Item 1. Condensed Consolidated Financial Statements

126K characters. Original on sec.gov · Markdown

Item 1. Condensed Consolidated Financial Statements

AppLovin Corporation

Condensed Consolidated Balance Sheets

(in thousands, except for share and per share data)



	September 30, 2021		December 31, 2020
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	1,049,617	$	317,235
Accounts receivable, net	412,884		296,964
Prepaid expenses and other current assets	163,864		48,795
Total current assets	1,626,365		662,994
Property and equipment, net	62,910		28,587
Operating lease right-of-use assets	77,435		84,336
Goodwill	997,661		249,773
Intangible assets, net	1,758,796		1,086,332
Other assets	44,593		42,571
Total assets	$	4,567,760	$	2,154,593
Liabilities, redeemable noncontrolling interest, and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	208,539	$	147,275
Accrued liabilities	131,877		95,057
Licensed asset obligation	17,808		18,760
Short-term debt	18,310		15,210
Deferred revenue	84,884		86,886
Operating lease liabilities	21,278		22,206
Deferred acquisition costs, current	87,072		212,658
Total current liabilities	569,768		598,052
Non-current liabilities:
Long-term debt	1,731,020		1,583,990
Operating lease liabilities, non-current	65,705		71,755
Other non-current liabilities	152,048		59,032
Total liabilities	2,518,541		2,312,829
Commitments and Contingencies (Note 5)
Redeemable noncontrolling interest	160		309
Stockholders’ equity (deficit):
Convertible preferred stock, 100,000,000 and 109,090,908 shares authorized, nil and 109,090,908 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	—		399,589
Class A, Class B and Class F common stock, $0.00003 par value—1,700,000,000 (Class A 1,500,000,000, Class B 200,000,000, Class F nil) and 429,600,000 (Class A 386,400,000, Class B nil, Class F 43,200,000) shares authorized, 373,641,135 (Class A 225,833,513, Class B 147,807,622, Class F nil) and 226,364,401 (Class A 183,800,251, Class B nil, Class F 42,564,150) shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	11		7
Additional paid-in capital	3,084,928		453,655
Accumulated other comprehensive income (loss)	(27,560)		604
Accumulated deficit	(1,008,320)		(1,012,400)
Total stockholders’ equity (deficit)	2,049,059		(158,545)
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity (deficit)	$	4,567,760	$	2,154,593

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Operations

(in thousands, except for per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	726,951	$	381,740	$	1,999,634	$	941,249
Costs and expenses:
Cost of revenue	254,052		163,060		722,966		357,564
Sales and marketing	285,224		153,014		816,200		417,000
Research and development	108,523		51,136		246,861		99,950
General and administrative	34,104		15,276		122,116		41,256
Lease modification and abandonment of leasehold improvements	—		—		—		7,851
Extinguishments of acquisition-related contingent consideration	—		74,712		—		74,712
Total costs and expenses	681,903		457,198		1,908,143		998,333
Income (loss) from operations	45,048		(75,458)		91,491		(57,084)
Other income (expense):
Interest expense and loss on settlement of debt	(18,756)		(20,110)		(72,796)		(57,548)
Other income (expense), net	(9,217)		1,169		(997)		5,347
Total other expense	(27,973)		(18,941)		(73,793)		(52,201)
Income (loss) before income taxes	17,075		(94,399)		17,698		(109,285)
Provision for (benefit from) income taxes	16,933		(4,485)		13,767		(2,324)
Net income (loss)	142		(89,914)		3,931		(106,961)
Add: Net loss attributable to noncontrolling interest	36		226		149		546
Net income (loss) attributable to AppLovin	178		(89,688)		4,080		(106,415)
Less: Net income attributable to participating securities	(1)		—		(568)		—
Net income (loss) attributable to common stock—Basic	177		(89,688)		3,512		(106,415)
Net income (loss) attributable to common stock—Diluted	$	177	$	(89,688)	$	3,539	$	(106,415)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.00	$	(0.42)	$	0.01	$	(0.50)
Diluted	$	0.00	$	(0.42)	$	0.01	$	(0.50)
Weighted average common shares used to compute net income (loss) per share attributable to common stockholders:
Basic	368,427,532		214,638,272		309,353,304		212,998,263
Diluted	384,324,785		214,638,272		327,426,792		212,998,263

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	142	$	(89,914)	$	3,931	$	(106,961)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss), net of tax effect of $5.4 million and $8.0 million for the three and nine months ended September 30, 2021	(18,255)		218		(28,164)		278
Interest rate swap gain, net of tax effect of $1.5 million and $2.5 million for the three and nine months ended September 30, 2020	—		4,338		—		4,926
Total other comprehensive income (loss)	(18,255)		4,556		(28,164)		5,204
Add: Net loss attributable to noncontrolling interest	36		226		149		546
Total comprehensive loss attributable to AppLovin	$	(18,077)	$	(85,132)	$	(24,084)	$	(101,211)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (Deficit)

(in thousands, except share data)

(unaudited)


	Redeemable Noncontrolling Interest			Convertible Preferred Stock			Class A, Class B and Class F Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares		Amount	Shares	Amount
Balance as of December 31, 2020	$	309		109,090,908	$	399,589	226,364,401	$	7	$	453,655	$	604	$	(1,012,400)	$	(158,545)
Exercises and vesting of early exercised Class A common stock options	—			—	—		1,232,156	—		10,143		—		—		10,143
Repurchase of Class A common stock	—			—	—		(214,509)	—		—		—		—		—
Stock-based compensation	—			—	—		—	—		29,667		—		—		29,667
Total other comprehensive loss, net	—			—	—		—	—		—		(721)		—		(721)
Net loss	(54)			—	—		—	—		—		—		(10,521)		(10,521)
Balance as of March 31, 2021	255			109,090,908	399,589		227,382,048	7		493,465		(117)		(1,022,921)		(129,977)
Exercises and vesting of early exercised Class A common stock options	—			—	—		1,020,588	—		5,190		—		—		5,190
Exercise of warrants, net of shares withheld	—			—	—		6,229,081	—		—		—		—		—
Issuance of Class A common stock in connection with acquisitions	—			—	—		6,320,688	—		342,170		—		—		342,170
Issuance of Class A common stock	—			—	—		12,006	—		—		—		—		—
Issuance of Class A common stock in connection with initial public offering, net of issuance costs as adjusted for cost reimbursement	—			—	—		22,500,000	1		1,747,970		—		—		1,747,971
Conversion of preferred stock to common stock in connection with initial public offering	—			(109,090,908)	(399,589)		109,090,908	3		399,586		—		—		—
Repurchase of Class A common stock	—			—	—		(390,000)	—		—		—		—		—
Stock-based compensation	—			—	—		—	—		26,852		—		—		26,852
Total other comprehensive loss, net	—			—	—		—	—		—		(9,188)		—		(9,188)
Net income (loss)	(59)			—	—		—	—		—		—		14,423		14,423
Balance as of June 30, 2021	196			—	—		372,165,319	11		3,015,233		(9,305)		(1,008,498)		1,997,441
Exercises and vesting of early exercised Class A common common stock equity grants	—			—	—		991,787	—		7,782		—		—		7,782
Issuance of Class A common stock in connection with acquisitions	—			—	—		405,205	—		25,000		—		—		25,000
Issuance of Class A common stock	—			—	—		78,824	—		2,503		—		—		2,503
Stock-based compensation	—			—	—		—	—		34,410		—		—		34,410
Total other comprehensive loss, net	—			—	—		—	—		—		(18,255)		—		(18,255)
Net income (loss)	(36)			—	—		—	—		—		—		178		178
Balance as of September 30, 2021	$	160		—	$	—	373,641,135	$	11	$	3,084,928	$	(27,560)	$	(1,008,320)	$	2,049,059

