we will succeed in continuing to develop and launch new Apps. Even if successful, certain genres of mobile apps, such as casual games, may have a relatively short lifespan. Further, as our Apps expand into additional genres of mobile games or additional categories of mobile apps, we will face risks specific to those genres or categories. For example, in mid-core games, there is typically a higher upfront investment prior to the launch of a game compared to casual games, which means publishing a new game in that genre will expose us to greater risks as our financial condition and results of operations will be more significantly adversely affected to the extent such a game does not become popular and commercially successful. If we are not successful in launching new mobile games or expanding into other genres of mobile games or categories of mobile apps, our business, financial condition, and results of operations could be adversely affected.

If we fail to retain existing users or add new users cost-effectively, or if our users decrease their level of engagement with Apps, our business, financial condition, and results of operations could be adversely affected.

The size of our user base and the level of user engagement with our Apps are critical to our success. Our results of operations have been and will continue to be significantly determined by our success in acquiring and engaging App users. We expect that the number of our App users may fluctuate or decline in one or more markets from time to time, particularly in markets where we have achieved higher penetration rates. In addition, if people do not perceive our Apps as useful or entertaining, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement, which could harm our revenue. A number of mobile apps that achieved early popularity have since seen their user bases or user engagement levels decline. There is no guarantee that we will not experience a similar erosion of our App users or user engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different Apps. Any number of factors can adversely affect user growth and engagement, including if:

 

  

users increasingly engage with mobile apps offered by competitors or mobile apps in categories other than those of our Apps;

 

  

we fail to introduce new Apps or features that users find engaging or that achieve a high level of market acceptance or we introduce new Apps, or make changes to existing Apps that are not favorably received;

 

  

users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of advertisements that we display;

 

  

users have difficulty installing, updating, or otherwise accessing our Apps as a result of actions by us or third parties;

 

  

we are unable to continue to develop Apps that work with a variety of mobile operating systems and networks; and

 

  

questions about the quality of our Apps, our data practices or concerns related to privacy and sharing of personal information and other user data, safety, security, or other factors.

Additionally, we expect it will become increasingly difficult and more expensive for us to acquire users for our Apps for a variety of reasons, including the increasingly competitive nature of the mobile app ecosystem and the significant amount of time and attention users are dedicating to competing entertainment options. Further, we believe that changes that Apple has implemented during the last several years to its platform, particularly the removal of the Top Grossing rankings and decreasing the prominence of the Top Free rankings, may adversely affect the number of organic downloads of our

 

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Apps. If our competitors increase their user acquisition spending, we could experience higher costs per an install for our Apps, which would adversely affect our revenue and margins. Furthermore, our spending on user acquisition is based on certain assumptions about their projected behavior, particularly for new Apps for which we do not have similar Apps in our portfolio to aid us in our modeling efforts. If we are unable to grow our user base and increase our user engagement levels, or unable to do so cost effectively, our business, financial condition, and results of operations could be adversely affected.

We have experienced significant growth through strategic acquisitions and partnerships, and we face risks related to the integration of such acquisitions and the management of such growth.

As part of our growth strategy, we have frequently acquired companies, businesses, personnel, and technologies in the past, and we intend to continue to evaluate and pursue strategic acquisitions and partnerships. For example, since 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships, including for the acquisition of PeopleFun in the first quarter of 2018, MAX in the third quarter of 2018, SafeDK in July 2019, and Machine Zone, Inc. (Machine Zone) in May 2020. In addition, in February 2021, we entered into a share purchase agreement to acquire Adjust, which we amended and restated and then further amended in March 2021. Each of these acquisitions requires unique approaches to integration due to, among other reasons, the structure of the acquisitions, the size, locations, and cultural differences among their teams and ours, and has required, and will continue to require, attention from our management team. As we continue to grow, the size of our acquisitions and investments may increase. For instance, our acquisition of Machine Zone was our largest acquisition to date, and we expect our acquisition of Adjust to have a greater total purchase consideration. In addition to the larger purchase prices associated with such acquisitions and investments, larger acquisitions and investments may also require additional management resources to integrate more significant and often more complex businesses into our company. We will continue to explore and evaluate additional acquisitions, some of which may be the same size or even larger in scale and investment than the Machine Zone acquisition and our pending acquisition of Adjust.

Our future success depends in part on our ability to integrate these acquisitions and manage these businesses, partnerships, and transactions effectively. If we are unable to obtain the anticipated benefits or synergies of such acquisitions, or we encounter difficulties integrating acquired businesses with ours, our business, financial condition, and results of operations could be adversely affected.

Challenges and risks from such strategic acquisitions and partnerships include:

 

  

diversion of our management’s attention in the acquisition and integration process, including oversight over acquired businesses which continue their operations under contingent consideration provisions in acquisition agreements;

 

  

declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future performance;

 

  

the need to integrate the operations, systems, technologies, products, and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise in connection with integration;

 

  

the need to implement internal controls, procedures, and policies appropriate for a larger, U.S.-based public company at companies that prior to acquisition may not have as robust controls, procedures, and policies, in particular, with respect to the effectiveness of internal controls, cyber and information security practices and incident response plans, compliance with privacy and other regulations protecting the rights of clients and users, and compliance

 

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with U.S.-based economic policies and sanctions which may not have previously been applicable to the acquired company’s operations;

 

  

the difficulty in accurately forecasting and accounting for the financial impact of an acquisition transaction, including accounting charges, write-offs of deferred revenue under purchase accounting, and integrating and reporting results for acquired companies that have not historically followed GAAP;

 

  

the implementation of restructuring actions and cost reduction initiatives to streamline operations and improve cost efficiencies;

 

  

the fact that we may be required to pay contingent consideration in excess of the initial fair value, and contingent consideration may become payable at a time when we do not have sufficient cash available to pay such consideration;

 

  

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries as well as tax risks that may arise from the acquisition;

 

  

increasing legal, regulatory, and compliance exposure, and the additional costs related to mitigate each of those, as a result of adding new offices, employees and other service providers, benefit plans, equity, job types, and lines of business globally; and

 

  

liability for activities of the acquired company before the acquisition, including intellectual property, commercial, and other litigation claims or disputes, cyber and information security vulnerabilities, violations of laws, rules and regulations, including with respect to employee classification, tax liabilities, and other known and unknown liabilities.

If we are unable to successfully integrate and manage our acquisitions and strategic partnerships, we may not realize the expected benefits of such transactions or become exposed to additional liabilities, and our business, financial condition, and results of operations could be adversely affected.

We plan to continue to expand and diversify our operations through strategic acquisitions and partnerships. We face a number of risks related to these transactions.

We plan to continue to expand and diversify our operations with additional strategic acquisitions or partnerships, strategic collaborations, joint ventures, or licensing arrangements. As we continue to grow, these transactions may be larger and require significant investments, such as our acquisition of Machine Zone and our pending acquisition of Adjust. We may be unable to identify or complete prospective acquisitions or partnerships for many reasons, including our ability to identify suitable targets, increasing competition from other potential acquirers, the effects of consolidation in our industries, potentially high valuations of acquisition candidates, and the availability of financing to complete larger acquisitions. Even if we do complete any such transactions, we may incur significant costs, such as professional service fees. In addition, applicable antitrust laws and other regulations may limit our ability to acquire targets, particularly larger targets, or force us to divest an acquired business. If we are unable to identify suitable targets or complete acquisitions, our growth prospects could be adversely affected, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all markets.

Further, completing larger acquisitions or other strategic transactions is significantly riskier in that such transactions require additional consideration and management attention to complete, and could introduce additional exposure to regulatory and compliance risk. To complete these transactions, we may need to spend large amounts of cash, which may not be available to us on acceptable terms, if at all, or issue equity or equity-linked consideration, which may dilute our current stockholders. For example, in connection with our pending acquisition of Adjust, we expect to issue convertible securities

 

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that are convertible into an aggregate number of shares of our Class A common stock determined by dividing $352.0 million by the volume-weighted average trading price per share of our Class A common stock over any 10 consecutive full trading day period (chosen by the stockholder representative under the share purchase agreement) within 20 trading days commencing with and following the day our Class A common stock is first traded on the Nasdaq Global Select Market. See the section titled “Description of Capital Stock—Adjust Convertible Securities” for additional information. Further, we generally devote more time and resources towards performing diligence on larger transactions and may be required to devote more resources towards regulatory requirements in connection with such transactions. To the extent that we do not perform sufficient diligence on a larger acquisition or such a transaction does not generate the expected benefits, our business, financial condition, and results of operations will be harmed, and to a greater extent than would occur with a smaller transaction.

Absent such strategic transactions, we would need to undertake additional development or commercialization activities at our own expense. If we elect to fund and undertake such additional efforts on our own, we may need to obtain additional expertise and additional capital, which may not be available to our company on acceptable terms, if at all. If we are unable to do any of the foregoing, we may not be able to develop our Core Technologies, Software, and Apps effectively or achieve our expected product roadmap on a timely basis, which could adversely affect our business, financial condition, and results of operations.

The benefits of a strategic acquisition or partnership may also take considerable time to develop, and we cannot be certain that any particular strategic acquisition or partnership will produce the intended benefits. Further, acquisitions could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities or amortization expenses related to intangible assets, or write-offs of goodwill and intangible assets. If we are unable to identify and complete strategic acquisitions or partnerships, our business, financial condition, and results of operations could be adversely affected.

Our strategic acquisitions and partnerships may expose us to tax risks.

From time to time, we have acquired and may acquire companies, assets, businesses, and technologies and we have entered into and may enter into other strategic partnerships and transactions. We face a variety of tax risks related to such transactions, including that we may be required to make tax withholdings in various jurisdictions in connection with such transactions or as part of our continuing operations following a transaction, and that the companies or businesses we acquire may cause us to alter our international tax structure or otherwise create more complexity with respect to tax matters. Additionally, while we typically include indemnification provisions in our definitive agreements related to strategic acquisitions and partnerships, these indemnification provisions may be insufficient in the event that tax liabilities are greater than expected or in areas that are not fully covered by indemnification. If we are unable to adequately predict and address such tax issues as they arise, our business, financial condition, and results of operations could be adversely affected.

We have entered into strategic partnerships with mobile gaming studios, and a failure to maintain such relationships may harm our ability to launch new Apps as well as our brand and reputation.

From time to time, we have entered into strategic partnerships with mobile gaming studios (our Partner Studios). We have historically allowed these Partner Studios to continue their operations with a degree of autonomy. In certain of these transactions, we have bought games from such Partner Studios and entered into development agreements whereby such Partner Studios provide us support in developing and improving games and grant us a right of first refusal with respect to future games.

 

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These agreements typically have a fixed term, after which our Partner Studios may choose not to continue working with us. Any deterioration in our relationship with these Partner Studios may harm our ability to monetize the games we purchase and launch future mobile games developed by these Partner Studios and may lead to such Partner Studios choosing not to renew their partnerships with us. Further, if a Partner Studio becomes dissatisfied with us, our brand and reputation may be harmed and we may have more difficulty entering into similar partnerships in the future. Additionally, our international Partner Studios may be located in areas with less certain legal and regulatory regimes or more potential risks, which may increase our costs to maintain such strategic partnership. If we are unable to maintain any of these partnerships, we may be required to invest significant resources in expanding our other studios or entering into agreements with additional mobile gaming studios in order to continue producing the same volume and quality of Apps, and our business, financial condition, and results of operations could be adversely affected.

We rely on third-party platforms to distribute our Apps and collect revenue, and if our ability to do so is harmed, or such third-party platforms change their policies in such a way that restricts our business, increases our expenses, or limits the information we derive from our Apps, our business, financial condition, and results of operations could be adversely affected.

The mobile app ecosystem depends in part on a relatively small number of third-party distribution platforms, such as the Apple App Store, the Google Play Store, and Facebook, some of which are direct competitors. We derive significant revenue from the distribution of our Apps through these third-party platforms and almost all of our IAPs are made through the payment processing systems of these third-party platforms. We are subject to the standard policies and terms of service of such third-party platforms, which generally govern the promotion, distribution, content, and operation of applications on such platforms. Each platform provider has broad discretion to change and interpret its terms of service and other policies with respect to us and other mobile app companies, and those changes may be unfavorable to us. A platform provider may also change its fee structure, add fees associated with access to and use of its platform, alter how mobile apps are labeled or are able to advertise on its platform, change how the personal information of its users is made available to developers on its platform, limit the use of personal information for advertising purposes, restrict how users can share information on its platform or across platforms, or significantly increase the level of compliance or requirements necessary to use its platform. For example, in June 2020, Apple announced a plan to overhaul IDFA, which anonymously profiles users for targeted advertising, as part of a new proposed application tracking transparency framework that, among other things, would require opt-in consent for certain types of tracking. The extent of such potential IDFA and transparency changes, and their timing, remains uncertain. We rely in part on IDFA to provide us with data that helps our Software better market and monetize Apps. The proposed IDFA and transparency changes may require us to engage in significant changes to our data collection practices, which may require our expenditure of substantial costs and resources, and to the extent we are unable to utilize IDFA or a similar offering, or if the transparency changes and any related opt-in or other requirements result in decreases in the availability or utility of data relating to Apps, our Software may not be as effective, we may not be able to continue to efficiently generate revenue for our Apps, and our revenue and results of operations may be harmed. Additionally, Apple implemented new requirements for consumer disclosures regarding privacy and data processing practices in December 2020, which has resulted in increased compliance requirements and could result in decreased usage of our Apps. Apple has also announced a new application tracking transparency framework that would require opt-in consent for certain types of tracking. This proposed transparency framework, which is anticipated to be implemented in spring of 2021, could have an impact on the effectiveness of our advertising practices and/or our ability to efficiently generate revenue for our Apps. Any similar changes to the policies of Apple or Google may materially and adversely affect our business, financial condition, and results of operations.

 

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If we violate, or a distribution platform provider believes we have violated, a distribution platform’s terms of service, or if there is any change or deterioration in our relationship with such distribution provider, that platform provider could limit or discontinue our access to its platform. For example, in August 2020, Apple and Google removed a mobile game developed by one of our competitors from their platforms for violating their standard policies and terms of service. If one of our distribution platform partners were to limit or discontinue the distribution of our Apps on their platform, it could adversely affect our business, financial condition, and results of operations.

We also rely on the continued popularity, user adoption, and functionality of third-party platforms. In the past, some of these platform providers have been unavailable for short periods of time or experienced issues with their in-app purchasing functionality. In addition, third-party platforms also impose certain file size limitations, which may limit the ability of users to download some of our larger Apps in over-the-air updates. Aside from these over-the-air file size limitations, a larger game file size could cause users to delete our mobile games once the file size grows beyond the capacity of their devices’ storage limitations or could reduce the number of downloads of these mobile games.

If issues arise with third-party platforms that impact the visibility or availability of our Apps, our users’ ability to access our Apps or our ability to monetize our Apps, or otherwise impact the design or effectiveness of our Software, our business, financial condition, and results of operations could be adversely affected.

Our revenue has been concentrated in various ways and the loss of, or a significant reduction in, any such revenue source, or our failure to successfully expand and diversify our revenue sources could adversely affect our business, financial condition, and results of operations.

We have historically experienced revenue concentration with respect to certain Apps as well as other facets of our business. Our future success depends, in part, on launching or acquiring and successfully monetizing additional Apps and on establishing and maintaining successful relationships with a diverse set of business clients. While our Apps consist of over 200 mobile games, currently a limited number of those are responsible for a significant portion of our revenue. In 2020, two games, Matchington Mansion and Wordscapes, collectively represented approximately 31% of our revenue. The loss or failure to successfully monetize one of these Apps could have a significant impact on our results of operation. Similarly, our future success depends, in part, on the ability of our Owned Studios and Partner Studios to launch and monetize additional mobile games and other mobile apps, as well as, on our ability to successfully acquire and monetize additional mobile games and other mobile apps, and these Apps may not successfully diversify our revenue concentration. If we are unable to successfully launch or acquire new Apps, our reliance on a limited number of Apps may increase. Additionally, certain genres of games typically rely on only a small portion of their total users for a significant amount of their revenue, and as we expand our number of Apps in these genres, such as mid-core, we may experience these effects and need to attract, engage, and increase the spending levels of these particular users to achieve success.

More generally, we face concentration risk in that our Software and Apps operate in the mobile app ecosystem and specifically mobile gaming. As such, our business depends, in part, on the continued health and growth of these app ecosystems. Further, a significant amount of our total revenue is derived through a limited number of third-party distribution platforms, such as the Apple App Store, the Google Play Store, and Facebook. Because Facebook and Google are also significant partners of Adjust, following the closing of that acquisition, a deterioration in our or Adjust’s relationship with such companies would have a greater impact on our business, financial condition, and results of operations. If any of these concentrated portions of our revenue are harmed or are lost, our business, financial condition, and results of operations could be adversely affected.

 

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We have experienced recent rapid growth, which may not be indicative of our future growth. We may be unable to effectively manage the growth of our business, which could adversely affect our business, financial condition, and results of operations.

We have experienced rapid growth in the scale, scope, and complexity of our business. For example, while we only launched our Apps in 2018, today, our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by twelve studios. Our growth in any prior period should not be relied upon as an indication of our future performance, as we may not be able to sustain our growth rate in the future. Even if our revenue continues to increase, we expect that our revenue growth rate may decline in the future as a result of a variety of factors, including because of more difficult comparisons to prior periods and the saturation of the market. The overall growth of our revenue depends in part on our ability to execute on our growth strategies.

Additionally, the growth and expansion of our business has placed and continues to place a significant strain on our management, operations, financial infrastructure, and corporate culture. Our future success depends in part on our ability to manage this expanded business and to continue to grow both our Software and Apps. If not managed effectively, this growth could result in the over-extension of our management systems and information technology systems and our internal controls and procedures may not be adequate to support this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand and reputation and adversely affect our business, financial condition, and results of operations.

Our future growth may involve expansion into new business opportunities, and any efforts to do so that are unsuccessful or are not cost-effective could adversely affect our business, financial condition, and results of operations.

In the past, we have grown by expanding our offerings into new business opportunities and we expect to continue to do so. We have dedicated resources to expanding into adjacent business opportunities in which large competitors have an established presence, as was the case with our Apps. Additionally, our future growth may include expansion into additional genres of mobile games or into other mobile app sectors, which may require significant investment in order to launch and which may not be prove successful. Our future growth depends in part on our ability to correctly identify areas of investment and to cost-effectively execute on our plans. We have in the past and may in the future expend significant resources in connection with strategic acquisitions and partnerships to expand into new business opportunities. Even if successful, the growth of any new business opportunity could create significant challenges for our management and operational resources and could require considerable investment. The deployment of significant resources towards a new opportunity that proves unsuccessful, or our inability to choose the correct investment opportunities for our future, could adversely affect our business, financial condition, and results of operations.

Our international operations are subject to increased challenges and risks.

We expect to continue to expand our international operations in the future by opening new offices, entering into strategic partnerships with new international game studios, acquiring companies that may have international operations, and providing our Apps in additional countries and languages. For example, our Owned Studios and Partner Studios are located throughout the world, including in areas with less certain legal and regulatory regimes or more potential risks, such as China and Vietnam. Expanding our international operations may subject us to risks associated with:

 

  

recruiting and retaining talented and capable management and employees in foreign countries;

 

  

the diversion of senior management attention;

 

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challenges caused by distance, language, and cultural differences;

 

  

developing and customizing Software and Apps that appeal to the tastes and preferences of users in international markets;

 

  

the inability to offer certain Software or Apps in certain foreign countries;

 

  

competition from local mobile app developers with intellectual property rights and significant market share in those markets and with a better understanding of user preferences;

 

  

utilizing, protecting, defending, and enforcing our intellectual property rights;

 

  

negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights;

 

  

the inability to extend proprietary rights in our brand, content, or technology into new jurisdictions;

 

  

implementing alternative payment methods for features and virtual goods in a manner that complies with local laws and practices and protects us from fraud;

 

  

compliance with applicable foreign laws and regulations, including anti-bribery laws, privacy laws, and laws relating to content and consumer protection (for example, the United Kingdom’s Office of Fair Trading’s 2014 principles relating to IAPs in free-to-play games that are directed toward children 16 and under);

 

  

credit risk and higher levels of payment fraud;

 

  

currency exchange rate fluctuations;

 

  

protectionist laws and business practices that favor local businesses in certain countries;

 

  

double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws in the United States or the foreign jurisdictions in which we operate;

 

  

political, economic, and social instability;

 

  

public health crises, such as the COVID-19 pandemic, which can result in varying impacts to our employees, clients, users, advertisers, app developers, and business partners internationally;

 

  

higher costs associated with doing business internationally, including costs related to local advisors;

 

  

export or import regulations; and

 

  

trade and tariff restrictions.

Our ability to successfully gain market acceptance in any particular international market is uncertain and, in the past, we have experienced difficulties and have not been successful in all the countries we have entered. If we are unable to continue to expand internationally or manage the complexity of our global operations successfully, our business, financial condition, and results of operations could be adversely affected.

Our business depends in part on our ability to increase in-app purchases, manage the economies in our Apps and respond to changes with respect to in-app purchases, and any failure to do so could adversely affect our business, financial condition, and results of operations.

Our business and future growth depend in part on our ability to increase the amount of IAPs in our Apps, which requires our studios to effectively design mobile games and other apps that create

 

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features and virtual goods for which users will pay. Users make IAPs because of the perceived in-app value of virtual goods, which is dependent on the relative ease of obtaining an equivalent good by playing our mobile games. The perceived in-app value of these virtual goods can be impacted by various actions that we take in the mobile games including offering discounts for virtual goods, giving away virtual goods in promotions, or providing easier non-paid means to secure these goods. Managing virtual economies is difficult and relies on our assumptions and judgement. Further, changes in user preferences, including with respect to how they interact with mobile apps and general views towards IAPs, could decrease levels of spending on IAPs on our Apps and in the mobile app ecosystem generally. If we fail to manage our virtual economies properly or fail to promptly and successfully respond to any disruption in such economies, our reputation may be harmed and our users may be less likely to play our mobile games and to purchase virtual goods from us in the future, which could adversely affect our business, financial condition, and results of operations.

In addition, changes in the policies of Apple, Google, or other third-party platforms, or changes in accounting policies promulgated by the SEC, and national accounting standards bodies affecting software and virtual goods revenue recognition, could further significantly affect the way we report revenue related to IAPs, which could adversely affect our results of operations. Any changes in user, third-party platform, or regulator views towards IAPs, or any inability by us to respond to changing trends with respect to IAPs, could adversely affect our business, financial condition, and results of operations.

We are highly dependent on our co-founder and chief executive officer, as well as our senior management team, and our business and growth may be adversely affected if we fail to attract, retain, and motivate key personnel.

Our future success depends in significant part on the continued service of our key management and engineering personnel, including our co-founder, CEO, and Chairperson, Adam Foroughi. Our ability to compete and grow depends in part on the efforts and talents of these employees and executives, who are important to our vision, strategic direction, culture, products, and technology. We do not have employment agreements, other than offer letters, with Mr. Foroughi or other members of our senior management team, and we do not maintain key-man insurance for members of our senior management team. The loss of Mr. Foroughi or any other member of our senior management team could cause disruption and adversely affect our business, financial condition, or results of operations.

In addition, our ability to execute our strategy depends in part on our continued ability and the continued ability of our Partner Studios to identify, hire, develop, motivate, and retain highly skilled employees, particularly in the competitive fields of game development, product management, engineering, and data science. We believe that our corporate culture has been an important factor in our ability to hire and retain key employees, and if we are unable to maintain our corporate culture as we grow, we may be unable to foster the innovation, creativity, and teamwork we believe we need to support our growth. While we believe we compete favorably, competition for highly skilled employees is intense, particularly in the San Francisco Bay Area, where our headquarters is located. Interviewing, hiring, and integrating new employees has been and will continue to be particularly challenging during the COVID-19 pandemic. As part of our global remote working plans, throughout the duration of the COVID-19 pandemic, we will devote increased efforts to maintaining our collaborative culture, including through the use of videoconferencing and other online communication and sharing tools, and to monitoring the health, safety, morale, and productivity of our employees, including new employees, as we evaluate the impacts of the COVID-19 pandemic on our business and employees. If we are unable to identify, hire, and retain highly skilled employees, our business, financial condition, and results of operations could be adversely affected.

We have historically hired a number of key personnel and added additional team members working on our Apps through strategic acquisitions and partnerships, and as competition within the mobile app

 

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ecosystem for attractive target companies with a skilled employee base persists and increases, we may incur significant expenses and difficulty in continuing this practice. The loss of talented employees with experience in the assets we acquire could result in significant disruptions to our business and the integration of acquired assets and businesses. If we do not succeed in recruiting, retaining, and motivating these key employees, we may not achieve the anticipated results of acquisitions.

Security breaches, improper access to or disclosure of our data or user data, other hacking and phishing attacks on our systems, or other cyber incidents could harm our reputation and adversely affect our business.

The mobile app ecosystem is prone to cyberattacks by third parties seeking unauthorized access to our data or the data of our clients or users or to disrupt our ability to provide service. Our Platform and Apps involve the collection, storage, processing, and transmission of a large amount of data, including personal information. We also store and implement measures designed to secure the source code for our Platform and Apps as they are created. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data, including source code, or user data, including personal information, content, or payment information from users, or information from business clients, could result in the unauthorized loss, modification, disclosure, destruction, or other misuse of such data, which could adversely affect our business and reputation, damage our operations, result in litigation or regulatory enforcement action, and diminish our competitive position. In particular, a breach, whether physical, electronic, or otherwise, of the systems on which such source code and other sensitive data are stored could lead to damage or piracy of our offerings, lost or reduced ability to protect our intellectual property, and diminished competitive position.

Computer malware, viruses, social engineering (predominantly spear phishing attacks or credential stuffing), and general hacking have become more prevalent in the mobile app ecosystem. These have occurred on our systems and otherwise in our business in the past, and we expect will continue to occur in the future. We regularly encounter attempts to create false or undesirable user accounts or take other actions for purposes such as spamming or other objectionable ends. Such breaches and attacks may cause interruptions to the services we provide, degrade the user experience, cause clients or users to lose confidence and trust in our Platform or Apps, impair our internal systems and other systems and networks used in our business, or adversely affect our financial condition. Our efforts to protect our data, user data, and information from clients and partners, and to disable undesirable activities on our Platform or Apps, may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, vendor, or partner error or malfeasance, including defects or vulnerabilities in information technology systems or offerings; breaches of physical security of our facilities or technical infrastructure; or other threats that evolve.

In addition, some developers or other business partners, such as those that help us measure the effectiveness of advertisements, may receive or store information provided by us or by our users through mobile or web apps. We provide limited information to such third parties based on the scope of services provided to us. These third parties may misappropriate our information and engage in unauthorized use of it. If these third parties fail to adopt or adhere to adequate data security practices, or experience a breach of their networks, our data or our users’ data may be improperly accessed, used, or disclosed. In such an event, we may have increased costs arising from the restoration or implementation of additional security measures which could adversely affect our business and results of operations. Any theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could also adversely affect our business, competitive position, and results of operations.

Cyberattacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we have developed systems and processes that are designed

 

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to protect our data, user data, and information from our partners; to prevent data loss, disable undesirable accounts and activities on our Platform or Apps; and to prevent and detect security breaches; we cannot assure you that such measures will provide comprehensive security, that we will be able to identify breaches or to react to them in a timely manner or that our remediation efforts will be successful. We experience cyberattacks and other security incidents of varying degrees from time to time, and we may incur significant costs in investigating, protecting against, litigating, or remediating such incidents. We may face increased risks of cyberattacks and other security incidents during the COVID-19 pandemic as a result of more employees working remotely, our use of third-party systems designed to enable the transition to a remote workforce introducing security risks and increased cyberattacks, such as phishing attacks by threat actors using the attention placed on the COVID-19 pandemic as a method for targeting personnel.

In addition to our efforts to mitigate cybersecurity risks, we are making significant investments in privacy, safety, security, and content review efforts to combat misuse of our services and user data by third parties. As a result of these efforts, we anticipate that we will discover incidents of misuse of user data or other undesirable activity by third parties. We may not discover all such incidents or activity, whether as a result of our data limitations, the scale of activity on our Platform, challenges related to our personnel working remotely during the COVID-19 pandemic, the re-allocation of resources to other projects, or other factors, and we may be notified of such incidents or activity by users, the media, or other third parties. Such incidents and activities have in the past, and may in the future, include the use of user data or our systems in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, improper advertising practices, activities that threaten people’s safety on- or offline or instances of spamming, scraping, data harvesting, or unsecured datasets. We may also be unsuccessful in our efforts to enforce our policies or otherwise remediate any such incidents. Any of the foregoing developments could adversely affect user trust and engagement, harm our brand and reputation, require us to change our business practices, and adversely affect our business and results of operations.

We are subject to a variety of laws and regulations in the United States and abroad relating to cybersecurity and data protection, a number of which also provide a private right of action. Affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper access to or disclosure of data, which has occurred in the past and which could cause us to incur significant expense and liability, distract management and technical personnel, and result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could adversely affect our reputation, business, financial condition, or results of operations.

We anticipate increasing our operating expenses in the future, and we may not be able to achieve or maintain our profitability in any given period. If we cannot achieve or maintain our profitability, our business could be adversely affected.

Although our cash flow from operations was positive in 2018, 2019, and 2020, we incurred a net loss of $125.9 million in 2020 and we may not always achieve sufficient revenue or manage our expenses in order to achieve positive cash flow from operations or profitability in any given period. Our operating expenses may continue to rise as we implement additional initiatives designed to increase revenue, potentially including: developing our Platform and technology stack, expanding our Software, launching Apps, strategic acquisitions and partnerships, business client and user acquisition spending, international expansion, hiring additional employees, and taking other steps to strengthen and grow our company. We are likely to recognize costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. We also anticipate that the costs of acquiring new business clients and mobile app

 

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users, and otherwise marketing our Software and Apps, will continue to rise. Further, we may continue to incur significant costs in connection with strategic acquisitions and partnerships, which costs may increase or become more concentrated to the extent we enter into larger transactions. If we are not able to maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all, and which may be dilutive to our stockholders. If we are unable to generate adequate revenue growth and manage our expenses, we may incur significant losses in the future and may not be able to maintain positive cash flow from operations or profitability.

Our Platform and Apps, as well as our internal systems, rely on software and hardware that is highly technical, and any errors, bugs, or vulnerabilities in these systems, or failures to address or mitigate technical limitations in our systems, could adversely affect our business, financial condition, and results of operations.

Our Platform and Apps, as well as our internal systems, rely on software and hardware that is highly technical and complex. In addition, our Platform and Apps, as well as our internal systems, depend in part on the ability of such software and hardware to store, retrieve, process, and manage immense amounts of data. The software and hardware on which we rely has contained, and will in the future contain, errors, bugs, or vulnerabilities and our systems are subject to certain technical limitations that may compromise our ability to meet our objectives. Some errors, bugs, or vulnerabilities inherently may be difficult to detect and may only be discovered after the code has been released for external or internal use. Errors, bugs, vulnerabilities, design defects, or technical limitations within the software and hardware on which we rely have in the past led to, and may in the future lead to, outcomes including a negative experience for clients and users who use our offerings, compromised ability of our offerings to perform in a manner consistent with our terms, contracts, or policies, delayed product or App launches or enhancements, targeting, measurement, or billing errors, compromised ability to protect the data of our users and/or our intellectual property, or reductions in our ability to provide some or all of our services. To the extent such errors, bugs, vulnerabilities, or defects impact our Software or the accuracy of data in any such Software, our clients may become dissatisfied with our offerings, our brand and reputation may be harmed, and we may make operational decisions, such as with respect to our Apps using such Software or any future strategic acquisition, that are based on inaccurate data. Any errors, bugs, vulnerabilities, or defects in our systems or the software and hardware on which we rely, failures to properly address or mitigate the technical limitations in our systems, or associated degradations or interruptions of service or failures to fulfill our commitments to our clients may lead to outcomes including damage to our reputation, increased product engineering expenses, regulatory inquiries, litigation, or liability for fines, damages, or other remedies, any of which could adversely affect our business, financial condition, and results of operations.

Our business depends in part on our ability to maintain and scale our technical infrastructure, and any significant disruption to our Platform or Apps could damage our reputation, result in a potential loss of engagement, and adversely affect our business, financial condition, and results of operations.

Our reputation and ability to attract and retain our business clients and users depends in part on the reliable performance of our Platform and Apps. We have in the past experienced, and may in the future experience, interruptions in the availability or performance of our offerings from time to time. Our systems may not be adequately designed or may not operate with the reliability and redundancy necessary to avoid performance delays or outages that could be harmful to our business. If our offerings are unavailable when users attempt to access them, or if they do not load as quickly as expected, users may not use our offerings as often in the future, or at all, which could adversely affect our business and results of operations. As we continue to grow, we will need an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy our needs and the needs of our business clients and users. It is possible that we may fail to continue to

 

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effectively scale and grow our technical infrastructure to accommodate these increased demands, which may adversely affect our user engagement and revenue growth. Additionally, we rely in part on third-party data centers and cloud hosting infrastructure. Our business may be subject to interruptions, delays, or failures resulting from natural disasters and other events outside of our control that impact us or these third-party providers. If such an event were to occur, users may be subject to service disruptions or outages and we may not be able to recover our technical infrastructure and user data in a timely manner to restart or provide our services. If we fail to efficiently scale and manage our infrastructure, or if events disrupt our infrastructure or those of our third-party providers, our business, financial condition, and results of operations could be adversely affected.

The COVID-19 pandemic and responses thereto across the globe have altered how individuals interact with each other and affected how we and our business partners are operating, and the extent to which this situation will impact our future results of operations remains uncertain.

The ongoing COVID-19 pandemic and resulting social distancing and shelter-in-place orders put in place around the world have caused widespread disruption in global economies, productivity, and financial markets and have altered the way in which we conduct our day-to-day business.

The full extent to which the COVID-19 pandemic and the various responses thereto impact our business, operations, and results of operations will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic, including any potential future waves of the pandemic; governmental, business, and individual actions that have been and continue to be taken in response to the pandemic; the effect on our clients; disruptions or restrictions on our employees’ ability to work and travel; the availability and cost to access the capital markets; and interruptions related to our cloud networking and mobile app infrastructure and that impact our business partners, platform providers, clients, and customer service and support providers. As a result of the COVID-19 pandemic, we have temporarily closed our offices around the world, including our corporate headquarters in Palo Alto, California, and implemented travel restrictions. While substantially all of our business operations can be performed remotely, many of our employees are juggling additional work-related and personal challenges. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, including as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, users, business partners, and stockholders.

In addition to the potential direct impacts to our business, the global economy has been, and is likely to continue to be, significantly weakened as a result of the actions taken in response to the COVID-19 pandemic, and future government intervention remains uncertain. A weakened global economy may negatively impact our business partners as well as our users’ in-app purchasing decisions and users’ buying decisions across the globe generally, which could adversely affect advertiser activity. We may experience heightened levels of variability in the pricing of advertising both in terms of user acquisition and as it relates to our Software and Apps. If these conditions result in significant decreased pricing of advertising, the revenue we make from our Software and advertisers paying to display advertisements in our Apps could be adversely affected, particularly if the levels of user engagement in our Apps are not sufficient to offset these declines, and we may experience increased pressure on our overall margins. If we are not able to respond to and manage the direct and indirect impact of the COVID-19 pandemic on our business, then our business, financial condition, and results of operations could be adversely affected.

Our company culture has contributed to our success and if we cannot maintain this culture as we grow, our business could be harmed.

We believe that our company culture has been critical to our success and will be important for our continued growth. We face a number of challenges that may affect our ability to sustain our corporate

 

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culture, including: failure to identify, attract, reward, and retain people in leadership positions in our organization who share and further our culture and values; the increasing size and geographic diversity of our workforce; competitive pressures to move in directions that may divert us from our culture and values; the continued challenges of a rapidly-evolving industry; the increasing need to develop expertise in new areas of business that affect us; a negative perception of our treatment of employees or our response to employee sentiment related to political or social causes or actions of management; and the integration of new personnel and businesses from acquisitions. If we are not able to maintain our culture, we could lose the innovation, passion, and dedication of our team and as a result, our business, financial condition, and results of operations could be adversely affected.

If we do not successfully or cost-effectively invest in, establish, and maintain awareness of the AppLovin brand, our business, financial condition, and results of operations could be adversely affected.

We believe that establishing and maintaining the AppLovin brand is critical to maintaining and creating favorable relationships with, and our ability to attract, new business clients, particularly Enterprise Clients, and key personnel. Increasing awareness of the AppLovin brand will depend largely upon our marketing efforts and our ability to successfully differentiate our Software from the offerings of our competitors. In addition, successfully globalizing and extending our brand requires significant investment and extensive management time. If we fail to maintain and increase brand awareness and recognition of our Software, our business, financial condition, and results of operations could be adversely affected.

We generally do not have long-term agreements with our business clients.

Our business clients are not required to enter into long-term agreements with us and may choose to stop using our Software at any time. For example, our advertising agreements can be executed in as little as one day and can be terminated for convenience on two days’ notice. In order to continue to grow our Software, we must consistently provide offerings that clients see as valuable and choose to use. If we fail to maintain our relationships with our clients, or if the terms of these relationships become less favorable to us, our results of operations would be harmed. Additionally, as certain of our Enterprise Clients are also our competitors, these clients may choose to invest in their own offerings rather than continue to use our Software. Any failure to maintain our relationships with business clients could adversely affect our business, financial condition, and results of operations.

If our Apps do not meet user expectations, or contain objectionable content, our reputation, business, financial condition, and results of operations could be adversely affected.

Expectations regarding the quality, performance, and integrity of our Apps are high. We must continually adapt to changing user preferences including the popularity of various game categories, style of play, and IAP options. Users may be critical of our Apps, business models, or business practices for a wide variety of reasons, including perceptions about gameplay, fairness, game content, features, or services. Independent industry analysts may publish reviews of our Apps from time to time, as well as those of our competitors, and perception of our Apps in the marketplace may be significantly influenced by these reviews. We have no control over what users or these industry analysts report. If users and industry analysts negatively respond to our Apps or changes that we make to our Apps, or provide negative reviews of our Apps, our reputation, business, financial condition, and results of operations could be adversely affected.