The accompanying notes are an integral part of these condensed consolidated financial statements

AppLovin Corporation

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (Deficit)

(in thousands, except share data)

(unaudited)


	Redeemable Noncontrolling Interest			Convertible Preferred Stock					Class A, Class B and Class F Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
			Shares		Amount			Shares		Amount
Balance as of December 31, 2019	$	—		109,090,908		$	399,589		220,157,922		$	7	$	235,190	$	(4,140)	$	(887,213)	$	(256,567)
Exercises and vesting of early exercised Class A common stock options	—			—		—			442,503		—		145		—		—		145
Repurchase of unvested Class A common stock related to early exercised stock options	—			—		—			(425,001)		—		—		—		—		—
Repurchase of Class A common stock	—			—		—			(114,000)		—		(760)		—		—		(760)
Stock-based compensation	—			—		—			—		—		3,462		—		—		3,462
Total other comprehensive loss, net	—			—		—			—		—		—		(1,903)		—		(1,903)
Net income	—			—		—			—		—		—		—		4,664		4,664
Balance as of March 31, 2020	—			109,090,908		399,589			220,061,424		7		238,037		(6,043)		(882,549)		(250,959)
Exercises and vesting of early exercised Class A common stock options	—			—		—			37,593		—		117		—		—		117
Repurchase of Class A common stock	—			—		—			(135,000)		—		(1,006)		—		—		(1,006)
Issuance of common stock warrants and options in connection with an acquisition	—			—		—			—		—		39,040		—		—		39,040
Issuance of common stock warrants in connection with lease modification	—			—		—			—		—		433		—		—		433
Acquisition of noncontrolling interest	2,556			—		—			—		—		—		—		—		—
Stock-based compensation	—			—		—			—		—		4,747		—		—		4,747
Total other comprehensive income, net	—			—		—			—		—		—		2,551				2,551
Net loss	(320)			—		—			—		—		—		—		(21,391)		(21,391)
Balance as of June 30, 2020	2,236			109,090,908		399,589			219,964,017		7		281,368		(3,492)		(903,940)		(226,468)
Exercises and vesting of early exercised Class A common stock options	—			—		—			2,487,705		—		840		—		—		840
Issuance of Class A common stock in connection with acquisitions	—			—		—			2,479,996		—		106,133		—		—		106,133
Stock-based compensation	—			—		—			—		—		10,568		—		—		10,568
Total other comprehensive income, net	—			—		—			—		—		—		4,556		—		4,556
Net loss	(226)			—		—			—		—		—		—		(89,688)		(89,688)
Balance as of September 30, 2020	$	2,010		109,090,908		$	399,589		224,931,718		$	7	$	398,909	$	1,064	$	(993,628)	$	(194,059)

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating Activities
Net income (loss)	$	3,931	$	(106,961)
Adjustments to reconcile net income (loss) to operating activities:
Amortization, depreciation and write-offs	315,409		157,223
Amortization of debt issuance costs and discount	8,980		5,753
Stock-based compensation	91,828		19,362
Change in operating right-of-use asset	18,199		4,375
Lease modification and abandonment of leasehold improvements	—		7,851
Loss on extinguishments of acquisition related contingent consideration	—		74,712
Change in fair value of contingent consideration	(230)		—
Loss on settlement of debt	16,852		—
Net unrealized gains on fair value remeasurement of financial instruments	(9,305)		(4,400)
Net (gain) loss on foreign currency remeasurement	(4,080)		1,304
Changes in operating assets and liabilities:
Accounts receivable	(99,999)		(27,062)
Prepaid expenses and other current assets	(107,461)		(32,515)
Other assets	7,729		2,572
Accounts payable	49,345		(4,205)
Operating lease liabilities	(18,270)		(3,674)
Accrued and other liabilities	11,211		(2,389)
Deferred revenue	(7,303)		30,780
Net cash provided by operating activities	276,836		122,726
Investing Activities
Purchase of property and equipment	(962)		(2,842)
Acquisitions, net of cash acquired	(1,198,789)		(559,080)
Purchase of non-marketable investments and other	(15,000)		(1,500)
Proceeds from other investing activities	11,358		—
Capitalized software development costs	(2,859)		—
Net cash used in investing activities	(1,206,252)		(563,422)
Financing Activities
Proceeds from issuance of common stock in initial public offering, net of issuance costs as adjusted for cost reimbursement	1,745,228		—
Proceeds from debt issuance, net of issuance costs	844,729		331,346
Payments of debt principal	(711,482)		(60,493)
Payments of finance leases	(9,690)		(7,342)
Proceeds from exercise of stock options	25,486		1,104
Payments of deferred acquisition costs	(231,664)		(14,442)
Repurchases of common stock	—		(1,766)
Payments of deferred IPO costs	—		(220)
Net cash provided by financing activities	1,662,607		248,187
Effect of foreign exchange rate on cash and cash equivalents	(809)		65
Net increase (decrease) in cash and cash equivalents	732,382		(192,444)
Cash and cash equivalents at beginning of the period	317,235		396,247
Cash and cash equivalents at end of the period	$	1,049,617	$	203,803

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Condensed Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Supplemental non-cash investing and financing activities disclosures:
Issuance of convertible security related to acquisitions	$	342,170	$	—
Acquisitions not yet paid	$	74,347	$	16,073
Settlement of convertible security through issuance of common stock	$	25,000	$	—
Assets acquired under finance leases	$	12,584	$	5,459
Right of use assets acquired under operating leases	$	3,508	$	6,937
Settlement of bonus compensation through issuance of common stock	$	2,503	$	—
Acquisitions of business through issuance of common stock and common stock warrants	$	—	$	38,167
Settlement of contingent consideration through issuance of common stock	$	—	$	31,422
Deferred IPO costs not yet paid	$	—	$	530
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	72,182	$	12,362
Cash paid for interest on debt	$	47,021	$	44,687

The accompanying notes are an integral part of these condensed consolidated financial statements.

AppLovin Corporation

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Principles of Consolidation

Description of Business

AppLovin Corporation (the “Company” or “AppLovin”) was incorporated in the state of Delaware on July 18, 2011. The Company is a leader in the mobile app industry with a focus on building a software-based platform for mobile app developers to improve the marketing and monetization of their apps. The Company also has a globally diversified portfolio of apps—free-to-play mobile games that it operates through its own or partner studios.

The Company’s operations are headquartered in Palo Alto, California, and has several operating locations in the U.S. as well as various international office locations in North America, Asia and Europe.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus related to its initial public offering ("IPO") dated April 14, 2021 and filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The condensed consolidated balance sheet data as of December 31, 2020 was derived from the audited consolidated financial statements at that date but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of the Company’s financial position, results of operations, cash flows and stockholders’ equity for the interim periods presented. The results of operations for the three and nine months ended September 30, 2021 shown in this report are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or any other period.

Principles of Consolidation

The unaudited condensed consolidated financial statements reflect the accounts of AppLovin Corporation and its subsidiaries in which the Company has a controlling financial interest. In accordance with the provisions of Accounting Standards Codification (“ASC”) 810, Consolidation, the Company consolidates any variable interest entity (“VIE”) of which the Company is the primary beneficiary. The Company engages in business relationships with certain entities in the ordinary course of business to develop game Apps. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company evaluates its relationships with all VIEs on an ongoing basis. All intercompany transactions and balances have been eliminated upon consolidation.

Initial Public Offering and Capital Structure Change

The Company’s registration statement on Form S-1 (the “IPO Registration Statement”) related to its IPO was declared effective on April 14, 2021, and the Company’s Class A common stock began trading on the Nasdaq Global Select Market on April 15, 2021. On April 19, 2021, the Company completed its IPO, in which the Company sold 22,500,000 shares of Class A common stock at price to the public of $80.00 per share. The Company received aggregate net proceeds of $1.75 billion after deducting underwriting discounts and commissions of $47.2 million and offering expenses of $7.9 million subject to certain cost reimbursements. KKR Capital Markets LLC was an underwriter for the IPO and is an affiliate of KKR Denali Holdings L.P. (“KKR Denali”), who is a principal stockholder of the Company. The Company used $400.0 million of the net proceeds from the IPO to repay the entire outstanding amount under the revolving credit facility (See Note 8). KKR Capital Markets LLC is a lender under the revolving credit facility and an affiliate of KKR Denali, a principal stockholder of the Company.

Following the effectiveness of the IPO Registration Statement, the Company filed its Amended and Restated Certificate of Incorporation, which became effective immediately prior to the closing of the IPO (the “IPO Certificate”). The IPO Certificate authorizes a total of 1,500,000,000 shares of Class A common stock, 200,000,000 shares of Class B common stock, 150,000,000 shares of Class C common stock, and 100,000,000 shares of preferred stock. Upon the filing and effectiveness of the IPO Certificate, all shares of Class F common stock and Series A convertible preferred stock then outstanding automatically converted into the equivalent number of shares of Class A common stock, respectively (the “Capital Stock Conversions”). Following the Capital Stock Conversions and immediately prior to the completion of the IPO, a total of 150,307,622 shares of Class A common stock held by Adam Foroughi, the Company’s co-founder, CEO, and Chairperson; Herald Chen, the Company’s President and Chief Financial Officer, and a member of the Company’s board of directors; and KKR Denali (collectively with certain affiliates, the Class B Stockholders) were exchanged for an equivalent number of shares of Class B common stock pursuant to the terms of certain exchange agreements. Following the closing of the IPO, the Company had two classes of outstanding common stock: Class A common stock and Class B common stock. No shares of the Company’s Class C common stock or preferred stock were issued and outstanding as of September 30, 2021.

The rights of the holders of all classes of stock pursuant to the IPO Certificate are as follows:

Common Stock

The rights of the holders of Class A common stock, Class B common stock, and Class C common stock (referred to together as the “common stock”) are identical, except with respect to voting and conversion.

Voting Rights

Holders of the Class A common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, holders of the Class B common stock are entitled to 20 votes for each share held on all matters submitted to a vote of stockholders, and holders of the Class C common stock are not entitled to vote on any matter that is submitted to a vote of stockholders, except as otherwise required by law. The holders of the Class A common stock and Class B common stock will vote together as a single class, unless otherwise required by law. Under the IPO Certificate, approval of the holders of at least a majority of the outstanding shares of the Class B common stock voting as a separate class will be required to increase the number of authorized shares of the Class B common stock. In addition, Delaware law could require either holders of the Class A common stock, the Class B common stock, or the Class C common stock to vote separately as a single class in the following circumstances:

if the Company were to seek to amend the IPO Certificate to increase or decrease the par value of a class of stock, then that class would be required to vote separately to approve the proposed amendment; and
if the Company were to seek to amend the IPO Certificate in a manner that alters or changes the powers, preferences or special rights of a class of stock in a manner that affected its holders adversely, then that class would be required to vote separately to approve the proposed amendment.

Until the date on which the final conversion of all outstanding shares of Class B common stock pursuant to the terms of the IPO Certificate occurs, approval of at least two-thirds of the outstanding shares of the Company’s Class B common stock voting as a separate class will be required to amend or modify any provision of the IPO Certificate inconsistent with, or otherwise alter, any provision of the IPO Certificate to modify the voting, conversion, or other rights, powers, preferences, privileges, or restrictions of the Company’s Class B common stock.

Upon the closing of the IPO, the Class B Stockholders held all of the issued and outstanding shares of the Company’s Class B common 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).

Dividend Rights

Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of the Company’s common stock will be entitled to receive dividends out of funds legally available if the Company’s board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that the Company’s board of directors may determine.

No Preemptive or Similar Rights

The Company’s common stock will not be entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.

Right to Receive Liquidation Distributions

If the Company becomes subject to a liquidation, dissolution or winding-up, the assets legally available for distribution to the Company’s stockholders would be distributable ratably among the holders of the Company’s common stock and any participating preferred stock outstanding at that time, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights of and the payment of liquidation preferences, if any, on any outstanding shares of preferred stock.

Conversion of Class B Common Stock

Each share of Class B common stock will be convertible at any time at the option of the holder into one share of Class A common stock. Following the closing of the IPO, shares of Class B common stock will automatically convert into shares of Class A common stock upon sale or transfer except for certain transfers described in the IPO Certificate, including transfers for estate planning, transfers among KKR Denali and its affiliates, or other transfers among the Class B Stockholders. Withdrawal from the Voting Agreement constitutes a transfer.

Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date fixed by the Company’s board of directors that is no less than 61 days and no more than 180 days following the date on which (i) the Voting Agreement is terminated or (ii) Adam Foroughi is no longer involved with the Company as a member of the board of directors or as an executive officer.

Conversion of Class C Common Stock

After the conversion or exchange of all outstanding shares of the Company’s Class B common stock into shares of Class A common stock, all outstanding shares of Class C common stock will convert automatically into Class A common stock, on a share-for-share basis, on 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.

Preferred Stock

The Company’s IPO Certificate also authorizes the issuance of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors.

2. Summary of Significant Accounting Policies

Revenue from Contracts with Customers

The Company generates Business and Consumer revenue. Business Revenue includes fees paid by mobile app advertisers that use the Company’s software platform (“Software Platform”), and revenue generated from the sale of digital advertising inventory of the Company’s apps (“Apps”). Consumer Revenue consists of mobile in-app purchases (“IAPs”) made by users within Apps.

Business Revenue

The Software Platform provides the technology to match advertisers and third-party owners of digital advertising inventory (“Publishers”) via auctions at large scale and microsecond-level speeds. The pricing and terms for all mobile advertising arrangements are governed by the Company’s 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 placement of advertisements on mobile applications owned by Publishers, the Company’s performance obligation is to provide an advertiser with access to the Software Platform which facilitates the advertiser’s purchase of advertising inventory from Publishers. The Company does not control the advertising inventory prior to its transfer to the advertiser, the Company’s customer, because the Company does not have the substantive ability to direct the use of, nor obtain substantially all of the remaining benefits from the advertising inventory. The Company is not primarily responsible for fulfillment and does not have any inventory risk. The Company is an agent as it relates to the sale of third-party advertising inventory and presents 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 purchase Apps advertising inventory either through the Software Platform or through third-party advertising networks (“Ad Networks”). Revenue from the sale of advertising inventory through Ad Networks is recognized net of the amounts retained by Ad Networks as the Company is unable to determine the gross amount paid by the advertisers to Ad Networks.