Further, despite reasonable precautions, some users may be offended by certain mobile app content, advertisements displayed in our Apps or by the treatment of other users. For example, if users believe that an advertisement displayed in an App contains objectionable content, we could experience

 

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damage to our brand and reputation and users could refuse to play such game and pressure platform providers to remove the App from their platforms. While such content may violate our terms and we may subsequently remove it, our brand and reputation may nonetheless be harmed and our clients may become dissatisfied with our services. Furthermore, steps that we may take in response to such instances, such as temporarily or permanently shutting off access of a user to our Apps, could adversely affect our business and results of operations. Any failure to meet user expectations or provide our Apps without objectionable content could adversely affect our reputation, business, financial condition, and results of operations.

The proliferation of “cheating” programs and scam offers that seek to exploit our mobile games and users may adversely affect game-playing experiences and lead users to stop playing our mobile games. Our failure to maintain a customer support ecosystem may enhance these risks.

Our users rely on our customer support organization to resolve any issues relating to our mobile games. Customer support is important for satisfying user expectations regarding the quality, performance, and integrity of our mobile games. We currently have limited customer support operations, which we recently acquired through Machine Zone. If we do not effectively train, supplement, and manage our customer support organization to assist our users, and if that support organization does not succeed in helping users quickly resolve issues or provide effective ongoing support, we could experience decreased user engagement and harm to our reputation with potential new users.

Additionally, unrelated third parties have developed, and may continue to develop, “cheating” programs that enable users to exploit vulnerabilities in our mobile games, play them in an automated way, collude to alter the intended game play, or obtain unfair advantages over other users who do play fairly. These programs harm the experience of users who play fairly and may disrupt the virtual economies of our mobile games and reduce the demand for certain IAPs. In addition, unrelated third parties have attempted to scam our users with fake offers for virtual goods or other game benefits. These unauthorized or fraudulent transactions are usually arranged on third-party websites and the virtual goods offered may have been obtained through unauthorized means, such as exploiting vulnerabilities in our mobile games, or may be fraudulent offers. We do not generate any revenue from these transactions. These unauthorized purchases and sales from third-party sellers have in the past and could in the future impede our revenue and profit growth.

There can be no assurance that our customer support and other efforts to detect, prevent, or minimize these unauthorized or fraudulent transactions will be successful, that these actions will not increase over time or that our customer support efforts will be successful in resolving user issues. Any failure to maintain adequate customer support or success of third-party cheating programs or scams may negatively affect game-playing experiences and lead users to stop playing our mobile games, which could adversely affect our business, financial condition, and results of operations.

Our business is subject to economic, market, public health, and geopolitical conditions as well as to natural disasters beyond our control.

Our business is subject to economic, market, public health, and geopolitical conditions, as well as natural disasters beyond our control. Our revenue is driven in part by discretionary consumer spending habits and preferences, and by advertising spending patterns. Historically, consumer purchasing and advertising spending have each declined during economic downturns and periods of uncertainty regarding future economic prospects or when disposable income or consumer lending is lower. General macro-economic conditions, such as a recession or economic slowdown in the United States or internationally, including those resulting from the COVID-19 pandemic and geopolitical issues, could create uncertainty and adversely affect discretionary consumer spending habits and preferences as

 

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well as advertising spending. Uncertain economic conditions may also adversely affect our business clients. As a result, we may be unable to continue to grow in the event of future economic slowdowns. We are particularly susceptible to market conditions and risks associated with the mobile app ecosystem, which also include the popularity, price, and timing of our Apps, changes in user demographics, the availability and popularity of other forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.

Additionally, our principal offices are located in the San Francisco Bay Area, an area known for earthquakes and susceptible to fires, and are thus vulnerable to damage. All of our facilities are also vulnerable to damage from natural or manmade disasters, including power loss, earthquakes, fires, explosions, floods, communications failures, terrorist attacks, contagious disease outbreak (such as the COVID-19 pandemic), and similar events. If any disaster were to occur, our ability to operate our business at our facilities could be impaired and we could incur significant losses, recovery from which may require substantial time and expense.

Risks Related to Legal and Regulatory Matters

We are subject to laws and regulations concerning privacy, information security, data protection, consumer protection, advertising, tracking, targeting, and protection of minors, and these laws and regulations are continually evolving. Our actual or perceived failure to comply with these laws and regulations could adversely affect our business, financial condition, and results of operations.

We receive, store, and process personal information and other user data, and we enable our users to share their personal information with each other and with third parties, including within our Apps. There are numerous federal, state, and local laws around the world regarding privacy and the collection, storing, sharing, use, processing, disclosure, deletion, and protection of personal information and other user data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules.

Various government and consumer agencies have called for new regulation and changes in industry practices and are continuing to review the need for greater regulation for the collection of information concerning consumer behavior on the internet, including regulation aimed at restricting certain targeted advertising practices. For example, the GDPR, which became effective in May 2018, created new individual privacy rights and imposed worldwide obligations on companies processing personal data of European Union users, which has created a greater compliance burden for us and other companies with European users, and subjects violators to substantial monetary penalties. The United Kingdom has implemented legislation that substantially implements the GDPR and which also provides for substantial monetary penalties. With regard to transfers to the United States of personal data (as such term is used in the GDPR and applicable EU member state legislation, and as similarly defined under the proposed ePrivacy Regulation) from our employees and European users and other third parties, we have relied upon the EU-U.S. and Swiss-U.S. Privacy Shield as well as certain standard contractual clauses approved by the EU Commission (the SCCs); however, both the EU-U.S. Privacy Shield and the EU Model Clauses have been subject to legal challenge, and on July 16, 2020, the Court of Justice of the European Union, Europe’s highest court, held in the Schrems II case that the E.U.-U.S. Privacy Shield was invalid, and imposed additional obligations in connection with the use of the SCCs. EU regulators since have issued additional guidance regarding these additional requirements that we and other companies must consider and undertake when using the SCCs. We are in the process of assessing this decision and related guidance and their impact on our data transfer mechanisms. The SCCs and other cross-border data transfer mechanisms may face additional legal challenges or be the subject of additional legislative activity and regulatory guidance. This decision imposes restrictions on the ability to transfer personal data from the European Union and Switzerland

 

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to the United States, and with the exit of the United Kingdom from the EU, we and other companies face additional restrictions on transfers of personal data from the United Kingdom. We and many other companies may need to implement different or additional measures to establish or maintain legitimate means for the transfer and receipt of personal data from the European Economic Area and the United Kingdom to the United States, and we may, in addition to other impacts, experience additional costs associated with increased compliance burdens, and we and our clients face the potential for regulators to apply different standards to the transfer of personal data from the European Economic Area and the United Kingdom to the United States, and to block, or require ad hoc verification of measures taken with respect to, certain data flows from the European Economic Area and the United Kingdom to the United States. We and our clients may face a risk of enforcement actions by data protection authorities in the European Economic Area and the United Kingdom relating to personal data transfers. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel, and adversely affect our business, financial condition, and results of operations. Any of these developments may have an adverse effect on our business.

Another example is the State of California’s passage of the CCPA, which went into effect on January 1, 2020, with implementing regulations taking effect August 14, 2020, and which created new privacy rights for users residing in the state. The California Privacy Rights Act was approved by California voters in November 2020 and will significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. There is also increased attention being given to the collection of data from minors. For instance, COPPA requires companies to obtain parental consent before collecting personal information from children under the age of 13. Compliance with the GDPR, CCPA, COPPA, and similar legal requirements, such as Law no. 13.709/2018 of Brazil, the Lei Geral de Proteção de Dados Pessoais, has required us and will continue to require us to devote significant operational resources and incur significant expenses. Our privacy compliance and oversight efforts will require significant time and attention from our management and board of directors.

Further, children’s privacy has been a focus of recent enforcement activities and subjects our business to potential liability that could adversely affect our business, financial condition, or operating results. Enforcement of COPPA, which requires companies to obtain parental consent before collecting personal information from children under the age of thirteen, has increased in recent years. In addition, the GDPR prohibits certain processing of the personal information of children under the age of thirteen to sixteen (depending on jurisdiction) without parental consent. The CCPA requires companies to obtain the consent of children in California under the age of sixteen (or parental consent for children under the age of thirteen) before selling their personal information. Although we take reasonable efforts to comply with these laws and regulations, we may in the future face claims under COPPA, the GDPR, the CCPA, or other laws relating to children’s privacy.

All of our mobile games are subject to our privacy policy and our terms of service located in application storefronts, within our mobile games, and on our corporate website. We generally comply with industry standards and are subject to the terms of our privacy-related obligations and commitments to users and third parties. We strive to comply with all applicable laws, policies, legal obligations, and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It is also possible that new laws, policies, legal obligations, or industry codes of conduct may be passed, or existing laws, policies, legal obligations, or industry codes of conduct may be interpreted in such a way that could prevent us from being able to offer services to citizens of a certain jurisdiction or may make it costlier or more difficult for us to do so. Any failure or perceived failure by us to comply with laws and regulations concerning privacy, information security, data protection, consumer protection, and protection of minors; our privacy policy and terms of service; our or other privacy-

 

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related obligations to users or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others and could cause our users to lose trust in us, which could adversely affect our business, financial condition, or results of operations. Additionally, if third parties we work with, such as users, developers, vendors, service providers, or other business partners violate applicable laws or our policies, such violations may also put our users’ information at risk and could in turn adversely affect our reputation, business, financial condition, and results of operations.

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing, which could subject us to claims or otherwise adversely affect our business, financial condition, and results of operations.

We are subject to a variety of laws in the United States and abroad that affect our business, including state and federal laws regarding consumer protection, electronic marketing, protection of minors, data protection, and privacy, competition, taxation, intellectual property, money transmission, money laundering, investment screening, export, and national security, which are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. There is a risk that existing or future laws may be interpreted in a manner that is not consistent with our current practices and which could adversely affect our business. As our Platform grows and evolves and our Software and our Apps are used in a greater number of countries, we may also become subject to laws and regulations in additional jurisdictions or other jurisdictions may claim that we are required to comply with their laws and regulations.

With respect to our Apps, we are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as content that depicts violence, the social casino game genre, or loot boxes, many of which are ambiguous or still evolving and could be interpreted in ways that could adversely affect our business or expose us to liability. Some state attorney generals as well as other international regulatory bodies have brought and may continue to bring legal actions against social casino app developers and the third-party distribution platforms for such apps. Further, several jurisdictions have been regulating and continue to regulate the use of loot boxes in mobile games. Loot boxes are a commonly used monetization technique in free-to-play mobile games in which a user can acquire a virtual loot box, typically through mobile game play or by using virtual goods, but the user does not know which virtual good(s) he or she will receive (which may be a common, rare, or extremely rare item, and may be a duplicate of an item the user already has in his or her inventory) until the loot box is opened. The user will always receive one or more virtual goods when he or she opens the loot box, but the user does not know exactly which item(s) until the loot box is opened. In April 2018, each of the Belgian Gaming Commission and the Dutch Gambling Authority declared that loot boxes as implemented in certain games by other companies that they reviewed constituted illegal gambling under each country’s laws. Further, the Federal Trade Commission (the FTC) has examined consumer protection issues related to loot boxes and various other jurisdictions, including certain U.S. states, Australia, and the United Kingdom are reviewing or have indicated that they intend to review the legality of loot boxes and whether they constitute gambling. Additionally, in May 2019, a bill was introduced to the Senate that would prohibit loot boxes and pay-to-win micro-transactions in “minor oriented” games. In some of our mobile games, certain mechanics may be deemed as “loot boxes”. New regulation by the FTC, U.S. states, or other international jurisdictions could require that these game mechanics be modified or removed from games or that such apps be changed entirely, both of which could increase the costs of operating our mobile games, impact user engagement and monetization, or otherwise adversely affect our business. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative

 

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proposals could harm our reputation or otherwise impact the growth of our business. It is difficult to predict how existing or new laws may be applied to these or similar game mechanics or genres. Further, laws or regulations may vary significantly across jurisdictions.

It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere that could restrict the mobile app ecosystem, including user privacy, advertising, communications, taxation, content suitability, copyright, distribution, and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing of IAPs, labeling of free-to-play mobile games, or regulation of currency, banking institutions, unclaimed property or money transmission may be interpreted to cover our mobile games and the virtual currency, goods, or payments that we receive. If that were to occur we may be required to seek licenses, authorizations, or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding these activities may lessen the growth of the mobile app ecosystem. Any costs incurred as a result of adapting to laws and regulations, or as a result of liability in connection therewith, could adversely affect our business, financial condition, and results of operations.

We are subject to the Foreign Corrupt Practices Act, and similar anti-corruption and anti-bribery laws, and non-compliance with such laws could subject us to criminal penalties or significant fines and adversely affect our business and reputation.

We are subject to the Foreign Corrupt Practices Act (the FCPA), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, and similar anti-corruption and anti-bribery laws applicable in the jurisdictions in which we conduct business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years, are interpreted broadly and prohibit companies, their employees, and third party business partners, representatives, and agents from promising, authorizing, making or offering improper payments or other benefits, directly or indirectly, to government officials and others in the private sector in order to influence official action, direct business to any person, gain any improper advantage, or obtain or retain business. As we continue to expand our business internationally, our risks under these laws increase.

We and our third-party business partners, representatives, and agents may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of our employees, third-party business partners, representatives, and agents, even if we do not explicitly authorize such activities. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees, third-party business partners, representatives, and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible and our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.

Any violation of the FCPA or other applicable anti-corruption laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, suspension or disbarment from U.S. government contracts, substantial diversion of management’s attention, significant legal fees and fines, severe criminal or civil sanctions against us,

 

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our officers, or our employees, disgorgement of profits, other sanctions and remedial measures, and prohibitions on the conduct of our business, any of which could adversely affect our reputation, business, financial condition, and results of operations.

We are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in global markets or subject us to liability if we violate the controls.

Our Core Technologies, Software, and Apps may be subject to U.S. export controls. Exports of our products and the underlying technology may require export authorizations, including by license, a license exception, or other appropriate government authorizations, including the filing of an encryption classification request or self-classification report, as applicable.

Furthermore, our activities are subject to U.S. economic sanctions laws and regulations administered by the U.S. Department of Treasury’s Office of Foreign Assets Control that prohibit the shipment of most technologies to embargoed jurisdictions or sanctioned parties without the required export authorizations. If we need to obtain any necessary export license or other authorization for a particular sale, the process may be time-consuming and may result in the delay or loss of opportunities to sell our products.

We take precautions to prevent our products and the underlying technology from being provided, deployed or used in violation of export control and sanctions laws, including implementation of IP address blocking and sanctioned person screening, and are in the process of further enhancing our policies and procedures relating to export control and sanctions compliance. However, we cannot assure you that our policies and procedures relating to export control and sanctions compliance will prevent violations in the future by us or our partners or agents. If we are found to be in violation of U.S. sanctions or export control regulations, including failure to obtain appropriate import, export, or re-export licenses or permits, it can result in significant penalties and government investigations, as well as reputational harm and loss of business. Knowing and willful violations can result in possible incarcerations for responsible employees and managers.

In addition to the United States, various other countries regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our clients’ ability to implement our products in those countries. Changes in our Core Technologies, Software, or Apps, or future changes in export and import regulations may create delays in the introduction of our products and the underlying technology in international markets, prevent our clients with global operations from deploying our products globally, or, in some cases, prevent the export or import of our products to certain countries, governments, or persons altogether. From time to time, various governmental agencies have proposed additional regulation of encryption technology.

Our growth strategy includes further expanding our operations and client and user base in international markets and acquiring companies that may operate in countries where we do not already do business. Such acquisitions may subject us to additional or expanded export regulations. Further, any change in export or import regulations or controls, economic sanctions or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential clients with global operations. Any decreased use of our products or limitation on our ability to export or sell our products in major international markets could adversely affect our business, financial condition, and results of operations.

 

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Changes in tax laws or tax rulings could adversely affect our effective tax rates, business, financial condition, and results of operations.

The tax regimes we are subject to or operate under are unsettled and may be subject to significant change. Changes in tax laws (including in response to the COVID-19 pandemic) or tax rulings, or changes in interpretations of existing laws, could cause us to be subject to additional income-based taxes and non-income taxes (such as payroll, sales, use, value-added, digital tax, net worth, property, and goods and services taxes), which in turn could adversely affect our financial condition and results of operations. For example, in December 2017, the U.S. federal government enacted the tax reform legislation known as the Tax Cuts and Jobs Act (the 2017 Tax Act). The 2017 Tax Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the U.S. corporate tax rate, implementing a partially territorial tax system, and imposing a one-time deemed repatriation tax on certain post-1986 foreign earnings. In addition, many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations. Some of these or other new rules could result in double taxation of our international earnings. Any significant changes to our future effective tax rate could adversely affect our business, financial condition, and results of operations.

We may have exposure to greater than anticipated tax liabilities.

Our income tax obligations are based in part on our corporate operating structure and intercompany arrangements, including the manner in which we develop, value, manage, and use our intellectual property and the valuation of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States and other jurisdictions, are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional tax revenue. Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws. However, the taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could impact our worldwide effective tax rate and adversely affect our financial condition and results of operations. Moreover, changes to our corporate structure and intercompany agreements, including through acquisitions, could impact our worldwide effective tax rate and adversely affect our business, financial condition, and results of operations.

In addition, we are subject to federal, state, and local taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for (benefit from) taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. Our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles, and interpretations, including those relating to income tax nexus, by our earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by challenges to our intercompany relationships and transfer pricing arrangements. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our business, with some changes possibly affecting our tax obligations in future or past years. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.

 

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Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and any such assessments could adversely affect our business, financial condition, and results of operations.

We do not collect sales and use, value added, and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable in certain jurisdictions. Sales and use, value added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable or that our presence in such jurisdictions is sufficient to require us to collect taxes, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, and interest or future requirements may adversely affect our financial condition and results of operations. Further, in June 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state sellers even if those sellers lack any physical presence within the states imposing the sales taxes. Under the Wayfair decision, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after the publication of the Wayfair decision) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state sellers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state sellers on sales that occurred in prior tax years, which could create additional administrative burdens for us, put us at a competitive disadvantage if such states do not impose similar obligations on our competitors, and decrease our future sales, which could adversely affect our business, financial condition, and results of operations.

If we are found liable for content that is distributed through or advertising that is served through our Software or Apps, our business could be adversely affected.

As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, public performance royalties, or other claims based on the nature and content of materials that we distribute. The Digital Millennium Copyright Act (the DMCA) is intended, in part, to limit the liability of eligible service providers for caching, hosting, or linking to user content that includes materials that infringe copyrights or other rights. We rely on the protections provided by the DMCA in conducting our business. Similarly, Section 230 of the Communications Decency Act (Section 230) protects online distribution platforms, such as ours, from actions taken under various laws that might otherwise impose liability on the platform provider for what content creators develop or the actions they take or inspire.

However, the DMCA, Section 230, and similar statutes and doctrines that we may rely on in the future are subject to uncertain judicial interpretation and regulatory and legislative amendments. Future regulatory or legislative changes may ultimately require us to take a more active approach towards content moderation, which could diminish the depth, breadth, and variety of content we offer and, in so doing, reduce our revenue. Moreover, the DMCA and Section 230 provide protections primarily in the United States. If the rules around these statutes and doctrines change, if international jurisdictions refuse to apply similar protections, or if a court were to disagree with our application of those rules to our business, we could incur liability and our business could be adversely affected. If we become liable for these types of claims as a result of the content that is included in our Apps or the advertisements that are served through our Software, then our business may be adversely affected. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could adversely affect our business. Our insurance may not be adequate to cover these types of claims or any liability that may be imposed on us.

In addition, regardless of any legal protections that may limit our liability for the actions of third parties, we may incur significant legal expenses and other costs if copyright holders assert claims, or

 

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commence litigation, alleging copyright infringement against our third-party developers. While we prohibit mobile apps without distribution rights from the copyright holder, and we maintain processes and systems for the reporting and removal of infringing mobile apps, such prohibitions, processes, and systems may not always be successful. If other developers, licensees, platform providers, business partners, and personnel are influenced by the existence of types of claims or proceedings and are deterred from working with us as a consequence, our ability to maintain or expand our business, including through international expansion plans, could be adversely affected.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our business, financial condition, and results of operations.

As a public company, we will incur greater legal, accounting, and other expenses than we incurred as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), and the rules and regulations of the SEC and the Nasdaq listing standards. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. Compliance with these requirements has increased and will continue to increase our legal, accounting, and financial compliance costs and increase demand on our systems, making some activities more time-consuming and costly. We expect these rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. As a public company, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. In addition, as a public company, we may be subject to shareholder activism, which can lead to substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate.

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 will 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, and results of operations could be adversely affected, 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 of directors and adversely affect our business, financial condition, and results of operations.

Legal or regulatory proceedings and settlements could cause us to incur additional expenses or otherwise adversely affect our business, financial condition, and results of operations.

We are involved in or may become involved in claims, suits, government investigations, including formal and informal inquiries from government authorities and regulators, and proceedings arising in the ordinary course of our business, including actions with respect to intellectual property claims, securities claims, privacy, data protection, or law enforcement matters, tax matters, labor and employment claims, commercial and acquisition-related claims, and other matters. We may become the subject of investigations, inquiries, data requests, requests for information, actions, and audits in the United States, Europe, and around the world, particularly in the areas of privacy, data protection, law enforcement, consumer protection, and competition, as we continue to grow and expand our operations. In addition, we are currently, and may in the future be, subject to regulatory orders or

 

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consent decrees. For example, data protection, competition, and consumer protection authorities in the European Union have initiated actions, investigations, or administrative orders seeking to restrict the ways in which we collect and use information, or impose sanctions, and other authorities may do the same.

Any such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of their outcomes, such legal or regulatory proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel attention, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in substantial costs, civil and criminal liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products or services, or requiring a change in our business practices, products or technologies, which could adversely affect our reputation, business, financial condition, and results of operations.

Risks Related to Our Intellectual Property

Many of our products and services contain open source software, and we license some of our software through open source projects, which may pose particular risks to our proprietary software, products, and services in a manner that could adversely affect our business, financial condition, and results of operations.

We use open source software in our Core Technologies, Software, and Apps and expect to continue to use open source software in the future. In addition, we contribute software source code to open source projects under open source licenses or release internal software projects under open source licenses, and anticipate continuing to do so in the future. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, under some open source licenses, if we combine our proprietary software with open source software in a certain manner, third parties may claim ownership of, a license to, or demand release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code. Such third parties may also seek to enforce the terms of the applicable open source license through litigation which, if successful, could require us to make our proprietary software source code freely available, purchase a costly license, or cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. In addition to risks related to open source license requirements, use of certain open source software may pose greater risks than use of third-party commercial software, since open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could adversely affect our business, financial condition, and results of operations.

Our ability to acquire and maintain licenses to intellectual property may affect our business, financial condition, and results of operations. Competition for these licenses may make them more expensive and increase our costs.

While most of the intellectual property we use in our Core Technologies, Software, and Apps is created by us, from time to time, we also acquire rights to third-party intellectual property. Proprietary licenses may limit our use of intellectual property to specific uses and for specific time periods, require time and attention of licensors in providing guidance and related approvals, and include other contractual obligations with which we must comply. Additionally, competition for these licenses is

 

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intense and often results in increased advances, minimum payment guarantees, and royalties to the licensor, and as such we may be unable to identify suitable licensing targets or complete licensing arrangements. If we are unable to obtain and remain in compliance with the terms of these licenses or obtain additional licenses on reasonable economic terms, our business and results of operations could be adversely affected. Further, if the mix of IAPs shifts toward mobile games in which we use licensed intellectual property or if we develop additional Apps that require licensing of third-party intellectual property, our overall margins may be reduced due to royalty obligations.

In addition, many of our Apps are built on proprietary source code of third parties, such as Unity Software. Unity Software offers certain solutions that may compete with our offerings. If we are unable to renew licenses to proprietary source code underlying our mobile games, or the terms and conditions of these licenses change at the time of renewal, our business, financial condition, and results of operations could be adversely affected. We rely on third parties, including Unity, to maintain versions of their proprietary engines that allow us to distribute our mobile games on multiple platforms. If a third party from whom we license source code discontinues support for one or more of these platforms, our business, financial condition, and results of operations could be adversely affected.

Failure to protect or enforce our proprietary and intellectual property rights or the costs involved in such enforcement could adversely affect our business, financial condition, and results of operations.

We regard our Core Technologies, Software, and Apps and related source code as proprietary and rely on a variety of methods, including a combination of copyright, patent, trademark, and trade secret laws and employee and third-party non-disclosure agreements, to protect our proprietary rights. We view the protection of our trade secrets, copyrights, trademarks, service marks, trade dress, domain names, patents, and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state, and common law rights, as well as contractual restrictions and business practices. We also enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and business practices may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.

We own or license, and pursue the registration of, copyrights, trademarks, service marks, domain names, and patents in the United States and in certain locations outside the United States. This process can be expensive and time-consuming, may not always be successful depending on local laws or other circumstances, and we also may choose not to pursue registrations in every location depending on the nature of the project to which the intellectual property rights pertain. We may, over time, increase our investments in protecting our creative works.

We are aware that some unauthorized copying of our Apps occurs, and if a significantly greater amount of unauthorized copying of our Apps were to occur, it could adversely affect our business. In addition, even if authorized copying of our Apps occurs, third-party platforms may not remove infringing material. We also cannot be certain that existing intellectual property laws will provide adequate protection for our products in connection with emerging technologies. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity, and diversion of management and technical resources. If we fail to maintain, protect, and enhance our intellectual property rights, our business, financial condition, and results of operations could be adversely affected.

 

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We are, and may in the future be, subject to intellectual property disputes, which are costly to defend and could require us to pay significant damages and could limit our ability to use certain technologies in the future.

From time to time, we have faced, and we may face in the future, allegations that we have infringed the trademarks, copyrights, patents, and other intellectual property rights of third parties, including from our competitors, non-practicing entities and former employers of our personnel. Intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement, we may be obligated to alter our Platform or Apps, in a particular geographic region or worldwide, pay royalties or significant settlement costs, purchase licenses, or develop substitutes.

In certain of our agreements we also indemnify our licensees and other business partners. We may incur significant expenses defending these business partners if they are sued for intellectual property infringement based on allegations related to our technology. If a business partner were to lose a lawsuit and in turn seek indemnification from us, we also could be subject to significant monetary liabilities. In addition, because our Core Technologies, Software, and Apps often involve the use of third-party technology, this increases our exposure to litigation in circumstances where there is a claim of infringement asserted against one of our mobile games or other products and services in question, even if the claim does not pertain to our technology.

Risks Related to Financial and Accounting Matters

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of the applicable Nasdaq listing standards. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting, which includes hiring additional accounting and financial personnel to implement such processes and controls.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improved controls and systems do not perform as expected, we may experience further deficiencies in our controls.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, to the extent we acquire other businesses, the acquired company may not have a sufficiently robust system of controls and we may discover deficiencies. Any

 

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failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could adversely affect our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely cause the market price of our Class A common stock to decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Global Select Market. Prior to this offering, we were not required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and were therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could adversely affect our business, financial condition, and results of operations and could cause the market price of our Class A common stock to decline.

Our results of operations could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.

Our reported results of operations are impacted by the accounting standards promulgated by the SEC and accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. A change in accounting standards could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. The frequency of accounting standards changes could accelerate, including conversion to unified international accounting standards. Accounting standards affecting revenue recognition have affected, and could further significantly affect, the way we account for revenue. Any future changes to accounting standards may cause our results of operations to fluctuate. For example, if the accounting standards for revenue derived from free-to-play mobile games were to change, particularly with respect to revenue generated from digital storefronts, our results of operations could be adversely affected.

Further, although we believe our estimates are reasonable based on available user information, we may revise such estimates in the future in the event our users’ average playing period changes. Any adjustments arising from changes in the estimates of the lives of these virtual goods would be applied to the current quarter and prospectively on the basis that such changes are caused by new information indicating a change in the user behavior patterns of our users. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards could adversely our results of operations.

 

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We rely on assumptions, estimates and unaudited financial information to calculate certain of our key metrics and other figures presented herein, and real or perceived inaccuracies in such metrics could adversely affect our reputation and our business.

Certain of the metrics presented herein are calculated using internal company data that has not been independently verified, data from third-party attribution partners, or unaudited financial information of companies that we have acquired or partnered with. While these metrics and figures are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring these metrics and figures across our worldwide client base and user base. Additionally, certain figures relating to our strategic acquisitions and partnerships are based on unaudited financial information that has been prepared by the management of such companies and has not been independently reviewed or audited. We cannot assure you that such financial information would not be materially different if such information was independently reviewed or audited. We regularly review and may adjust our processes for calculating our metrics and other figures to improve their accuracy, but these efforts may not prove successful and we may discover material inaccuracies. In addition, our methodology for calculating these metrics may differ from the methodology used by other companies to calculate similar metrics and figures. We may also discover unexpected errors in the data that we are using that resulted from technical or other errors. If we determine that any of our metrics or figures are not accurate, we may be required to revise or cease reporting such metrics or figures. Any real or perceived inaccuracies in our metrics and other figures could harm our reputation and adversely affect our business.

Conversion of key internal systems and processes, particularly our enterprise resource planning system, and problems with the design, implementation, or operation of these systems and processes could interfere with, and therefore adversely affect, our business and operations.

We converted certain key internal business systems and processes, including our enterprise resource planning, system to a cloud-based system. We have invested, and will continue to invest, significant capital and human resources in the design, implementation, and operation of these business systems and processes. Any problems in the functioning of these systems or processes, particularly any that impact our operations, could adversely affect our ability to process payments, record and transfer information in a timely and accurate manner, recognize revenue, file SEC reports in a timely manner, or otherwise run our business and could adversely affect our business, financial condition, and results of operations.

We may be required to record a significant charge to earnings if our goodwill becomes impaired.

We are required under GAAP to review our goodwill for impairment at least annually or more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating a requirement to reevaluate whether our goodwill continues to be recoverable, include a significant decline in the market price of our Class A common stock and our market capitalization, slower growth rates in our industry, or other materially adverse events. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined.

We have substantial indebtedness under our senior secured credit facilities and our obligations thereunder may limit our operational flexibility or otherwise adversely affect our business, financial condition, and results of operations.

We are party to a credit agreement that provides for senior secured credit consisting of term loans and a revolving credit facility, which are scheduled to mature in 2025. As of December 31, 2020, the aggregate principal amount of our outstanding indebtedness under our credit facilities was

 

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$1.64 billion, consisting of $1.49 billion in aggregate principal amount of term loans and $150.0 million in aggregate principal amount of borrowings under our revolving credit facility. On February 12, 2021, our credit agreement was amended to, among other things, increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.82 billion, to add an additional $10.0 million in aggregate principal amount of revolving commitments, increasing the total revolving commitments to $600.0 million, and to reduce the interest rate on the incremental term loans issued on May 6, 2020 to have the same interest rate as all other term loans. On March 31, 2021, we borrowed an additional $250.0 million under our revolving credit facility and following such draw down we had an aggregate amount of $400.0 million outstanding under this facility. There can be no assurance that we will be able to repay this indebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all.

Our indebtedness could adversely impact us. For example, these obligations could among other things:

 

  

make it difficult for us to pay other obligations;

 

  

increase our cost of borrowing;

 

  

make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, strategic acquisitions and partnerships, debt service requirements, or other purposes;

 

  

restrict us from making strategic acquisitions and partnerships or cause us to make divestitures or similar transactions;

 

  

adversely affect our liquidity and result in a material adverse effect on our financial condition upon repayment of the indebtedness;

 

  

require us to dedicate a substantial portion of our cash flow from operations to service and repay the indebtedness, reducing the amount of cash flow available for other purposes;

 

  

increase our vulnerability to adverse and economic conditions;

 

  

increase our exposure to interest rate risk from variable rate indebtedness;

 

  

place us at a competitive disadvantage compared to our less leveraged competitors; and

 

  

limit our flexibility in planning for and reacting to changes in our business.

In addition, from time to time we have entered into interest rate swap instruments to limit our exposure to changes in variable interest rates. While our hedging strategy is designed to minimize the impact of increases in interest rates applicable to our variable rate debt, including our credit facility, there can be no guarantee that our hedging strategy will be effective, and we may experience credit-related losses in some circumstances.

Our credit agreement also imposes restrictions on us and requires us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by market, economic, financial, competitive, legislative, and regulatory factors, as well as other factors that are beyond our control. A breach of any of the covenants in the credit agreement governing our credit facilities could result in an event of default, which, if not cured or waived, could trigger acceleration of our indebtedness and an increase in the interest rates applicable to such indebtedness, and may result in the acceleration of or default under any other debt we may incur in the future to which a cross-acceleration or cross-default provision applies. In addition, we have granted a security interest in a significant portion of our assets to secure our obligations under our credit facility. During the existence of an event of default under our credit agreement, the applicable lenders could exercise their rights and remedies thereunder, including by way of initiating foreclosure proceedings against any assets

 

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constituting collateral for our obligations under the credit facility. The acceleration of the indebtedness under our credit agreement or under any other indebtedness could have a material and adverse effect on our business, financial condition, and results of operations. See the section titled “Description of Certain Indebtedness” for additional information.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and results of operations, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, or interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay strategic acquisitions and partnerships, capital expenditures, and payments on account of other obligations, seek additional capital, restructure or refinance our indebtedness, or sell assets. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and could require us to comply with more onerous covenants, which could further restrict our business operations. In addition, we cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all.

If we are unable to repay or otherwise refinance our indebtedness when due, or if any other event of default is not cured or waived, the applicable lenders could accelerate our outstanding obligations or proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the agreements governing our credit facility or the exercise by the applicable lenders of their rights under the security documents could have a material and adverse effect on our business.

We may require additional capital to meet our financial obligations and support business growth, and this capital may not be available on acceptable terms or at all.

We intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop our Platform and Software, enhance our existing Apps and develop new Apps and features, improve our operating infrastructure, or enter into strategic acquisitions and partnerships. Accordingly, we may need to engage in equity, equity-linked, or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could experience significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our Class A common stock. Any debt financing that we secure in the future could involve offering additional security interests and undertaking restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In August 2018, we entered into a credit agreement, which provides for a term loan and revolving credit facility, and we must adhere to financial covenants therein. We may not be able to obtain additional financing on terms favorable to us, if at all. Additionally, if we seek to access additional capital or increase our borrowing, there can be no assurance that financing and credit may be available on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business

 

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growth and to respond to business challenges could be significantly impaired, and our business, financial condition, or results of operations could be adversely affected.

The London Interbank Offered Rate calculation method may change and LIBOR is expected to be phased out after 2021.

Interest on our term loan and revolving credit facility, which are scheduled to mature in 2025, may be calculated based on the London Interbank Offered Rate (LIBOR). On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. We may need to renegotiate our credit facility or incur other indebtedness, and changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, may negatively impact the terms of such renegotiated credit facility or such other indebtedness. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.

Risks Related to Ownership of Our Class A Common Stock and Governance

The multi-class structure of our common stock and the Voting Agreement among the Class B Stockholders will have the effect of concentrating voting power with the Class B Stockholders, which will limit your ability to influence the outcome of matters submitted to our stockholders for approval, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction.

Following this offering, we will have three classes of common stock. Our Class A common stock, which is the stock we are offering by means of this prospectus, has one vote per share, our Class B common stock has 20 votes per share, and our Class C common stock has no voting rights, except as otherwise required by law. Upon the closing of this offering, Adam Foroughi, our co-founder, CEO, and Chairperson; Herald Chen, our President and Chief Financial Officer, and a member of our board of directors; and KKR Denali (collectively with certain affiliates, the Class B Stockholders) will together hold all of the issued and outstanding shares of our Class B common stock. Accordingly, upon the closing of this offering, the Class B Stockholders will collectively hold approximately 93.4% of the voting power of our outstanding capital stock in the aggregate. The Class B Stockholders have entered into the Voting Agreement whereby all Class B common stock held by the Class B Stockholders and their respective permitted entities and permitted transferees will be voted as determined by two of Mr. Foroughi, Mr. Chen, and KKR Denali (one of which must be Mr. Foroughi). As a result, the Class B Stockholders, in particular, Mr. Foroughi, Mr. Chen, and KKR Denali, will be able to determine or significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction. The Class B Stockholders may have interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing, or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company, and might ultimately affect the market price of our Class A common stock.

 

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Future transfers by the holders of Class B common stock will generally result in those shares automatically converting into shares of Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning, transfers among KKR affiliates, or other transfers among the Class B Stockholders. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon certain events specified in our amended and restated certificate of incorporation. We refer to the date on which such final conversion of all outstanding shares of Class B common stock pursuant to the terms of our amended and restated certificate of incorporation occurs as the Final Conversion Date. See the section titled “Description of Capital Stock” for additional information about our multi-class structure.

In addition, because our Class C common stock carries no voting rights (except as otherwise required by law), if we issue Class C common stock in the future, the holders of Class B common stock may be able to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders for a longer period of time than would be the case if we issued Class A common stock rather than Class C common stock in such transactions. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

Following the completion of this offering, we will be considered a “controlled company” within the meaning of the Nasdaq corporate governance requirements, and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

As a result of our multi-class common stock structure and the Voting Agreement among the Class B Stockholders, the Class B Stockholders will collectively hold greater than a majority of the voting power of our outstanding capital stock following the completion of this offering and the Class B Stockholders will have the authority to vote the shares of all Class B common stock, subject to the terms of the Voting Agreement, at their discretion on all matters to be voted upon by stockholders. Therefore, we will be considered a “controlled company” as that term is set forth in the Nasdaq corporate governance requirements. Under these corporate governance requirements, a company in which over 50% of the voting power for the election of directors is held by an individual, a group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

  

the requirement that a majority of its board of directors consist of independent directors;

 

  

the requirement that we have a nominating/corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  

the requirement that we have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

For at least a period following this offering, we intend to utilize certain of these exemptions. As a result, we will not have a majority of independent directors and our compensation committee will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements. In the event that we cease to be a “controlled company” and our Class A common stock continues to be listed on Nasdaq, we will be required to comply with these provisions within the applicable transaction periods.