The Company recognizes 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 Ad 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, 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. The Company categorizes its virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action in gameplay; accordingly, the Company recognizes revenue from the sale of consumable virtual goods as the goods are consumed and the Company’s performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the user over an extended period of time; accordingly, the Company recognizes revenue from the sale of durable virtual goods ratably over the period of time the goods are available to the user and the Company’s 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 the Company’s distribution partners. The transaction price is equal to the gross amount charged to users because the Company is the principal in the transaction. IAPs fees are non-refundable. Such payments are initially recorded to deferred revenue.

The EAUL represents the Company’s 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. The Company determines the EAUL on a game-by-game basis. For a newly launched game that has limited playing data, the Company determines its EAUL based on the EAUL of a game that has sufficiently similar characteristics. The Company determines the EAUL on a quarterly basis and applies 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.

The Company presents taxes collected from customers and remitted to governmental authorities on a net basis.

Asset Acquisitions and Business Combinations

The Company performs 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, the Company then performs 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, the Company accounts for the transaction as a business combination.

For transactions accounted for as business combinations, the Company allocates 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 value 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 the Company receives final information, including appraisals and other analyses. During the measurement period, which is one year from the acquisition date, the Company 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.

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. The Company generally includes contingent consideration in the cost of the assets acquired only when the uncertainty is resolved. The Company recognizes 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

The Company enters into strategic agreements with mobile gaming studios (“Partner Studios”). The Company has historically allowed these Partner Studios to continue their operations with a significant degree of autonomy. In some cases, the Company 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, the Company is 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, “Acquisitions” for additional information.

Recent Accounting Pronouncements (Issued and Not Yet Adopted)

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The standard eliminates beneficial conversion feature and cash conversion models resulting in more convertible instruments being accounted for as a single unit; and simplifies classification of debt on the balance sheet and earnings per share calculation. These changes will become effective for the Company on January 1, 2022. The Company is currently evaluating the potential impact of these changes.

In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Option. The ASU requires the issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the guidance, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. These changes will become effective for the Company on January 1, 2022. The Company is currently evaluating the potential impact of these changes.

Recent Accounting Pronouncements (Issued and Adopted)

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements. The Company adopted this ASU on January 1, 2021 with no material financial statement impact upon adoption.

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Investments—Equity Securities, Investments—Equity Method and Joint Ventures, and Derivatives and Hedging. This ASU clarifies the interaction among the accounting standards for equity securities, equity method investments and certain derivatives. The Company adopted this ASU on January 1, 2021 with no material financial statement impact upon adoption.

3. Revenue

Disaggregation of Revenue

The following table presents revenue disaggregated by type (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Business Revenue - Apps	$	156,208	$	132,583	$	475,394	$	327,915
Business Revenue - Software Platform	193,307		39,841		427,390		127,262
Total Business Revenue	349,515		172,424		902,784		455,177
Consumer Revenue	377,436		209,316		1,096,850		486,072
Total Revenue	$	726,951	$	381,740	$	1,999,634	$	941,249

Revenue disaggregated by geography, based on user location, consists of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
United States	437,501		234,430		1,209,846		586,330
Rest of the World	289,450		147,310		789,788		354,919
Total Revenue	$	726,951	$	381,740	$	1,999,634	$	941,249

Contract Balances

Contract liabilities consist of deferred revenue and include payments received in advance of the satisfaction of performance obligations. During the three months ended September 30, 2021 and 2020, the Company recognized $63.1 million and $44.0 million of revenue that was included in deferred revenue as of June 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021 and 2020, the Company recognized $86.9 million and $8.2 million of revenue that was included in deferred revenue as of December 31, 2020 and 2019, respectively.

Unsatisfied Performance Obligations

All of the Company’s unsatisfied performance obligations relate to contracts with an original expected length of one year or less.

4. Fair Value Measurements

The following table sets forth the Company’s financial instruments that were measured at fair value by level within the fair value hierarchy on a recurring basis as of the dates indicated (in thousands):


				As of September 30, 2021
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Financial Assets:
Money market funds	Cash and cash equivalents	$	820,594	$	820,594	$	—	$	—
Marketable equity securities	Prepaid expenses and other current assets	5,165		5,165
Total financial assets		$	825,759	$	825,759	$	—	$	—
Financial Liability:
Convertible security	Deferred acquisition costs, current	$	25,000	$	25,000	$	—	$	—


				As of December 31, 2020
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Financial Assets:
Money market funds	Cash and cash equivalents	$	6,413	$	6,413	$	—	$	—
Embedded derivative	Long-term debt	5,680		—		—		5,680
Total financial assets		$	12,093	$	6,413	$	—	$	5,680
Financial Liability:
Convertible security	Deferred acquisition costs, current	$	46,500	$	—	$	—	$	46,500

Convertible Security

In November 2020, the Company issued a convertible security as part of the consideration exchanged for certain mobile game Apps acquired from an independent foreign-based mobile game developer (the "Seller"). The Company elected to account for the convertible security using the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The fair value of the convertible security was determined using the probability-weighted expected return method (“PWERM”). This valuation methodology is based on unobservable estimates and judgements, and therefore is classified as a Level 3 fair value measurement. The significant unobservable input used in the fair value measurement of the convertible security is the expected timing of occurrence of an IPO and a discount for lack of marketability derived based on the remaining term of the lock up period related to the Company's Class A common stock into which the convertible security is convertible. Fair value measurements are highly sensitive to changes in this input and significant changes in this input would result in a significantly higher or lower fair value. For the three and nine months ended September 30, 2021, the Company recorded a total loss of $1.0 million and $3.5 million, respectively, in other income (expense), net in the Company’s condensed consolidated statements of operations due to the change in fair value of the convertible security. The convertible security is recorded in deferred acquisition costs, current, in the Company’s condensed consolidated balance sheets. In August 2021, the Seller elected to convert 50% of the convertible security with a stated value of $20.0 million into 405,205 shares of the Company's Class A common stock at a conversion price of $49.4 per share. The lock-up period to which the Class A common stock was subject expired during the three-month period ended September 30, 2021. As such, the fair value of the related convertible security was transferred from Level 3 to Level 1.