 

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We cannot predict the effect our multi-class structure may have on the market price of our Class A common stock.

We cannot predict whether our multi-class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multi-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices and in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the multi-class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

There has been no prior public trading market for our Class A common stock, and an active trading market may not develop or be sustained following this offering.

We have been approved to list our Class A common stock on the Nasdaq Global Select Market under the symbol “APP”. However, prior to this offering, there has been no prior public trading market for our Class A common stock. We cannot assure you that an active trading market for our Class A common stock will develop on such exchange or elsewhere or, if developed, that any market will be sustained. The initial public offering price of our Class A common stock was determined through negotiation between us, the selling stockholder, and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following this offering.

The market price of our Class A common stock could be volatile, and you could lose all or part of your investment.

The market price of our Class A common stock following this offering may fluctuate substantially and be higher or lower than the initial public offering price, depending on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock. Factors that could cause fluctuations in the market price of our Class A common stock include the following:

 

  

price and volume fluctuations in the overall stock market from time to time, including fluctuations due to general economic uncertainty or negative market sentiment, in particular related to the COVID-19 pandemic;

 

  

volatility in the market and trading volumes of technology stocks;

 

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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

  

sales of shares of our Class A common stock by us or our stockholders, as well as the anticipation of lock-up releases;

 

  

rumors and market speculation involving us or other companies in our industry;

 

  

failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

  

actual or perceived significant data breaches involving our Platform or Apps;

 

  

the financial or non-financial metric projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

  

third-party data published about us or other mobile gaming companies, whether or not such data accurately reflects actual levels of usage;

 

  

announcements by us or our competitors of new products or services;

 

  

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

  

fluctuations in the trading volume of shares of our Class A common stock or the size of our public float;

 

  

short selling of our Class A common stock or related derivative securities;

 

  

actual or anticipated changes or fluctuations in our results of operations;

 

  

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

 

  

our issuance of shares of our Class A common stock;

 

  

litigation or regulatory action involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

  

developments or disputes concerning our intellectual property or other proprietary rights;

 

  

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

  

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

  

changes in accounting standards, policies, guidelines, interpretations, or principles;

 

  

major catastrophic events in our domestic and foreign markets;

 

  

any significant change in our management; and

 

  

general economic conditions and slow or negative growth of our markets.

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the market price of our Class A common stock could decline for reasons unrelated to our business, financial condition, or results of operations. The market price of our Class A common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired, or the prices that you may obtain for your shares of our Class A common stock.

 

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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If the market price of our Class A common stock is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. Such litigation could adversely affect our business, financial condition, and results of operations.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

You should not rely on an investment in our Class A common stock to provide dividend income. We do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, our credit agreement contains, and any future credit facility or financing we obtain may contain, terms limiting the amount of dividends that may be declared or paid on our Class A common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and applicable contractual restrictions. As a result, stockholders should rely on sales of their Class A common stock after price appreciation as the only way to realize any future gains on their investment.

We have broad discretion over the use of the proceeds from this offering and we may not use them effectively.

We intend to use the proceeds received by us from this offering, net of underwriting discounts and commissions and expenses payable by us, for working capital and other general corporate purposes, as well as the acquisition of, or investment in, complementary products, technologies, solutions, or businesses, although we have no present commitments or agreements to enter into any material acquisitions or investments. Accordingly, our management will have broad discretion in the application of the proceeds from this offering and you will not have the opportunity as part of your investment decision to assess whether the proceeds are being used effectively. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our investments may not yield a favorable return to our investors and may negatively impact the market price of our Class A common stock. The failure by our management to apply these proceeds effectively could adversely affect our business, financial condition, and results of operations.

A substantial portion of the outstanding shares of our Class A common stock after this offering will be restricted from immediate resale, but may be sold in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our Class A common stock.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market after this offering and the perception that these sales could occur may also depress the market price of our Class A common stock. Following the completion of this offering, based on 185,033,746 shares of our Class A common stock outstanding and 150,421,563 shares of our Class B common stock outstanding (after giving effect to the Capital Stock Conversions and the Class B Stock Exchange) as of December 31, 2020, we will have 210,033,746 shares of our Class A common stock and 147,921,563 shares of our Class B common stock outstanding after this offering.

All of our directors and executive officers, and the holders of substantially all of our outstanding equity securities have entered into market standoff agreements with us or have entered into lock-up agreements with the underwriters under which they have agreed or will agree, subject to specific

 

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exceptions, not to sell any of our stock during the period ending 180 days after the date of this prospectus; provided that:

 

  

up to 15% of the shares of common stock (including shares issuable upon exercise of vested options) held as of the date of this prospectus by current and former employees (as such term is defined for purposes of Form S-8), but excluding current executive officers and directors, subject to the lock-up agreements may be sold at the commencement of trading on the first trading day on which our Class A common stock is traded on the Nasdaq Global Select Market (the First Trading Day Release); and

 

  

up to 20% of the shares held as of the date of this prospectus (including shares issuable upon the exercise of options that are scheduled to be vested as of the date that is 90 days thereafter provided, however, the lock-up signatory continues to be a service provider to us through such date) subject to the lock-up agreements may be sold at the commencement of trading on the second trading day after we announce earnings for our second quarter of 2021 (the Earnings-Related Release). The Earnings-Related Release will not occur unless we have announced earnings, either through a major news service or on a Form 8-K, at least five trading days in advance of the date of such earnings announcement. This Earnings-Related Release will not apply to shares owned by any limited liability company, partnership, corporation, trust, or other entity (including, without limitation, any investment fund), unless all of the equity interests and other economic interests in such entity are owned exclusively by lock-up signatory and immediate family members of such lock-up signatory.

To the extent not released on the First Trading Day Release or Earnings-Related Release described above, pursuant to the lock-up agreements, if (i) at least 120 days have elapsed since the date of this prospectus, and (ii) the lock-up period is scheduled to end during or within five trading days prior to a regularly-scheduled blackout period under our insider trading policy, the lock-up period will end 10 trading days prior to the commencement of such blackout period (the Blackout-Related Release); provided that in the event the lock-up period will end during such period, we will notify the representatives of the date of the impending Blackout-Related Release promptly upon our determination of the date of the Blackout-Related Release and in any event at least seven trading days in advance of the date of the Blackout-Related Release, and will announce the date of the expected Blackout-Related Release through a major news service, or on a Form 8-K, at least two trading days in advance of the Blackout-Related Release. In addition, beginning 181 days after the date of this prospectus, the remainder of the shares of our Class A common stock (including shares of Class A common stock issuable upon conversion of Class B common stock) will become eligible for sale in the public market.

If not earlier released, all of our outstanding shares of Class A common stock, other than those sold in this offering which are freely tradable, will become eligible for sale upon expiration of the lock-up period, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. See the section titled “Shares Eligible for Future Sale” for additional information.

Upon completion of this offering, stockholders owning an aggregate of up to 210.9 million shares of our Class A common stock (including shares issuable upon conversion of our Class B common stock and the exercise of certain warrants) will be entitled, under our IRA, to certain demand registration rights. Holders of shares of our Class A common stock issued upon conversion of the convertible securities to be issued in connection with our pending acquisition of Adjust will also be entitled to these rights with respect to such shares. In addition, we intend to file a registration statement to register shares reserved for future issuance under our equity compensation plans and a registration statement to register shares of Class A common stock issued pursuant to our 2011 Plan for resale in connection with the First Trading Day Release. Upon effectiveness of these registration statements, subject to the satisfaction of applicable exercise periods and compliance with the market standoff

 

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agreements and lock-up agreements referred to above, the registered shares, including those issued upon exercise of outstanding stock options, will be available for immediate resale in the United States in the open market.

Sales of our Class A common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.

Although we ceased to be an emerging growth company, we have continued to take advantage of certain reduced disclosure requirements in the registration statement of which this prospectus forms a part, which may make our Class A common stock less attractive to investors.

We ceased to be an emerging growth company, as defined in the JOBS Act, on December 31, 2020. However, because we ceased to be an emerging growth company after we confidentially submitted our draft registration statement related to this offering to the SEC, we will continue to be treated as an emerging growth company for certain purposes until the earlier of the date on which we complete this offering or December 31, 2021. As such, we have continued to take advantage of certain exemptions that allow us to comply with reduced disclosure obligations regarding selected financial data and executive compensation arrangements in the registration statement of which this prospectus forms a part that are not available to non-emerging growth companies. We cannot predict if investors will find our Class A common stock less attractive because we have relied on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be less demand for our Class A common stock and the market price of our Class A common stock may fall.

The issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive plans, or otherwise will dilute all other stockholders.

Our amended and restated certificate of incorporation that will be in effect upon completion of this offering authorizes us to issue up to 1,500,000,000 shares of Class A common stock, up to 150,000,000 shares of Class C common stock, and up to 100,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue shares of Class A common stock or securities convertible into shares of our Class A common stock from time to time in connection with a financing, acquisition, investment, our equity incentive plans, or otherwise. For example, in connection with our pending acquisition of Adjust, we expect to issue convertible securities that are convertible into an aggregate number of shares of our Class A common stock determined by dividing $352.0 million by the volume-weighted average trading price per share of our Class A common stock over any 10 consecutive full trading day period (chosen by the stockholder representative under the share purchase agreement) within 20 trading days commencing with and following the day our Class A common stock is first traded on the Nasdaq Global Select Market. See the section titled “Description of Capital Stock—Adjust Convertible Securities” for additional information. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline.

 

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Our multi-class stock structure, the Voting Agreement, and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our Class A common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult, including the following:

 

  

our multi-class common stock structure and the Voting Agreement, which provide the Class B Stockholders with the ability to determine or significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding common stock;

 

  

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

  

a special meeting of our stockholders will only be able to be called by a majority of our board of directors, the chairperson of our board of directors, our Chief Executive Officer, or our President;

 

  

advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

 

  

our amended and restated certificate of incorporation will not provide for cumulative voting;

 

  

our amended and restated certificate of incorporation will allow stockholders to remove directors only for cause;

 

  

our amended and restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established and shares of which may be issued by our board of directors, without further action by our stockholders;

 

  

after the first date on which the outstanding shares of our Class B common stock represent less than a majority of the total combined voting power of our Class A common stock and our Class B common stock (the Voting Threshold Date), our stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter; and

 

  

certain litigation against us will only be able to be brought in Delaware.

These provisions, alone or together, could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the market price of our Class A common stock.

Our amended and restated bylaws will designate a state or federal court located within the State of Delaware and the federal district courts of the United States as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws, which will become effective immediately prior to the completion of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders,

 

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(iii) any action arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws, or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants, and provided that this exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. However, while the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court are “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our federal forum provision. If the federal forum provision is found to be unenforceable, we may incur additional costs associated with resolving such matters.

Any person or entity purchasing or otherwise acquiring or holding or owning (or continuing to hold or own) any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such claims against us and our current and former directors, officers, stockholders, or other employees. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either exclusive forum provision contained in our amended and restated bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this prospectus include statements about:

 

  

our future financial performance, including our expectations regarding our revenue, cost of revenue, and operating expenses, and our ability to achieve or maintain future profitability;

 

  

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

  

the demand for our Software and Apps;

 

  

our ability to attract and retain business clients and users;

 

  

our ability to develop new products, features, and enhancements for our Core Technologies and Software and to launch or acquire new Apps and successfully monetize them;

 

  

our ability to compete with existing and new competitors in existing and new markets and offerings;

 

  

our ability to successfully acquire and integrate companies and assets and to expand and diversify our operations through strategic acquisitions and partnerships;

 

  

our ability to maintain the security and availability of our Core Technologies, Software, and Apps;

 

  

our expectations regarding the effects of existing and developing laws and regulations, including with respect to taxation and privacy and data protection;

 

  

our ability to manage risk associated with our business;

 

  

our expectations regarding new and evolving markets;

 

  

our ability to develop and protect our brand;

 

  

our expectations and management of future growth;

 

  

our expectations concerning relationships with third parties;

 

  

our ability to attract and retain employees and key personnel;

 

  

our ability to maintain, protect and enhance our intellectual property;

 

  

the increased expenses associated with being a public company; and

 

  

our anticipated uses of net proceeds from this offering.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those

 

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described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, partnerships, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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INDUSTRY, MARKET, AND OTHER DATA

Unless otherwise indicated, estimates and information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity, and market size, are based on industry publications and reports generated by third-party providers, other publicly available studies, and our internal sources and estimates. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, we have not independently verified the accuracy or completeness of the data contained in such sources. The content of, or accessibility through, the below sources and websites, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein and any websites are an inactive textual reference only.

The sources of the statistical data, estimates, and market and industry data contained in this prospectus include App Annie and Sensor Tower, as well as the sources provided below:

 

  

App Annie, The State of Mobile 2019;

 

  

App Annie, The State of Mobile 2020;

 

  

eMarketer, Average US Time Spent with Mobile in 2019 Has Increased, June 2019;

 

  

International Data Corporation, Worldwide Mobile In-Game Advertising Forecast, 2020-2024, December 2020;

 

  

International Data Corporation, Worldwide Mobile and Handheld Gaming Forecast, 2020–2024, March 2020;

 

  

Sensor Tower, The Top 1% of App Publishers Generate 80% of All New App Installs, November 2019;

 

  

Statista, Number of apps available in leading app stores as of 3rd quarter 2020; and

 

  

Statista, Number of available apps in the Apple App Store from 2008 to 2020.

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale by us of shares of our Class A common stock in this offering will be approximately $1.74 billion, based upon the initial public offering price of $80.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of Class A common stock by the selling stockholder.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, facilitate an orderly distribution of shares for the selling stockholder, and enable access to the public equity markets for us and our stockholders.

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We intend to use approximately $400.0 million of the net proceeds from this offering to repay the entire outstanding amount under our revolving credit facility. An affiliate of KKR Capital Markets LLC is a lender under our revolving credit facility. Because KKR Capital Markets LLC is an underwriter for this offering, it is deemed to have a “conflict of interest” within the meaning of FINRA Rule 5121(f)(5). See the section titled “Underwriters (Conflicts of Interest)” for additional information. Additionally, we expect to use a portion of the net proceeds we receive from this offering to enter into strategic acquisitions and partnerships. However, other than our pending acquisition of Adjust, we do not have definitive agreements or commitments for any material acquisitions or partnerships at this time.

We cannot further specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we may invest the net proceeds that we receive in this offering in short-term, investment grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. In addition, the terms of our credit agreement place certain limitations on the amount of cash dividends we can pay, even if no amounts are currently outstanding. See the section titled “Description of Certain Indebtedness” for additional information.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of December 31, 2020 as follows:

 

  

on an actual basis;

 

  

on a pro forma basis, giving effect to (i) the Capital Stock Conversions, as if such conversions had occurred on December 31, 2020, (ii) the filing and effectiveness of our amended and restated certificate of incorporation that will become effective immediately prior to the completion of this offering, (iii) the increase in our senior secured term loan facility by $300.0 million in February 2021, as if such transaction had occurred on December 31, 2020, (iv) the borrowing of an additional $250.0 million under our revolving credit facility in March 2021, as if such transaction had occurred on December 31, 2020 (such transactions in clauses (iii) and (iv), the Recent Debt Transactions), and (v) the Class B Exchange, as if such exchange had occurred on December 31, 2020; and

 

  

on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) the sale and issuance by us of 22,500,000 shares of our Class A common stock in this offering, based upon the initial public offering price of $80.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us (with respect to these offering expenses, $2.7 million had been paid at December 31, 2020 and $0.9 million had been accrued as of December 31, 2020), (iii) the sale by the selling stockholder of 2,500,000 shares of our Class A common stock in this offering (including the conversion of such shares from Class B common stock to Class A common stock in connection with such sale), and (iv) the application of the estimated net proceeds from the offering, as described in the section titled “Use of Proceeds.”

 

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The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes, our unaudited pro forma condensed combined statement of operations, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

   As of December 31, 2020 
   Actual  Pro forma  Pro forma as
adjusted
 
   (in thousands, except for share and per share data) 

Cash and cash equivalents

  $317,235  $863,741  $2,211,326 
  

 

 

  

 

 

  

 

 

 

Long-term debt

  $1,599,200  $2,165,498  $1,765,498 

Stockholders’ equity (deficit):

    

Convertible preferred stock, par value $0.00003 per share: 109,090,908 shares authorized, issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted

   399,589       

Preferred stock, par value $0.00003 per share: no shares authorized, issued, and outstanding, actual; 100,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

          

Class A common stock, par value $0.00003 per share: 386,400,000 shares authorized, 183,800,251 shares issued and outstanding, actual; 1,500,000,000 shares authorized, 185,033,746 shares issued and outstanding, pro forma; and 1,500,000,000 shares authorized, 210,033,746 shares issued and outstanding, pro forma as adjusted

   6   6   6 

Class B common stock, par value $0.00003 per share: no shares authorized, issued, and outstanding, actual; 200,000,000 shares authorized, 150,421,563 shares issued and outstanding, pro forma; and 200,000,000 shares authorized, 147,921,563 shares issued and outstanding, pro forma as adjusted.

      5   5 

Class C common stock, par value $0.00003 per share: no shares authorized, issued, and outstanding, actual; 150,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

          

Class F common stock, par value $0.00003 per share: 43,200,000 shares authorized, 42,564,150 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted

   1       

Additional paid-in capital

   453,655   853,240   2,598,080 

Accumulated other comprehensive loss

   604   604   604 

Accumulated deficit

   (1,012,400  (1,032,192  (1,032,192
  

 

 

  

 

 

  

 

 

 

Total stockholders’ equity (deficit)

   (158,545  (178,337  1,566,503 
  

 

 

  

 

 

  

 

 

 

Total capitalization

  $1,440,655  $1,987,161  $3,332,001 
  

 

 

  

 

 

  

 

 

 

 

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The pro forma and pro forma as adjusted columns in the table above are based on 185,033,746 shares of our Class A common stock, 150,421,563 shares of our Class B common stock, and no shares of our Class C common stock outstanding as of December 31, 2020 (after giving effect to the Capital Stock Conversions and the Class B Stock Exchange), and exclude the following:

 

  

20,867,025 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $6.25 per share;

 

  

254,200 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock granted after December 31, 2020, with a weighted-average exercise price of $27.03 per share;

 

  

7,424,256 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $11.48 per share;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of an outstanding convertible security that was issued in connection with our asset acquisition from Athena FZE;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of convertible securities to be issued in connection with our pending acquisition of Adjust;

 

  

the effect of the transactions described in the section titled “Certain Relationships and Related Party Transactions—Other Transactions;” and

 

  

47,190,000 shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

  

39,000,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Plan, which became effective prior to the completion of this offering;

 

  

390,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Partner Plan, which became effective prior to the completion of this offering; and

 

  

7,800,000 shares of our Class A common stock to be reserved for future issuance under our ESPP, which became effective prior to the completion of this offering.

Our 2021 Plan and ESPP each provides for annual automatic increases in the number of shares of our Class A common stock reserved thereunder, and our 2021 Plan also provides for increases to the number of shares of our Class A common stock that may be granted thereunder based on shares under our 2011 Plan that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations, or are forfeited or otherwise repurchased by us. See the sections titled “Executive Compensation—Employee Benefit and Stock Plans,” “Description of Capital Stock—Adjust Convertible Securities,” and “Description of Capital Stock—Athena Convertible Security” for additional information.

In addition, following the completion of this offering, we may issue up to 2,360,400 shares of Class B common stock in exchange for an equivalent number of shares of Class A common stock (after giving effect to the Capital Stock Conversions) pursuant to the Equity Award Exchange Agreement.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Net tangible book value (deficit) per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our Class A common stock outstanding (not including any shares of our convertible preferred stock). Our historical net tangible deficit as of December 31, 2020 was $(1.5) billion, or $(6.62) per share. Our pro forma net tangible book value as of December 31, 2020 was $(1.5) billion, or $(4.53) per share, based on the total number of shares of our common stock outstanding as of December 31, 2020, after giving effect to the Capital Stock Conversions, the Class B Stock Exchange, the Recent Debt Transactions, and the filing and effectiveness of our amended and restated certificate of incorporation that will become effective immediately prior to the completion of this offering.

After giving effect to the sale of by us of 22,500,000 shares of our Class A common stock in this offering at the initial public offering price of $80.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of estimated net proceeds from the offering, as described in the section titled “Use of Proceeds,” our pro forma as adjusted net tangible book value as of December 31, 2020 would have been $226.4 million, or $0.63 per share. This represents an immediate increase in pro forma net tangible book value of $5.16 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $79.37 per share to investors purchasing shares of our Class A common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Initial public offering price per share

   $80.00 

Historical net tangible deficit per share as of December 31, 2020

  $(6.62 

Increase per share attributable to the pro forma adjustments described above

   2.09  
  

 

 

  

Pro forma net tangible book value per share as of December 31, 2020

   (4.53 

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of Class A common stock in this offering

  $5.16  
  

 

 

  

Pro forma as adjusted net tangible book value per share immediately after this offering

    0.63 
   

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

   $79.37 
   

 

 

 

The following table presents, as of December 31, 2020, after giving effect to the Capital Stock Conversions and the Class B Stock Exchange, the differences between the existing stockholders and the new investors purchasing shares of our Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received by us from the issuance of our Class A common stock, and the average price per share paid or to be paid to us at the initial public offering price of $80.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses:

 

   Shares Purchased  Total Consideration  Average
Price Per
Share
 
   Number   Percent  Amount
(in thousands)
   Percentage 

Existing stockholders

   335,455,309    94 $688,836    28 $2.05 

New investors

   22,500,000    6   1,800,000    72   80.00 
  

 

 

   

 

 

  

 

 

   

 

 

  

Totals

   357,955,309    100 $2,488,836    100 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

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The foregoing table does not reflect any sales by the selling stockholder in this offering. Sales by the selling stockholder in this offering will cause the number of shares held by existing stockholders to be reduced to 332,955,309 shares, or approximately 93.0% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 25,000,000 shares, or approximately 7.0% of the total number of shares of our common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. If the underwriters’ over-allotment is exercised in full, our existing stockholders would own 92.0% and our new investors would own 8.0% of the total number of shares of our Class A common stock and Class B common stock outstanding upon completion of this offering.

The number of shares of our Class A common stock, Class B common stock, and Class C common stock that will be outstanding after this offering is based on 185,033,746 shares of our Class A common stock, 150,421,563 shares of our Class B common stock, and no shares of our Class C common stock outstanding as of December 31, 2020 (after giving effect to the Capital Stock Conversions and the Class B Stock Exchange), and excludes:

 

  

20,867,025 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $6.25 per share;

 

  

254,200 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock granted after December 31, 2020, with a weighted-average exercise price of $27.03 per share;

 

  

7,424,256 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of December 31, 2020, with a weighted-average exercise price of $11.48 per share;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of an outstanding convertible security that was issued in connection with our asset acquisition from Athena FZE;

 

  

any shares of our Class A common stock issuable following this offering upon conversion of convertible securities to be issued in connection with our pending acquisition of Adjust;

 

  

the effect of the transactions described in the section titled “Certain Relationships and Related Party Transactions—Other Transactions;” and

 

  

47,190,000 shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

  

39,000,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Plan, which became effective prior to the completion of this offering;

 

  

390,000 shares of our Class A common stock to be reserved for future issuance under our 2021 Partner Plan, which became effective prior to the completion of this offering; and

 

  

7,800,000 shares of our Class A common stock to be reserved for future issuance under our ESPP, which became effective prior to the completion of this offering.

Our 2021 Plan and ESPP each provides for annual automatic increases in the number of shares of our Class A common stock reserved thereunder, and our 2021 Plan also provides for increases to the number of shares of our Class A common stock that may be granted thereunder based on shares under our 2011 Plan that expire, are tendered to or withheld by us for payment of an exercise price or

 

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for satisfying tax withholding obligations, or are forfeited or otherwise repurchased by us. See the sections titled “Executive Compensation—Employee Benefit and Stock Plans,” “Description of Capital Stock—Adjust Convertible Securities,” and “Description of Capital Stock—Athena Convertible Security” for additional information.

Following the completion of this offering, we expect to issue up to 1.75% of the authorized shares under our 2021 Plan to certain key management, current and acquired company employees, and Partner Studio employees. In addition, we may issue up to 2,360,400 shares of Class B common stock in exchange for an equivalent number of shares of Class A common stock pursuant to the Equity Award Exchange Agreement.

To the extent that any outstanding options to purchase our Class A common stock or warrants are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated statement of operations data for 2019 and 2020 and the selected consolidated balance sheet data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated statement of operations data for 2018 from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated financial and other data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes, and our unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus.

Consolidated Statements of Operations and Comprehensive Income (Loss) Data

 

  Year Ended December 31, 
  2018  2019  2020 
  (in thousands, except for share and per share
amounts)
 

Revenue

 $483,363  $994,104  $1,451,086 

Costs and expenses:

   

Cost of revenue(1)(2)

  53,758   241,274   555,578 

Sales and marketing(1)(2)

  166,799   481,781   627,796 

Research and development(1)

  16,270   44,966   180,652 

General and administrative(1)

  14,854   31,712   66,431 

Lease modification and abandonment of leasehold improvements

        7,851 

Extinguishments of acquisition-related contingent consideration

  (10,763     74,820 
 

 

 

  

 

 

  

 

 

 

Total cost and expenses

  240,918   799,733   1,513,128 
 

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  242,445   194,371   (62,042

Other income (expense):

   

Interest expense and loss on settlement of debt

  (484,644  (73,955  (77,873

Other income (expense), net

  1,940   5,818   4,209 
 

 

 

  

 

 

  

 

 

 

Total other income (expense)

  (482,704  (68,137  (73,664
 

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  (240,259  126,234   (135,706

Provision for (benefit from) for income taxes

  19,736   7,194   (9,772
 

 

 

  

 

 

  

 

 

 

Net income (loss)

  (259,995  119,040   (125,934

(Loss) attributable to noncontrolling interest

        (747
 

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to AppLovin shareholders

  (259,995  119,040   (125,187
 

 

 

  

 

 

  

 

 

 

Less: Income attributable to participating securities

     (42,664   
 

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to common stock—Basic

  (259,995  76,376   (125,187
 

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to common stock—Diluted

 $(259,995 $76,561  $(125,187
 

 

 

  

 

 

  

 

 

 

Net income (loss) per share attributable to common stockholders:(3)

   
 

 

 

  

 

 

  

 

 

 

Basic

 $(1.37 $0.36  $(0.58
 

 

 

  

 

 

  

 

 

 

Diluted

 $(1.37 $0.36  $(0.58
 

 

 

  

 

 

  

 

 

 

Weighted average common shares used to compute net income (loss) per share attributable to common stockholders:(3)

   

Basic

  189,533,630   210,937,147   214,936,545 
 

 

 

  

 

 

  

 

 

 

Diluted

  189,533,630   212,365,429   214,936,545 
 

 

 

  

 

 

  

 

 

 

 

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  Year Ended December 31, 
  2018  2019  2020 
  (in thousands, except for share and per share
amounts)
 

Pro forma net income (loss) per share attributable to common stockholders (unaudited):(3)

   

Basic

   $(0.39
 

 

 

 

Diluted

   $(0.39
 

 

 

 

Pro forma weighted average common shares used to compute net income (loss) per share attributable to common stockholders (unaudited):(3)

   

Basic

    324,102,590 
 

 

 

 

Diluted

    324,102,590 
 

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

   Year Ended December 31, 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $517   $124   $982 

Sales and marketing

   2,582    1,922    10,668 

Research and development

   1,009    5,009    36,852 

General and administrative

   1,357    3,167    13,885 
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $5,465   $10,222   $62,387 
  

 

 

   

 

 

   

 

 

 

 

(2)

Includes amortization expense related to acquired intangibles as follows:

 

   Year Ended December 31, 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $7,932   $74,787   $228,339 

Sales and marketing

   495    7,641    11,587 
  

 

 

   

 

 

   

 

 

 

Total amortization expense related to acquired intangibles

  $8,427   $82,428   $239,926 
  

 

 

   

 

 

   

 

 

 

 

(3)

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical net income (loss) per share and the number of shares used in the computation of the per share amounts. Unaudited pro forma basic net loss per share attributable to common stockholders is computed to give effect to the automatic conversion of all outstanding shares of our preferred stock into 109,090,908 shares of Class A common stock and the automatic conversion of the convertible security issued in connection with a strategic partnership with Athena FZE (see Note 6 to our consolidated financial statements included in this prospectus) into 625,000 shares of common stock at $64.00 per share, which is the initial public offering price per share multiplied by 0.8, weighted for the part of the year when the convertible security was outstanding.

Consolidated Balance Sheet Data

 

   Year Ended December 31, 
   2019  2020 
   (in thousands) 

Cash and cash equivalents

  $396,247  $317,235 

Working capital(1)

   347,346   64,942 

Total assets

   1,202,485   2,154,593 

Total debt

   1,180,584   1,599,200 

Convertible preferred stock

   399,589   399,589 

Accumulated deficit

   (887,213  (1,012,400

Total stockholders’ deficit

   (256,567  (158,545

 

(1)

Working capital is defined as current assets less current liabilities.

 

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Non-GAAP Financial Measures

We review a number of operating and financial metrics, including the following financial measures that were not prepared in accordance with GAAP to evaluate our business. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

 

   Year Ended December 31, 
   2018  2019  2020 
   (in thousands, except percentages) 

Net income (loss)

  $(259,995 $119,040  $(125,934

Adjusted EBITDA

  $        255,618  $        301,197  $        345,495 

Net income (loss) margin

   (53.8)%   12.0  (8.7)% 

Adjusted EBITDA margin

   52.9  30.3  23.8

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a description of Adjusted EBITDA and Adjusted EBTIDA margin and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial and Other Data” and the consolidated financial statements and the related notes, and our unaudited pro forma condensed combined statement of operations included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers. Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Since inception, our platform has driven over six billion mobile app installs for mobile app developers. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Since our founding in 2011, we have been focused on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. Our founders, who are mobile app developers themselves, quickly realized the real impediment to success and growth in the mobile app ecosystem was a discovery and monetization problem—breaking through the congested app stores to efficiently find users and successfully grow their business. Their first-hand experience with these developer challenges led to the development of our infrastructure and software—AppLovin Core Technologies and AppLovin Software. We capitalized on our success and understanding of the mobile app ecosystem by launching AppLovin Apps in 2018. Our Apps now consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by twelve studios.

As an early leader in the mobile app ecosystem, we have achieved significant growth through a number of milestones:

 

  

2011: Designed and built the first generation of our Core Technologies and Software.

 

  

2012: Introduced an early version of AppDiscovery, our marketing Software solution, on Android. We launched AppDiscovery on iOS later that year.

 

  

2014: Expanded internationally with our first office in Europe and have since grown to fourteen offices worldwide.

 

  

2017: Introduced additional developer services and tools offering distributed development and creative services to develop and test ads.

 

  

2018: Launched AppLovin Apps by creating Lion Studios, and then acquired PeopleFun, a mobile games studio; acquired or partnered with more than ten mobile game studios to date.

 

  

2018: Strategically enhanced our Software by acquiring MAX, an in-app bidding platform, which improves monetization on apps.

 

  

2019: Added brand safety features to MAX by acquiring and integrating SafeDK, and augmented MAX through the development of our Compass analytics tool.

 

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2020: Expanded our portfolio of casual mobile games, and also diversified into the mid-core genre through the acquisition of Machine Zone.

 

  

2020: Launched our AXON machine-learning recommendation engine, enhancing the efficacy of our marketing software solution, AppDiscovery.

 

LOGO

Revenue $1,500 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 MILLIONS FOUNDED 2011 SCALED THE BUSINESS, TEAM, AND LARGE SCALE DATA INFRASTRUCTURE LAUNCHED CONTEXTUAL AD NETWORK AppDiscovery 2012 2013 2014 2015 2016 2017 ADDED PUBLISHING AND VERTICALLY INTEGRATED CONTENT AppLovin Apps $483 2018 LAUNCHED MONETIZATION SOLUTIONS MAX $994 2019 NEW ML-BASED RECOMMENDATION ENGINE AXON $1451 2020

Our focus on building a market-leading software platform, coupled with our unique approach to developing and growing our Apps portfolio, has produced a business model characterized by rapid growth and strong cash flow generation. Our revenue has grown at a 76% CAGR from 2016 to 2020. For 2020, our revenue grew 46% year-over-year from 2019, from $994.1 million in 2019 to $1.45 billion in 2020. For 2019, our revenue grew 106% year-over-year from 2018, from $483.4 million in 2018 to $994.1 million in 2019. We generated a net loss of $260.0 million in 2018, net income of $119.0 million in 2019, and a net loss of $125.9 million in 2020. We generated Adjusted EBITDA of $255.6 million, $301.2 million, and $345.5 million in 2018, 2019, and 2020, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $139.0 million, $198.5 million, and $222.9 million in 2018, 2019, and 2020, respectively. This has allowed us to reinvest in our expansion and growth and consummate strategic acquisitions and partnerships. See the section titled “—Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Our Business Model

We collect revenue from two sources—business clients and consumers. In 2020, Business Revenue represented 49% of total revenue and Consumer Revenue represented 51% of total revenue.

Business Revenue

We generate Business Revenue from fees paid by mobile app advertisers, or business clients, that use our Software to grow and monetize their apps. We also collect Business Revenue from business clients that purchase the digital advertising inventory of our portfolio of Apps. We are able to grow our Business Revenue by improving our Software, adding more apps to our Apps portfolio and increasing engagement on our existing Apps.

 

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Business clients include a wide variety of advertisers, from indie developer studios to some of the largest global internet platforms, such as Facebook and Google. While we have nearly 1,400 business clients as of December 31, 2020, the vast majority of our revenue is derived from our Enterprise Clients. See “—Key Metrics” below for additional information on how we calculate Enterprise Clients. Approximately 99% of our 2020 Business Revenue came from our 172 Enterprise Clients as of December 31, 2020. Our Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 118% in 2020.6 We see multiple opportunities to gain new business clients, and to increase spend from existing business clients, as we help them grow their businesses and make them more successful.

Our Software includes AppDiscovery and MAX. Business clients use AppDiscovery to automate, optimize, and manage their user acquisition investments. They set marketing and user growth goals, and AppDiscovery optimizes their ad spend in an effort to achieve their return on advertising spend targets and other marketing objectives. AppDiscovery comprises the vast majority of revenue from our Software. Revenue is generated from our advertisers, typically on a performance-based, cost-per-install basis, and shared with our advertising publishers, typically on a cost per impression model.

Business clients use MAX to optimize purchases of app ad inventory. The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Revenue from MAX is generated based on a percentage of client spend. As more developers move to in-app bidding monetization, we expect growth in the adoption of, and revenue from, MAX.

Business clients that purchase advertising inventory from our Apps are able to target highly relevant users from our diverse and global portfolio of over 200 mobile games. Our clients leverage a broad set of high-performing mobile ad formats, including playable and rewarded video, and are able to match these ads with relevant users resulting in a better return on their advertising spend. By increasing the number of users and their engagement, as well as better matching ads with the appropriate target audience, we are able to increase our revenue from business clients that purchase advertising inventory from our Apps. Revenue from business clients related to our Apps is generated from ads purchased by advertisers, as well as from revenue-sharing agreements between some of our studios and a selection of third-party studios for which they publish and monetize games.

Business Client Case Study: Geisha Tokyo

Geisha Tokyo is an independent game studio located in Japan, focused on casual games. Geisha was struggling to scale and monetize their business, in particular on a global basis, and turned to us for help.

Geisha Tokyo deployed MAX to increase ad revenue in May 2019, and within two weeks, its leading game, Traffic Run, saw a 31% increase in average ad revenue per installation. Geisha Tokyo was then able to reinvest its earnings into AppDiscovery, funding user acquisition campaigns to drive even more users to its game. Traffic Run subsequently reached over two million installs in those first two weeks and became a top 10 free game in the U.S. app store rankings for iPhone. Several weeks after a significant campaign push, Geisha Tokyo reached scale with AppDiscovery on MAX in August 2019. The combined effect of gaining more users and making more with MAX led to a 101% increase in the studio’s daily average ad revenue for Traffic Run when comparing the first two weeks of August to the last two weeks.

 

6 

We measure Net Dollar-Based Retention Rate in 2020 for our Enterprise Clients as current period revenue divided by prior period revenue. Prior period revenue is measured as revenue in 2019 from our Enterprise Clients as of December 31, 2019. Current period revenue is revenue in 2020 from our Enterprise Clients as of December 31, 2020, and excludes revenue from any new Enterprise Clients during 2020.

 

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Given this immediate success, Geisha Tokyo moved its entire portfolio of 78 games to our software by December 2019. With the increased ad revenue across its full portfolio of apps on our Software, Geisha Tokyo’s user acquisition spend on our Software grew by 425% and our revenue from Geisha Tokyo increased by 133% when comparing the month of December 2019 to the month of December 2020.

Consumer Revenue

Consumer Revenue is generated when a user of one of our Apps makes an in-app purchase (IAP). Our Apps are generally free-to-play mobile games and generate Consumer Revenue through IAPs. IAPs consist of virtual goods used to enhance gameplay, accelerate access to certain features or levels, and augment other mobile game progression opportunities for the user. IAPs drive more engagement and better economics from our Apps. The vast majority of our IAP revenue flows through two app stores, Apple App Store and Google Play, which charge us a standard commission on IAPs.

During the three months ended December 31, 2020, we had an average of 2.1 million Monthly Active Payers (MAPs) across our portfolio of Apps. Over that period, we had an Average Revenue Per Monthly Active Payer (ARPMAP) of $41. Leveraging the benefit of our integrated Platform and Apps, we see opportunities to grow our App-related revenue streams by increasing MAPs and expanding ARPMAP within existing games and through new game development, acquisitions and partnerships. See “—Key Metrics” below for additional information on how we calculate MAPs and ARPMAP.

 

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LOGO

Tokyo-based Geisha was struggling to scale and monetize their business on a global basis, so they deployed AppLovin 360° solution. Installs driven in 2M+ ?TUV_VYQ_YGGMU i t ll QP_/#: 0 i t ll (1) WEEK 2 24’_&‘2.1;/‘06 101% 425% 78 games increase daily growth in in their portfolio, ad revenue(1) UA spend(2) moved to AppLovin solutions (1) Increase in average daily ad revenue from first half to second half of August, reflecting full deployment of our Software. (2) Increase in Geisha Tokyo’s UA spend on our Software from December 2019 to December 2020, after moving all games to AppLovin solutions.


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Key Metrics

We review the following key metrics on a regular basis in order to evaluate the health of our business, identify trends affecting our performance, prepare financial projections, and make strategic decisions.

Enterprise Clients. We focus on the number of Enterprise Clients, which are third-party business clients from whom we have collected greater than $125,000 of revenue in the trailing 12 months to a given date. Enterprise Clients generate the vast majority of our Business Revenue and Business Revenue growth. We expect to increase the revenue from Enterprise Clients over time.

Revenue Per Enterprise Client (RPEC). We define RPEC as (i) the total revenue derived from our Enterprise Clients in a twelve-month period, divided by (ii) Enterprise Clients as of the end of that same period. RPEC shows how efficiently we are monetizing each Enterprise Client. We expect to increase RPEC over time as we enhance our Software and Apps.

The following table shows our Enterprise Clients as of December 31, 2018, 2019, and 2020, and our RPEC for 2018, 2019, and 2020.

 

   Year Ended
December 31,
 
   2018   2019   2020 

Enterprise Clients

   192    167    172 

Revenue Per Enterprise Client (in thousands)

  $2,184   $3,515   $4,081 

Monthly Active Payers (MAPs). We define a MAP as a unique mobile device active on one of our Apps in a month that completed at least one IAP during that time period. A consumer who makes IAPs within two separate Apps on the same mobile device in a monthly period will be counted as two MAPs. MAPs for a particular time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution partners. Some of our Apps do not utilize such third-party attribution partners, and therefore our MAPs figure for any period does not capture every user that completed an IAP on our Apps. We estimate that our counted MAPs generated approximately 98% of our Consumer Revenue during the year ended December 31, 2020, and as such, management believes that MAPs are still a useful metric to measure the engagement and monetization potential of our games. We expect to increase our MAPs over time as we increase the number of our Apps and enhance the engagement and monetization of our Apps.

Average Revenue Per Monthly Active Payer (ARPMAP). We define ARPMAP as (i) the total Consumer Revenue derived from our Apps in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP. We expect to increase ARPMAP over time as we enhance the monetization of our Apps.

The following table shows our Monthly Active Payers and Average Revenue Per Monthly Active Payer for 2018, 2019, and 2020.

 

   Year Ended
December 31,
 
   2018   2019   2020 

Monthly Active Payers (millions)

   0.3    1.0    1.5 

Average Revenue Per Monthly Active Payer

  $11   $32   $41 

 

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Non-GAAP Financial Metrics

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA for a particular period as net income (loss) before interest expense and loss on settlement of debt, other (income) expense, net, provision for (benefit from) income taxes, amortization, depreciation and write-offs and as further adjusted for stock-based compensation expense, acquisition-related expense, loss (gain) on extinguishments of acquisition related continent consideration, non-operating foreign exchange losses, lease modification and abandonment of leasehold improvements, and change in the fair value of contingent consideration. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue for the same period.

Adjusted EBITDA and Adjusted EBITDA margin are key measures we use to assess our financial performance and are also used for internal planning and forecasting purposes. We believe Adjusted EBITDA and Adjusted EBITDA margin are helpful to investors, analysts, and other interested parties because they can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, these measures are frequently used by analysts, investors, and other interested parties to evaluate and assess performance. We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and are presented for supplemental informational purposes only and should not be considered as alternatives or substitutes to financial information presented in accordance with GAAP. These measures have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Furthermore, these metrics have certain limitations in that they do not include the impact of certain expenses that are reflected in our consolidated statement of operations that are necessary to run our business. Thus, our Adjusted EBITDA and Adjusted EBITDA margin should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

 

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The following table provides our Adjusted EBITDA and Adjusted EBITDA margin for 2018, 2019, and 2020, and a reconciliation of net income (loss) to Adjusted EBITDA:

 

   Year Ended
December 31,
 
   2018  2019  2020 
   (in thousands, except percentages) 

Net income (loss)

  $(259,995 $119,040  $(125,934

Adjusted as follows:

    

Interest expense and loss on settlement of debt

   484,644   73,955   77,873 

Other (income) expense, net

   (1,940  (5,818  (6,183

Provision for (benefit from) income taxes

   19,736   7,194   (9,772

Amortization, depreciation and write-offs

   16,061   92,806   254,951 

Non-operating foreign exchange losses

         1,210 

Stock-based compensation

   5,465   10,222   62,387 

Acquisition-related expense

   2,410   3,798   7,850 

Loss (gain) on extinguishments of acquisition related contingent consideration

   (10,763     74,820 

Change in the fair value of contingent consideration

         442 

Lease modification and abandonment of leasehold improvements

         7,851 
  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  $255,618  $301,197  $345,495 
  

 

 

  

 

 

  

 

 

 

Net income (loss) margin

   (53.8)%   12.0  (8.7)% 
  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA margin

   52.9  30.3  23.8
  

 

 

  

 

 

  

 

 

 

In 2019 and 2020, our net income (loss) and Adjusted EBITDA included $0.2 million and $62.0 million related to the fair value adjustment of the deferred revenue balance assumed as a result of the acquisitions of SafeDK in 2019 and Machine Zone in 2020.

Factors Affecting Our Performance

We believe that the future success of our business depends on many factors, including the factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to continue to grow profitably while maintaining strong cash flow.

Continue to invest in innovation

We have made, and intend to continue to make, significant investments in our Core Technologies and Software to enhance their effectiveness and value proposition for our business clients. We expect that these investments will require spending on research and development, and acquisitions and partnerships related to technology components and products. We believe investments in our Core Technologies, such as our launch of AXON and acquisition of MAX, will further improve their effectiveness for developers. Our investments will also allow us to enter new mobile app sectors outside of gaming. While our investments in research and development and acquisitions and partnerships may not result in revenue in the near term, we believe these investments position us to increase our revenue over time.

Retain and grow existing business clients

We rely on existing business clients for a significant portion of our revenue. As we improve our Software and Apps, we can attract additional spend from these business clients. Our business clients

 

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include indie studio developers and some of the largest mobile advertising platforms in the world. We believe there is significant room for us to further expand our relationships with these clients and increase their usage of our Software. We have invested in targeted sales and account-based marketing efforts to identify and showcase opportunities to business clients and plan to continue to do so in the future.

In the past, our business clients have generally increased their usage of our Software and Apps, and as a result, growth from existing business clients has been a primary driver of our revenue growth. Our Enterprise Clients had a Net Dollar-Based Retention Rate of approximately 118% in 2020. We must continue to retain our existing business clients and expand their spend with us over time to continue to grow our revenue, increase profitability and drive greater cash flow.

Add new business clients globally

Our future success depends in part on our ability to acquire new business clients. We recently increased our focus on markets outside the United States to serve the needs of business clients globally. In 2020, only 39% of our revenue from business clients was generated from outside of the United States. We believe that the global opportunity is significant and will continue to expand as developers and advertisers outside the United States adopt our Software and advertise on our Apps. We also see opportunities to acquire new business clients outside of mobile gaming, as the capabilities of our Core Technologies and Software are relevant to the broader mobile app ecosystem. We are investing in direct sales, product development, education, and other capabilities to drive increased awareness and adoption of our Software and Apps, which investments may impact our profitability in the near term as we seek further scale. We must continue to acquire new business clients to grow our revenue, increase profitability, and drive greater cash flow.

Optimization, growth, and expansion of our AppLovin Apps

We plan to continue to invest in developing new Apps and enhancing existing Apps. Because our Apps are typically free to download and use, economically acquiring users and monetizing through advertising and IAPs is critical to the future success of our Apps. We plan to launch several new Apps per year, as well as continue to make investments by acquiring and partnering with studios in mobile gaming and other mobile app sectors.

Given our expertise in app marketing, we are able to pursue a highly-optimized and scaled user acquisition investment playbook. For 2020, we invested $627.8 million in sales and marketing, a large percentage of which was invested in user acquisition to grow the number of users engaging with our Apps. We believe the scale, insights, and effective monetization strategies provided through our Software and integrated business model allow us to optimize ad spend across our portfolio of Apps. We also invest in the growth of our Apps by improving in-game monetization, optimizing game economies and in-game conversion, and opt-in business services, such as creative services and localization. We must continue to optimize, grow, and expand our Apps portfolio to grow our revenue, increase profitability, and drive greater cash flow.

Continued execution of strategic acquisitions and partnerships

We intend to continue to make strategic acquisitions and enter into strategic partnerships to grow our portfolio of Apps and add complementary software and tools to our Core Technologies. Since the beginning of 2018, we have invested over $1 billion in 15 strategic acquisitions and partnerships with mobile app developers and for technologies to enhance our Core Technologies. We have been very successful in growing mobile apps that we have added to our Apps portfolio. We estimate that a year after joining our portfolio, Apps we acquired in 2018 and 2019 have increased their quarterly revenue

 

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over 100% on average.7 We have also invested strategically to enhance our Core Technologies. For example, in 2018 we acquired MAX, an in-app bidding platform, which improves monetization on apps.

While we have a strong pipeline of strategic acquisition and partnership opportunities, we believe our future results of operations will be affected by our ability to continue to identify and execute such transactions that are accretive to our growth and profitability.

Growth and structure of the mobile app ecosystem

Our business and results of operations will be impacted by industry factors that drive overall performance of the mobile app ecosystem. The mobile app ecosystem has grown rapidly in recent years. We expect that any acceleration, or slowing, of this growth would affect our business and results of operations. In addition, even if the mobile app ecosystem continues to grow at its current rate, our ability to position ourselves within the market will impact our business and results of operations.

Mobile app developers, including AppLovin, rely on third-party platforms, such as the Apple App Store and Google Play Store, among others, to distribute games, collect payments made for IAPs, and target users with relevant advertising. We expect this to continue for the foreseeable future. These third-party platforms have significant market power and discretion to set platform fees, select which apps to promote, and decide how much consumer information to provide to advertising networks that enable our Platform to target users with personalized and relevant advertising and allocate marketing campaigns in an efficient and cost-effective manner. Any changes made in the policies of third-party platforms could drive rapid change across the mobile app ecosystem. For example, in June 2020, Apple announced a plan to overhaul IDFA, which anonymously profiles users for targeted advertising, as part of a new proposed application tracking transparency framework that, among other things, would require opt-in consent for certain types of tracking. We rely in part on IDFA to provide us with data that helps our Software better market and monetize Apps and to the extent we are unable to utilize IDFA or a similar offering, our Software may not be as effective, and we may not be able to continue to efficiently generate revenue for our Apps.

New tools for developers, industry standards, and platforms may emerge in the future. We believe our focus on the mobile app ecosystem has allowed us to understand the needs of our business clients and our relentless innovation has enabled us to quickly adapt to changes in the industry and pioneer new solutions. We must continue to innovate and stay ahead of developments in the mobile app ecosystem in order for our business to succeed and our results of operations to continue to improve.

Definitive Agreement to Acquire Adjust

In February 2021, we signed a share purchase agreement with Adjust, a leading mobile app attribution, measurement, and analytics company in Germany, which we amended and restated and then further amended in March 2021. We have agreed to acquire all the outstanding shares of Adjust for an estimated purchase price of approximately $1.0 billion, consisting of (i) $598.0 million in cash, subject to certain purchase price adjustments; (ii) convertible securities that are convertible into an aggregate number of shares of our Class A common stock determined by dividing $352.0 million by the volume-weighted average trading price per share of our Class A common stock over any 10 consecutive full trading day period (chosen by the stockholder representative under the share purchase agreement) within 20 trading days commencing with and following the day our Class A common stock is first traded on the Nasdaq Global Select Market; and (iii) the assumption of up to $40.0 million in the aggregate of debt, accrued interest, and fees of Adjust, in each case upon the terms and subject to the conditions of the share purchase agreement. The Adjust acquisition is subject to customary closing conditions and is

 

7 

Based on a comparison of unaudited revenue for such acquired Apps for the three months prior to the acquisition against our revenue from such Apps in the same period in the subsequent year.

 

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expected to close in the second quarter of 2021. The acquisition of Adjust will provide us with a set of strategic SaaS mobile marketing solutions that expand our suite of innovative tools for mobile app developers. Adjust tracks over $11.0 billion of mobile media spend through its platform and has over 500 employees globally.

Certain Summary Consolidated Statement of Profit or Loss and Other Comprehensive income Data

The following table presents certain summary consolidated statement of profit or loss and other comprehensive income data prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board for Adjust for the years ended December 31, 2019 and 2020 (unaudited):

 

   Year Ended December 31, 
   2019   2020 
   (in EUR thousands) 

Revenue

   71,130   85,299 

Total comprehensive income (loss)

   (40,307   (81,329

Impact of COVID-19

The COVID-19 pandemic and resulting social distancing and shelter-in-place orders put in place around the world have caused widespread disruption in global economies, productivity, and financial markets and have altered the way in which we conduct our day-to-day business. As a result of the COVID-19 pandemic we have temporarily closed our offices around the world, including our corporate headquarters in Palo Alto, California, and implemented travel restrictions. Our Software and Apps do not require physical interaction, thus, our ability to meet the needs of our clients and users has not been materially affected. The full impact of the COVID-19 pandemic on the global economy and the extent to which the pandemic may impact our business, financial condition, and results of operations in the future remains uncertain. See the section titled “Risk Factors—The COVID-19 pandemic and responses thereto across the globe have altered how individuals interact with each other and affected how we and our business partners are operating, and the extent to which this situation will impact our future results of operations remains uncertain” for additional information.

Components of Results of Operations

Revenue

We collect Business Revenue from advertisers spending on our Software and Apps. Business Revenue from our Software is generated from our advertisers, typically on a performance-based, cost-per-install basis, then shared with our advertising publishers, typically on a cost per impression model. Business Revenue generated from our Apps comes from advertisers that purchase ad inventory from our diverse portfolio of Apps. Business Revenue from our Apps was 71% of total Business Revenue in 2020.

We generate Consumer Revenue from IAPs made by users within our Apps.

Cost of Revenue and Operating Expenses

Cost of revenue. Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology related intangible assets, and expenses associated with operating our network infrastructure. Third-party payment processing fees relate to

 

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Consumer Revenue. The fees for IAPs are processed and collected by third-party distribution partners. Network operating costs include bandwidth, energy, and other equipment costs related to our co-located data centers and also to costs for third-party cloud service providers. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.

Sales and marketing. Sales and marketing expenses consist primarily of user acquisition costs, other advertising expenses, personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in sales and marketing, and amortization of acquired user-related intangible assets, marketing programs, travel, customer service costs, and allocated facilities and information technology costs.

We plan to continue to invest in sales and marketing to grow our customer base and increase brand awareness. As a result, we expect sales and marketing expenses to increase in absolute dollars. We also expect our sales and marketing expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to grow our customer base and increase brand awareness, and to decrease over the long term as we benefit from greater scale.

Research and development. Research and development expenses consist primarily of product development costs, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in research and development, professional services costs related to development of new apps by third parties, consulting costs, regulatory compliance costs, and allocated facilities and information technology costs.

We plan to continue to invest in research and development to continue to enhance our Core Technologies and Software, and to improve existing games and develop new games. As a result, we expect research and development expenses to increase in absolute dollars. We also expect our research and development expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to enhance our Core Technologies and Software and improve our existing Apps and develop new Apps, and to decrease over the long term as we benefit from greater scale.

General and administrative. General and administrative expenses consist primarily of costs incurred to support our business, including personnel-related expenses for salaries, employee benefits, and stock-based compensation for employees engaged in finance, accounting, legal, human resources and administration, professional services fees for legal, accounting, recruiting, and administrative services (including acquisition-related expenses), insurance, travel, and allocated facilities and information technology costs.

We plan to continue to invest in our general and administrative function to support the growth of our business. In addition, following the completion of this offering, we expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of a public company, increased insurance and investor relations expenses, and increased professional services fees (including acquisition-related expenses). As a result, we expect general and administrative expenses to increase in absolute dollars. We also expect our general and administrative expenses as a percentage of revenue to fluctuate period-over-period in the near term as we invest to support the growth of our business, and to decrease over the long term as we benefit from greater scale.

Interest expense and loss on settlement of debt. Interest expense and loss on settlement of debt consists primarily of loss related to debt extinguishment, interest expense associated with our outstanding debt, including accretion of debt discount, and changes in fair value of interest rate swap accounted for as a cash flow hedge related to the stream of variable interest payments associated with a portion of our outstanding debt.

 

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Other income (expense), net. Other income (expense), net, includes interest earned on our cash and cash equivalents, gains and losses related to embedded derivatives and other financial instruments accounted for at fair value, and foreign currency exchange gains (losses), which consist primarily of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period.

Provision for (benefit from) income taxes. We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, impacts from acquisition restructuring, deduction benefits related to foreign-derived intangible income, future changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss.

Results of Operations

The following tables summarize our consolidated financial and other data. We have derived the summary consolidated statement of operations data for 2019 and 2020 and summary consolidated balance sheet data as of December 31, 2020 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for 2018 from our audited consolidated financial statements not included in this prospectus.

 

   Year Ended
December 31,
 
   2018  2019  2020 
   (in thousands) 

Revenue

  $483,363  $994,104  $1,451,086 

Costs and expenses:

    

Cost of revenue(1)(2)

   53,758   241,274   555,578 

Sales and marketing(1)(2)

   166,799   481,781   627,796 

Research and development(1)

   16,270   44,966   180,652 

General and administrative(1)

   14,854   31,712   66,431 

Extinguishments of acquisition-related contingent consideration

   (10,763     74,820 

Lease modification and abandonment of leasehold improvements

     7,851 
  

 

 

  

 

 

  

 

 

 

Total costs and expenses

   240,918   799,733   1,513,128 
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   242,445   194,371   (62,042

Other income (expense):

    

Interest expense and loss on settlement of debt

   (484,644  (73,955  (77,873

Other income (expense), net

   1,940   5,818   4,209 
  

 

 

  

 

 

  

 

 

 

Total other expense

   (482,704  (68,137  (73,664
  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   (240,259  126,234   (135,706

Provision for (benefit from) income taxes

   19,736   7,194   (9,772
  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $(259,995 $119,040  $(125,934
  

 

 

  

 

 

  

 

 

 

 

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(1)

Includes stock-based compensation expense as follows:

 

   Year Ended
December 31,
 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $517   $124   $982 

Sales and marketing

   2,582    1,922    10,668 

Research and development

   1,009    5,009    36,852 

General and administrative

   1,357    3,167    13,885 
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $     5,465   $  10,222   $     62,387 
  

 

 

   

 

 

   

 

 

 

 

(2)

Includes amortization expense related to acquired intangibles as follows:

 

   Year Ended
December 31,
 
   2018   2019   2020 
   (in thousands) 

Cost of revenue

  $7,932   $74,787   $228,339 

Sales and marketing

   495    7,641    11,587 
  

 

 

   

 

 

   

 

 

 

Total amortization expense related to acquired intangibles

  $     8,427   $  82,428   $   239,926 
  

 

 

   

 

 

   

 

 

 

The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue(1):

 

   Year Ended
December 31,
 
   2018  2019  2020 

Revenue

   100  100  100

Costs and expenses:

    

Cost of revenue

   11  24  38

Sales and marketing

   35  48  43

Research and development

   3  5  12

General and administrative

   3  3  5

Extinguishments of acquisition-related contingent consideration

   (2)%     5

Lease modification and abandonment of leasehold improvements

       1
  

 

 

  

 

 

  

 

 

 

Total costs and expenses

   50  80  104
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   50  20  (4)% 

Other income (expense):

    

Interest expense and loss on settlement of debt

   (100)%   (7)%   (5)% 

Other income (expense), net

   0  1  0
  

 

 

  

 

 

  

 

 

 

Total other expense

   (100)%   (7)%   (5)% 
  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   (50)%   13  (9)% 

Provision for (benefit from) income taxes

   4  1  (1)% 
  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (54)%   12  (9)% 
  

 

 

  

 

 

  

 

 

 

 

(1)

Totals of percentages of revenue may not foot due to rounding.

 

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Comparison of Years Ended December 31, 2019 and 2020

Revenue

 

   Year Ended
December 31,
   2019 to 2020
% Change
 
   2019   2020 
   (in thousands, except percentages) 

Business Revenue

  $595,948   $711,152    19

Consumer Revenue

   398,156    739,934    86
  

 

 

   

 

 

   

Total revenue

  $994,104   $1,451,086    46
  

 

 

   

 

 

   

Total revenue increased $457.0 million, or 46%, in 2020 compared to 2019 due to an increase in Business Revenue of 19% and an increase in Consumer Revenue of 86%.

Our Business Revenue increased by $115.2 million from 2019 to 2020. Our revenue from Enterprise Clients drove the vast majority of this increase, as revenue from Enterprise Clients represented 99% of Business Revenue in 2020. RPEC increased from approximately $3.5 million to $4.1 million from 2019 to 2020, while the number of Enterprise Clients increased from 167 to 172 over the same period. The increase in our Business Revenue from Apps of $106.2 million was primarily as a result of increased advertising revenue from Apps acquired in 2020 which contributed 57% of the increase, as well as increased advertising revenue from our existing Apps and new Apps developed by our Owned and Partner Studios, which together contributed 43% of the increase. Our Business Revenue from Apps grew due to a 27% increase in the volume of advertising impressions in 2020 compared to 2019 while price per advertising impression remained consistent with 2019. Our Business Revenue from our Software increased by $9.0 million from 2019 to 2020 primarily due to a 45% increase in installations, partially offset by a 34% decrease in price per installation. Our Business Revenue from our Software was also negatively impacted by increased usage of advertising inventory by our growing portfolio of Owned Studios and Partner Studios as this inventory was consumed by such studios rather than being sold to third-parties. Usage of advertising inventory by our Owned Studios and Partner Studios represented 22% of installations in 2020. We do not recognize Business Revenue from transactions with our Owned Studios and Partner Studios.

Our Consumer Revenue increased by $341.8 million from 2019 to 2020, primarily due to a 41% increase in the volume of in-app purchases, as well as a 32% increase in price per in-app purchase. Apps acquired during 2020 generated $194.7 million of the increase, with Apps that were part of our portfolio prior to the beginning of 2020 and newly developed Apps accounting for the remainder.

Cost of revenue

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Cost of revenue

  $241,274  $555,578   130

Percentage of revenue

   24  38 

Cost of revenue increased by $314.3 million, or 130%, in 2020 compared to 2019. The increase was primarily due to a $153.6 million increase in amortization of acquired-technology driven by an increase in acquisition activity, a $112.0 million increase in third-party payment processing fees as a result of the growth in Consumer Revenue, a $28.6 million increase in expenses associated with operating our network infrastructure driven by the growth in our operations, and a $10.4 million increase in professional service fees.

 

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Sales and marketing

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Sales and marketing

  $481,781  $627,796   30

Percentage of revenue

   48  43 

Sales and marketing expenses increased by $146.0 million, or 30%, in 2020 compared to 2019. The increase was primarily due to a $115.1 million increase in user acquisition costs, a $18.2 million increase in personnel-related expenses primarily due to an increase in stock-based compensation due to higher fair value of our common stock and increase in headcount, and a $7.0 million increase in professional service fees.

Research and development

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Research and development

  $44,966  $180,652   302

Percentage of revenue

   5  12 

Research and development expenses increased by $135.7 million, or 302%, in 2020 compared to 2019. The increase was primarily due to a $79.4 million increase in personnel-related expenses primarily due to acquisitions, an increase in stock-based compensation due to higher fair value of our common stock and an increase in headcount, a $46.5 million increase in professional services costs related to development of new games by third parties, and a $4.6 million increase in rent and facilities costs.

General and administrative

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

General and administrative

  $31,712  $66,431   109

Percentage of revenue

   3  5 

General and administrative expenses increased by $34.7 million, or 109%, in 2020 compared to 2019. The increase was primarily due to a $25.0 million increase in personnel-related expenses primarily related to acquisitions and an increase in stock-based compensation due to higher fair value of our common stock, and a $6.7 million increase in professional service fees.

Extinguishments of acquisition-related contingent consideration

In 2020, we reached an agreement to amend the terms of an asset acquisition agreement to settle the acquisition holdback and a portion of the earn-out due to the seller 12 months following the acquisition’s closing in 2019. We agreed to such amendment in order to provide equity ownership that would better align the interests of the sellers with ours in light of their ongoing obligations to us as part of a development and services agreement. We recorded an extinguishment loss of $74.8 million in 2020 in connection with this subsequent agreement and recognized a loss equal to the excess of the

 

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fair value of consideration paid to the seller and the fair value of the contingent consideration determined immediately prior to this amendment. We agreed to settle for a combination of a cash payment of $3.4 million and issuance of certain shares of our Class A common stock at a fair value of $106.1 million as of the settlement date.

Lease modification and abandonment of leasehold improvements

We recognized a net loss of $7.9 million in 2020 in connection with the termination of one of Machine Zone’s leases and the write-off of leasehold improvements and other assets related to this real estate lease.

Interest expense

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Interest expense

  $(73,955 $(77,873  5

Percentage of revenue

   (7)%   (5)%  

Interest expense increased by $3.9 million, or 5%, in 2020 compared to 2019. This increase was primarily due to higher interest expense related to term loans issued in 2020.

Other income (expense), net

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Other income (expense), net

  $5,818  $4,209   (28)% 

Percentage of revenue

   1  0 

Other income (expense), net decreased by $1.6 million, or 28%, in 2020 compared to 2019. The change is mainly due to a $1.2 million increase in foreign exchange loss attributable to a license asset obligation assumed as part of the Machine Zone acquisition, a $4.6 million decrease in interest earned, a $1.5 million increase in remeasurement losses offset by a $5.7 million increase due to a term loan embedded derivative gain.

Provision for (benefit from) income taxes

 

   Year Ended
December 31,
  2019 to 2020
% Change
 
   2019  2020 
   (in thousands, except percentages) 

Provision for (benefit from) income taxes

  $7,194  $(9,772  (236)% 

Percentage of revenue

   1  (1)%  

The change from a $7.2 million provision for income taxes in 2019 to a $9.8 million benefit from income taxes in 2020 is primarily due to pre-tax losses in 2020 as compared to pre-tax income in 2019. Our benefit from income taxes in 2020 was also impacted by foreign income taxed at different rates, a change in foreign deferred tax rates resulting from restructuring of the Company, a reduction in foreign-derived intangible income deduction, an increase in non-deductible stock-based compensation expense, and an increase in non-deductible loss related to extinguishments of acquisition-related contingent consideration.

 

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Comparison of Years Ended December 31, 2018 and 2019

Revenue

 

   Year Ended
December 31,
   2018 to 2019
% Change
 
   2018   2019 
   (in thousands, except percentages) 

Business Revenue

  $429,256   $595,948    39

Consumer Revenue

   54,107    398,156    636
  

 

 

   

 

 

   

Total revenue

  $483,363   $994,104    106
  

 

 

   

 

 

   

Total revenue increased $510.7 million, or 106%, in 2019 compared to 2018 due to an increase in Business Revenue of 39% and an increase in Consumer Revenue of 636%.

Our Business Revenue increased by $166.7 million from 2018 to 2019. Our revenue from Enterprise Clients drove the vast majority of this increase, as revenue from Enterprise Clients represented 98% of Business Revenue in 2019. RPEC increased from approximately $2.2 million to $3.5 million from 2018 to 2019, which more than offset the decrease in Enterprise Clients from 192 to 167 over the same period. The increase in our Business Revenue from Apps of $231.4 million was primarily as a result of increased advertising revenue from our existing Apps and advertising revenue from new Apps developed by our Owned Studios and Partner Studios, which together contributed over 90% of the increase, as well as increased advertising revenue from Apps acquired in 2019. Our Business Revenue from Apps grew due to a 412% increase in the volume of advertising impressions in 2019 compared to 2018, partially offset by a 53% decrease in price per advertising impression. Our Business Revenue from our Software declined by $64.7 million from 2018 to 2019 primarily due to a 57% decrease in price per installation, partially offset by a 72% increase in installations. Our Business Revenue from our Software was also negatively impacted by increased usage of advertising inventory by our growing portfolio of Owned Studios and Partner Studios as this inventory was consumed by such studios rather than being sold to third-parties. Usage of advertising inventory by our Owned Studios and Partner Studios represented 21% of installations in 2019. We do not recognize Business Revenue from transactions with our Owned Studios and Partner Studios.

Our Consumer Revenue increased by $344.0 million from 2018 to 2019, primarily due to a 576% increase in the volume of in-app purchases, as well as a 9% increase in price per in-app purchase. Apps acquired during 2019 generated $277.0 million of the increase, with Apps that were part of our portfolio prior to the beginning of 2019 and newly developed Apps accounting for the remainder.

Cost of revenue

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Cost of revenue

  $53,758  $241,274   349

Percentage of revenue

   11  24 

Cost of revenue increased $187.5 million, or 349%, in 2019 compared to 2018. The increase was primarily due to a $105.7 million increase in third-party payment processing fees as a result of the growth in Consumer Revenue, a $66.7 million increase in amortization of acquired-technology driven by an increase in acquisition activity, and a $6.9 million increase in expenses associated with operating our network infrastructure driven by the growth in our operations.

 

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Sales and marketing

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Sales and marketing

  $166,799  $481,781   189

Percentage of revenue

   35  48 

Sales and marketing expenses increased $315.0 million, or 189%, in 2019 compared to 2018. The increase was primarily due to a $292.2 million increase in user acquisition costs, a $9.9 million increase in professional service fees, a $7.1 million increase in amortization of acquired intangible assets driven by an increase in acquisition activity, a $3.3 million increase in personnel-related expenses primarily due to an increase in headcount, and a $2.5 million increase in other advertising and marketing expenses.

Research and development

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Research and development

  $16,270  $44,966   176

Percentage of revenue

   3  5 

Research and development expenses increased $28.7 million, or 176%, in 2019 compared to 2018. The increase was primarily due to an $18.9 million increase in personnel-related expenses primarily due to an increase in headcount, and a $9.2 million increase in professional services costs related to development of new games by third parties.

General and administrative

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

General and administrative

  $14,854  $31,712   113

Percentage of revenue

   3  3 

General and administrative expenses increased by $16.9 million, or 113%, in 2019 compared to 2018. The increase was primarily due to a $6.6 million increase in personnel-related expenses primarily due to an increase in headcount, a $4.0 million increase in professional service fees, and a $2.0 million write-off of certain intangible game assets.

Extinguishments of acquisition-related contingent consideration

In March 2018, we closed the acquisition of PeopleFun, Inc. In December 2018, we reached an agreement with the sellers to amend the terms of an earn-out payment to provide for a one-time payment of cash and the issuance of shares of our Class A common stock. We recognized a gain of $10.8 million in 2018 in connection with this subsequent agreement, representing the difference between the carrying value of the contingent consideration liability and the fair value of the amended payment. As the amendment to the terms of the earn-out payment was based on facts and circumstances that did not exist as of the acquisition date, a modification was made to the original terms and conditions, and we recognized the gain in the period the amendment was made rather than recording a change to the purchase price.

 

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Interest expense and loss on settlement of debt

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Interest expense and loss on settlement of debt

  $(484,644 $(73,955  (85)% 

Percentage of revenue

   (100)%   (7)%  

Interest expense and loss on settlement of debt decreased by $410.7 million, or 85%, in 2019 compared to 2018. This decrease was primarily due to a $422.7 million loss related to debt extinguished in 2018, partially offset by higher interest expense related to term loans issued in 2018 and 2019.

Other income (expense), net

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Other income (expense), net

  $1,940  $5,818   200

Percentage of revenue

   0  1 

Other income (expense), net increased by $3.9 million, or 200%, in 2019 compared to 2018 primarily due to an increase in cash and cash equivalents and higher interest rates.

Provision for income taxes

 

   Year Ended
December 31,
  2018 to 2019
% Change
 
   2018  2019 
   (in thousands, except percentages) 

Provision for income taxes

  $19,736  $7,194   (64)% 

Percentage of revenue

   4  1 

Provision for income taxes decreased by $12.5 million primarily due to a reduction of a deferred tax liability resulting from restructuring of an entity. Our income tax provision in 2019 was also impacted by foreign income taxed at different rates, an increase in foreign-derived intangible income deduction, and a reduction in global intangible low-taxed income.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated results of operations for each of the quarterly periods for the years ended December 31, 2019 and 2020. These unaudited quarterly results of operations have been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information set forth in the table below reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and the results of a particular quarter or other interim period are not necessarily indicative of the results for a full year. You should read the following unaudited quarterly consolidated results of operations in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

  Three Months Ended 
  March 31,
2019
  June 30,
2019
  Sept. 30,
2019
  Dec. 31,
2019
  March 31,
2020
  June 30,
2020
  Sept. 30,
2020
  Dec. 31,
2020
 
  (in thousands) 

Revenue

 $206,241  $248,452  $260,597  $278,814  $260,178  $299,331  $381,740  $509,837 

Costs and expenses:

 

       

Cost of revenue(1)(2)

  46,063   55,613   66,661   72,937   76,453   118,051   163,060   198,014 

Sales and marketing(1)(2)

  105,330   114,282   127,869   134,300   128,667   135,319   153,014   210,796 

Research and development(1)

  6,845   10,522   12,243   15,356   19,112   29,702   51,136   80,702 

General and administrative(1)

  7,337   6,637   6,446   11,292   10,810   15,170   15,276   25,175 

Lease modification and abandonment of leasehold improvements

                 7,851       

Extinguishments of acquisition-related contingent consideration

                    74,712   108 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total costs and expenses

  165,575   187,054   213,219   233,885   235,042   306,093   457,198   514,795 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  40,666   61,398   47,378   44,929   25,136   (6,762  (75,458  (4,958

Other income (expense):

        

Interest expense

  (14,421  (19,245  (20,929  (19,360  (18,629  (18,809  (20,110  (20,325

Other income (expense), net

  367   1,929   2,112   1,410   1,021   3,157   1,169   (1,138
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expense

  (14,054  (17,316  (18,817  (17,950  (17,608  (15,652  (18,941  (21,463
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  26,612   44,082   28,561   26,979   7,528   (22,414  (94,399  (26,421

Provision for (benefit from) income taxes

  5,092   8,602   5,553   (12,053  2,864   (703  (4,485  (7,448
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

  21,520   35,480   23,008   39,032   4,664   (21,711  (89,914  (18,973
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

  Three Months Ended 
  March 31,
2019
  June 30,
2019
  Sept. 30,
2019
  Dec. 31,
2019
  March 31,
2020
  June 30,
2020
  Sept. 30,
2020
  Dec. 31,
2020
 
  (in thousands) 

Cost of revenue

 $30  $30  $31  $33  $29  $49  $126  $778 

Sales and marketing

  489   524   533   376   452   789   1,571   7,856 

Research and development

  1,197   1,245   1,261   1,306   1,527   2,342   6,823   26,160 

General and administrative

  832   683   534   1,118   1,454   1,852   2,348   8,231 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total stock-based compensation

  2,548   2,482   2,359   2,833   3,462   5,032   10,868   43,025 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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(2)

Includes amortization expense related to acquired intangibles as follows:

 

  Three Months Ended 
  March 31,
2019
  June 30,
2019
  Sept. 30,
2019
  Dec. 31,
2019
  March 31,
2020
  June 30,
2020
  Sept. 30,
2020
  Dec. 31,
2020
 
  (in thousands) 

Cost of revenue

 $11,573  $15,495  $21,538  $26,181  $27,576  $44,562  $65,535  $90,666 

Sales and marketing

     2,438   2,438   2,765   2,694   2,726   3,050   3,117 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total amortization expense related to acquired intangibles

 $11,573  $17,933  $23,976  $28,946  $30,270  $47,288  $68,585  $93,783 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The following table sets forth the components of our unaudited quarterly consolidated results of operations for each of the periods presented as a percentage of revenue(1):

 

  Three Months Ended 
  March 31,
2019
  June 30,
2019
  Sept. 30,
2019
  Dec. 31,
2019
  March 31,
2020
  June 30,
2020
  Sept. 30,
2020
  Dec. 31,
2020
 

Revenue

  100  100  100  100  100  100  100  100

Costs and expenses:

        

Cost of revenue

  22  22  26  26  29  39  43  39

Sales and marketing

  51  46  49  48  49  45  40  41

Research and development

  3  4  5  6  7  10  13  16

General and administrative

  4  3  2  4  4  5  4  5

Lease modification and abandonment of leasehold improvements

            3    

Extinguishments of acquisition-related contingent consideration

              20  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total costs and expenses

  80  75  82  84  90  102  120  101
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  20  25  18  16  10  (2)%   (20)%   (1)% 

Other income (expense):

        

Interest expense

  (7)%   (8)%   (8)%   (7)%   (7)%   (6)%   (5)%   (4)% 

Other income (expense), net

  0  1  1  1  0  1  0  0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other expense

  (7)%   (7)%   (7)%   (6)%   (7)%   (5)%   (5)%   (4)% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

  13  18  11  10  3  (7)%   (25)%   (5)% 

Provision for (benefit from) income taxes

  2  3  2  (4)%   1  (0)%   (1)%   (1)% 

Net income (loss)

  10  14  9  14  2  (7)%   (24)%   (4)% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

Totals of percentages of revenue may not foot due to rounding.