Embedded Derivative

Loans issued under Company’s credit agreement with the lenders party thereto and Bank of America, N.A., as administrative agent for the lenders (the “Credit Agreement”), contain certain interest adjustment features which were determined to be an embedded derivative requiring bifurcation and separate accounting as the features are not clearly and closely related to the host debt instrument. The embedded derivative was initially valued and remeasured using the “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument with and without the embedded derivative using a discounted cash flow approach. The difference of the estimated fair value between the instrument with the embedded derivative and the instrument without the embedded derivative is the fair value of the embedded derivative. This valuation methodology is based on unobservable estimates and judgements, and therefore is classified as a Level 3 fair value measurement. The significant unobservable input used in the fair value measurement of the embedded derivative is the expected timing of occurrence of an IPO. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs would result in a significantly higher or lower fair value. The initial fair value of the embedded derivative was determined to be nominal for term loans issued prior to 2021 and $5.6 million for the term loans issued in February 2021, which was accounted for as a reduction to the carrying amount of the term loans. After the effectiveness of the IPO Registration Statement, the applicable margins for both the Term Loans and the Revolving Credit Loans were reduced by 0.25% on April 16, 2021 in accordance with the pre-existing terms of the Credit Agreement. As a result, the embedded derivative for the contingent interest adjustment feature related to the term loans was settled. The Company remeasured the embedded derivative to its fair value of $17.8 million on the settlement date, and then reclassified it to the carrying amount of the term loans. For the three and nine months ended September 30, 2021, the Company recorded a total gain of nil and $7.6 million, respectively, in other income (expense), net in the Company’s condensed consolidated statements of operations due to the change in fair value of the embedded derivative. There was no gain or loss related to the change in fair value of the embedded derivative during the same periods in 2020.

Marketable Equity Securities

The Company’s marketable equity securities consist entirely of its investment in the ordinary shares of Huuuge, Inc., a foreign-based independent mobile game developer, which completed its initial public offering and became listed on the Warsaw Stock Exchange in the first quarter of 2021. The Company had carried the investment at cost in other assets on the Company’s consolidated balance sheets in prior fiscal years. The cost basis of the investment was immaterial. The fair value of the marketable equity securities was based on the quoted market price of Huuuge, Inc.’s ordinary shares as of September 30, 2021, and therefore was classified as a Level 1 fair value measurement. For the three and nine months ended September 30, 2021, the Company recorded a total unrealized gain of $0.4 million and $5.2 million, respectively, in other income (expense), net in the Company’s condensed consolidated statements of operations as a result of remeasuring the investment to fair value.

The following table presents a reconciliation of the Company’s financial asset and liability measured at fair value as of September 30, 2021 using significant unobservable inputs (Level 3), and the change in fair value (in thousands):


	Embedded Derivative		Convertible Security
Balance as of December 31, 2020	$	5,680	$	46,500
Addition related to the issuance of term loans in February 2021	5,630		—
Extinguishment of term loans in February 2021	(1,130)		—
Change in fair value recognized in earnings	7,640		3,500
Settlements	(17,820)		(25,000)
Transfers	—		(25,000)
Balance as of September 30, 2021	$	—	$	—

5. Commitments and Contingencies

Commitments

In May 2021, the Company amended a certain agreement with a cloud service provider to increase the aggregate spend commitment from $130.0 million to $300.0 million through May 2026.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.

Letters of Credit

As of September 30, 2021 and December 31, 2020 the Company had outstanding letters of credit in the aggregate amount of $11.1 million, which were issued as security for certain leased office facilities under the Credit Agreement. These letters of credit have never been drawn upon.

Legal Proceedings

The Company is involved from time to time in litigation, claims, and proceedings. The outcomes of the Company’s legal proceedings are inherently unpredictable and subject to significant uncertainty.

The Company records a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. If it is determined that a loss is reasonably possible and the loss or range of loss can be estimated, the reasonably possible loss is disclosed. The Company evaluates developments in legal matters that could affect the amount of liability that has been previously accrued, and related reasonably possible losses disclosed, and makes adjustments as appropriate. Significant judgment is required to determine the likelihood of matters and the estimated amount of losses related to such matters. To date, losses in connection with legal proceedings have not been material.

The Company expenses legal fees in the period in which they are incurred.

Indemnifications

The Company enters into indemnification provisions under agreements with other parties in the ordinary course of business, including certain customers, business partners, investors, contractors and the Company’s officers, directors and certain employees. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in the Company’s condensed consolidated statements of operations in connection with the indemnification provisions have not been material. As of September 30, 2021, the Company did not have any material indemnification claims that were probable or reasonably possible.

Non-income Taxes

The Company may be subject to audit by various tax authorities with regard to non-income tax matters. The subject matter of non-income tax audits primarily arises from different interpretations on tax treatment and tax rates

applied. The Company accrues liabilities for non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable, and the expense is recorded as a reduction of revenue or to general and administrative expenses depending on the nature of the liability.

6. Acquisitions

2021 Acquisitions

Business Combinations

On April 20, 2021, the Company acquired adjust GmbH (“Adjust”), a mobile application tracking and analytics company. The Company purchased all of the outstanding shares of the capital stock of Adjust and settled all of Adjust’s debt for the stated purchase consideration of $980.0 million, which was composed of $352.0 million stated value of convertible securities convertible into a variable number of shares of the Company's Class A common stock at a variable conversion price, $50.0 million of cash holdback, and remaining amount of $578.0 million in cash consideration. The fair value of the convertible securities and fair value of the cash holdback are estimated to be $342.2 million and $47.6 million, respectively. As such, the fair value of the acquisition consideration is determined to be $967.8 million. The transaction is expected to expand the Company’s Software solutions and has been accounted for as a business combination. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $3.1 million.

The following table summarizes the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed (in thousands):


Cash and cash equivalents	$	12,155
Accounts receivable and other current assets	21,840
Intangible assets
Customer Relationships—estimated useful life of 12 years	155,000
Developed Technology—estimated useful life of 6 years	77,000
Tradename—estimated useful life of 5 years	8,000
Goodwill	776,147
Operating lease right-of-use assets	8,130
Property and equipment, net	1,897
Finance lease right-of-use assets	43,156
Other assets	3,191
Accounts payable, accrued liabilities and other current liabilities	(15,540)
Deferred revenue	(5,600)
Operating lease liabilities	(8,130)
Finance lease liabilities	(43,156)
Deferred income tax liability	(66,273)
Total purchase consideration	$	967,817

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date. The Company has completed a preliminary valuation and expects to finalize it as soon as practical, but no later than one year from the acquisition date.

The income approach was used to determine the preliminary fair value of the customer relationships, developed technology and tradename. Goodwill represents the excess of the purchase price over the preliminary fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. For tax purposes, an estimated tax deductible goodwill of $692.5 million was generated as a result of this acquisition.

The Company’s condensed consolidated statement of operations for the nine months ended September 30, 2021 includes Adjust’s revenue of $49.4 million and pretax loss of $29.6 million for the period from the acquisition date of April 20, 2021 to September 30, 2021.

See Pro forma results of operations below under "Supplemental Pro Forma Information".

In May 2021, the convertible securities were converted into 6,320,688 shares of the Company's Class A common stock. As a result, the fair value of the convertible securities was reclassified into the stockholders' equity.

Asset Acquisitions

In April 2021, the Company completed two separate transactions to acquire certain mobile Apps from two foreign-based independent mobile game developers in exchange for an aggregate upfront cash consideration of $300.0 million and potential future earn-out payments. The Company incurred a total transaction cost of $6.0 million related to these transactions. Both transactions were accounted for as asset acquisitions with $306.0 million allocated to the acquired mobile Apps, which will be amortized over approximately eight years. Concurrent with the closings of these transactions, the Company entered into a development services agreement with each of the independent mobile game developers to support the acquired mobile Apps, as well as to develop new mobile Apps during the four-year term of the agreement. With respect to the first transaction, the potential future earn-out payments are contingent on the revenue generated by the acquired mobile Apps exceeding a certain revenue threshold, which will be measured and payable (if applicable) each year for four years from the date of the transaction. With respect to the second transaction, the potential future earn-out payments will be determined in a manner similar to the first transaction, in addition to a potential one-time earn-out payment of $50.0 million contingent on the achievement of a certain monthly revenue milestone within the four years following the date of the transaction.