 

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The following table provides our Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation of net income (loss) to Adjusted EBITDA:

 

  Three Months Ended 
  March 31,
2019
  June 30,
2019
  Sept. 30,
2019
  Dec. 31,
2019
  March 31,
2020
  June 30,
2020
  Sept. 30,
2020
  Dec. 31,
2020
 
  (in thousands, except percentages) 

Net income (loss)

 $21,520  $35,480  $23,008  $39,032  $4,664  $(21,711 $(89,914 $(18,973

Adjusted as follows:

        

Interest expense

  14,421   19,245   20,929   19,360   18,629   18,809   20,110   20,325 

Other (income) expense, net

  (367  (1,929  (2,112  (1,410  (1,110  (3,413  (1,658  (2

Provision for (benefit from) income tax

  5,092   8,602   5,553   (12,053  2,864   (703  (4,485  (7,448

Amortization, depreciation and write-offs

  13,880   20,339   25,877   32,710   32,279   51,425   73,519   97,728 

Non-operating foreign exchange losses

                 40   691   479 

Stock-based compensation

  2,548   2,482   2,359   2,833   3,462   5,032   10,868   43,025 

Acquisition-related expense

  1,091   1,132   423   1,152   1,657   3,554   422   2,217 

Loss on extinguishments of acquisition related contingent consideration

                    74,712   108 

Change in the fair value of contingent consideration

                       442 

Lease modification and abandonment of leasehold improvements

                 7,851       
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  58,185   85,351   76,037   81,624   62,445   60,884   84,265   137,901 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) margin

  10.4%   14.3%   8.8%   14.0%   1.8%   (7.3)%   (23.6)%   (3.7)% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA margin

  28%   34%   29%   29%   24%   20%   22%   27% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a result of the acquisitions of SafeDK in 2019 and Machine Zone in 2020, our assumed deferred revenue balance was adjusted to fair value in the amount of $101 thousand, $74 thousand, $48 thousand, $20,468 thousand, $31,659 thousand, and $9,635 thousand in the six quarterly periods ending from September 30, 2019 through December 31, 2020, respectively.

Quarterly Trends

Revenue. Our revenue has increased sequentially in each period presented, except for the quarter ended March 31, 2020, through a combination of growth in our Consumer Revenue and growth in our Business Revenue from our Apps and Software. Our revenue in the quarter ended March 31, 2020

 

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decreased by 7% as compared to the prior quarter, primarily due to seasonality and other factors including testing our new AXON machine-learning recommendation engine. Our Consumer Revenue increased by 123% from the quarter ended March 31, 2020 to the quarter ended December 31, 2020, primarily driven by increased in-app purchases relating to acquired Apps as well as new Apps developed by our Owned and Partner Studios in 2020. Our Business Revenue from Apps increased over the same period by 76% as a result of increased advertising revenue from acquired Apps as well as new Apps developed by our Owned and Partner Studios in 2020. In the quarter ended December 31, 2020, our Business Revenue from Software increased by 101% compared to the prior quarter, primarily as a result of the launch of AXON, our machine-learning recommendation engine, in such prior quarter.

Cost of revenue. Our quarterly cost of revenue has generally increased sequentially in each period presented primarily due to increases in third party payment processing fees driven by our growing Consumer revenue, amortization of acquired-technology driven by an increase in acquisition activity and hosting costs associated with the launch of AXON.

Sales and marketing. Our quarterly sales and marketing expenses increased sequentially from a low in the quarter ended March 31, 2020 primarily driven by the seasonal nature of our gaming business as well as growth in our existing, newly developed and acquired Apps. Sales and marketing expenses declined in the quarter ended March 31, 2020 primarily due to a 5% decrease in our user acquisition spend due to seasonality.

Research and development. Research and development costs increased significantly in the second half of the year ended December 31, 2020 as a result of our investments in the development of our Software, including Axon, and new Apps.

General and administrative. General and administrative costs increased throughout 2020 as a result of headcount expansion and increased professional services costs to prepare for public company readiness.

Interest expense. Interest expense, net, did not substantially change as an increase in our indebtedness was offset by a decrease in interest rates during the year.

Provision for (benefit from) income taxes. On a quarterly basis, the provision for income taxes remained relatively consistent as a percentage of income before tax in 2019, with the exception of the quarter ended December 31, 2019, during which the Company recognized an income tax benefit related to restructuring of the Company. On a quarterly basis, the provision for (benefit from) income taxes fluctuated from quarter to quarter as a percentage of income (loss) before tax in 2020 primarily due to fluctuations in income (loss) before taxes and a change in tax status election made in the first quarter of 2020. Additionally, in the fourth quarter of 2020, we recognized an income tax benefit related to restructuring of the Company.

Liquidity and Capital Resources

Since inception, we financed our operations primarily through payments received from business clients using our Software and advertising on our Apps, and from user IAPs from our Apps, and through net proceeds we received from the sales of our convertible preferred stock and debt borrowings, including borrowings made under our credit agreement. As of December 31, 2020, we had cash and cash equivalents of $317.2 million.

We believe that our existing cash and cash equivalents would be sufficient to satisfy our anticipated working capital and capital expenditures needs for at least the next 12 months. Our future capital

 

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requirements, however, will depend on many factors, including our growth rate; expansion of sales and marketing activities; timing and extent of spending to support our research and development efforts; capital expenditures to purchase hardware and software; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in teams and technologies, including intellectual property rights, which could increase our cash requirements. For example, in 2020, we completed a number of asset and business acquisitions, which reduced our year-end 2020 cash balance by $674.7 million. As a result of these and other factors, we may be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing from outside sources is required, we may not be able to raise it on terms acceptable to us, or at all. In particular, the recent COVID-19 pandemic has caused a disruption in the global financial markets, which may reduce our ability to access capital and negatively affect our liquidity in the future. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.

The following table summarizes our cash flows for the periods indicated:

 

   Year Ended December 31, 
   2018  2019  2020 
   (in thousands) 

Net cash provided by operating activities

  $139,030  $198,462  $222,883 

Net cash used in investing activities

   (67,169  (411,554  (679,891

Net cash provided by financing activities

   1,638   333,160   377,855 

Operating Activities

Net cash provided by operating activities was $222.9 million for 2020, primarily consisting of a $125.9 million of net loss, adjusted for certain non-cash items, which included $255.0 million of depreciation and amortization expense, $62.4 million of stock-based compensation expense, $74.8 million of loss on extinguishments of acquisition related contingent consideration, $8.2 million of amortization of debt issuance costs and discount, and $7.9 million of lease modification and abandonment of leasehold improvement partially offset by a $67.0 million increase in cash consumed by working capital. The increase in cash consumed by working capital was primarily driven by an increase in accounts receivable, prepaid expenses and other assets and decrease in operating lease liabilities partially offset by higher accounts payable and deferred revenue.

Net cash provided by operating activities was $198.5 million for 2019, primarily consisting of $119.0 million of net income, adjusted for certain non-cash items, which included $92.8 million of depreciation and amortization expense, $10.2 million of stock-based compensation expense and $5.0 million of amortization of debt issuance costs and discount partially offset by a $31.2 million increase in cash consumed by working capital. The increase in cash consumed by working capital was primarily driven by an increase in accounts receivable and prepaid expenses and other current assets partially offset by higher accounts payable and accrued and other liabilities.

Net cash provided by operating activities was $139.0 million for 2018, primarily consisting of $260.0 million of net loss, adjusted for certain non-cash items, which included $428.2 million of amortization of debt issuance costs and loss on settlement of debt, $16.1 million of depreciation and amortization expense, and $5.5 million of stock-based compensation expense partially offset by a $39.9 million increase in cash consumed by working capital and a $10.8 million gain in extinguishments of acquisition related contingent consideration. The increase in cash consumed by working capital was primarily driven by an increase in accounts receivable and decrease in accounts payable partially offset by lower prepaid expenses and other current assets.

 

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Investing Activities

Net cash used in investing activities was $679.9 million for 2020, consisting of $674.7 million related to acquisitions, $3.2 million in purchases of property and equipment, and $2.0 million in purchases of non-marketable securities.

Net cash used in investing activities was $411.6 million for 2019, consisting of $404.2 million related to acquisitions, $4.0 million in purchases of non-marketable securities and $3.4 million in purchases of property and equipment.

Net cash used in investing activities was $67.2 million for 2018, primarily consisting of $65.9 million related to acquisitions.

Financing Activities

Net cash provided by financing activities was $377.9 million for 2020, primarily consisting of $481.3 million of proceeds from debt issuance and $9.3 million proceeds from issuance of common stock partially offset by $64.3 million of principal repayment of debt, $18.9 million payment of licensed asset obligation, $17.6 million of payment of deferred acquisition costs, and $9.7 million of payment under finance leases.

Net cash provided by financing activities was $333.2 million for 2019, primarily consisting of $388.9 million of proceeds from debt issuance partially offset by $41.5 million of payment of deferred acquisition costs, $11.2 million of principal repayment of debt and $5.7 million of payment under finance leases.

Net cash provided by financing activities was $1.6 million for 2018, primarily consisting of $791.1 million of proceeds from debt issuance and $399.6 million in proceeds from the issuance of preferred stock partially offset by $1,183.0 million of principal repayment of debt and $5.9 million of payment under finance leases.

Credit Agreement

On August 15, 2018, we entered into a credit agreement with the lenders party thereto and Bank of America, N.A., as administrative agent for the lenders (the credit agreement), which provided for $820.0 million of senior secured term loans and a $50.0 million senior secured revolving loan facility. The credit agreement was amended on April 23, 2019 to increase the senior secured term loan facility by $400.0 million to an aggregate principal amount of $1.22 billion. The credit agreement was further amended on April 27, 2020 to modify certain negative covenants contained therein. The credit agreement was further amended on May 6, 2020 to increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.52 billion. The credit agreement was further amended on October 27, 2020 to add an additional $541.7 million in aggregate principal amount of revolving commitments and reduce the existing commitments by $1.7 million, increasing the total revolving commitments to $590.0 million, reduce the interest rate on the revolving loans, and extend the maturity date of the revolving loans.

The credit agreement was further amended on February 12, 2021 to increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.82 billion, to add an additional $10.0 million in aggregate principal amount of revolving commitments, increasing the total revolving commitments to $600.0 million and to reduce the interest rate on the incremental term loans issued on May 6, 2020 to have the same interest rate as all other term loans. On March 31, 2021, we borrowed an additional $250.0 million under our revolving credit facility and following such draw down we had an aggregate amount of $400.0 million outstanding under this facility.

 

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As of December 31, 2020, our total outstanding indebtedness under the credit agreement was $1.64 billion, consisting of $1.49 billion of outstanding term loans and $150.0 million of outstanding revolving loans. See the section titled “Description of Certain Indebtedness” for additional information.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020:

 

   Payments Due by Period 
   Total   Less than
1 Year
   1-3 Years   3-5 Years   More than
5 years
 
   (in thousands) 

Long-term debt(1)

  $1,644,332   $15,210   $30,420   $30,420   $1,568,282 

Convertible security(2)

   40,000    40,000             

Deferred acquisition costs(3)

   185,214    166,158    19,056         

Operating lease commitments(4)

   110,948    26,123    30,153    24,889    29,783 

Finance lease commitments(5)

   6,192    3,581    2,611         

License asset obligations(6)

   18,760    18,760             

Licensor commitments(7)

   5,000    2,000    3,000    0    0 

Non-cancelable purchase obligations(8)

   131,247    14,389    52,858    64,000    0 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $2,141,693   $286,221   $138,098   $119,309   $1,598,065 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Consists of borrowings under our credit agreement. The table above does not include interest payments which vary based on changes in the interest rate index. See the section titled “Description of Certain Indebtedness” and Note 9 to our consolidated financial statements included elsewhere in this prospectus for additional information regarding our long-term debt obligations.

(2)

Represents a convertible security issued in connection with a strategic partnership with Athena FZE. Such security is convertible into shares of our Class A common stock starting 61 days following this offering. The convertible security may be converted, at the option of the holder, into a number of shares of our Class A Common Stock equal to $40.0 million divided by a conversion price equal to (i) the 20-day volume-weighted average trading price per share of Class A Common Stock multiplied by (ii) 0.8. If any portion of the convertible security is converted by November 12, 2021, we have agreed to redeem in cash such remaining portion of the convertible security. If the holder does not convert the entire maximum conversion amount by November 18, 2021, we are required to redeem the remaining conversion amount for cash. If this offering does not close on or prior to November 18, 2021, we are required to redeem the convertible security for $40.0 million in cash. The convertible security does not entitle the holder to any voting rights or other rights as a stockholder prior to conversion. The fair value of the convertible security was determined to be $45 million as of the issuance date.

(3)

Deferred acquisition costs represent part of the consideration related to games acquired in asset acquisition transactions.

(4)

Consists of non-cancellable commitments for real estate leases and lease of networking equipment colocation space. See Note 8 to our consolidated financial statements included elsewhere in this prospectus for additional information.

(5)

Consists of payments related to finance leases of networking equipment. One of the leases is under month-to-month lease arrangement with renewal options. The amounts include payments attributable to optional renewal periods if it is reasonably certain that we will exercise such options. See Note 8 to our consolidated financial statements included elsewhere in this prospectus for additional information.

(6)

Represents an obligation under a technology license agreement assumed as part of Machine Zone acquisition.

(7)

Licensor commitments include minimum guarantee royalty payments due to licensors for use of their mobile game products.

(8)

The contractual commitment obligations in the table above are associated with agreements that are enforceable and legally binding.

Several of the definitive agreements governing our acquisitions of our Owned Studios and arrangements with Partner Studios provide for payment contingent upon future performance metrics. The table above does not include any amounts related to these obligations. These contingent consideration arrangements include payouts based on a percentage of revenue or profitability metrics, payouts of fixed amounts based on the achievement of certain operating targets, and revenue share arrangements for specific apps, and some of these arrangements do not have a maximum limit of contingent consideration achievable. Because these contingent consideration arrangements are based

 

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on the success of relevant Apps and are not guaranteed, we do not expect our results of operations would be materially and adversely effected by the payment of amounts under any such arrangement. The table below presents a summary of the significant contingent consideration arrangements:

 

Relevant

Transaction

  Contingent Consideration Summary

Recoded asset acquisition (January 2019)

  

Future one-time earn-out payments, based on a service agreement, of either $60.0 million or $30.0 million per game depending on the nature of the new game App developed, subject to the achievement of a certain monthly revenue milestone in the initial thirty-six months following the launch of a new game App. The term of the service agreement is initially three years, after which time the agreement is terminable by either party upon thirty days’ written notice. We are also required to make future one-time earn-out payments, based on a development agreement during the term of six years, of $10.0 million to each of two additional new game Apps developed, subject to the achievement of the same monthly revenue milestone in the initial thirty-six months following the launch of such game Apps.

Samfinaco Games asset acquisition (August 2019)

  

Future earn-out payments for each of the four years from the date of the transaction based on the greater of (i) a predetermined percentage of revenue or (ii) a predetermined percentage of earnings before interest, taxes, depreciation and amortization generated by the acquired game Apps over each such year. We are also required to make future earn-out payments based on performance metrics of the newly developed game Apps which are similar to the performance metrics of the initially acquired mobile game Apps during the four years from the date of the transaction.

Zenlife asset acquisition (June 2020)

  

Future earn-out payments for each of the four years from the date of the transaction based on the excess, if any, of revenue generated by the initially acquired game App for such year above the sum of (i) an annual fixed baseline revenue and (ii) the aggregate earn-out payments made in prior years. We are also required to make future earn-out payments for newly developed game Apps determined under the similar approach as for the initially acquired mobile game Apps.

Other asset acquisition (March 2020)

  

Future earn-out payments based on a predetermined percentage of revenue net of certain direct costs generated by the initially acquired game App, or additional game Apps developed under a service and development agreement, over the term of the agreement, which is initially two years, but which may renew for an additional two-year term.

Other asset acquisition (April 2020)

  

Future earn-out payments for each of the four years from the date of the transaction are based on (i)(a) the revenue generated by the initially acquired game App and any additional game Apps developed under a service and development agreement over the term of four years in excess of (b) a baseline revenue threshold, multiplied by (ii) tiered revenue multiples, up to a cumulative amount of $45.0 million.

Athena acquisition (November 2020)  

Future earn-out payments for each of the four years from the date of the transaction based on (i)(a) the revenue generated by the initially acquired game Apps in each such year in excess of (b) a certain revenue threshold, multiplied by (ii) a predetermined revenue multiple.

For acquisitions of Owned Studios that are accounted for as business combinations, contingent consideration is initially recognized at fair value. For our other transactions, we generally recognize

 

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contingent consideration only on the date when the related performance metrics are achieved. See Notes 2, 6, and 19 to our consolidated financial statements included elsewhere in this prospectus for additional information.

As of December 31, 2020, we had recorded liabilities of $15.1 million related to uncertain tax positions. Due to uncertainties in the timing of potential tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonable estimate of the timing of payments in individual years particularly beyond 12 months. As a result, this amount is not included in the table above.

In April 2020, we entered into a share purchase agreement with Redemption Games, Inc. (Redemption Games). We purchased a majority of the outstanding common stock of Redemption Games and entered into agreements with the equityholders of Redemption Games that, among other things, provide for call/put rights whereby such holders can elect to require us to purchase all or a portion of their vested securities on a specified date in February of each year from 2022 to 2025 and we can require such holders to sell to us all of their remaining securities on or after February 19, 2025, each for a purchase price per share of the then current fair market value per share of common stock of Redemption Games. Based on the fair market value of the common stock of Redemption Games at December 31, 2020, the purchase price for an exercise in full of such call options would have been $6.7 million.

Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates.

As of December 31, 2020, we had unrestricted cash and cash equivalents of $317.2 million. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our cash equivalents.

As of December 31, 2020, we had a term loan balance of $1.64 billion. A hypothetical 50 basis point change in interest rates as of December 31, 2020 would have resulted in a change in net income of $8.0 million in 2020.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenue, or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Critical Accounting Policies and Estimates

We believe that the following accounting policies involve a high degree of judgment and complexity and are critical to understanding and evaluating our consolidated financial condition and results of our operations. An accounting policy is considered to be critical if it requires judgment on a significant accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the reported amounts of assets, liabilities, revenue and expenses, and related disclosures in our audited consolidated financial statements. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the

 

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results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

We believe that the following critical accounting policies reflect the more significant judgments, estimates and assumptions used in the preparation of our consolidated financial statements. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for additional information.

Revenue from Contracts with Customers

We generate revenue from two types of customers—Business and Consumer. Business Revenue includes fees paid by mobile app advertisers that use our Software, and revenue generated from the sale of digital advertising inventory of our Apps. Consumer Revenue consists of IAPs made by users within our Apps.

Business Revenue

Our Software provides the technology to match advertisers and third-party owners of digital advertising inventory via auctions at large scale and microsecond-level speeds. The pricing and terms for all mobile advertising arrangements are governed by our terms and conditions and generally stipulate payment terms of 30 days subsequent to the end of the month. The contract is fully cancellable at any time.

For Business Revenue generated through the placement of advertisements on mobile game apps owned by publishers, our performance obligation is to provide an advertiser with access to our Software which facilitates the advertiser’s purchase of advertising inventory from publishers. We do not control the advertising inventory prior to its transfer to the advertiser, our customer, because we do not have the substantive ability to direct the use of, nor obtain substantially all of the remaining benefits from, the advertising inventory. We are not primarily responsible for fulfillment and do not have any inventory risk. We are an agent as it relates to the sale of third-party advertising inventory and present revenue on a net basis. The transaction price is the product of either the number of completions of agreed upon actions or advertisements displayed and the contractually agreed upon price per advertising unit with the advertiser less consideration paid or payable to publishers.

Advertisers also purchase the advertising inventory of our Apps either through our Software or through third-party advertising networks. Revenue from the sale of advertising inventory through third-party advertising networks is recognized net of the amounts retained by third-party advertising networks as we are unable to determine the gross amount paid by the advertisers to the third-party advertising networks.

We recognize mobile advertising revenue when the agreed upon action is completed or when the ad is displayed to users, depending on the agreed upon pricing mechanism with an advertiser or third-party advertising network. The number of advertisements delivered and completions of agreed upon actions is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Consumer Revenue

IAPs include fees collected from users for the purchase of virtual goods to enhance their gameplay experience. The identified performance obligation is to provide users with the ability to acquire, use,

 

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and hold virtual items over the estimated period of time the virtual items are available to the user or until the virtual item is consumed. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, we recognize revenue from the sale of consumable virtual goods as the goods are consumed and our performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, we recognize revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user and our performance obligation is satisfied, which is generally the estimated average user life (EAUL). Payment is required at the time of purchase and the purchase price is a fixed amount. Users make IAPs through our distribution partners. The transaction price is equal to the gross amount charged to users because we are the principal in the transaction. IAPs fees are non-refundable. Such payments are initially recorded to deferred revenue.

The EAUL represents our best estimate of the expected life of paying users for the applicable game. The EAUL begins when a user makes a first purchase of durable virtual goods and ends when a user is determined to be inactive. We determine the EAUL on a game-by-game basis. For a newly launched game that has limited playing data, we determine our EAUL based on the EAUL of a game that has sufficiently similar characteristics. We determine the EAUL on a quarterly basis and apply such calculated EAUL to all bookings in the respective quarter. Determining the EAUL is subjective and requires management’s judgment. Future playing patterns may differ from historical playing patterns, and therefore the EAUL may change in the future. The EAULs are generally between six and nine months.

We present taxes collected from customers and remitted to governmental authorities on a net basis.

Asset Acquisitions and Business Combinations

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 that test suggests that the set of assets and activities is a business, 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 suggests that the acquired assets and activities constitute a business, we account for the transaction as a business combination.

For transactions accounted for as business combinations, we allocate the fair value of acquisition consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. Acquisition consideration includes the fair value of any promised contingent consideration. The excess of the fair value of acquisition consideration over the fair values of acquired identifiable assets and liabilities is recorded as goodwill. Contingent consideration is remeasured to its fair value each reporting period with changes in the fair value of contingent consideration recorded in general and administrative expenses. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analyses. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related costs are expensed as incurred.

 

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For transactions accounted for as asset acquisitions, the cost, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. We generally include contingent consideration in the cost of the assets acquired only when the uncertainty is resolved. We recognize contingent consideration adjustments to the cost of the acquired assets prospectively using the straight-line method over the remaining useful life of the assets. No goodwill is recognized in asset acquisitions.

Services and Development Agreements

We enter into strategic agreements with Partner Studios. We have historically allowed these Partner Studios to continue their operations with a significant degree of autonomy. In some cases, we bought Apps from Partner Studios and entered into service and development agreements whereby Partner Studios provide support in improving existing Apps and developing new Apps. The substantial majority of payments associated with service agreements for existing Apps are expensed to research and development when the services are rendered as the payments primarily relate to developing enhancements for the Apps. Payments for new Apps associated with development agreements are generally made in connection with the development of a particular App, and therefore, we are subject to development risk prior to the release of the App. Accordingly, payments that are due prior to completion of an App are generally expensed to research and development over the development period as the services are incurred. Payments due after completion of an App are generally capitalized and expensed as cost of revenue. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for additional information.

Software Development Costs

We incur development costs related to internal-use software and the development of Apps. We review software development costs on a quarterly basis to determine if the costs qualify for capitalization. As a result of an agile and iterative development process, the preliminary project stage remains ongoing until just prior to launch, at which time final feature selection occurs. As such, software development costs do not meet the criteria for capitalization and are expensed as incurred to research and development expenses. We did not capitalize any software development costs during the years ended December 31, 2018, 2019, and 2020.

Goodwill

Goodwill is allocated to reporting units and tested for impairment on an annual basis during the fourth quarter or more frequently if we believe indicators of impairment exist. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. When conducting quantitative annual goodwill impairment assessments, we compare the fair value of its reporting units to their carrying value. If the carrying value of a reporting unit exceeds its fair value, then we record a goodwill impairment. Commencing January 1, 2019, the lesser of (i) the entire amount by which the carrying value of a reporting unit exceeds its fair value or (ii) the carrying value of goodwill allocated to such reporting unit is recorded as an impairment to goodwill. As of December 31, 2018, 2019, and 2020, no impairment of goodwill has been identified.

Intangible Assets

This consists of identifiable intangible assets, primarily Apps, user base, developed technology and intellectual property licenses resulting from acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives, generally 2 to 7 years. Our estimates of useful lives of intangible assets are

 

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based on cash flow forecasts which incorporate various assumptions, including forecasted user acquisition costs, user attrition rates and level of user engagement.

Intangible assets also include costs of intellectual property that we license from third parties for use of their content in our game. The licensing agreements include license payments, which are due over the terms of the agreements. We recognize these license payments as a license asset and a license obligation at the fair value on the contract date, based on a discounted cash flow model. The amortization of the licensed asset commences when the game with licensed content is launched and when licensed agreement is executed; and is recorded in cost of revenue on a straight-line method over the remaining license terms or estimated useful life of the game with licensed content, whichever is shorter. The classification of the license obligations between current and long-term is based on the expected timing of the payments to the licensor.

Impairment of Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. If such circumstances are present, we assess the recoverability of the long-lived assets by comparing the carrying value to the undiscounted future cash flows associated with the related assets. If the future net undiscounted cash flows are less than the carrying value of the assets, the assets are considered impaired and an expense equal to the amount required to reduce the carrying value of the assets to the estimated fair value is recorded as an impairment of intangible assets in the consolidated statements of operations. 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. For example, if future operating results do not meet current forecasts, we may be required to record future impairment charges for acquired intangible assets. Additional factors which significantly affect future cash flows related to long-lived assets include, but are not limited to, forecasted user acquisition costs, user attrition rates, and level of user engagement. Significant changes in these factors may require us to reassess recoverability of long-lived assets and record impairment. Impairment charges could materially decrease future net income and result in lower asset values on our consolidated balance sheet. There were no material impairment charges recorded for the years ended December 31, 2018, 2019, and 2020.

Stock-Based Compensation

We estimate the fair value of employee stock-based compensation awards on the grant date using the Black-Scholes option pricing model and recognize the grant date fair value as compensation expense on a straight-line basis over the requisite service period. The Black-Scholes option pricing model requires use of various assumptions, including expected option life and expected stock price volatility. We determine the expected option life as the average of the options’ contractual term and the options’ vesting period. We estimate the options’ volatility using volatilities of public companies in a comparable industry, stage of life cycle, and size. We use the straight-line method for recording stock-based compensation expense and recognize forfeitures as they occur.

After the adoption of the Accounting Standards Update 2018-07—Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, on January 1, 2019, we account for non-employee stock-based compensation awards similar to employee stock-based compensation awards. Prior to 2019, options and other equity awards granted to non-employees were subject to periodic remeasurement over the period during which services were rendered based on the remaining contractual term.

 

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The following tables summarize the assumptions used in the Black-Scholes option pricing model to determine the fair value of our stock options:

The weighted average assumptions used to estimate the fair value of employee and non-employee stock options granted are as follows:

 

   Year Ended December 31, 
         2018              2019              2020       

Weighted-average expected term

   6.50   6.05   5.94 

Expected volatility

   62  43  39

Risk-free interest rate

   2.59  1.91  0.56

Dividend yield

   0  0  0

Given the absence of a public trading market for our Class A common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our Class A common stock, including:

 

  

independent third-party valuations of our Class A common stock;

 

  

the price of sales of our Class A common stock and preferred stock in recent secondary sales by existing stockholders to investors;

 

  

our capital resources and financial condition;

 

  

the preferences held by our preferred stock classes relative to those of our Class A common stock;

 

  

the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;

 

  

our historical operating and financial performance as well as our estimates of future financial performance;

 

  

valuations of comparable companies;

 

  

the hiring of key personnel;

 

  

the status of our development, product introduction, and sales efforts;

 

  

the price paid by us to repurchase outstanding shares;

 

  

the relative lack of marketability of our Class A common stock;

 

  

industry information such as market growth and volume and macro-economic events; and

 

  

additional objective and subjective factors relating to our business.

Prior to this offering, in valuing our Class A common stock, our board of directors determined the fair value of our Class A common stock using both the income and market approach valuation methods, in addition to giving consideration to recent secondary sales of our Class A common stock. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on our weighted-average cost of capital, and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of our company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to our company’s financial forecasts to estimate the value of the subject company.

 

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Following this offering, it will not be necessary to determine the fair value of our Class A common stock, as the shares will be traded in the public market.

Based upon the initial public offering price of $80.00 per share, the aggregate intrinsic value of our stock options outstanding as of December 31, 2020 was $2.14 billion, with $589.6 million related to vested stock options.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes.

We record uncertain tax positions on the basis of a two-step process in which determinations are made (i) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a tax authority.

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in our consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the dates of the statement of financial position included in this prospectus.

 

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LETTER FROM ADAM FOROUGHI, CO-FOUNDER, CEO, AND CHAIRPERSON

From the beginning, we built AppLovin differently.

When we founded AppLovin in 2011, we thought our vision for solving the mobile app discovery problem was exactly the kind of big idea that every venture capitalist would love. Maybe it just wasn’t the right timing, but not a single VC chose to invest with us after countless meetings. At AppLovin, we love a challenge, and rather than being discouraged, we were motivated. We knew that mobile apps were changing the world, and that the importance of the app ecosystem would only increase. We believed that if we could help developers get their apps discovered by the right end users, we would build a meaningful business that would simultaneously better the lives of consumers around the world.

Without venture capital, we committed to profitable growth from Day 1. We remained intensely focused on the things that mattered most—our people, our products, and our technology. Every dollar and every resource were allocated with care. Looking back, we have had positive cash flows from operating activities each year since 2013 and we still treat every dollar like it is our own.

Our lean, entrepreneurial approach means that we can make fast decisions, be flexible and creative, and deliver more value for our customers. We keep our technology at the core of everything we do and are always thinking about what comes next. While we have grown significantly over the years, we have maintained this hungry, smart, and focused culture—a culture that is embedded in our DNA. This approach has fueled our success to date and will continue to carry us into the future.

We thank you for considering an investment in AppLovin, and we are excited to share our story with you.

Our Mission

Our mission is to grow the mobile app ecosystem.

When we started in 2011, mobile was in its early days, but it was clear the smartphone had unlocked a new world of possibility. Apps—with their endless use cases and potential – were the future, and we wanted to be in the middle of it.

So, we set out to build our own apps. The first one was an app discovery product for the consumer. We were so excited to share our work with the world, but soon realized there were no great alternatives to do this cost effectively. We realized that getting our app to the user was actually the hard part, and that this was a big problem. With that one foundational insight, we rebuilt our business around the developer—creating products that made the developers’ lives easier, and enabling them to reach users in every corner of the globe. AppDiscovery was born.

The success of AppDiscovery and the products that came after it, stems from our belief that when our partners succeed, we succeed. At AppLovin, we wake up every day to build the best tools and products in the market, and to provide our business clients with measurable gains that fuel growth in their enterprises.

In 2018, we created AppLovin Apps to further extend our reach in the mobile app ecosystem. Today, AppLovin Apps has grown into a portfolio of over 200 leading mobile apps that entertain tens of millions of happy consumers every day. When we build our tools, we build for our business clients and for our AppLovin Apps. Our experience as an app developer allows us to better understand and better serve, the needs of our business clients—which, in turn, creates more growth in their business, and in ours.

 

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Our People and Our Culture

Every day, I am humbled by the talent and dedication of our team, and the passion they bring to our business. To the AppLovin team, thank you.

We believe that great people and great culture is the bedrock for our success. Today, we still maintain the same nimble approach that kickstarted our business when AppLovin was bootstrapped with a few developers in a small Palo Alto office:

We seek excellence. We want to be the best. We keep the bar high and we hold each other accountable. We aim to work harder and smarter than the rest.

We are entrepreneurial. We haven’t forgotten our roots. We hire exceptional people and we let them build. We are always looking for new ways to do things, always investing, always improving.

We are inclusive and excel through our culture of diversity. We believe in giving each person the opportunity to advance themselves based on the merits of their work. We are a company where every person has the opportunity to grow, learn, and contribute. Diverse cultures bring diverse viewpoints, which fosters innovation. Often, our best leaders don’t have traditional backgrounds and challenge the most conventional of wisdom.

We are fast and deliver. Our business is about performance. We feel immense responsibility to our customers, our users, and our fellow AppLovin teammates to deliver on our mission each and every day.

We do it all with integrity. We are open and honest, even if it is not the easy thing to do. We build for the long-term, and we strive to do it the right way. We know that our reputation takes a lifetime to build and a moment to lose.

Our Future

Writing this letter, I am even more optimistic than I was when I first took that trip down Sand Hill Road in 2011. The mobile app economy is bigger than we had ever imagined, and our platform is stronger.

From the beginning, we built AppLovin differently, and we promise to continue building differently. We always put innovation first and strive to deliver market leading solutions to the mobile app ecosystem.

With all the progress that we have made so far, we feel that AppLovin’s journey is just beginning. We hope you join us.

LOGO

 

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BUSINESS

Our mission is to grow the mobile app ecosystem by enabling the success of mobile app developers.

Our software solutions provide advanced tools for mobile app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. Since inception, our platform has driven over six billion mobile app installs for mobile app developers. Our software, coupled with our deep industry knowledge and expertise, has allowed us to rapidly scale a successful and diversified portfolio of owned mobile apps. We have also accelerated our market penetration through an active acquisition and partnership strategy. Our scaled and integrated business model sits at the nexus of the mobile app ecosystem, which creates a durable competitive advantage that has fueled our clients’ success and our strong growth.

Over the past two decades, mobile apps have become integral to our lives. Mobile apps offer a wide array of applications, such as allowing users to seamlessly share ideas, make purchases, monitor health, and access entertainment. Based on data from IDC, we estimate our total market opportunity to be $189 billion in 2020, growing to $283 billion in 2024, or a 10.6% CAGR. Growth of the mobile app ecosystem benefits mobile app users, but makes it harder for mobile app developers, and particularly indie developers, to scale and succeed in a crowded market. Most developers lack access to the marketing, monetization, and data analytics tools required to stand out among the more than 4.8 million mobile apps available on the Apple App Store and Google Play Store, according to Statista, or attract sufficient numbers of mobile app users to create and sustain a successful long-term business. Underscoring how difficult it is to create a successful mobile app, SensorTower estimates that 80% of all mobile app downloads were generated by 1% of the total developers across Apple App Store and Google Play Store in the third quarter of 2019.

The marketing and monetization challenges faced by mobile app developers are particularly acute for developers of mobile games, which is one of the largest and fastest-growing segments within the mobile app ecosystem. According to IDC, there are more than 2 billion mobile gamers worldwide—and, according to Statista, there are more than 1.3 million mobile gaming apps on the Apple App Store and Google Play Store. Mobile gaming accounts for 39% of worldwide app downloads and for 72% of all app store consumer spend by value, according to Sensor Tower.

AppLovin is critical to the success of mobile app developers, in particular mobile game developers, solving key marketing and monetization challenges. Through our technologies and scaled distribution, developers are able to manage, optimize, and analyze their marketing investments, and improve the monetization of their apps. The key elements of our solutions are delivered through the AppLovin Platform, which is comprised of AppLovin Core Technologies and AppLovin Software:

 

  

AppLovin Core Technologies: Our foundational technology infrastructure which powers our Software and, in turn, our Apps. Our Core Technologies consist of our AXON machine-learning recommendation engine, our App Graph, and our elastic cloud infrastructure. Our Core Technologies are robust, having processed over 3 petabytes of data per day on average, as many as 3 trillion predictions per day, and up to 6.5 trillion events per day in January 2021, while remaining flexible enough to rapidly adjust to our clients’ evolving needs. Our App Graph stores and manages anonymized data from hundreds of millions of mobile devices we reach every day, which our AXON engine then leverages to better predict and match users to relevant advertising content.

 

  

AppLovin Software: A comprehensive suite of tools for developers to get their mobile apps discovered and downloaded by the right users, optimize return on marketing spend, and

 

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maximize monetization of engagement. Our Software reaches an audience of over 410 million users every day.8 Our Software is comprised of three solutions:

 

  

AppDiscovery, our marketing software solution, is the cornerstone of our Software, augmented by our rapidly growing MAX monetization solution and Compass analytics tools. AppDiscovery is powered by AXON and provides the technology to match advertiser demand with publisher supply through auctions at vast scale and microsecond-level speeds, peaking at 3.5 million requests processed per second in January 2021.

 

  

MAX utilizes an advanced in-app bidding technology that optimizes the value of a developer’s advertising inventory by running a real-time competitive auction, driving more competition and higher returns for publishers.

 

  

Compass is the analytics tool within MAX which gives developers the testing capabilities, insights, and intelligence needed to stay competitive and manage profitability.

In 2018, given an opportunity to scale our own apps using our Software, insights, and expertise in the mobile app ecosystem, we launched our first-party content strategy, AppLovin Apps. Today, our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by twelve studios including Owned Studios and Partner Studios. Our Apps provide data and insights as users play games, thus improving our App Graph and AXON recommendation engine. Since 2018, 31 of our games have ranked in the Top 10 Free Games overall, according to Sensor Tower. Our studios generally focus on low-risk development of easy to learn and play games, which appeal to a broad range of demographics, but also develop several games for other genres. This approach mitigates risk that traditional games face and replaces it with a more predictable and repeatable economic model.

The combination of our Platform and Apps forms a strategic flywheel that drives growth across our business and furthers our competitive advantages. As more developers use our Platform’s Software to market and monetize their mobile apps, we gain access to more users and more user engagement further strengthening our scaled distribution. As our distribution grows, we gain better insights for our App Graph and AXON recommendation engine, which then further enhances our Software. This continuously improving flywheel helps developers that use our Software to create and sustain successful businesses, growing both our own business and the mobile app ecosystem.

We accelerate our capabilities and enhance our strategic position in the mobile app ecosystem by actively pursuing acquisitions and partnerships for new technologies and apps. Insights that we derive from our strategic position and flywheel allow us to proactively identify attractive acquisition and partnership opportunities across the mobile app ecosystem. Since the beginning of 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships with app studios, games, and technologies. In the case of new apps, we are able to deploy our Software and expertise to accelerate revenue growth, enabling us to generate strong returns on investment. We estimate that a year after joining our portfolio, Apps we acquired in 2018 and 2019 have increased their quarterly revenue over 100% on average.9 Strategic acquisitions and partnerships will continue to be a part of our growth strategy going forward.

 

8 

For the three months ended December 31, 2020. We calculate this audience as the average number of unique device identities that open a mobile app (whether that mobile app our own or a third party’s) which has our software development kit (SDK) on each day in a period. We measure this figure through our SDK. An individual who uses an app in more than one country on a particular day will be counted as more than one unique device identity; however, if an individual uses more than one app in the same day, such individual is only counted once. This figure does not include any users who have opted out of allowing apps to track on their mobile phone.

9 

Based on a comparison of unaudited revenue for such acquired Apps for the three months prior to the acquisition against our revenue from such Apps in the same period in the subsequent year.

 

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Our focus on building market-leading technology, coupled with our unique approach to developing and growing our Apps portfolio, has produced a business model characterized by rapid growth and strong cash flow generation. Our revenue has grown at a 76% CAGR from 2016 to 2020. For 2020, our revenue grew 46% year-over-year from 2019, from $994.1 million in 2019 to $1.45 billion in 2020. For 2019, our revenue grew 106% year-over-year from 2018, from $483.4 million in 2018 to $994.1 million in 2019. We generated a net loss of $260.0 million in 2018, net income of $119.0 million in 2019, and a net loss of $125.9 million in 2020. We generated Adjusted EBITDA of $255.6 million, $301.2 million, and $345.5 million in 2018, 2019, and 2020, respectively. Additionally, we have generated strong cash flows, with net cash provided by operating activities of $139.0 million, $198.5 million, and $222.9 million in 2018, 2019, and 2020, respectively. This has allowed us to reinvest in our expansion and growth. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Adjusted EBITDA” for a description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Industry Background

Key Trends within the Mobile App Ecosystem

The mobile app ecosystem is growing rapidly and is increasingly defining how we interact with the world. Increasing global penetration of smartphones, the cloud, and faster data has fueled a rapid expansion in the mobile app ecosystem. In 2019, for the first time Americans consumed more content on mobile devices than on TV according to eMarketer, providing a significant growth opportunity for the mobile app ecosystem. Mobile apps offer an amazing array of applications, such as allowing users to seamlessly share ideas, make purchases, monitor their health, and access entertainment. Based on data from IDC, we estimate that our market opportunity within the mobile app ecosystem will grow from $189 billion in 2020 to $283 billion in 2024, or a 10.6% CAGR. In 2019, over 204 billion applications were downloaded globally, and the average consumer spent 3.7 hours per day on mobile, according to App Annie.

The proliferation of accessible and affordable advanced development tools has led to lower cost and shorter development times for new apps. A broad selection of high quality, easy to use, commoditized development kits has decreased the time, capital, and expertise required to make an app. App stores have removed distribution barriers by seamlessly delivering apps to billions of users. Through live operations efforts, developers regularly update and tailor their in-market apps to optimize engagement, usage, and monetization.

Mobile gaming has become one of the largest and fastest-growing sectors within the mobile app ecosystem. Mobile gaming accounts for 39% of worldwide app downloads and for 72% of all app store consumer spend by value, according to Sensor Tower. Improvements in processors, displays, battery life, and connectivity have attracted users to mobile devices from other platforms and fueled the acceleration of growth across mobile gaming. With the creation of new gaming genres that have a wide appeal, the profile of gamers has broadly expanded.

Key Challenges for Developers

Today’s app developer journey has three key steps – make, market, and monetize. The ‘make’ step has never been easier, but developers still face key challenges in marketing and monetizing their apps.

The abundance of apps today creates a discovery and marketing challenge for mobile app developers. The ease of making apps has created a highly fragmented market with over 2.87 million

 

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apps available through the Google Play Store and 1.96 million apps available through the Apple App Store, according to Statista. Of these, there are more than 1.3 million mobile games for users to choose from, according to Statista. As the number of apps has grown, so have the number of mobile app users, creating an incredibly complex matching dilemma. To further amplify the problem, even after a user downloads an app, for the average consumer in the United States, that app is now just one of the nearly 100 apps on the average smartphone according to App Annie, meaning developers must compete for user engagement and screen time. As a result, developers must overcome both a crowded marketplace and home screen to successfully market and monetize their apps, and this is especially difficult for indie developers. Today, only approximately 4,000 mobile apps generate more than $1 million annually, according to IDC.

Many developers lack access to marketing and monetization tools required to build a successful business in the mobile app ecosystem. Most mobile apps are free to install and many rely on in-game advertising and IAPs for monetization. To be successful, a developer’s app must not just be discovered but also generate user engagement to effectively sell ad inventory or create compelling content for IAPs. To generate advertising revenue, developers must navigate a complicated partner ecosystem with revenue leakage at each step. Effective marketing spend that matches a targeted ad, priced accurately and for the right user, leads to better results. These small efficiency gains differentiate apps in the highly fragmented and inefficient broader mobile app ecosystem.

Our Market Opportunity

Based on data from IDC, we estimate our total market opportunity in the mobile app ecosystem to be $189 billion. We calculated this estimate by aggregating worldwide total in-app advertising revenue of $101 billion (including both gaming and non-gaming in-app display, video, and other advertising, but excluding in-app search advertising) and worldwide direct game spending of $88 billion for 2020.

Today, many of our customers come from the mobile gaming market. We initially focused on this market because we saw a sophisticated yet fragmented market, which would appreciate the need for highly effective marketing spending that leads to improved customer retention, customer lifetime value, and return on investment. Based on data from IDC, we estimate the mobile gaming market opportunity for developers/publishers to be $110 billion in 2020, comprised of both direct game spending of $88 billion and mobile gaming advertising payouts to developers/publishers of $22 billion.

Our Software can also serve the rapidly growing, broader mobile app market. Our Software is already used by several non-gaming apps and we will continue to expand our value proposition for these apps going forward. As such, we believe we have an attractive opportunity to capture market share in the broader mobile advertising market.

How We Grow the Mobile App Ecosystem

We have built and invested in our Platform, which expands the mobile app ecosystem by solving key developer growth challenges. We deliver value to mobile app developers by helping scale their businesses and maximize their revenue through our marketing and monetization technologies and expertise. Our uniquely integrated Platform —comprised of our Core Technologies and Software—combines marketing, monetization, and analytics into a single unified technology stack.

 

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AppLovin’s Integrated Approach

 

 

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Applovin software Platform marketing appdiscovery monetization max analytics compass applovin core technologies axon machine learning app graph flexible, robust, cloud infrastructure apps Applovin apps client apps

AppLovin Core Technologies

Our Core Technologies are our foundational technology infrastructure, which powers our Software and, in turn, our Apps. Our Core Technologies consist of our AXON machine-learning recommendation engine, our App Graph data management layer, and our elastic cloud infrastructure. Our Core Technologies catalogue and consolidate billions of interactions globally every day into our proprietary App Graph. AXON receives information from our App Graph and uses its machine-learning algorithms to match each user to relevant advertising content, driving better engagement and monetization.

Our flexible, robust cloud infrastructure is the backbone of our Core Technologies. This proprietary system allows us to operate at massive scale and process significant data while maintaining a high degree of flexibility, so that we may keep pace with the ever-evolving needs of our customers. Our Core Technologies operate at high scale and speed, having processed over 3 petabytes of data per day on average, as many as 3 trillion predictions per day, and up to 6.5 trillion events per day in January 2021. Our globally distributed data infrastructure ensures we are able to connect with devices worldwide and process aggregate user activity across our Software.

AppLovin Software

Our Software provides a comprehensive suite of tools for developers, primarily indie developers, to grow their businesses by automating and optimizing the marketing and monetization of their apps. This suite is made up of three key solutions:

 

  

AppDiscovery is our marketing software solution, which matches advertiser demand with publisher supply through auctions at vast scale and microsecond-level speeds, peaking at 3.5 million requests processed per second in January 2021. AppDiscovery is powered by our AXON machine-learning recommendation engine with predictive algorithms that enable developers to match their apps to users that are more likely to download them.

 

  

MAX is our in-app bidding software that optimizes the value of an app’s advertising inventory by running a real-time competitive auction, driving more competition and higher returns for publishers. Many developers that integrate MAX have experienced a measurable increase in their average revenue per daily active user over traditional monetization tools and save countless hours because they are able to automate manual monetization work through its advanced feature set.

 

  

Compass is our analytics software solution which is integrated into MAX, gives developers insights from deep analytics, allowing developers to optimize ad-based monetization, improve

 

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user engagement, and manage their return on investment. Compass delivers advanced analytics such as advanced reporting and profitability analysis to developers in an easy-to-use, integrated solution.

When deployed together, our Software helps developers better reach and monetize a more precisely targeted and valuable user base.

Our Software is delivered through an integrated and seamless user interface, allowing developers to accelerate their revenue opportunities, reduce the time they spend on marketing and monetization, and focus on what they do best—developing apps.

AppLovin Apps

Our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games run by twelve studios with a deep bench of talented developers. These Apps are accessed by nearly 32 million users every day.10 In addition, 31 of our games have reached the Top Ten Free Games, according to Sensor Tower. Our diversified portfolio covers five gaming genres, the most frequent of which is casual games, and appeals to a broad global audience across different ages, genders, and locations.

Our Owned Studios and Partner Studios utilize our Software to market and monetize our Apps. When using our Software, our Apps have an economic advantage, which benefits our business as a whole. The strategy of our studios is to allow developers to focus on creating great Apps, while leveraging our Software and expertise to unlock the potential of those Apps.

For example, PeopleFun was acquired in March 2018 and after a year, we estimate PeopleFun had increased its quarterly revenue by over five times and monthly installs on AppDiscovery by nearly seven times.11

Similarly, in November 2019, we acquired Clipwire Games, which was not a business client. After its first year using our Software, we estimate Clipwire Games increased its quarterly revenue by four times and monthly installs on AppDiscovery from zero to 254,000.12

 

 

10 

For the three months ended December 31, 2020. We calculate this figure as the average number of unique device identities that opens one of our Apps on each day in a period. We use third-party attribution partners to measure this figure. An individual who opens more than one App on a particular day will be counted as more than one user for this purpose.

11 

The quarterly revenue measurement is based on a comparison of the unaudited revenue of PeopleFun for January through March 2018 compared to our unaudited revenue generated by PeopleFun for the same period in 2019. The monthly installs measurement is based on internal data from AppDiscovery for the same periods.

12 

The quarterly revenue measurement is based on a comparison of the unaudited revenue of Clipwire Games for August through October 2019 compared to our unaudited revenue generated by Clipwire Games for the same period in 2020. The monthly installs measurement is based on internal data from AppDiscovery for the same periods.

 

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Acquired in Q1 2018 Texas-based PeopleFun was acquired in early 2018. The team previously founded Ensemble Studios, the developer behind Age of Empires. 1.4M st s 12 th i t ll A Dis v y 214k PRE-ACQUISITION VS. th +12 MONTHS INSTALLS i t ll T t l 5.4x Q rt ly R v 1x PRE-ACQUISITION VS. +12 MONTHS POST The quarterly revenue measurement is based on a comparison of the unaudited revenue of PeopleFun for January through March 2018 compared to our unaudited revenue generated by PeopleFun for the same period in 2019. The monthly installs measurement is based on internal data from AppDiscovery for the same periods.


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Acquired in Q4 2019 Acquired Toronto, Canada-based studio in late 2019 after identifying Bingo Story as a potential category leader. 254k t +12 months A Di i t ll PRE-ACQUISITION VS. 0 +12 MONTHS INSTALLS i t ll T t l 4x Q rt ly R 1x PRE-ACQUISITION VS. +12 MONTHS POST The quarterly revenue measurement is based on a comparison of the unaudited revenue of Clipwire Games for August through October 2019 compared to our unaudited revenue generated by Clipwire Games for the same period in 2020. The monthly installs measurement is based on internal data from AppDiscovery for the same periods.


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Our Strategic Flywheel

The mutually reinforcing combination of our Software’s scaled distribution, our App’s first-party content, and our Core Technologies’ recommendation engine creates a powerful flywheel effect that enhances each component and importantly improves our overall strategic position and capabilities. As our Software improves and is able to deliver more effective ads to more relevant users, more developers use and integrate their apps with our Software, growing our scaled distribution. This grows the number of users on and level of engagement with our Apps and third-party apps. With a larger number of users engaged with our Software and our Apps, our App Graph gains more insights and data. The enhanced App Graph feeds our AXON machine-learning recommendation engine, improving its insights and matching capabilities. As the insights generated by AXON improve, the effectiveness of our Software is enhanced in real-time. Better Software leads to more developer demand, restarting the virtuous cycle of our strategic flywheel.

Our Software benefits from more apps and users from both our Apps and those of third-party developers. Through more volume and better underlying software, our Software can better match and price the supply of advertising inventory and demand from advertisers, helping users discover the apps they love and delivering better returns for developers. Apps—whether third party or our own—benefit from the improved marketing and monetization capabilities of our Software, driving growth in users and revenue. With greater scale and resources, developers can reinvest to create new apps, improve existing apps, and further invest in user acquisition, thereby growing the overall mobile app ecosystem.

We derive highly strategic insights from our flywheel. As the largest user of our Software, our Apps benefit from the expertise and cost savings of our Software, leading to greater returns on user acquisition spend. This allows our Apps to make significant investments in user acquisition, giving us further insights into the effectiveness of our tools and monetization strategies across the ecosystem.

 

 

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MORE USERS SERVED RELEVANT ADS Scaled Distribution First Party Content AppDiscovery MARKETING MAX MONETIZTION APPLOVIN AppLovin Apps CONTINUOUSLY IMPROVING SOFTWARE INCREASED INSIGHTS AND MORE DATA AXON App Graph Infrasturcture Recommendation Engine

 

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Higher monetization and more users more users served relevant ads more likely to download more users download relevant apps more usage and data better insights and more engagement appdiscovery marketing max monetization applovin apps & client apps infrastructure app graph axon

Our Strategic Acquisitions and Partnerships

We accelerate our technical capabilities, strategic positioning, and growth through strategic acquisitions and partnerships. We have developed a proven and repeatable process for acquiring highly sophisticated technology that enhances our Platform and for selecting and scaling our Apps global portfolio. Our business sits at the nexus of the mobile app ecosystem, which gives us deep insights into potential acquisitions and partnerships. Additionally, as a first-hand participant in the mobile app ecosystem, we have developed a strong relationship with other participants, allowing us to more easily identify and enter into partnerships or acquire companies and technologies. Our acquisitions and partnerships include investments in software, such as our acquisitions of MAX and SafeDK, and game studios, such as our acquisition of PeopleFun and partnership with Belka Games.

Our unique and active role in the ecosystem allows us to make informed, data-driven decisions regarding which tools best address developer pain points. As part of AppLovin, our strategic acquisitions and partnerships benefit from our software and expertise, typically achieving step-function improvements in performance. Once we have acquired or partnered with a studio, we allow the studio to maintain its creative autonomy and help the studio to manage its business needs by leveraging all of the tools and capabilities of our Platform. Given our strategic insights and long-standing relationships with many game studios, we are able to identify highly attractive acquisitions and partnerships. Since the beginning of 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships. We estimate that a year after joining our portfolio, Apps we acquired in 2018 and 2019 have increased their quarterly revenue over 100% on average.13

Benefits to Mobile App Developers

Our Platform enables mobile app developers to:

 

  

Reach and attract users at scale. Our Software reaches over 410 million users per day, enabling developers to target and find the right users for their apps worldwide. Developers are able to set their user acquisition and revenue goals to target the most relevant, highest value users.

 

  

Maximize monetization of engagement. Developers use our Software to generate incremental revenue by maximizing the monetization of their mobile app ad inventory. Our tools operate at nearly instantaneous speeds and at vast scale to enhance monetization for developers while preserving the end user experience.

 

  

Leverage proprietary data and insights. Developers benefit from accessing comprehensive real-time insights through our customized user dashboards, helping them optimize campaigns, improve user engagement, and manage their return on investment. 

 

  

Automate time consuming and manual processes. Our Software automates marketing and monetization, allowing developers to focus on improving their apps rather than managing complex go-to-market processes manually.

 

  

Seamlessly adapt to industry innovation. Our cloud-based Core Technologies and Software are continuously updated as the mobile app ecosystem evolves. Developers on our Software benefit from this ongoing advancement and optimization, and are able to rapidly adapt to industry changes in marketing and monetization without losing focus on mobile app creation.

 

13 

Based on a comparison of unaudited revenue for such acquired Apps for the three months prior to the acquisition against our revenue from such Apps in the same period in the subsequent year.

 

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Our Strengths

 

  

Unique and improving position. Our competitive advantages, overall growth, and strong financial profile are a direct result of our integrated portfolio and strategic flywheel. We leverage insights across our flywheel to optimize our strategic position and business, in particular with regard to the allocation of development resources and investments.

 

  

Proven and optimized mobile app discovery and monetization technologies. For almost a decade, we have been improving our Platform. Powered by our AXON machine-learning recommendation engine and our App Graph, we leverage deep insights and technical expertise to create powerful software platforms and a significant competitive advantage. It is built using a scalable, globally distributed framework with an elastic architecture that allows us to rapidly build new technologies and adapt to changing industry demands. We automate marketing and monetization, freeing developers to focus on what they do best—app development.

 

  

An advantaged approach to the mobile apps market. Our Apps leverage the strength of our Platform and expertise to achieve strong discovery and monetization, leading to a differentiated approach and business model. As part of the AppLovin flywheel, our Apps provide more users and insights for our Platform. This advantaged approach to the mobile apps market provides the opportunity to expand into other mobile app sectors.

 

  

Highly accretive approach to strategic acquisitions and partnerships. We have a proven and repeatable playbook approach to our strategic acquisitions and partnerships. Since the beginning of 2018, we have invested over $1 billion across 15 strategic acquisitions and partnerships with app studios, games, and technologies. The mobile app ecosystem remains highly fragmented and provides an ongoing growth opportunity for us.

 

  

Strong business model drives rapid growth and cash flow. Based on our integrated assets and scale, we have a strong business model that has produced rapid revenue growth and an attractive margin profile. We take a capital-efficient approach to growth, resulting in significant cash flow. We are able to reinvest this cash flow to fuel sustainable growth.

 

  

Founder-led business, with a proven and experienced team to execute. Our co-founder, CEO, and Chairperson Adam Foroughi, leads a tenured management team with significant experience in the mobile app industry and scaling successful businesses. We believe the most critical element to our success is our ability to attract and retain the best talent. Our CEO and AppLovin have earned numerous awards, including a Top CEO award from Glassdoor, Entrepreneur of the Year Award in 2018 in Northern California from Ernst & Young, and multiple “best places to work” awards.

Our Strategy for Growth

We have a comprehensive strategy to continue our growth and further enhance our market position in the mobile app ecosystem.

 

 

Existing market expansion. We have an attractive market opportunity within our growing mobile app segments and will continue to invest across our Core Technologies, Software, and Apps:

 

  

Enhance and extend machine-learning platform technologies. As we increase our scale and reach, we benefit from compounding improvements to our AXON machine-learning recommendation engine, which in turn improves the efficacy and growth of our Software solutions.

 

  

Expand distribution reach and software capabilities. Improvements to AXON and our App Graph help to accelerate AppDiscovery’s growth. We also see an opportunity to increase market adoption of our MAX monetization solution, which is relatively new, and build out the distribution reach of our Software by developing direct sales and partner channels.

 

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Grow AppLovin Apps. We intend to grow our AppLovin Apps portfolio by making appropriate user acquisition investments, using live-ops to enhance engagement and monetization of our Apps, and launching new titles.

 

 

New market extensions. We believe our technology and expertise are applicable to other market segments and geographies that we do not currently address:

 

  

Expand into other mobile app segments and industries. Our long-term objective is to power and operate mobile apps across multiple verticals such as e-commerce, entertainment, and health and wellness. We believe our deep expertise and capabilities in the complex mobile gaming sector will allow us to successfully apply our technology in other verticals.

 

  

Geographic expansion and industry partnerships. We have a large international expansion opportunity given only 38% of our total revenue came from outside of the United States in 2020. To expand our reach, we plan to further invest in our sales and marketing to increase penetration among new and existing clients.

 

  

Other performance marketing and yield marketing categories. We believe our technology and expertise are applicable to other large and growing performance marketing categories beyond mobile apps.

 

 

Pursue accretive strategic acquisitions and partnerships. Given our proven track record, long-standing relationships with key industry players, and reputation as a partner of choice, we have a deep pipeline of software and app investment opportunities which we will continue to pursue. We have successfully invested over $1 billion across 15 strategic acquisitions and partnerships across app studios, games, and technologies.

Our Platform and Apps

We solve the marketing and monetization challenges facing mobile app developers through our Platform, which includes our Core Technologies and Software. Our Platform helps grow the worldwide mobile app ecosystem by enabling developers to scale their businesses while remaining focused on creating and improving their apps. We scale our own Apps by fully utilizing our Software and expert insights, while continuously improving our software for the benefit of all developers.

AppLovin Core Technologies

 

 

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Our Core Technologies power our client-facing Software and consist of our AXON machine-learning recommendation engine, our App Graph, and a flexible, robust cloud infrastructure. The underlying elastic architecture is managed through multiple cloud providers and our own co-located data centers, handling massive amounts of data while remaining flexible enough to rapidly add new solutions and technology in response to changing market and customer needs. Our Core Technologies process device-level data from hundreds of millions of devices. Our App Graph stores and manages this anonymized data allowing AXON to then leverage it to better predict and match users to relevant advertising content. These insights fuel our Software, which better matches users to content and create a more personalized experience.

 

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Our Software also enables real-time auctions that optimize the value for each impression, while simultaneously enabling developers to attain an attractive value for each of the impressions from their inventory. The sum total of these mutually reinforcing software elements has created a robust and successful marketing and monetization engine that processed over 3 petabytes of data per day on average and up to 6.5 trillion events per day in January 2021. Our Core Technologies operate at high scale and speed, processing on average over 200 billion requests per day and as many as 3 trillion predictions per day in January 2021.

AppLovin Software

 

 

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Our comprehensive Software suite enables app developers to automate their mobile app marketing, engagement, and monetization efforts in three core ways. First, we provide marketing technology that allows developers to reach more of the most suitable users with personalized content, in order to increase the number of users who download and engage with their apps. Second, we provide developers with monetization and analytics technology to maximize the value of their inventory by obtaining a high price for each impression. Third, we provide developers a set of capabilities to optimize their apps and help streamline their businesses.

Our key Software offerings are AppDiscovery, MAX, and Compass, which is part of MAX.

AppDiscovery

AppDiscovery is a suite of marketing solutions that enables developers to automate, optimize, and manage their marketing efforts. AppDiscovery is powered by machine-learning with predictive algorithms that enable developers to match their apps to users that are more likely to download them. This form of personalized advertising focuses on the end user, enabling the advertisers to find the right users and delivering to users more of what they are likely to be interested in. AppDiscovery leverages our AXON machine-learning recommendation engine to target the right users with the right marketing campaign, at scale. Advertisers not only attract users that download, but also find a high volume of users that stay and engage with their apps for greater retention and ultimately, increased opportunities for better monetization. Revenue from AppDiscovery comprises a vast majority of revenue from our Software.

With AppDiscovery, advertisers can define the framework of their campaigns in the following ways:

 

  

Reach: Advertisers identify what they are willing to pay to acquire their target users. Our technology finds the users at that value who are most likely to download and engage with the app.

 

  

Global scale: Advertisers can choose to connect with users in different regions around the world, and our technology suggests the best locations based on their parameters.

 

  

Retain and engage: Our algorithms automatically adjust based on the likelihood users will engage. Our clients can analyze by retention periods from initial app download onwards, so that advertisers understand the effectiveness of their marketing investments.

 

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Targeted  returns: Advertisers set their goals and target return on ad sales and our algorithms adjust cost and campaign specifics to meet them.

AppDiscovery includes the following features:

 

  

Advanced campaign management: An interface to create, manage, and automatically optimize campaigns based on return on ad sales goals.

 

  

Real-time analytics: An interface to see results and optimize against them with our ROI-based analytics environment.

 

  

Life-Time-Value (LTV) reporting: A tool that breaks down campaign results by source and location, allowing advertisers to make real-time, informed decisions about the value and longevity of their campaigns.

 

  

High quality and quantity creatives: Advertisers can make and test as many creatives as needed. They also have access to our in-house creative team for expert ad creation and testing strategies.

MAX

MAX is a suite of monetization solutions that optimize the value of a developer’s traffic by running a single unbiased auction in which advertisers bid simultaneously, driving more competition and higher prices for publishers. MAX auctions are more effective than historical tools and approaches because MAX yields more targeted users for advertisers and enables publishers to achieve better prices for each impression. MAX has become the preferred in-app bidding solution for many developers worldwide, helping drive meaningful growth and momentum for MAX.

MAX includes the following features:

 

  

Advanced in-app bidding technology: MAX’s competitive auctions happen in real time with the most bidding platforms in the industry bidding simultaneously for developers’ inventory at high volume. The competitive global demand helps maximize average revenue per user on each impression with many developers experiencing a measurable increase when moving to MAX.

 

  

Automated monetization: MAX saves developers time through its extensive suite of APIs for automation.

 

  

Ad quality assurance and review: MAX drives superior user experience with exclusive features that automatically flag risky content to keep developers’ brands safe.

 

  

Powerful insights: MAX helps developers better understand the LTV for each user and increase revenue to maximize yield for each ad opportunity.

 

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Compass

The Compass Analytics tool within MAX provides insights to manage against key performance indicators, understand the long-term value of users, and help manage profitability. Through advanced reporting and profitability analysis, Compass allows developers to measure their performance holistically: moving from traditional campaign-level reports to lifetime user performance reporting, and from single app insights to reporting across revenue streams.

AppLovin Apps

 

 

LOGO

applovin apps final fantasy xv word bingo

Today, our Apps consist of a globally diversified portfolio of over 200 free-to-play mobile games across five genres, run by twelve studios with a deep bench of talented developers. Our Owned Studios and Partner Studios have developed and published more than 200 games across a number of genres including: casual, hypercasual, match-three, midcore, and card/casino. Within our Apps, no single game contributed more than 16% of our total revenue in 2020. Our Apps contribute a highly predictable and diversified stream of revenue which we leverage to invest into acquiring more users and driving continued growth.

A diverse portfolio allows us to reach multiple user demographics and diversify our mobile game development across many different genres. We have a broad audience on our Apps and this allows our Software to connect users to a wide range of content. Today, a large segment of our portfolio is casual games which have a lower risk of development and generally have more predictable revenue streams and return on investments. Casual games can be played a few minutes at a time and appeal to a wide range of users across many highly attractive demographics.

Our Owned Studios and Partner Studios leverage live ops to quickly iterate and increase in-game monetization by optimizing app economies and improving in-game conversion on items and offers. Our Software and expertise provide analytical tools, testing capabilities, and tools for apps like distributed development, competitive insights, localizations resources, creative services to develop and test ads and resource centers to access design and development expertise.

 

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We also provide a set of services that help both our Apps and third-party developers optimize their games and leverage our expertise to better streamline their business operations.

Our Apps are operated by twelve Owned Studios and Partner Studios located worldwide:

 

 

LOGO

STUDIO Lion Studios peoplerun Magic Ant Firecraft Studios BELKA GAMES Clipwire GAMES GeeWa Redemption GAMES machine zone zenlife GAMES KRYSS ATHENA STUDIO YEAR 2018 2018 2018 2019 2019 2019 2020 2020 2020 2020 2020 2020 LOCATION United States United States United States China Cyprus Canada Czech Republic United States United States Singapore Denmark Vietnam GENRE Hypercasual Word Puzzle Mathc-three Casual Bingo PvP Match-three Mid-core Resource Management Card Word APP Hooked Inc. Wordscapes Fill - one-line Matchington Mansion Clockmaker Bingo Story Smashing Four Sweet Escapes Final Fantasy XV Cooking Madness Kryss - The Battle of Words Woody Block Puzzle #1 Top Grossing Sports Game in 17 countries #q Top Grossing Word Game in 106 countries #1 Top Grossing Trivia Game in 28 countries #1 Top Grossing Family Game in 145 countries Top 100 Grossing Game in 101 countries Top 5 Grossing Board Game in 32 countries #1 Top Grossing Strategy Game in 15 countries Top 5 Grossing Puzzle Game in 51 countries #1 Top Grossing Role Playing Game in 105 countries Top 5 Grossing Strategy Game in 46 countries Top 5 Grossing Word Game in 16 countries #1 Top Grossing Board Game in 103 countries According to App Annie these are the best grossing ranks ever achieved on iOS.

Competition

We operate in a fragmented mobile app ecosystem composed of divisions of large, well-established companies as well as privately-held companies. The large companies in our ecosystem may play multiple different roles given the breadth of their businesses.

 

  

Advertisers typically engage with several advertising platforms and networks to purchase advertisements on mobile games and other mobile apps, looking to optimize their marketing investments. Such advertising platform companies vary in size and include players such as Facebook, Google, Amazon, and Unity Software, as well as various private companies. Several of these platforms, including Facebook, Google, Amazon, and Unity Software, are also our partners and clients.

 

  

There are many companies that develop online and mobile games and other mobile apps. The larger gaming companies in our ecosystem include Activision Blizzard, Tencent, and Zynga, as well as other public and private companies. Many of these companies are also our partners and clients. We also expect new players to enter the market and existing companies to allocate more resources to develop and market more mobile games and apps.

We believe that the principal competitive factors in our market are:

 

  

the ability to enhance and improve technologies and offerings;

 

  

knowledge, expertise, and experience in the mobile app ecosystem;

 

  

relationships with third parties in the mobile app ecosystem;

 

  

the ability to reach and target a large number of users;

 

  

the ability to identify and execute on strategic transactions;

 

  

the ability to successfully launch and monetize mobile apps;

 

  

the pricing and perceived value of offerings;

 

  

brand and reputation; and

 

  

ability to expand into new offerings and geographies.

We believe we compete favorably with respect to these factors.

 

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Our Values

Our AppLovin Values capture our company’s culture and guide our approach on how we build and grow our business with all stakeholders:

We seek excellence, together. We know that our customers trust us to deliver immersive experiences and best-in-class tools. We take this very seriously, challenging one another to always do better. We are our toughest critics and most loyal fans. While we value individual initiative, we collaborate to drive forward as one team.

We are tenacious, move fast, and deliver. We move quickly and intentionally. Together we set a fast pace with high expectations, and then move beyond. We leverage all of our resources so we do not miss opportunities and find ways to deliver exceptional solutions.

We operate with integrity and intellectual honesty. We may move quickly and deliver, but we do it the right way. We do what is fair and operate with integrity because that is always the best course for customers, partners and all other stakeholders.

We foster entrepreneurship to challenge what is next. Taking risks and embracing challenges are part of our DNA. We empower our employees to try new things, question others, and innovate. This opens doors to new opportunities, which leads to more successful outcomes.

We excel through our culture of equality. Diversity and inclusion are principles that guide how we build our teams, grow our employees, and develop our company. We celebrate different approaches, points of view, and our diverse voices. It connects us with the players, developers, and global communities we serve.

Our employees are a key reason for our success and are essential for our continued growth. We benefit from a distributed global workforce and we plan to continue investing in hiring employees in our many locations worldwide. Our culture, industry success, and competitive compensation enable us to successfully retain our employees and to effectively recruit and retain new talent. We have been awarded multiple “best places to work” awards and our CEO was recognized as a Top CEO by Glassdoor and Entrepreneur of the Year in Northern California by Ernst & Young in 2019 and 2018, respectively.

In addition, following our initial public offering, we intend to use $75.0 million of our Class A common stock for charitable purposes, which will allow us to amplify our impact in our industry and the communities in which we work.

Research and Development

Continued investment in research and development is important to advancing our Core Technologies, Software, and Apps. These advancements are key to attaining our strategic objectives and meeting the evolving needs of our customers. The underlying elastic architecture of our Core Technologies allows us to create, test, and deploy new features rapidly while distributing them globally. We also continue to invest in new and existing Apps.

Our research and development team is working on cutting edge technologies, which allows us to attract top talent globally. As of December 31, 2020, we had approximately 571 employees, or 63% of our total headcount, involved in research and development and related activities. Our research and development organization is based in Palo Alto, California with additional resources around the world.

Intellectual Property

Our success depends in part upon our ability to protect our intellectual property rights with respect to our Core Technologies, Software, and Apps, and to operate without infringing, misappropriating or

 

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otherwise violating valid and enforceable third-party intellectual property. We seek to accomplish that objective by establishing intellectual property rights in and protecting those assets through a combination of patents, patent applications, registered and unregistered trademarks, copyrights, trade secrets, license agreements, confidentiality procedures, non-disclosure agreements with third parties, and other contractual measures. Though we rely in part upon these legal and contractual protections, we believe that factors, such as our unique position in the mobile app ecosystem and as one of the largest mobile game publishers, our flywheel advantage, our expertise and determination of our employees, and the functionality and flexibility of our Platform in an ever-evolving industry, are also key contributors to our success.

As of December 31, 2020, we owned the following patents related to the business: 64 issued U.S. patents, 18 U.S. patent applications, 28 non-U.S. issued patents, and 37 non-U.S. pending patent applications. Our issued U.S. patents, and any patents that may issue from our pending applications, are scheduled to expire at dates ranging between 2022 and 2039, excluding any additional term for patent term adjustments or extensions. In addition, as of December 31, 2020, we owned the following trademarks related to the business: 40 registered trademarks in the United States, 21 pending trademark applications in the United States, as well as 443 registered trademarks in non-U.S. jurisdictions, and 78 pending trademark applications in various non-U.S. jurisdictions. Finally, we have registered domain names for websites that we use in our business, such as www.applovin.com.

We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives and maintain our competitive position. Notwithstanding these efforts, there can be no assurance that we will adequately protect our intellectual property or that it will provide any competitive advantage. We take steps to protect our proprietary information, in part, by entering into confidentiality agreements with our employees, consultants, developers, and vendors, and generally limiting access to and distribution of our proprietary information. However, we cannot assure you that the steps taken by us will prevent misappropriation of our proprietary rights. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our Core Technologies, Software, or Apps or obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult and time consuming. Further, our intellectual property rights may be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. See the section titled “Risk Factors—Risks Related to Intellectual Property” for more information regarding risks related to intellectual property.

Employees and Additional Team Members

As of December 31, 2020, we had a total of 902 full-time employees located in eight countries. As a result of our 15 strategic acquisitions and partnerships, we also have access to approximately 1,100 additional team members, approximately 71% of whom are research and development resources and all of whom are located outside of the United States. Our geographic diversification enhances our ability to retain and attract highly skilled talent as well as manage our headcount costs. As of December 31, 2020, approximately 23% of our full-time employees were located outside of the United States. None of our employees are represented by a labor union. In certain countries in which we operate, we are subject to, and comply with, local labor law requirements, which may automatically make our employees subject to industry-wide collective bargaining agreements. We have not experienced any work stoppages and we consider our relations with our employees to be good. We work to identify, attract, and retain employees who are aligned with and will help us progress towards our mission, and we seek to provide competitive cash and equity compensation.

 

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Compliance with Government Regulation

We are subject to various federal, state, and international laws and regulations that affect companies conducting business on mobile platforms, including those relating to privacy, data protection, and the use and protection of data from employees, users and others (including minors), the internet, behavioral advertising, mobile apps, content, advertising and marketing activities, sweepstakes and giveaways, and anti-corruption. Additional laws and regulations relating to these areas likely will be passed in the future, and these or existing laws and regulations may be interpreted or enforced in new or expanded manners, each of which could result in significant limitations on ways we can collect and process data of users, employees and others, communicate with users, and operate our business. New and evolving laws and regulations, and changes in their enforcement and interpretation, may require changes to our Platform, Apps, or business practices, and may significantly increase our compliance costs and otherwise adversely affect our business and results of operations. As our business expands to include additional Software and Apps, and our operations continue to expand internationally, our compliance requirements and costs may increase and we may be subject to increased regulatory scrutiny.

Data Privacy and Security Laws

The data we collect and otherwise process is integral to our Platform and Apps, providing us with insights to improve our developer tools, to optimize app discovery and monetization and to improve our Apps. Our collection, use, receipt, and other processing of data in our business subjects us to numerous U.S. state and federal laws and regulations, and foreign laws and regulations, addressing privacy, data protection and the collection, storing, sharing, use, transfer, disclosure, protection and processing of certain types of data. Such regulations include, for example, the European Union General Data Protection Regulation, the Children’s Online Privacy Protection Act, Section 5(a) of the Federal Trade Commission Act, and the California Consumer Privacy Act. We work to comply with, and to help allow developers and ecosystem partners to comply with, applicable laws and regulations relating to privacy, data protection and information security. This helps underpin our strategy of building trust and providing a strong experience to ecosystem partners and clients. See the section titled “Risk Factors—Risks Related to Our Business—We are subject to laws and regulations concerning privacy, information security, data protection, consumer protection, and protection of minors, and these laws and regulations are continually evolving. Our actual or perceived failure to comply with these laws and regulations could adversely affect our business, financial condition, and results of operations” for additional information about our approach to laws and regulations relating to privacy, data protection, and information security.

Facilities

Our corporate headquarters is in Palo Alto, California, where we currently lease approximately 72,812 square feet under a lease agreement that expires in March 2027. We also lease and license facilities in the United States in Carlsbad, San Francisco, San Jose, and Santa Clara, California; Las Vegas, Nevada; Secaucus, New Jersey; and Richardson, Texas; and internationally in Toronto, Canada; Beijing and Shanghai, China; Limassol, Cyprus; Prague, Czech Republic; Berlin, Germany; Dublin, Ireland; Herzliya, Israel; Tokyo, Japan; and Seoul, South Korea.

We believe that our facilities are suitable to meet our current needs. However, we intend to expand our facilities and add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate any such growth. We expect to incur additional expenses in connection with such new or expanded facilities.

 

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Legal Proceedings

From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. We are not currently a party to any legal proceedings that, if determined adversely to us, would, in our opinion, have a material adverse effect on our business, financial condition, results of operations, or cash flows. Future litigation may be necessary to defend ourselves and our business partners and to determine the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

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MANAGEMENT

Executive Officers and Directors

The following table provides information regarding our executive officers and directors as of February 28, 2021:

 

Name

  

Age

   

Position(s)

Executive Officers:

    

Adam Foroughi

   40   

Chief Executive Officer and Chairperson

Herald Chen

   51   

President, Chief Financial Officer, and Director

Katie Jansen

   42   

Chief Marketing Officer

Vasily (Basil) Shikin

   35   

Chief Technology Officer

Victoria Valenzuela

   47   

Chief Legal Officer and Corporate Secretary

Non-Employee Directors:

    

Craig Billings(1)(2)

   48   

Director

Margaret Georgiadis(1)(3)

   57   

Director

Edward Oberwager(2)

   36   

Director

Cathy Sun(1)

   31   

Director

Eduardo Vivas(3)

   35   

Director

 

(1)

Member of the Audit Committee.