In June 2021, the Company acquired certain mobile Apps from a foreign-based independent mobile game developer in exchange for an upfront cash consideration of $130.0 million and future earn-out payments. The Company incurred a total transaction cost of $4.0 million related to the transaction. The transaction was accounted for as an asset acquisition with $134.0 million allocated to the acquired mobile Apps, which will be amortized over nine years. Concurrent with the closing of the transaction, the Company entered into a development services agreement with the independent mobile game developer to support the acquired mobile Apps, as well as to develop new mobile Apps during the four-year term of the agreement. With respect to all initially acquired mobile Apps, the potential future earn-out payments are contingent on the revenue and/or earnings before interest, taxes, depreciation and amortization ("EBITDA") generated by the acquired mobile Apps exceeding certain thresholds.

In August 2021, the Company acquired certain mobile Apps from a foreign-based independent mobile game developer in exchange for a total cash consideration of $150.0 million. The transaction was accounted for as an asset acquisition with $150.0 million allocated to the acquired mobile Apps, which will be amortized over 6 years.

During the three and nine months ended September 30, 2021, the Company also completed a number of other asset acquisitions for an aggregate upfront cash consideration of $28.8 million and $36.8 million, respectively, as well as potential future earn-out payments that are contingent on the revenue and/or profit generated by the acquired mobile Apps.

During the three and nine months ended September 30, 2021, the Company recognized total earn-out costs of $9.9 million and $97.5 million, respectively, of which $0.7 million and $68.6 million were related to an asset acquisition closed in 2020. These earn-out costs increased the book value of the acquired mobile Apps, and are amortized over the remaining useful life of the originally acquired mobile Apps.

In January 2021 the Company paid $60.0 million to Recoded, an independent foreign-based mobile game developer, in relation to a new mobile App acquired in 2020. In February 2021, the Company paid an additional $90.0 million to Recoded related to deferred cash consideration for the acquisition that closed in 2019.

2020 Acquisitions

Business Combinations

Geewa—On January 31, 2020, the Company acquired Geewa A.S. (“Geewa”), a privately held company specializing in mobile gaming. The transaction expanded the Company’s Apps portfolio and was accounted for as a business combination. The Company purchased all of the outstanding shares of the capital stock of Geewa for a total consideration of $25.6 million, of which $23.5 million was paid in cash and the unpaid balance was attributed to a $2.1 million indemnity holdback that was paid in January 2021. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $0.3 million.

The following table summarizes the fair value of identifiable assets acquired and liabilities assumed (in thousands):


Cash	$	1,043
Accounts receivable and other current assets	1,457
Intangible assets
Apps—estimated useful life of 5 years	17,040
Tradename—estimated useful life of 5 years	260
Developed Technology—estimated useful life of 2 years	590
Property, equipment and other tangible assets	369
Goodwill	9,805
Accounts payable, accrued liabilities and other liabilities	(4,935)
Total purchase consideration	$	25,629

The income approach was used to value the developed Apps and tradename. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is not deductible for tax purposes.

Pro forma results of operations have not been presented because the effect of the acquisition was not material to the condensed consolidated statements of operations.

*Redemption Games—*On April 6, 2020, the Company acquired Redemption Games, Inc. (“Redemption Games”), a privately held company specializing in mobile gaming. The transaction expanded the Company’s Apps portfolio and was accounted for as a business combination. As part of the transaction, the Company purchased 95.5% of the outstanding shares of the capital stock of Redemption Games for an aggregate total consideration of $53.7 million. Based on the consideration paid and the percent acquired, the transaction implied a total value for Redemption of $56.2 million. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $0.6 million. In November 2020, the Company increased its ownership in Redemption Games to 98.2% by exchanging 2.7% of minority shares for the Company’s Class A common stock. The difference between the $4.5 million in fair value of the Class A common stock issued and the $1.5 million in fair value of the minority shares was recognized as stock-based compensation in research and development expenses.

The following table summarizes the fair value of identifiable assets acquired and liabilities assumed (in thousands):


Cash	$	2,787
Accounts receivable, net	1,850
Intangible assets
Apps—estimated useful life of 5 years	44,000
Tradename—estimated useful life of 5 years	900
Goodwill	20,198
Other tangible assets	131
Accounts payable	(2,492)
Other liabilities	(11,142)
Total valuation	56,232
Redeemable noncontrolling interest	(2,556)
Total purchase consideration	$	53,676

Pro forma results of operations have not been presented because the effect of the acquisition was not material.

*Machine Zone, Inc.—*On May 19, 2020, the Company acquired Machine Zone, Inc. (“Machine Zone”), a privately held company specializing in mobile gaming. The transaction expanded the Company’s Apps portfolio and was accounted for as a business combination. The Company purchased all of the outstanding shares of the capital stock of Machine Zone and settled all Machine Zone debt for an aggregate acquisition price of $328.6 million comprising $287.1 million cash paid to Machine Zone lenders, common stock warrants issued to Machine Zone lenders and preferred stockholders with the aggregate fair value of $38.2 million and a settlement of the preexisting accounts receivable balance of $3.3 million. Transaction costs incurred by the Company in connection with the acquisition, including professional fees, were $2.8 million.

The Company also assumed an intellectual property license agreement with a third-party game content provider that was included in the Machine Zone acquisition. The term of the intellectual property license agreement is set to expire in December 2021 with the option to renew for additional terms by the mutual agreement of the parties. The remaining future fixed payments under the intellectual property license agreement as of the date of the Machine Zone acquisition amounted to $37.1 million.

The following table summarizes the fair value of identifiable assets acquired and liabilities assumed (in thousands):


Cash	$	37,767
Accounts receivable and other current assets	27,284
Intangible assets
Tradename—estimated useful life of 10 years	13,000
Apps—estimated useful life of 3—5 years	272,000
Intellectual property license—useful life of 2 years	28,551
Goodwill	82,353
Right-of-use assets under operating leases	125,639
Property, equipment and other tangible assets	42,312
Accounts payable, accrued liabilities and other liabilities	(81,591)
Deferred revenue	(43,200)
License obligation	(35,685)
Operating lease liabilities	(139,875)
Total purchase consideration	$	328,555

The income approach was used to value the developed Apps and tradename. The replacement cost approach was used to value the intellectual property license asset. Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is deductible for tax purposes.

Contemporaneously with the closing of the acquisition, the Company exited from one of Machine Zone’s real estate leases. The Company accounted for this lease termination as a transaction separate from the business combination since the lease termination was negotiated primarily for the benefit of the combined entity; the Company was the party who directly negotiated this lease amendment with the lessor; and such negotiation took place contemporaneously with the negotiation of the business combination. The Company decreased the operating lease right-of-use asset and operating lease liability by $57.6 million and $63.1 million, respectively. The Company also wrote-off $15.0 million of leasehold improvements and other assets related to this real estate lease. In connection with this transaction, the Company issued a common stock warrant with the fair value of $0.4 million.