(2)

Member of the Compensation Committee.

(3)

Member of the Nominating and Corporate Governance Committee.

Executive Officers

Adam Foroughi. Mr. Foroughi is one of our co-founders and has served as our Chief Executive Officer and a member of our board of directors since December 2011. He was designated as Chairperson of our board of directors in March 2021. He previously co-founded two advertising technology companies, Lifestreet Media Inc. and Social Hour Inc. Mr. Foroughi holds a B.A. in Business Administration from the University of California, Berkeley.

Mr. Foroughi was selected to serve on our board of directors because of the perspective and experience he brings as our Chief Executive Officer and co-founder.

Herald Chen. Mr. Chen has served as our President and Chief Financial Officer since November 2019 and as a member of our board of directors since August 2018. Prior to joining us, he served as the head of Technology, Media and Telecom at Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, KKR), an investment firm that manages multiple alternative asset classes, from 2007 to 2019, having previously worked for the firm from 1995 to 1997. He also currently serves on the board of directors of GoDaddy, Inc., an online solutions provider, and Internet Brands Inc., an integrated digital media and software services company. Mr. Chen holds a B.S. in Economics (Finance) and a B.S.E. in Mechanical Engineering from the University of Pennsylvania and an M.B.A. from the Stanford University Graduate School of Business.

Mr. Chen was selected to serve on our board of directors because of his extensive operating and management experience, his knowledge of technology companies and his experience serving on the boards of directors of other public and private technology companies.

 

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Katie Jansen. Ms. Jansen has served as our Chief Marketing Officer since October 2012. Prior to joining us, she served as Vice President of Marketing, Marketing Director at PlayFirst, Inc., a publisher of casual games, from October 2009 to March 2012. She holds a B.S. in Psychology from California Polytechnic State University, San Luis Obispo and an M.B.A. from San Francisco State University.

Vasily (Basil) Shikin. Mr. Shikin has served as our Chief Technology Officer since January 2020 and prior to that served as our Vice President of Engineering since January 2012. Prior to joining us, from May 2008 to January 2012, he served as Senior Software Engineer at DeviceAnywhere, Inc., a cloud-based platform for testing and monitoring mobile websites and applications acquired by Keynote Systems, Inc. Mr. Shikin holds a Masters in Mathematics from Saint-Petersburg State University.

Victoria Valenzuela. Ms. Valenzuela has served as our Chief Legal Officer and Corporate Secretary since May 2020. Ms. Valenzuela joined us through our acquisition of Machine Zone where she served as Chief Legal Officer from January 2015 to April 2020. From May 2004 to December 2014, she served as General Counsel, Vice President, Legal Affairs, and Corporate Secretary of Cypress Semiconductor Corporation, a semiconductor company acquired by Infineon Technologies AG. Prior to Cypress Semiconductor, she was a corporate and technology attorney with Brobeck, Phleger & Harrison, LLP and Clifford Chance LLP. She holds a B.A. in Political Science from California State University, Fullerton and a J.D. from Stanford University Law School.

Non-Employee Directors

Craig Billings. Mr. Billings has served as a member of our board of directors since December 2020. Mr. Billings has served as Chief Financial Officer and Treasurer since March 2017 and as President since May 2019 at Wynn Resorts, Limited, a developer and operator of hotels and casinos. He has also served as a Non-Executive Director of Wynn Macau, Limited, a majority owned subsidiary of Wynn Resorts since August 2018. From December 2015 to January 2018, Mr. Billings served as Non-Executive Chairman of NYX Gaming Ltd., a developer of digital gaming systems which was acquired by Scientific Games Corporation in January 2018. Mr. Billings has been a Certified Public Accountant since 1999. He holds a B.S. in Business Administration from the University of Nevada, Las Vegas and an M.B.A. from Columbia Business School.

Mr. Billings was selected to serve on our board of directors because of his significant operational experience as an executive and his financial expertise.

Margaret Georgiadis. Ms. Georgiadis has served as a member of our board of directors since January 2021. Ms. Georgiadis served as President and Chief Executive Officer of Ancestry, a global family history and consumer genomics company, from May 2018 to December 2020. From February 2017 to May 2018, she served as Chief Executive Officer of Mattel, Inc., a global children’s entertainment company specializing in toys and consumer products. She also has served as President, Americas, from 2011 to 2017 and Vice President, Global Sales Operations, from 2009 to 2011, at Google Inc., a global technology company. She currently serves on the board of directors of McDonald’s Corporation and several private companies, and previously served on the board of directors of Amyris, Inc. and Mattel, Inc. She holds an A.B. from Harvard College and an M.B.A. from Harvard Business School.

Ms. Georgiadis was selected to serve on our board of directors because of her significant operational experience, her experience serving on the boards of directors of other public companies, and her financial expertise.

Edward Oberwager. Mr. Oberwager has served as a member of our board of directors since November 2019. He joined KKR in 2008 where he is a Managing Director, Private Equity.

 

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Mr. Oberwager currently serves on the board of directors of several privately-held companies. Mr. Oberwager holds a B.A. in Classics from Georgetown University and an M.B.A. from Harvard Business School.

Mr. Oberwager was selected to serve on our board of directors because of his extensive experience as an investment professional and his experience serving on the boards of directors of other technology companies.

Cathy Sun. Ms. Sun has served as a member of our board of directors since November 2019. She has also served on the board of Internet Brands Inc. since March 2020. She joined KKR in September 2016 where she is a Director. From August 2014 to August 2016, she was a member of the investing team at TPG Capital, a private equity firm. She holds a B.A. in Economics from Harvard University.

Ms. Sun was selected to serve on our board of directors because of her experience and perspective as an investment professional in the technology industry.

Eduardo Vivas. Mr. Vivas has served as a member of our board of directors since August 2018. He has served as Chief Executive Officer at Deal.com, Inc. (d/b/a Curated.com), an online outdoor sports retailer he co-founded, since August 2017. From March 2014 to April 2017, Mr. Vivas served as Head of Product, Talent Solutions at LinkedIn Corporation, a business and employment-oriented online service. He joined LinkedIn through its acquisition of Bright.com, an employment website company he co-founded and served as Chief Product Officer from October 2011 to February 2014.

Mr. Vivas was selected to serve on our board of directors because of his significant operational experience as an executive with technology companies.

Family Relationships

There are no family relationships among any of our executive officers or directors.

Code of Business Conduct and Ethics

Our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our code of business conduct and ethics will be posted on the investor relations page on our website. We intend to disclose any amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act.

Board of Directors

Our business and affairs are managed under the direction of our board of directors. Our board of directors currently consists of seven directors. Pursuant to our current certificate of incorporation and voting agreement dated November 12, 2019 (the Prior Voting Agreement), our current directors were elected as follows:

 

  

Messrs. Foroughi, Chen, Billings, and Vivas were elected as the designees nominated by holders of our common stock; and

 

  

Mr. Oberwager and Ms. Sun were elected as the designees nominated by holders of our Series A convertible preferred stock.

 

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The Prior Voting Agreement will terminate and the provisions of our current certificate of incorporation by which our directors were elected will be amended and restated in connection with this offering. Pursuant to the terms of such agreement, we have entered into an agreement with KKR Denali (the Director Nominations Agreement). See “Description of Capital Stock—Director Nominations Agreement” for a description of the Director Nominations Agreement. After this offering, the number of directors will be fixed by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering. Each of our current directors will continue to serve as a director until the election and qualification of their successor, or until their earlier death, resignation, or removal.

KKR Board Designee

Pursuant to the Director Nominations Agreement, KKR Denali will have the right to designate a nominee to our board of directors subject to the maintenance of certain ownership requirements in us. See the section titled “Description of Capital Stock—Director Nominations Agreement” for additional information. The initial designee by KKR Denali is Mr. Oberwager.

Director Independence and Controlled Company Exemption

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning their background, employment and affiliations, our board of directors has determined that each of Messrs. Billings and Vivas and Ms. Georgiadis do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the Nasdaq corporate governance requirements. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in the section titled “Certain Relationships and Related Party Transactions.”

After the consummation of this offering, the Class B Stockholders will control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the Nasdaq corporate governance requirements. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirements:

 

  

that a majority of our board of directors consist of independent directors;

 

  

that our board of directors have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  

that our board of directors have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  

for an annual performance evaluation of the nominating and corporate governance committee and compensation committee.

For at least a period following this offering, we intend to utilize certain of these exemptions. As a result, we will not have a majority of independent directors and our compensation committee will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements. See the section titled “Risk Factors—Risks Related to Ownership of Our Class A Common Stock and

 

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Governance—Following the completion of this offering, we will be considered a “controlled company” within the meaning of the Nasdaq corporate governance requirements, and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.” In the event that we cease to be a “controlled company” and our Class A common stock continues to be listed on Nasdaq, we will be required to comply with these provisions within the applicable transaction periods.

Lead Independent Director

Our board of directors has adopted, effective prior to the completion of this offering, corporate governance guidelines that provide that one of our independent directors will serve as our lead independent director. Our board of directors has appointed Mr. Billings to serve as our lead independent director. As lead independent director, Mr. Billings will preside over periodic meetings of our independent directors, serve as a liaison between the chairperson of our board of directors and the independent directors and perform such additional duties as our board of directors may otherwise determine and delegate.

Committees of the Board of Directors

Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors is described below. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors.

Audit Committee

Following the completion of this offering, our audit committee will consist of Mr. Billings and Mses. Georgiadis and Sun, with Mr. Billings serving as chairperson. Mr. Billings and Ms. Georgiadis will meet the requirements for independence under the Nasdaq corporate governance requirements and SEC rules and regulations. We intend to utilize the transition period under the Nasdaq corporate governance requirements and SEC rules and regulations, which provides that we must have a fully independent audit committee within one year of listing on the Nasdaq Global Select Market and the effective date of the registration statement of which this prospectus forms a part, respectively. Each member of our audit committee will also meet the financial literacy and sophistication requirements of the Nasdaq listing standards. In addition, our board of directors has determined that each of Mr. Billings and Mses. Georgiadis and Sun is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. Following the completion of this offering, our audit committee will, among other things:

 

  

select a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

 

  

help to ensure the independence and performance of the independent registered public accounting firm;

 

  

discuss the scope and results of the audit with the independent registered public accounting firm, and review, with management and the independent registered public accounting firm, our interim and year-end results of operations;

 

  

develop procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

  

review our policies on risk assessment and risk management;

 

  

review related party transactions; and

 

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approve or, as required, pre-approve, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Our audit committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable rules and regulations of the SEC and the Nasdaq listing standards.

Compensation Committee

Following the completion of this offering, our compensation committee will consist of Messrs. Oberwager and Billings, with Mr. Oberwager serving as chairperson. Mr. Billings will meet the requirements for independence under the Nasdaq corporate governance requirements. We intend to utilize the “controlled company” exemption from having a compensation committee composed entirely of independent directors. Each member of our compensation committee will also be a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act (Rule 16b-3). Following the completion of this offering, our compensation committee will, among other things:

 

  

review, approve and determine, or make recommendations to our board of directors regarding, the compensation of our executive officers;

 

  

administer our equity compensation plans;

 

  

review and approve and make recommendations to our board of directors regarding incentive compensation and equity compensation plans; and

 

  

establish and review general policies relating to compensation and benefits of our employees.

Our compensation committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable rules and regulations of the SEC and the Nasdaq listing standards.

Nominating and Corporate Governance Committee

Following the completion of this offering, our nominating and corporate governance committee will consist of Ms. Georgiadis and Mr. Vivas, with Ms. Georgiadis serving as chairperson, and each of whom will meet the requirements for independence under the Nasdaq corporate governance requirements. Following the completion of this offering, our nominating and corporate governance committee will, among other things:

 

  

identify, evaluate and select, or make recommendations to our board of directors regarding, nominees for election to our board of directors and its committees;

 

  

evaluate the performance of our board of directors and of individual directors;

 

  

consider and make recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

  

review developments in corporate governance practices;

 

  

evaluate the adequacy of our corporate governance practices and reporting; and

 

  

develop and make recommendations to our board of directors regarding corporate governance guidelines and matters.

Our nominating and corporate governance committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable Nasdaq listing standards.

 

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Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee (or other board committee performing equivalent functions) of any entity that has one or more of its executive officers serving on our board of directors or compensation committee. See the section titled “Certain Relationships and Related Party Transactions” for information about related party transactions involving members of our compensation committee or their affiliates.

Non-Employee Director Compensation

Our employee directors, Adam Foroughi and Herald Chen, have not received any compensation for their services as directors for the year ended December 31, 2020. The compensation received by Adam Foroughi as an employee is set forth in the section titled “Executive Compensation—2020 Summary Compensation Table.”

Other than Craig Billings, who was granted an option award under our 2011 Plan in connection with his appointment to our board of directors in December 2020, our non-employee directors did not receive any compensation for their service as directors for the year ended December 31, 2020 and did not hold any outstanding equity awards as of December 31, 2020.

The following table provides information regarding the compensation of Craig Billings for service as a director for the year ended December 31, 2020:

 

Name

  Option
Awards ($)(1)
  Total ($) 

Craig Billings

   971,447(2)   971,447 

 

(1)

The amount reported represents the aggregate grant-date fair value of the stock option, calculated in accordance with ASC 718. The assumptions used in calculating the aggregate grant-date fair value of the stock option are set forth in Note 13 to our consolidated financial statements included elsewhere in this prospectus. Note that the amount reported in this column reflects the accounting cost for this stock option and does not correspond to the actual economic value that may be received by Mr. Billings from this stock option.

(2)

As of December 31, 2020, Mr. Billings had 21,000 shares subject to this stock option award outstanding. This option is subject to an early exercise provision and is immediately exercisable. The shares underlying this stock option vest, subject to Mr. Billings’ continued role as a service provider to us, as to 1/12th of the total shares on January 1, 2021, with 1/12th of the total shares vesting every three months thereafter; provided that 100% any unvested shares covered by the option will vest immediately prior to the closing of an Acquisition or Other Combination (each as defined in our 2011 Plan).

On January 15, 2021, Craig Billings received an option to purchase 12,950 shares of our Class A common stock under our 2011 Plan. All of the shares subject to the option were fully vested on the date of grant and the option was exercised in full in January 2021.

On January 23, 2021, Margaret Georgiadis received options to purchase a total of 206,000 shares of our Class A common stock under our 2011 Plan. With respect to 21,000 shares, 1/12th of the shares will vest, subject to Ms. Georgiadis’s continued role as a service provider to us, on April 21, 2021 with 1/12th of the shares vesting every three months thereafter; provided that 100% of any unvested shares covered by the option will vest immediately prior to the closing of an Acquisition or Other Combination (each as defined in our 2011 Plan). The options to purchase 185,000 shares were fully vested on the date of grant and such options were exercised in full in January 2021.

Outside Director Compensation Policy

Prior to this offering, we did not have a formal policy with respect to compensation payable to our non-employee directors for service as directors or non-employee director stock ownership guidelines.

 

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From time to time, we have granted equity compensation awards to certain non-employee directors to entice them to join our board of directors and for their continued service on our board of directors.

In February 2021, our board of directors adopted, and our stockholders have since approved, a new outside director compensation policy (the Director Compensation Policy) for our non-employee directors that became effective the date of the effectiveness of the registration statement of which this prospectus forms a part. The Director Compensation Policy was developed with input from our independent compensation consultant, Radford (Aon plc), regarding practices and compensation levels at comparable companies. The Director Compensation Policy is designed to attract, retain, and reward non-employee directors.

Under the Director Compensation Policy, each non-employee director will receive the cash and equity compensation for board services described below. We also will reimburse our non-employee directors for reasonable, customary, and documented travel expenses to meetings of our board of directors or its committee and other expenses.

Maximum Annual Compensation Limit

The Director Compensation Policy includes a maximum annual limit of $750,000 of cash compensation and equity compensation awards that may be paid, issued, or granted to a non-employee director in any fiscal year (increased to $1,000,000 in the non-employee director’s initial year of service as a non-employee director). For purposes of this limitation, the value of equity awards is based on the grant date fair value (determined in accordance with GAAP). Any cash compensation paid or equity compensation awards granted to a person for their service as an employee, or for their service as a consultant (other than as a non-employee director), will not count for purposes of the limitation. The maximum limit does not reflect the intended size of any potential compensation or equity awards to our non-employee directors.

Cash Compensation

Following the completion of this offering, non-employee directors will be entitled to receive the following cash compensation for their service under the Director Compensation Policy:

 

  

$50,000 per year for service as a board member;

 

  

$60,000 per year for service as chairperson of the board;

 

  

$20,000 per year for service as lead director of the board;

 

  

$25,000 per year for service as chairperson of the audit committee;

 

  

$10,000 per year for service as member of the audit committee;

 

  

$20,000 per year for service as chairperson of the compensation committee;

 

  

$10,000 per year for service as member of the compensation committee;

 

  

$10,000 per year for service as chairperson of the nominating committee; and

 

  

$5,000 per year for service as member of the nominating committee.

Each non-employee director who serves as the chairperson of a committee will receive only the annual cash fee as the chairperson of the committee, and not the additional annual cash fee as a member of the committee. All cash payments to non-employee directors are paid quarterly in arrears on a pro-rated basis.

 

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Equity Compensation

Initial Award

Each person who first becomes a non-employee director after the date of the effectiveness of the registration statement of which this prospectus forms a part will receive, on the first trading date on or after the date on which such individual first becomes a non-employee director, an initial award of RSUs (the Initial Award) (and, the date the Initial Award is granted, the Grant Date). The Initial Award will cover a number of shares of our Class A common stock having a grant date fair value (determined in accordance with GAAP) of $337,500, rounded to the nearest whole share (the New Hire Award). The New Hire Award will vest in 12 equal quarterly installments beginning on the first Quarterly Vesting Date to occur after such individual first becomes a non-employee director and each subsequent Quarterly Vesting Date thereafter, subject to the non-employee director continuing to be a service provider through the applicable vesting date. Our Quarterly Vesting Dates are February 20, May 20, August 20, and November 20. If the person was a member of our board of directors and also an employee, becoming a non-employee director due to termination of employment will not entitle them to an Initial Award.

Annual Award

Each non-employee director will automatically receive, on the date of each annual meeting of our stockholders following the effective date of the Director Compensation Policy, an annual award of RSUs (an Annual Award) covering a number of shares of our Class A common stock having a grant date fair value (determined in accordance with GAAP) of $225,000, rounded to the nearest whole share. The Annual Award will vest on the earlier of (i) the one-year anniversary of the date the Annual Award is granted or (ii) the day prior to the date of the annual meeting next following the date the Annual Award is granted, in each case, subject to the non-employee director continuing to be a service provider through the applicable vesting date.

In the event of a “change in control” (as defined in our 2021 Plan), each non-employee director’s outstanding awards will fully vest, provided that the non-employee director continues to be a non-employee director through the date of the change in control.

 

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EXECUTIVE COMPENSATION

Although we ceased to be an emerging growth company on December 31, 2020, we will continue to be treated as an emerging growth company for certain purposes, including executive compensation disclosure rules through the completion of this offering. This section provides an overview of the compensation of our named executive officers (our principal executive officer and the next two most highly compensated executive officers) for 2020 as well as our President and Chief Financial Officer. These individuals are:

 

  

Adam Foroughi, our Chief Executive Officer and Chairperson of our board of directors;

 

  

Herald Chen, our President and Chief Financial Officer;

 

  

Katie Jansen, our Chief Marketing Officer; and

 

  

Victoria Valenzuela, our Chief Legal Officer.

Summary Compensation Table

The amounts below represent the compensation awarded to or earned by or paid to our named executive officers and Mr. Chen for the year ended December 31, 2020:

 

Name and Principal Position

 Fiscal
Year
  Salary ($)  Bonus ($)  Option
Awards
($)(1)
  Non-Equity
Incentive Plan
Compensation
($)(2)
  All Other
Compensation
($)(3)
  Total ($) 

Adam Foroughi

Chief Executive Officer

  2020   400,000            9,462   409,462 
  2019   400,000            9,800   409,800 

Herald Chen(4)

Chief Financial Officer

  2020   400,000            7,467   407,467 
  2019   65,385      9,610,238      333   9,675,956 

Katie Jansen

Chief Marketing Officer

  2020   400,000      5,960,742   100,000   9,975   6,470,717 

Victoria Valenzuela(5)

Chief Legal Officer

  2020   252,083   62,192(6)   2,331,657      4,120   2,650,052 

 

(1)

The amounts reported represent the aggregate grant-date fair value of the stock options calculated in accordance with ASC 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth in Note 13 to our consolidated financial statements included elsewhere in this prospectus. Note that the amounts reported in this column reflect the accounting cost for these stock options and do not correspond to the actual economic value that may be received by our named executive officers from the stock options.

(2)

The amounts reported represent the amounts earned based upon achievement of certain performance goals under our executive bonus program.

(3)

Represents, in each case, amounts paid in connection with 401(k) matching by us.

(4)

Mr. Chen became our President and Chief Financial Officer in November 2019.

(5)

Ms. Valenzuela became our Chief Legal Officer in May 2020 in connection with our acquisition of Machine Zone.

(6)

The amount of Ms. Valenzuela’s bonus for 2020 was granted in connection with her employment in May 2020 and reflects the pro-rated amount of $100,000 for the period of her employment by us in 2020. In connection with Ms. Valenzuela’s employment, we entered into an agreement for her to participate in our executive bonus program. For 2020, we guaranteed the payment of her bonus on a pro-rated basis absent our experiencing unexpected and significantly diminished financial performance.

 

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Outstanding Equity Awards at 2020 Year-End

The following table sets forth information regarding outstanding equity awards held by our named executive officers and Mr. Chen as of December 31, 2020:

 

        Option Awards  Stock Awards 

Name

 Grant
Date(1)
  Vesting
Commencement
Date
  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price
($)(2)
  Option
Expiration
Date
  Number
of shares
or units
of stock
that have
not
vested
(#)(3)
  Market value
of shares or
units of
stock that
have not
vested ($)(4)
 

Adam Foroughi

                        

Herald Chen

  11/5/2019   11/4/2019   2,400,000(5)     $5.05   11/4/2029       
  11/5/2019   11/4/2019               1,119,801(8)   89,584,080 

Katie Jansen

  11/18/2020   11/13/2020   75,000(6)     $19.52   11/17/2030       
  11/18/2020   11/13/2020               75,000(9)   6,000,000 
  1/22/2019   1/1/2019               156,249(10)   12,499,920 
  1/12/2018   1/1/2018               65,001(11)   5,200,080 

Victoria Valenzuela

 

 

5/19/2020

 

  5/19/2020   187,500(7)     $7.45   5/18/2030       
  5/19/2020   5/19/2020               562,500(12)   45,000,000 
  5/19/2020   5/19/2020               90,000(13)   7,200,000 

 

(1)

Each of the outstanding equity awards listed in the table above was granted pursuant to our 2011 Plan.

(2)

This column represents the option exercise price per share of our Class A common stock on the grant date, as determined by our board of directors.

(3)

The amounts in this column reflect shares acquired upon the early-exercise of options that remain subject to vesting conditions and forfeiture.

(4)

The market price for our Class A common stock is based upon the initial public offering price of $80.00 per share.

(5)

This option is subject to an early exercise provision and is immediately exercisable. The vesting conditions are satisfied, subject to Mr. Chen’s continued role as a service provider to us, as to 1/4th of the total shares on November 4, 2020 with 1/48th of the total shares vesting monthly thereafter.

(6)

This option is subject to an early exercise provision and is immediately exercisable. The shares underlying this stock option vest, subject to Ms. Jansen’s continued role as a service provider to us, as to 1/4th of the total shares on November 13, 2021 with 1/48th of the total shares vesting monthly thereafter.

(7)

This option is subject to an early exercise provision and is immediately exercisable. The shares underlying this stock option vest, subject to Ms. Valenzuela’s continued role as a service provider to us, as to 1/4th of the total shares on May 19, 2021 with 1/48th of the total shares vesting monthly thereafter.

(8)

The vesting conditions are satisfied, subject to Mr. Chen’s continued role as a service provider to us, as to 1/4th of the total shares on November 4, 2020 with 1/48th of the total shares vesting monthly thereafter.

(9)

The vesting conditions are satisfied, subject to Ms. Jansen’s continued role as a service provider to us, as to 1/4th of the total shares on November 13, 2021 with 1/48th of the total shares vesting monthly thereafter.

(10)

The vesting conditions are satisfied, subject to Ms. Jansen’s continued role as a service provider to us, as to 1/4th of the total shares on January 22, 2020 with 1/48th of the total shares vesting monthly thereafter.

(11)

The vesting conditions are satisfied, subject to Ms. Jansen’s continued role as a service provider to us, as to 1/4th of the total shares on January 12, 2018 with 1/48th of the total shares vesting monthly thereafter.

(12)

The vesting conditions are satisfied, subject to Ms. Valenzuela’s continued role as a service provider to us, as to 1/4th of the total shares on May 19, 2021 with 1/48th of the total shares vesting monthly thereafter.

(13)

The vesting conditions are satisfied, subject to Ms. Valenzuela’s continued role as a service provider to us, as to 100% of the total shares on May 19, 2021.

 

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Executive Employment Agreements

We have entered into employment letters setting forth the terms and conditions of employment for each of our named executive officers and Mr. Chen as described below.

Adam Foroughi

We have entered into a confirmatory employment letter agreement with Mr. Foroughi. The letter agreement does not have a specific term and provides that Mr. Foroughi is an at-will employee. Mr. Foroughi’s current annual base salary is $100,000.

Herald Chen

We have entered into a confirmatory employment letter agreement with Mr. Chen. The letter agreement does not have a specific term and provides that Mr. Chen is an at-will employee. Mr. Chen’s current annual base salary is $400,000.

Katie Jansen

We have entered into a confirmatory employment letter agreement with Ms. Jansen. The letter agreement does not have a specific term and provides that Ms. Jansen is an at-will employee. Ms. Jansen’s current annual base salary is $400,000.

Victoria Valenzuela

We have entered into a confirmatory employment letter agreement with Ms. Valenzuela. The letter agreement does not have a specific term and provides that Ms. Valenzuela is an at-will employee. Ms. Valenzuela is also eligible for a $1.0 million cash retention bonus that is earned once she has been employed with us for one year (the Retention Bonus). Ms. Valenzuela’s current annual base salary is $400,000.

Potential Payments upon Termination or Change in Control

Executive Change in Control and Severance Plan

In March 2021, our board of directors adopted an Executive Change in Control and Severance Plan (the Executive Severance Plan) pursuant to which our executive officers and certain other key employees are eligible to receive severance benefits, as specified in and subject to the employee signing a participation agreement under our Executive Severance Plan. This Executive Severance Plan was developed with input from Radford (Aon plc), regarding severance practices at comparable companies. It will be designed to attract, retain, and reward senior level employees. The Executive Severance Plan generally will be in lieu of any other severance payments and benefits to which such key employee was entitled prior to signing the participation agreement, except as specifically provided under that employee’s participation agreement under the Executive Severance Plan.

Our board of directors has designated each of our executive officers as a participant under our Executive Severance Plan eligible for the rights to the applicable payments and benefits described below.

 

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In the event of a “termination” of the employment of a named executive officer by us for a reason other than “cause” or the named executive officer’s death or “disability” (as such terms are defined in our Executive Severance Plan), that occurs outside the change in control period (as described below), the named executive officer will be entitled to the following payments and benefits:

 

  

a lump sum payment equal to 12 months of the named executive officer’s annual base salary, or 18 months in the case of Mr. Foroughi; and

 

  

reimbursement, or taxable lump sum payment in lieu of reimbursement, equal to the premium cost of continued health coverage under the Consolidated Omnibus Reconciliation Act of 1985 as amended (COBRA) for a period of 12 months, or 18 months in the case of Mr. Foroughi.

In the event of a “termination” of the employment by us for a reason other than “cause” or the named executive officer’s death or “disability” or by the named executive officer for “good reason” (as such terms are defined in our Executive Severance Plan), in either case, occurring within a period beginning three months prior to and ending 12 months following a “change in control” (as defined in our Executive Severance Plan) (such period, the change in control period), the named executive officer will be entitled to the following payments and benefits:

 

  

a lump sum payment equal to 18 months of the named executive officer’s annual base salary, or 24 months in the case of Mr. Foroughi;

 

  

reimbursement, or taxable lump sum payment in lieu of reimbursement, equal to the premium cost of continued health coverage under the Consolidated Omnibus Reconciliation Act of 1985 as amended (COBRA) for a period of 18 months, 24 months in the case of Mr. Foroughi; and

 

  

100% accelerated vesting of all outstanding equity awards, and, with respect to equity awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at 100% of target levels for the relevant performance period(s).

Notwithstanding the foregoing, in the case of Mr. Chen, if his employment is involuntarily terminated without “cause“ or he resigns for “good reason” within the twelve months following a “change of control” (as such terms are defined in his participation agreement), then he will automatically vest in 100% of the option award granted to him on November 5, 2019. In the case of Ms. Valenzuela, if her employment is terminated by the Company without “cause” or she resigns for “good reason” (as such terms are defined in her participation agreement) on or prior to May 19, 2021, in addition to the benefits described above: (A) if such termination occurs within the change in control period, then she will receive a lump sum payment of her Retention Bonus (less applicable withholding taxes); and (B) if such termination occurs outside of the change in control period, then she will receive the benefit described in the preceding clause (A) and (2) she will fully vest in her stock option covering 90,000 shares granted on May 19, 2020.

In addition, in the case of Mr. Chen, upon an “acquisition” (as such term is defined in his participation agreement), 50% of the unvested portion of his stock option granted to him on November 5, 2019 (the “Original Option”) will become vested.

The receipt of the payments and benefits provided for under the Executive Severance Plan described above is conditioned on the named executive officer signing and not revoking a separation and release of claims agreement and such release becoming effective and irrevocable no later than the 60th day following the named executive officer’s involuntary termination of employment, as well as compliance with certain non-disparagement provisions and continued compliance with any confidentiality, proprietary information, and inventions agreement applicable to the named executive officer.

 

 

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In addition, if any of the payments or benefits provided for under the Executive Severance Plan or otherwise payable to a named executive officer would constitute “parachute payments” within the meaning of Section 280G of the Code and could be subject to the related excise tax, the named executive officer will receive either full payment of such payments and benefits or such lesser amount that would result in no portion of the payments and benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to them. Except as discussed above, the Executive Severance Plan does not require us to provide any tax gross-up payments to the named executive officers.

Employee Benefit and Stock Plans

2021 Equity Incentive Plan

Our board of directors has adopted and our stockholders have approved our 2021 Plan. Our 2021 Plan became effective on the business day immediately prior to the date of this prospectus. Our 2021 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), to our employees and any parent and subsidiary companies’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units (RSUs), stock appreciation rights (SARs), performance units, and performance shares to our employees, directors, and consultants and our parent and subsidiary companies’ employees and consultants. Our board of directors is expected to approve the termination of our 2011 Plan immediately prior to the effectiveness of our 2021 Plan with respect to the grant of future awards.

Authorized Shares

A total of 39,000,000 shares of our Class A common stock are reserved for issuance pursuant to our 2021 Plan. In addition, the shares reserved for issuance under our 2021 Plan also include any shares subject to stock options, RSUs, or similar awards granted under our 2011 Plan that, after the date our board of directors approved our 2021 Plan, expire or otherwise terminate without having been exercised in full, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding and remittance obligations, or are forfeited to or repurchased by us due to failure to vest (provided that the maximum number of shares that may be added to our 2021 Plan pursuant to the foregoing is 19,840,000 shares). The number of shares available for issuance under our 2021 Plan will also include an annual increase on the first day of each fiscal year beginning on January 1, 2021, equal to the least of:

 

  

39,000,000 shares;

 

  

five percent (5%) of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding fiscal year; or

 

  

such other amount as our board of directors may determine.

If an award granted under the 2021 Plan expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program or, with respect to restricted stock, RSUs, performance units, or performance shares, is forfeited or repurchased due to failure to vest, then the unpurchased shares (or for awards other than stock options or SARs, the forfeited or repurchased shares) will become available for future grant or sale under the 2021 Plan. With respect to SARs, only the net shares actually issued will cease to be available under the 2021 Plan and all remaining shares under SARs will remain available for future grant or sale under the 2021 Plan. Shares that have actually been issued under the 2021 Plan under any award will not be returned to the

 

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2021 Plan; provided, however, that if shares issued pursuant to awards of restricted stock, RSUs, performance shares, or performance units are repurchased or forfeited, such shares will become available for future grant under the 2021 Plan. Shares used to pay the exercise price of an award or to satisfy the tax withholding and remittance obligations related to an award will become available for future grant or sale under the 2021 Plan. To the extent an award is paid out in cash rather than shares, such cash payment will not result in a reduction in the number of shares available for issuance under the 2021 Plan.

Plan Administration

Our board of directors or one or more committees appointed by our board of directors will administer our 2021 Plan. The compensation committee of our board of directors is expected to administer our 2021 Plan. In addition, if we determine it is desirable to qualify transactions under our 2021 Plan as exempt under Rule 16b-3, such transactions will be structured with the intent that they satisfy the requirements for exemption under Rule 16b-3. Subject to the provisions of our 2021 Plan, the administrator has the power to administer our 2021 Plan and make all determinations deemed necessary or advisable for administering the 2021 Plan, including, but not limited to, the power to determine the fair market value of our Class A common stock, select the service providers to whom awards may be granted, determine the number of shares covered by each award, approve forms of award agreements for use under the 2021 Plan, determine the terms and conditions of awards (including, but not limited to, the exercise price, the time or times at which the awards may be exercised, any vesting acceleration or waiver or forfeiture restrictions, and any restriction or limitation regarding any award or the shares relating thereto), construe and interpret the terms of our 2021 Plan and awards granted under it, prescribe, amend, and rescind rules, regulations, and sub-plans relating to our 2021 Plan, and modify or amend each award, including, but not limited to, the discretionary authority to extend the post-termination exercisability period of awards (provided that no option or stock appreciation right will be extended past its original maximum term), and to allow a participant to defer the receipt of payment of cash or the delivery of shares that would otherwise be due to such participant under an award. The administrator also has the authority to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or cancelled in exchange for awards of the same type which may have a higher or lower exercise price and/or different terms, awards of a different type, and/or cash, or by which the exercise price of an outstanding award is increased or reduced. The administrator’s decisions, interpretations, and other actions are final and binding on all participants.

Stock Options

Stock options may be granted under our 2021 Plan. The exercise price of options granted under our 2021 Plan must at least be equal to the fair market value of our Class A common stock on the date of grant. The administrator will determine the term of each option, provided that the term of an incentive stock option may not exceed ten years. With respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term of an incentive stock option granted to such participant must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares, or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of an employee, director, or consultant, he or she may exercise his or her option for the period of time stated in his or her option agreement. In the absence of a specified time in an award agreement, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, in the absence of a specified time in an award agreement, the option will remain exercisable for three months following the termination of service. An option may not be exercised later than the expiration of its term. Subject to the provisions of our 2021 Plan, the administrator determines the other terms of options.

 

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Stock Appreciation Rights

SARs may be granted under our 2021 Plan. SARs allow the recipient to receive the appreciation in the fair market value of our Class A common stock between the exercise date and the date of grant. SARs may not have a term exceeding ten years. After the termination of service of an employee, director, or consultant, he or she may exercise his or her stock appreciation right for the period of time stated in his or her SARs agreement. In the absence of a specified time in an award agreement, if termination is due to death or disability, the SARs will remain exercisable for 12 months. In all other cases, in the absence of a specified time in an award agreement, the SARs will remain exercisable for three months following the termination of service. However, in no event may a stock appreciation right be exercised later than the expiration of its term. Subject to the provisions of our 2021 Plan, the administrator determines the other terms of SARs, including when such rights become exercisable and whether to pay any increased appreciation in cash or with shares of our Class A common stock, or a combination thereof, except that the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.

Restricted Stock

Restricted stock may be granted under our 2021 Plan. Restricted stock awards are grants of shares of our Class A common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any employee, director, or consultant and, subject to the provisions of our 2021 Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be appropriate (for example, the administrator may set restrictions based on the achievement of specific performance goals or continued service to us); provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Restricted Stock Units

RSUs may be granted under our 2021 Plan. RSUs are bookkeeping entries representing an amount equal to the fair market value of one share of our Class A common stock. Subject to the provisions of our 2021 Plan, the administrator determines the terms and conditions of RSUs, including the vesting criteria and the form and timing of payment. The administrator may set vesting criteria based upon the achievement of company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the administrator in its discretion. The administrator, in its sole discretion, may pay earned RSUs in the form of cash, in shares of our Class A common stock, or in some combination thereof. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at which any vesting requirements will be deemed satisfied. Participants will have no voting rights with respect to RSUs until the date shares are issued with respect to such RSUs. The administrator may provide that a participant is entitled to receive dividend equivalents with respect to the payment of cash dividends on shares having a record date prior to the date on which the applicable RSUs are settled or forfeited in accordance with our 2021 Plan.

Performance Units and Performance Shares

Performance units and performance shares may be granted under our 2021 Plan. Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or the awards otherwise vest. The

 

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administrator will establish performance objectives or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants. The administrator may set performance objectives based on the achievement of company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the administrator in its discretion. After the grant of a performance unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance units or performance shares. Performance units shall have an initial dollar value established by the administrator on or prior to the grant date. Performance shares shall have an initial value equal to the fair market value of our Class A common stock on the grant date. The administrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares, or in some combination thereof. Participants will have no voting rights with respect to performance units and/or performance shares until the date shares are issued with respect to such performance units and/or performance shares. The administrator may provide that a participation is entitled to receive dividend equivalents with respect to the payment of cash dividends on shares having a record date prior to the date on which the applicable performance shares are settled or forfeited in accordance with our 2021 Plan.

Non-Transferability of Awards

Unless the administrator provides otherwise, our 2021 Plan generally will not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime. If the administrator makes an award transferrable, such award will contain such additional terms and conditions as the administrator deems appropriate.

Certain Adjustments

In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefits available under our 2021 Plan, the administrator will adjust the number and class of shares that may be delivered under our 2021 Plan and/or the number, class, and price of shares covered by each outstanding award and the numerical share limits set forth in our 2021 Plan.

Dissolution or Liquidation

In the event of our proposed liquidation or dissolution, the administrator will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of such proposed transaction.

Merger or Change in Control

Our 2021 Plan provides that in the event of our merger with or into another corporation or entity or a change in control (as defined in our 2021 Plan), each outstanding award will be treated as the administrator determines, including, without limitation, that (i) awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a participant, that the participant’s awards will terminate upon or immediately prior to the consummation of such merger or change in control; (iii) outstanding awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon consummation of such merger or change in control and, to the extent the administrator determines, terminate upon or immediately prior to the effectiveness of such merger or change in control; (iv) (A) the termination of an award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such award or realization of

 

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the participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the administrator determines in good faith that no amount would have been attained upon the exercise of such award or realization of the participant’s rights, then such award may be terminated by us without payment), or (B) the replacement of such award with other rights or property selected by the administrator in its sole discretion; (v) with respect only to an award (or portion thereof) that is unvested as of immediately prior to the effective time of the merger or change in control, the termination of the award immediately prior to the effective time of the merger or change in control with such payment to the participant (including no payment) as the administrator determines in its discretion; or (vi) any combination of the foregoing. The administrator will not be obligated to treat all participants, awards, all awards a participant holds, or all awards of the same type, similarly in the transaction.

In the event an option or stock appreciation right is not assumed or substituted in the event of a merger or change in control, the administrator will notify each participant in writing or electronically that the option or stock appreciation right, as applicable, will be exercisable for a period of time determined by the administrator in its sole discretion, and the option or stock appreciation right, as applicable, will terminate upon the expiration of such period.

For awards granted to an outside director, in the event of a change in control, the outside director will fully vest in and have the right to exercise all of their outstanding options and SARs, all restrictions on restricted stock and RSUs will lapse and, for awards with performance-based vesting, unless specifically provided for in the award agreement, all performance goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions met.

Clawback

Awards are subject to any clawback policy of ours, and the administrator also may specify in an award agreement that the participant’s rights, payments, and/or benefits with respect to an award will be subject to reduction, cancellation, forfeiture, and/or recoupment upon the occurrence of certain specified events. Our board of directors may require a participant to forfeit, return, or reimburse us all or a portion of the award and/or shares issued under the award, any amounts paid under the award, and any payments or proceeds paid or provided upon disposition of the shares issued under the award in order to comply with such clawback policy or applicable laws.

Amendment and Termination

The administrator has the authority to amend, suspend, or terminate our 2021 Plan provided such action does not impair the existing rights of any participant. Our 2021 Plan will continue in effect until terminated by the administrator, but (i) no incentive stock options may be granted after ten years from the date our 2021 Plan was adopted by our board of directors and (ii) the annual increase to the number of shares available for issuance under our 2021 Plan will operate only until the tenth anniversary of the date our 2021 Plan was adopted by our board of directors.

2011 Equity Incentive Plan

Our board of directors adopted, and our stockholders approved, our Amended and Restated 2011 Equity Incentive Plan (our 2011 Plan) in October 2011. Our 2011 Plan was most recently amended in September 2020. Our 2011 Plan allows for the grant of incentive stock options, within the meaning of Section 422 of the Code, to employees or ours and of a parent and subsidiary of ours, and for the grant of nonstatutory stock options, RSUs, SARs, and restricted stock to employees, officers, directors and consultants of ours or any parent or subsidiary of ours.

 

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Authorized Shares

Our 2011 Plan will be terminated in connection with this offering, and accordingly, no shares will be available for issuance under the 2011 Plan following the completion of this offering. Our 2011 Plan will continue to govern outstanding awards granted thereunder. As of December 31, 2020, there were options to purchase 20,867,025 shares of our Class A common stock outstanding at a weighted-average exercise price of $6.25 per share.

Plan Administration

Our board of directors or a committee created and appointed by our board of directors, in either case the administrator, administers our 2011 Plan. Subject to general purposes, terms and conditions of our 2011 Plan, and to the direction of our board of directors, the administrator has full power to implement and carry out our 2011 Plan.

The administrator may, at any time or from time to time, authorize the Company, with the consent of the respective participants, to issue new awards in exchange for the surrender and cancellation of any or all outstanding awards. Without prior stockholder approval the administrator may reprice options or SARs (and where such repricing is a reduction in the exercise price of outstanding options or SARs, the consent of the affected participants is not required provided written notice is provided to them). The administrator may at any time buy from a participant an award previously granted with payment in cash, shares (including Restricted Stock) or other consideration, based on such terms and conditions as the administrator and the participant may agree.

Eligibility

Employees, officers, directors and consultants of ours or our parent or subsidiary companies are eligible to receive awards under our 2011 Plan, except that only employees of ours or our parent or subsidiary companies are eligible to receive incentive stock options.

Options

The administrator may grant options under our 2011 Plan to eligible persons and will determine whether such options will be incentive stock options or nonqualified stock options, the number of shares subject to the option, the exercise price of the option, the period during which the option may be exercised, and all other terms and conditions of the option, subject to our 2011 Plan. Our 2011 Plan provides that the exercise price of an option is determined by the administrator when the option is granted and generally is not less than the fair market value per share, except that the exercise price of an incentive stock option granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of ours or any parent or subsidiary of ours, or a 10% Stockholder, will not be less than one 110% of the fair market value of the shares on the date of grant. Our 2011 Plan also provides that the term of a stock option may not exceed 10 years, and the term of an incentive stock option granted to a 10% Stockholder may not exceed 5 years. If the employment or service of an option recipient is terminated for any reason other than cause, then the recipient (or the recipient’s legal representative or authorized assignee) generally may exercise the vested portion of his or her option within 3 months following the termination date (or such other period determined by the administrator, provided that such period extends at least 30 days following the termination date), except that if the termination is a result of the recipient’s death or recipient dies within 3 months following his or her termination date, then such period generally will be 12 months (or such other period determined by the administrator, provided that such period extends at least 6 months following the termination date), subject in all cases to the expiration date of the option. The administrator may modify, extend or renew outstanding options and authorize the grant of new options in substitution for

 

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outstanding options, provided that any such action may not, without the written consent of the recipient of an option, impair such person’s rights under any option previously granted. Any outstanding incentive stock option that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. Subject to our 2011 Plan, the administrator may reduce the exercise price of outstanding options without the consent of option recipients by a written notice to them, except the exercise price may not be reduced below the fair market value of a share on the date of reduction.

Restricted Stock

A restricted stock award is an offer by us to sell to an eligible person shares of our Class A common stock that are subject to certain specified restrictions. The administrator determines to whom an offer will be made, the number of shares the person may purchase, the purchase price, the restrictions to which the shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the terms and conditions of our 2011 Plan. Our 2011 Plan provides that holders of restricted stock will be entitled to receive all dividends and other distributions paid with respect to such restricted stock, unless provided otherwise by the administrator. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Restricted Stock Units

Our 2011 Plan permits the grant of awards of RSUs, which may be settled in cash, or by issuance of shares at a date in the future. No purchase price shall apply to an RSU settled in shares. To the extent permissible under applicable law, the administrator may permit a participant to defer payment under an RSU to a date or dates after the RSU is earned, provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code (or any successor). Payment may be made in the form of cash or whole Shares or a combination thereof, all as the administrator determines.

Transferability of Awards

Except as permitted by the administrator, awards granted under our 2011 Plan, and any interest therein, will not be transferable or assignable by any participant, other than by will or by the laws of descent and distribution, except that nonstatutory stock options may be transferred by instrument to an inter vivos or testamentary trust in accordance with the terms of our 2011 Plan.

Certain Adjustments

In the event that the number of outstanding shares of our Class A common stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or other change in our capital structure affecting shares without consideration, then in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under our 2011 Plan (i) the number of shares reserved for issuance under our 2011 Plan, (ii) the exercise prices of and number of shares subject to outstanding options and SARs, and (iii) the purchase prices of and/or number of shares subject to other outstanding awards will be proportionately adjusted, subject to any required action by our board of directors or our stockholders and compliance with applicable securities laws. However, fractions of a share will not be issued but will either be paid in cash at the fair market value of such fraction of a share or will be rounded down to the nearest whole share, as determined by the administrator.

Corporate Transactions

Our 2011 Plan provides that, in the event that we are subject to an acquisition or other combination, outstanding awards acquired under our 2011 Plan will be subject to the agreement

 

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evidencing the acquisition or other combination. The agreement need not treat all outstanding awards in an identical matter.

Amendment; Termination

Our board of directors may amend, suspend, or terminate our 2011 Plan at any time, provided that such action will not affect outstanding awards previously issued or granted without the written consent of the recipient of such award. As noted above, immediately prior to the effectiveness of the 2021 Plan, our 2011 Plan will be terminated and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing terms.

2021 Partner Studio Incentive Plan

Our board of directors has adopted and our stockholders have approved our 2021 Partner Plan. Our 2021 Partner Plan became effective on the business day immediately prior to the date of this prospectus. Our 2021 Partner Plan provides for the grant of nonstatutory stock options, restricted stock, restricted stock units (RSUs), stock appreciation rights (SARs), performance units, and performance shares to individuals or entities engaged by us or a parent or subsidiary of ours to render bona fide services to the party engaging such individual or entity.

Authorized Shares

A total of 390,000 shares of our Class A common stock are reserved for issuance pursuant to our 2021 Partner Plan.

If an award granted under the 2021 Partner Plan expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program or, with respect to restricted stock, RSUs, performance units, or performance shares, is forfeited or repurchased due to failure to vest, then the unpurchased shares (or for awards other than stock options or SARs, the forfeited or repurchased shares) will become available for future grant or sale under the 2021 Partner Plan. With respect to SARs, only the net shares actually issued will cease to be available under the 2021 Partner Plan and all remaining shares under SARs will remain available for future grant or sale under the 2021 Partner Plan. Shares that have actually been issued under the 2021 Partner Plan under any award will not be returned to the 2021 Partner Plan; provided, however, that if shares issued pursuant to awards of restricted stock, RSUs, performance shares, or performance units are repurchased or forfeited, such shares will become available for future grant under the 2021 Partner Plan. Shares used to pay the exercise price of an award or to satisfy the tax withholding and remittance obligations related to an award will become available for future grant or sale under the 2021 Partner Plan. To the extent an award is paid out in cash rather than shares, such cash payment will not result in a reduction in the number of shares available for issuance under the 2021 Partner Plan.

Plan Administration

Our board of directors or one or more committees appointed by our board of directors may administer our 2021 Partner Plan. The compensation committee of our board of directors administers our 2021 Partner Plan. Subject to the provisions of our 2021 Partner Plan, the administrator has the power to administer our 2021 Partner Plan and make all determinations deemed necessary or advisable for administering the 2021 Partner Plan, including, but not limited to, the power to determine the fair market value of our Class A common stock, select the service providers to whom awards may be granted, determine the number of shares covered by each award, approve forms of award agreements for use under the 2021 Partner Plan, determine the terms and conditions

 

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of awards (including, but not limited to, the exercise price, the time or times at which the awards may be exercised, any vesting acceleration or waiver or forfeiture restrictions, and any restriction or limitation regarding any award or the shares relating thereto), construe and interpret the terms of our 2021 Partner Plan and awards granted under it, prescribe, amend, and rescind rules, regulations, and sub-plans relating to our 2021 Partner Plan, and modify or amend each award, including, but not limited to, the discretionary authority to extend the post-termination exercisability period of awards (provided that no option or stock appreciation right will be extended past its original maximum term), and to allow a participant to defer the receipt of payment of cash or the delivery of shares that would otherwise be due to such participant under an award. The administrator also has the authority to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or cancelled in exchange for awards of the same type which may have a higher or lower exercise price and/or different terms, awards of a different type, and/or cash, or by which the exercise price of an outstanding award is increased or reduced. The administrator’s decisions, interpretations, and other actions are final and binding on all participants.

Stock Options

Stock options may be granted under our 2021 Partner Plan. The exercise price of options granted under our 2021 Partner Plan must at least be equal to the fair market value of our Class A common stock on the date of grant. The administrator will determine the term of each option. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares, or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of participant, it, he or she may exercise its, his or her option for the period of time stated in its, his or her option agreement. In the absence of a specified time in an award agreement, the option will remain exercisable three months following the termination of service. An option may not be exercised later than the expiration of its term. Subject to the provisions of our 2021 Partner Plan, the administrator determines the other terms of options.

Stock Appreciation Rights

SARs may be granted under our 2021 Partner Plan. SARs allow the recipient to receive the appreciation in the fair market value of our Class A common stock between the exercise date and the date of grant. SARs may not have a term exceeding ten years. After the termination of service of a participant, it, he or she may exercise its, his or her stock appreciation right for the period of time stated in its, his or her SARs agreement. In the absence of a specified time in an award agreement, the SARs will remain exercisable for three months following the termination of service. However, in no event may a stock appreciation right be exercised later than the expiration of its term. Subject to the provisions of our 2021 Partner Plan, the administrator determines the other terms of SARs, including when such rights become exercisable and whether to pay any increased appreciation in cash or with shares of our Class A common stock, or a combination thereof, except that the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.

Restricted Stock

Restricted stock may be granted under our 2021 Partner Plan. Restricted stock awards are grants of shares of our Class A common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any eligible individual or entity and, subject to the provisions of our 2021 Partner Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be appropriate (for example, the administrator may set restrictions based on the

 

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achievement of specific performance goals or continued service to us); provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Restricted Stock Units

RSUs may be granted under our 2021 Partner Plan. RSUs are bookkeeping entries representing an amount equal to the fair market value of one share of our Class A common stock. Subject to the provisions of our 2021 Partner Plan, the administrator determines the terms and conditions of RSUs, including the vesting criteria and the form and timing of payment. The administrator may set vesting criteria based upon the achievement of company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the administrator in its discretion. The administrator, in its sole discretion, may pay earned RSUs in the form of cash, in shares of our Class A common stock, or in some combination thereof. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at which any vesting requirements will be deemed satisfied. Participants will have no voting rights with respect to RSUs until the date shares are issued with respect to such RSUs. The administrator may provide that a participant is entitled to receive dividend equivalents with respect to the payment of cash dividends on shares having a record date prior to the date on which the applicable RSUs are settled or forfeited in accordance with our 2021 Partner Plan.

Performance Units and Performance Shares

Performance units and performance shares may be granted under our 2021 Partner Plan. Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or the awards otherwise vest. The administrator will establish performance objectives or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants. The administrator may set performance objectives based on the achievement of company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the administrator in its discretion. After the grant of a performance unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance units or performance shares. Performance units shall have an initial dollar value established by the administrator on or prior to the grant date. Performance shares shall have an initial value equal to the fair market value of our Class A common stock on the grant date. The administrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares, or in some combination thereof. Participants will have no voting rights with respect to performance units and/or performance shares until the date shares are issued with respect to such performance units and/or performance shares. The administrator may provide that a participation is entitled to receive dividend equivalents with respect to the payment of cash dividends on shares having a record date prior to the date on which the applicable performance shares are settled or forfeited in accordance with our 2021 Partner Plan.

Non-Transferability of Awards

Unless the administrator provides otherwise, our 2021 Partner Plan generally will not allow for the transfer of awards and only the recipient of an award may exercise an award during its, his or her lifetime. If the administrator makes an award transferrable, such award will contain such additional terms and conditions as the administrator deems appropriate.

 

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Certain Adjustments

In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefits available under our 2021 Partner Plan, the administrator will adjust the number and class of shares that may be delivered under our 2021 Partner Plan and/or the number, class, and price of shares covered by each outstanding award and the numerical share limits set forth in our 2021 Partner Plan.

Dissolution or Liquidation

In the event of our proposed liquidation or dissolution, the administrator will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of such proposed transaction.

Merger or Change in Control

Our 2021 Partner Plan provides that in the event of our merger with or into another corporation or entity or a change in control (as defined in our 2021 Partner Plan), each outstanding award will be treated as the administrator determines, including, without limitation, that (i) awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a participant, that the participant’s awards will terminate upon or immediately prior to the consummation of such merger or change in control; (iii) outstanding awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon consummation of such merger or change in control and, to the extent the administrator determines, terminate upon or immediately prior to the effectiveness of such merger or change in control; (iv) (A) the termination of an award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such award or realization of the participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the administrator determines in good faith that no amount would have been attained upon the exercise of such award or realization of the participant’s rights, then such award may be terminated by us without payment), or (B) the replacement of such award with other rights or property selected by the administrator in its sole discretion; (v) with respect only to an award (or portion thereof) that is unvested as of immediately prior to the effective time of the merger or change in control, the termination of the award immediately prior to the effective time of the merger or change in control with such payment to the participant (including no payment) as the administrator determines in its discretion; or (vi) any combination of the foregoing. The administrator will not be obligated to treat all participants, awards, all awards a participant holds, or all awards of the same type, similarly in the transaction.

In the event an option or stock appreciation right is not assumed or substituted in the event of a merger or change in control, the administrator will notify each participant in writing or electronically that the option or stock appreciation right, as applicable, will be exercisable for a period of time determined by the administrator in its sole discretion, and the option or stock appreciation right, as applicable, will terminate upon the expiration of such period.

Clawback

Awards are subject to any clawback policy of ours, and the administrator also may specify in an award agreement that the participant’s rights, payments, and/or benefits with respect to an award will be subject to reduction, cancellation, forfeiture, and/or recoupment upon the occurrence of certain specified events. Our board of directors may require a participant to forfeit, return, or reimburse us all

 

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or a portion of the award and/or shares issued under the award, any amounts paid under the award, and any payments or proceeds paid or provided upon disposition of the shares issued under the award in order to comply with such clawback policy or applicable laws.

Amendment and Termination

The administrator has the authority to amend, suspend, or terminate our 2021 Partner Plan provided such action does not impair the existing rights of any participant. Our 2021 Partner Plan will continue in effect until terminated by the administrator.

Employee Stock Purchase Plan

Our board of directors has adopted and our stockholders have approved, our Employee Stock Purchase Plan (our ESPP). Our ESPP became effective on the business day immediately prior to the date of this prospectus. However, no offering period or purchase period will begin unless and until otherwise determined by our board of directors.

Authorized Shares

A total of 7,800,000 shares of our Class A common stock are available for sale under our ESPP. The number of shares of our Class A common stock that will be available for sale under our ESPP also includes an annual increase on the first day of each fiscal year beginning with fiscal year 2022, equal to the least of:

 

  

7,800,000 shares;

 

  

one percent (1%) of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding fiscal year; or

 

  

such other amount as our board of directors may determine.

Plan Administration

Our board of directors, or a committee appointed by our board of directors, will administer our ESPP, and have full but non-exclusive authority to interpret the terms of our ESPP and determine eligibility to participate, subject to the conditions of our ESPP, as described below. We expect our compensation committee to administer our ESPP. The administrator has full and exclusive discretionary authority to construe, interpret, and apply the terms of the ESPP, to delegate ministerial duties to any of our employees, to designate separate offerings under the ESPP, to designate our subsidiaries and affiliates as participating in the ESPP, to determine eligibility, to adjudicate all disputed claims filed under the ESPP, and to establish procedures that it deems necessary or advisable for the administration of the ESPP, including, but not limited to, adopting such procedures, sub-plans, and appendices to the ESPP enrollment agreement as are necessary or appropriate to permit participation in the ESPP by employees who are foreign nationals or employed outside the U.S. The administrator’s findings, decisions, and determinations are final and binding on all participants to the full extent permitted by law.

Eligibility

Generally, all of our employees are eligible to participate if they are customarily employed by us, or any participating subsidiary, and unless determined otherwise by the administrator, in its discretion, prior to an enrollment date for all options granted on such enrollment date in an offering, (i) have completed at least two years of service (or a lesser period of time determined by the administrator) since his or her last hire date, (ii) customarily work more than 20 hours per week (or a lesser period of time determined by the administrator), (iii) customarily work more than five months per

 

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calendar year (or a lesser period of time determined by the administrator), (iv) are not a highly compensated employee within the meaning of Section 414(q) of the Code, and (v) are not a highly compensated employee within the meaning of Section 414(q) of the Code with compensation above a certain level or is an officer or subject to disclosure requirements under Section 16(a) of the Exchange Act.

However, an employee may not be granted rights to purchase shares of our Class A common stock under our ESPP if such employee:

 

  

immediately after the grant would own capital stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or

 

  

hold rights to purchase shares of our Class A common stock under all of our employee stock purchase plans that accrue at a rate that exceeds $25,000 worth of shares of our Class A common stock for each calendar year.

Offering Periods

Our ESPP includes a component that allows us to make offerings intended to qualify under Section 423 of the Code and a component that allows us to make offerings not intended to qualify under Section 423 of the Code to designated companies, as described in our ESPP. Our ESPP will provide for consecutive, overlapping 24-month offering periods. The offering periods will be scheduled to start on the first trading day on or after May 20 and November 20 of each year, except the first offering period will commence on the first trading day on or after the effective date of the registration statement of which this prospectus forms a part and will end on the first trading day on or before November 20, 2023, and the second offering period will commence on the first trading day on or after November 20, 2021. Each offering period will include purchase periods, which, unless the administrator provides otherwise, will (i) commence on the first trading day on or after May 20 and November 20 and (ii) terminate on the last trading day on or before November 20 of the same year and May 20 of the following year, respectively, except that the first purchase period under our ESPP will commence on the first trading day on or after the effective date of the registration statement of which this prospectus forms a part and will end on the last trading day on or before November 20, 2021.

Contributions

Our ESPP permits participants to purchase shares of our Class A common stock through contributions (in the form of payroll deductions or otherwise to the extent permitted by the administrator) of up to 15% of their eligible compensation. A participant may purchase a maximum of 590 shares of our Class A common stock during a purchase period.

Exercise of Purchase Right

Amounts contributed and accumulated by the participant will be used to purchase shares of our Class A common stock at the end of each 6-month purchase period. The purchase price of the shares will be 15% of the lower of the fair market value of our Class A common stock on the first trading day of the offering period or on the exercise date. If the fair market value of our Class A common stock on the exercise date is less than the fair market value on the first trading day of the offering period, participants will be automatically withdrawn from such offering period immediately following their purchase of shares of our Class A common stock on the exercise date and will be automatically re-enrolled in the next offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of our Class A common stock. Participation ends automatically upon termination of employment with us.

 

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Non-Transferability

A participant may not transfer rights granted under our ESPP (other than by will, the laws of descent and distribution, or as otherwise provided under our ESPP).

Merger or Change in Control

Our ESPP provides that in the event of a merger or change in control, as defined under our ESPP, a successor corporation may assume or substitute each outstanding purchase right. If the successor corporation refuses to assume or substitute for the outstanding purchase right, the offering period then in progress will be shortened, and a new exercise date will be set that will be before the date of the proposed merger or change in control. The administrator will notify each participant that the exercise date has been changed and that the participant’s option will be exercised automatically on the new exercise date unless prior to such date the participant has withdrawn from the offering period.

Amendment; Termination

The administrator has the authority to amend, suspend, or terminate our ESPP, except that, subject to certain exceptions described in our ESPP, no such action may adversely affect any outstanding rights to purchase shares of our Class A common stock under our ESPP. Our ESPP automatically will terminate in 2039, unless we terminate it sooner.

Executive Incentive Compensation Plan

Our board of directors has adopted an Executive Incentive Compensation Plan (the Bonus Plan). The Bonus Plan will be administered by a committee appointed by our board of directors. Unless and until our board of directors determines otherwise, our compensation committee will be the administrator of the Bonus Plan. The Bonus Plan will allow our compensation committee to provide incentive awards to selected employees, including our named executive officers, determined by our compensation committee, based upon performance goals established by our compensation committee. Our compensation committee, in its sole discretion, may establish target awards for participants under the Bonus Plan.

Under the Bonus Plan, our compensation committee will determine the performance goals applicable to awards, which goals may include, without limitation: attainment of research and development milestones, sales goals, business divestitures and acquisitions, cash flow, including but not limited to unlevered free cash flow, cash position, earnings (which may include any calculation of earnings, including but not limited to earnings before interest and taxes, earnings before taxes, earnings before interest, taxes, depreciation and amortization, and net earnings), earnings per share, net income, net profit, net sales, operating cash flow, operating expenses, operating income, operating margin, overhead or other expense reduction, product defect measures, product release timelines, productivity, profit, return on assets, return on capital, return on equity, return on investment, return on sales, revenue, revenue growth, sales results, sales growth, stock price, time to market, total stockholder return, working capital, individual objectives such as peer reviews or other subjective or objective criteria, and attainment of specified performance goals. As determined by our compensation committee, the performance goals may be based on GAAP or non-GAAP results and any actual results may be adjusted by our compensation committee for one-time items or unbudgeted or unexpected items when determining whether the performance goals have been met. The goals may be on the basis of any factors our compensation committee determines relevant, and may be on an individual, divisional, business unit, segment, or company-wide basis. Any criteria used may be measured on such basis as our compensation committee determines. The performance goals may differ from participant to participant and from award to award.

 

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Our compensation committee may, in its sole discretion and at any time, increase, reduce, or eliminate a participant’s actual award, or increase, reduce, or eliminate the amount allocated to the bonus pool. The actual award may be below, at, or above a participant’s target award, in our compensation committee’s discretion. Our compensation committee may determine the amount of any reduction on the basis of such factors as it deems relevant, and it will not be required to establish any allocation or weighting with respect to the factors it considers.

Unless otherwise determined by our compensation committee, to earn an actual award, a participant must be employed by us (or an affiliate of us, as applicable) through the date the bonus is paid. Payment of bonuses occurs as soon as administratively practicable after the end of the applicable performance period, but no later than the dates set forth in the Bonus Plan.

All awards under our Bonus Plan will be subject to reduction, cancellation, forfeiture, or recoupment in accordance with any clawback policy that we (or any parent or subsidiary of ours) are required to adopt pursuant to the listing standards of any national securities exchange or association on which our securities are listed or as is otherwise required by the Dodd-Frank Act or other applicable laws. In addition, our compensation committee may impose such other clawback, recovery, or recoupment provisions with respect to an award under the Bonus Plan as it determines necessary or appropriate, including without limitation a reacquisition right in respect of previously acquired cash, stock, or other property provided with respect to an award. Recovery of compensation under a clawback policy generally will not give the participant the right to resign for “good reason” or “constructive termination” (or similar term) under any agreement with us or any parent or subsidiary of ours. Additionally, our compensation committee may specify when providing for an award under the Bonus Plan that the participant’s rights, payments, and benefits with respect to the award will be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to any otherwise applicable vesting or performance conditions of the award.

Our board of directors or our compensation committee will have the authority to amend or terminate the Bonus Plan provided such action does not alter or impair the existing rights of any participant with respect to any earned bonus without the participant’s consent. The Bonus Plan will remain in effect until terminated in accordance with the terms of the Bonus Plan.

401(k) Plan

We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax-advantaged basis (the 401(k) Plan). Plan participants are able to defer eligible compensation on a pre-tax or after tax (Roth) basis, subject to applicable annual Code limits. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, pre-tax contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan, and earnings on Roth contributions are not taxable when distributed from the 401(k) plan.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to the compensation arrangements, including employment, termination of employment and change in control arrangements, discussed in the sections titled “Management” and “Executive Compensation,” the following is a description of each transaction since January 1, 2018 and each currently proposed transaction in which:

 

  

we have been or are to be a participant;

 

  

the amount involved exceeded or exceeds $120,000; and

 

  

any of our directors, executive officers or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest.

Series A Convertible Preferred Stock Financing

In August 2018, we sold 109,090,908 shares of our Series A convertible preferred stock to KKR Denali Holdings L.P. (KKR Denali) for an aggregate purchase price of $399,999,996.00. KKR Denali currently holds more than 5% of our outstanding Class A common stock. Edward Oberwager, a member of our board of directors, is a Managing Director of KKR and Cathy Sun, a member of our board of directors, is a Director of KKR. Herald Chen, our President and Chief Financial Officer and a member of our board of directors, was affiliated with KKR at the time of this transaction and is a limited partner in KKR Denali as well as other entities affiliated with KKR.

Investors’ Rights Agreement

We are party to our IRA, pursuant to which certain holders of our capital stock, including KKR Denali, Adam Foroughi and an entity affiliated with Mr. Foroughi, have the right to demand that we file a registration statement or request that their shares of our capital stock be covered by a registration statement that we are otherwise filing. See the section titled “Description of Capital Stock—Registration Rights” for additional information. Mr. Oberwager and Ms. Sun, members of our board of directors, are affiliated with KKR and Mr. Chen, our President and Chief Financial Officer and a member of our board of directors, was previously affiliated with KKR and is a limited partner in KKR Denali. Adam Foroughi, our CEO and Chairperson, and an entity affiliated with him are parties to our IRA.

Right of First Refusal

Pursuant to our equity compensation plans and certain agreements with our stockholders, including a right of first refusal and co-sale agreement, dated August 15, 2018, with certain holders of our capital stock, we or our assignees have a right to purchase shares of our capital stock which stockholders propose to sell to other parties. This right will terminate upon the completion of this offering. KKR Denali is party to the right of first refusal and co-sale agreement. Mr. Oberwager and Ms. Sun, members of our board of directors, are affiliated with KKR and Mr. Chen, our President and Chief Financial Officer and a member of our board of directors, was previously affiliated with KKR and is a limited partner in KKR Denali. Mr. Foroughi, our Chief Executive Officer and a member of our board of directors, and an entity affiliated with him are parties to the right of first refusal and co-sale agreement.

Prior Voting Agreement

We are a party to a voting agreement, dated November 12, 2019 (the Prior Voting Agreement) under which certain holders of our capital stock have agreed to vote their shares of our capital stock on

 

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certain matters, including with respect to the election of directors. The Prior Voting Agreement will terminate upon the completion of this offering. Mr. Oberwager and Ms. Sun, members of our board of directors, are affiliated with KKR and Mr. Chen, our President and Chief Financial Officer and a member of our board of directors, was previously affiliated with KKR and is a limited partner in KKR Denali. Mr. Foroughi, our CEO and Chairperson, and an entity affiliated with him are parties to the Prior Voting Agreement.

Pursuant to the terms of the Prior Voting Agreement, we have entered into an agreement with KKR Denali in which we have agreed to use commercially reasonable efforts to cause one person designated by KKR Denali to serve on and be elected to the board of directors. See “Description of Capital Stock—Director Nominations Agreement.”

Credit Facility

In August 2018, we entered into a credit agreement, which provided for term loans in an aggregate principal amount of $820.0 million and a revolving credit facility of $50.0 million. The credit agreement was amended to increase the principal amount of the term loan by an aggregate amount of $400.0 million on April 23, 2019 and amended again on April 27, 2020, May 6, 2020 and October 27, 2020. The credit agreement was further amended on February 12, 2021 to increase the senior secured term loan facility by $300.0 million to an aggregate principal amount of $1.82 billion, to add an additional $10.0 million in aggregate principal amount of revolving commitments, increasing the total revolving commitments to $600.0 million, and to reduce the interest rate on the incremental term loans issued on May 6, 2020 to have the same interest rate as all other term loans.

KKR Capital Markets LLC, an affiliate of KKR, acted as joint lead arranger and joint bookrunner for the credit agreement. In 2018, 2019, 2020, and in connection with the amendment in February 2021, we paid $6.5 million, $2.0 million, $1.5 million, and $0.8 million, respectively, in fees to KKR Capital Markets LLC in connection with the credit agreement. KKR Corporate Lending (CA) LLC, an affiliate of KKR, has provided revolving credit commitments in the amount of $15.0 million under our revolving credit facility. See the section titled “Description of Certain Indebtedness” for additional information.

Promissory Notes

Former Promissory Notes with Executive Officers

The following table sets forth a summary of promissory notes that we have entered into with certain of our executive officers, in consideration of our advancing amounts to allow them to early exercise their stock options. On August 7, 2020, we amended the promissory notes with Herald Chen, Katie Jansen, and Basil Shikin to lower the interest rate on the outstanding balance of such notes to the applicable IRS annual mid-term rate of 0.41%. These promissory notes previously had an interest rate of 2.59% (except with respect to our promissory note with Herald Chen, which had an interest rate of 1.59%). Each of Messrs. Chen and Shikin and Mses. Jansen and Valenzuela repaid their notes in February 2021.

 

Borrower

  Date   Principal Amount ($)   Interest Rate (%) 

Herald Chen

   11/22/2019    12,120,000    0.41 

Katie Jansen

   3/8/2019    503,000    0.41 
   3/8/2019    673,600    0.41 
   11/23/2020    1,464,000    0.39 

Basil Shikin

   3/8/2019    505,200    0.41 
   3/8/2019    503,000    0.41 

Victoria Valenzuela

   7/6/2020    4,863,343    0.45 

 

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Promissory Note with Related Party

Additionally, on March 8, 2019, we entered into a promissory note with Rafael Vivas, the brother of Eduardo Vivas, a member of our board of directors, for the same purpose as the promissory notes described above, which was also amended on August 7, 2020 to lower the interest rate on the outstanding balance of such note to the applicable IRS annual mid-term rate of 0.41%. This note previously had an interest rate of 2.59%. The note has a principal amount of $2,273,400 and remains outstanding.

Promissory Notes as Payment for Repurchases of Class A Common Stock

The following table sets forth a summary of promissory notes that we have entered into with certain of our directors and executive officers as payment for our repurchase of Class A common stock from the applicable directors and executive officers pursuant to certain stock repurchase agreements.

 

Seller

  Date   Principal Amount ($)   Interest Rate (%)   Number of
Repurchased
Class A
Common Stock
 

Eduardo Vivas

   12/19/2019    1,212,000    2.00    300,000 

Adam Foroughi

   12/20/2019    9,999,000    2.00    2,475,000 

Relationship with KKR

We have utilized and may continue to utilize KKR and/or its affiliates, including a team of operating professionals who work exclusively with KKR’s investment professionals and portfolio company management teams, and paid to KKR fees and expenses of $0.7 million in 2018.

Compensation to Related Party

The Chairperson and former President of our subsidiary, Lion Studios, LLC, Rafael Vivas, is the brother of Eduardo Vivas, a member of our board of directors. Rafael Vivas received annual salary and other cash compensation of $375,000, $500,000, and $266,667 in 2018, 2019, and 2020, respectively, and received a cash bonus of $25,000 in 2020. He also receives benefits consistent with other employees serving in similar roles. In addition, we granted Rafael Vivas a stock option to purchase 810,000 shares of our Class A common stock at a purchase price of $2.806667 per share during the year ended December 31, 2018 and a stock option to purchase 600,000 shares of our Class A common stock at an exercise price of $5.05 per share during the year ended December 31, 2019.

Directed Share Program

At our request, the underwriters have reserved up to 5% of the shares offered by this prospectus for sale at the initial public offering price through a directed share program available to directors, officers, certain employees, and their friends and family members, as well as certain of our partners and clients.

The number of shares of Class A common stock available for sale to the general public will be reduced to the extent that such persons purchase such reserved shares. Any shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. Additionally, except in the case of shares purchased by any director or officer, shares purchased through the directed share program will not be subject to a lock-up restriction. Other than the underwriting discount described on the front covered of this prospectus, the underwriters will not be entitled to any commission with respect to shares of Class A common stock sold pursuant to the directed share program.

 

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Executive Compensation

We have granted stock options to our executive officers. See the sections titled “Executive Compensation—Outstanding Equity Awards at 2020 Year-End” for a description of these stock options.

Exchange Agreements

To facilitate the Class B Stock Exchange, we have entered into exchange agreements with the Class B Stockholders and certain related entities, pursuant to which immediately following the effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering, all outstanding shares of our Class A common stock beneficially owned by the Class B Stockholders (after giving effect to the Capital Stock Conversions) and certain related entities will automatically be exchanged for an equivalent number of shares of our Class B common stock. In addition, following the completion of this offering, and pursuant to an Equity Award Exchange Agreement entered into between us and Herald Chen, Mr. Chen will have a right (but not an obligation), to require us to exchange any shares of Class A common stock received upon the exercise of options to purchase shares of Class A common stock for an equivalent number of shares of Class B common stock. This Equity Award Exchange applies only to equity awards granted to Mr. Chen prior to the effectiveness of the filing of our amended and restated certificate of incorporation. There are 2,360,400 shares of our Class A common stock subject to options held by Mr. Chen that may be exchanged, upon exercise, for an equivalent number of shares of our Class B common stock following this offering.

Other Transactions

In February 2021, we repurchased 153,541 and 60,968 shares from Mr. Chen and Ms. Valenzuela for aggregate purchase prices of $12.3 million and $4.9 million, respectively.

Cookie Monster Capital, LLC (Cookie Monster) is a mobile game developer owned by Eduardo Vivas, a member of our board of directors. We published an App developed by Cookie Monster under a game assignment and revenue share agreement entered in October 2020. In 2021, we have made payments to Cookie Monster in the amount of $0.1 million.

Other than as described above under this section titled “Certain Relationships and Related Party Transactions,” since January 1, 2018, we have not entered into any transactions, nor are there any currently proposed transactions, between us and a related party where the amount involved exceeds, or would exceed, $120,000, and in which any related person had or will have a direct or indirect material interest.

Limitation of Liability and Indemnification of Officers and Directors

We have adopted an amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering, and which will contain provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by the Delaware General Corporation Law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for the following:

 

  

any breach of their duty of loyalty to our company or our stockholders;

 

  

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  

unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

 

  

any transaction from which they derived an improper personal benefit.

 

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Any amendment to, or repeal of, these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to that amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.

In addition, we have adopted amended and restated bylaws, which will become effective immediately prior to the completion of this offering, and which will provide that we will indemnify, to the fullest extent permitted by law, any person who is or was a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that they are or were one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. Our amended and restated bylaws will provide that we may indemnify to the fullest extent permitted by law any person who is or was a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that they are or were one of our employees or agents or is or was serving at our request as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Our amended and restated bylaws will also provide that we must advance expenses incurred by or on behalf of a director or officer in advance of the final disposition of any action or proceeding, subject to limited exceptions.

Further, we have entered into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

The limitation of liability and indemnification provisions that will be included in our amended and restated certificate of incorporation,