The Company’s consolidated statements of operations for the nine months ended September 30, 2020 includes Machine Zone’s revenue of $64.2 million and pretax loss of $66.2 million for the period from the acquisition date of May 19, 2020 to September 30, 2020.

See Pro forma results of operations below under "Supplemental Pro Forma Information".

Asset Acquisitions

Zenlife asset acquisition—In June 2020, the Company acquired certain mobile Apps from an independent foreign-based mobile game developer in exchange for an upfront cash consideration of $160.0 million and 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 mobile 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. The transaction was accounted for as an asset acquisition with $173.3 million allocated to the acquired mobile Apps and $13.3 million to deferred tax liability. The recorded value of acquired mobile Apps is amortized over five years. Additionally, the Company entered into a service and development agreement with the independent mobile game developer to support the initially acquired mobile Apps as well as to develop new mobile Apps during the four-year term of the agreement. The Company is also required to make future earn-out payments for newly developed mobile Apps determined under the similar approach as for the initially acquired mobile Apps.

In March and April 2020, the Company completed two asset acquisitions to acquire two mobile Apps from two separate independent foreign-based mobile game developers in exchange for an aggregate upfront cash consideration of $35.0 million and future earn-out payments. Both transactions were accounted for as asset acquisitions with $35.0 million allocated to the acquired mobile Apps, which will be amortized over three and five years. Additionally, the Company entered into service and development agreements with the independent mobile game developers to support the initially acquired mobile Apps as well as to develop new mobile Apps. With respect to the first asset acquisition, future earn-out payments are based on a predetermined percentage of revenue net of certain direct costs generated by the initially acquired mobile App, or additional mobile Apps developed under the 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. With respect to the second asset acquisition, 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 mobile App and any additional mobile Apps developed under the 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.

During the three and nine months ended September 30, 2020, the Company recognized total earn-out costs of $12.4 million and $26.1 million, respectively, related to all acquired mobile Apps. These earn-out costs increased the book value of the acquired mobile Apps, and are amortized over the remaining useful life of the originally acquired mobile Apps.

Modification of asset acquisition-related contingent consideration—In September 2020, the Company amended the terms of an asset acquisition to settle the acquisition holdback and the earn-out due to the sellers 12 months following the acquisition’s closing in 2019. Under the terms of the amendment, the Company agreed to settle a $34.8 million liability related to an acquisition holdback and earn-out, with a combination of a cash payment of $3.4 million and the Company’s Class A common stock at the fair value of $106.1 million as of the settlement date, resulting in a $74.7 million extinguishment loss of the acquisition-related contingent consideration.

Supplemental Pro Forma Information

The unaudited supplemental pro forma information below presents the combined historical results of operations of the Company, Machine Zone and Adjust for each of the periods presented as if Adjust had been acquired as of January 1, 2020 and Machine Zone had been acquired as of January 1, 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	727,633	$	429,062	$	2,034,908	$	1,156,144
Net income (loss)	(51)		(102,917)		3,963		(230,779)

The unaudited supplemental pro forma information above include the following adjustments to net income (loss) in the appropriate pro forma periods (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
An (increase) in amortization expense related to the fair value of acquired identifiable intangible assets, net of the amortization expense already reflected in actual historical results	$	—	$	(5,934)	$	(7,325)	$	(42,058)
A net increase in revenue related to fair value adjustment	682		22,542		1,219		31,584
A decrease (increase) in expenses related to transaction expenses	—		—		14,115		(2,617)
An decrease (increase) in interest expense related to new debt financing, net of interest expense related to pre-existing debt settled as part of the acquisitions	—		(2,652)		(2,640)		97,107
A (decrease) in other income - liability classified warrants	—		—		—		(1,730)
An (increase) in tax provision	(156)		(3,201)		(1,232)		(18,877)

The unaudited supplemental pro forma information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisitions taken place on the date indicated, or of the Company's future consolidated results of operations. The supplemental pro forma information presented above has been derived from the Company's historical consolidated financial statements and from the historical accounting records of Adjust and Machine Zone.

7. Goodwill and Intangible Assets, Net

The following table presents goodwill activity (in thousands):


December 31, 2020	$	249,773
Goodwill acquired	776,147
Foreign currency translation	(28,259)
September 30, 2021	$	997,661

Intangible assets, net consisted of the following (in thousands):


	Weighted- Average Remaining Useful Life (Years)		As of September 30, 2021							As of December 31, 2020
	Gross Carrying Value	Accumulated Amortization	Net Book Value				Gross Carrying Value		Accumulated Amortization	Net Book Value


Long-lived intangible assets:
Apps	4.9		$	1,905,750	$	(439,885)	$	1,465,865		$	1,222,417	$	(232,832)	$	989,585
Customer Relationships	11.6		149,389		(5,533)		143,856			—		—		—
User base	4.5		68,817		(24,931)		43,886			68,817		(17,617)		51,200
License asset	0.2		28,551		(24,107)		4,444			28,551		(10,918)		17,633
Developed technology	5.4		89,532		(17,645)		71,887			14,946		(8,489)		6,457
Other	6.3		33,868		(5,010)		28,858			23,321		(1,864)		21,457
Total long-lived intangible assets			2,275,907		(517,111)		1,758,796			1,358,052		(271,720)		1,086,332
Short-lived intangible assets:
Apps	0.4		38,779		(36,886)		1,893			29,869		(25,599)		4,270
Total intangible assets			$	2,314,686	$	(553,997)	$	1,760,689		$	1,387,921	$	(297,319)	$	1,090,602

As of September 30, 2021 and December 31, 2020, short-lived mobile Apps were included in prepaid expenses and other current assets.

The Company recorded amortization expenses related to acquired intangible assets as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue	$	96,059	$	65,535	$	273,444	$	137,673
Sales and marketing	6,765		3,050		16,008		8,470
Total	$	102,824	$	68,585	$	289,452	$	146,143

8. Credit Agreement

On August 15, 2018, the Company entered into a Credit Agreement which provided for senior secured term loans in an aggregate principal amount of $820.0 million (the “Closing Term Loans”) and a revolving credit facility of $50.0 million.

On April 23, 2019, the Credit Agreement was amended to increase the senior secured term loan facility by $400.0 million, on terms identical to those applicable to the Closing Term Loans (together with the Closing Term Loans, the “Initial Term Loans”).

On April 27, 2020, the Credit Agreement was further amended to modify certain negative covenants.

On May 6, 2020, the Credit Agreement was further amended (the “Third Amendment”) to increase the senior secured term loan facility by an additional $300.0 million (the “Third Amendment Term Loans”).

On October 27, 2020, the Credit Agreement was further amended to increase the aggregate principal amount of the revolving credit facility by an additional $540.0 million.

On November 30, 2020, the Company borrowed $150.0 million under the revolving credit facility.

On February 12, 2021, the Company amended the Credit Agreement to 1) increase the senior secured term loan facility by an aggregate principal amount of $597.8 million (the “Fifth Amendment Term Loans”, and together with the Initial Term Loans, the “Term Loans”), on terms identical to those applicable to the existing Initial Term Loans, the proceeds of which was partially used to repay in full the outstanding principal and accrued and unpaid interest of the Third Amendment Term Loans, totaling $298.2 million, in accordance with the pre-existing early redemption option in the Credit Agreement, and 2) increase the aggregate principal amount of the revolving credit facility by an additional $10.0 million, on terms identical to those applicable to the existing revolving credit facility. According to the amended Credit Agreement, the Company is required to make equal quarterly repayments of $4.6 million with respect to the Term Loans. In connection with this amendment, the Company paid $0.8 million in fees to KKR Capital Markets LLC, who is affiliated with KKR Denali, one of the Company’s principal stockholders.

The Company evaluated the accounting for the Fifth Amendment Term Loans on a creditor-by-creditor basis. For existing creditors who participated in the Fifth Amendment Term Loans, the transaction was accounted for as a debt modification because the present value of the cash flows between the two debt instruments before and after the transaction was less than 10%. For new creditors, the transaction was accounted for as an issuance of new debt. As a result, $2.9 million of the $3.5 million third-party issuance costs related to the modified debt was recorded in other income (expense), net on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2021, with the remaining $0.6 million related to the new debt recorded as a reduction to the carrying amount of the Term Loans. In addition, the Company recorded $5.6 million for an embedded derivative related to the contingent interest adjustment feature of the Fifth Amendment Term Loans, which was bifurcated and accounted for separately as the feature is not clearly and closely related to the host instrument. For details regarding the fair value measurement of the embedded derivative, see Note 4. The debt discount, comprising of 1) the deferred third-party issuance costs, 2) the bifurcated embedded derivative and 3) the debt discount of the Initial Term Loans that were modified as part of the amendment, is being amortized to interest expense using the effective interest method over the remaining contractual term of the Term Loans.

The Company accounted for the early repayment of the Third Amendment Term loans as a debt extinguishment. As a result, the Company recognized a loss on debt extinguishment of $16.9 million during the three months ended March 31, 2021, which was recorded in interest expense and loss on extinguishment of debt on the Company’s condensed consolidated statements of operations. The loss on debt extinguishment consisted primarily of the unamortized original issue discount and debt issuance cost.

On March 31, 2021, the Company drew down an additional $250.0 million from the Company’s $600.0 million revolving credit facility. A lender under the revolving credit facility is an affiliate of KKR Denali, a principal stockholder of the Company. Following such draw down, the Company had an aggregate amount of $400.0 million outstanding under the revolving credit facility, which was repaid in full with the net proceeds from the IPO in April 2021.

After the effectiveness of the IPO Registration Statement, the applicable margins for both the Term Loans and the Revolving Credit Loans were reduced by 0.25% on April 16, 2021 in accordance with the pre-existing terms of the Credit Agreement. As a result, the embedded derivative for the contingent interest adjustment feature related to the Term Loans was settled. The Company remeasured the embedded derivative to its fair value of $17.8 million on the settlement date by recording a gain of $1.1 million in other income (expense), net in the Company’s condensed consolidated statements of operations, and then reclassified it to the carrying amount of the Term Loans as an additional debt discount. The new unamortized discount balance is subsequently amortized using the new effective interest rate determined on the settlement date of the embedded derivative.

As of September 30, 2021, the Company was in compliance with all of the covenants.

9. Cash Flow Hedges

The Company manages exposure to market risk associated with fluctuating interest rates with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for trading or speculative purposes. On November 14, 2018, the Company entered into an interest rate swap agreement as part of its interest rate risk management strategy in connection with the term loan. The notional amount for the swap was $410.0 million. The swap was a receive-variable (one-month LIBOR) and pay-fixed (2.9065%) interest rate swap with settlement date commencing on the last calendar day of each month and reset date on first day of each month beginning December 31, 2018.

The Company applied the hedge accounting provisions of the critical terms match hedge, and formally documented at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. The critical terms of the swap and hedged item coincided (notional amount, interest rate reset dates, interest rate payment dates, and underlying index), the hedge was expected to offset changes in expected cash flows due to fluctuations in one-month LIBOR over the term of the hedge. Therefore, the effectiveness of the hedge relationship was assessed each quarter by comparing the current terms of the swap and the debt to assure they continued to coincide and through an evaluation of the continued ability of the counterparty to the swap to honor its obligations under the swap. Had the critical terms no longer matched exactly, hedge effectiveness (both prospective and retrospective) would have to be assessed by evaluating the cumulative dollar-offset ratio for the actual derivative and the hedged item.

Unrealized changes in the fair value of derivatives accounted for as a critical term match hedge were reported in other comprehensive income (loss) and subsequently reclassified to earnings in the same period or periods during which the hedged forecasted transaction affected earnings. The interest rate swap contract expired on December 31, 2020 and the settlement value of the interest rate swap liability was reclassified to interest expense and loss on settlement of debt. For the three and nine months ended September 30, 2020, the Company recognized $2.9 million and $6.7 million of realized loss related to hedged transaction, respectively, which were recorded in interest expense and loss on settlement of debt in the Company’s condensed consolidated statements of operations. As of September 30, 2020, the settlement value of the interest rate swap liability before tax effect was $2.9 million and was included in accrued liabilities and reported in other comprehensive income net of tax effect.

10. Stock-based Compensation

In March 2021, the Company’s board of directors adopted, and its stockholders approved, the 2021 Equity Incentive Plan, the 2021 Partner Studio Incentive Plan and the Employee Stock Purchase Plan, all of which became effective on the business day immediately prior to the effective date of the IPO Registration Statement:

2021 Equity Incentive Plan

The 2021 Equity Incentive Plan (the “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 the Company’s 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 the Company’s employees, directors, and consultants and the Company’s parent and

subsidiary companies’ employees and consultants. A total of 39,000,000 shares of the Company’s Class A common stock were reserved for issuance pursuant to the 2021 Plan. The number of shares available for issuance under the 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 (a) 39,000,000 shares, (b) five percent (5%) of the outstanding shares of all classes of the Company’s common stock as of the last day of the immediately preceding fiscal year, or (c) such other amount as the Company’s board of directors may determine. Immediately prior to the effectiveness of the 2021 Plan, the 2011 Plan was terminated, and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing terms.

In the three and nine months ended September 30, 2021 the Company granted 870,410 and 6,908,924 RSUs to certain employees under the 2021 Plan at the weighted average grant date fair value of $58.92 and $58.60 per RSU, respectively. The RSUs generally vest over an approximate period of four to five years of continuous service from their respective vesting commencement dates.

2021 Partner Studio Incentive Plan

The 2021 Partner Studio Incentive Plan (the “2021 Partner Plan”) provides for the grant of nonstatutory stock options, restricted stock, RSUs, SARs, performance units, and performance shares to individuals or entities engaged by the Company or a parent or subsidiary of the Company to render bona fide services to the party engaging such individual or entity. A total of 390,000 shares of the Company’s Class A common stock are reserved for issuance pursuant to the 2021 Partner Plan.

In August 2021, the Company granted 359,623 RSUs under the 2021 Partner Plan. The RSUs generally vest over an approximate period of four to five years of continuous service and have a grant date fair value of $57.19 per RSU.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the “ESPP”) permits participants to purchase shares of the Company’s 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. Amounts contributed and accumulated by the participant will be used to purchase shares of the Company’ Class A common stock at the end of each 6-month purchase period with the purchase price of the shares being 85% of the lower of the fair market value of the Company’s Class A common stock on the first day of an offering period or on the exercise date. A participant may purchase a maximum of 590 shares of the Company’s Class A common stock during a purchase period. The ESPP provides for consecutive, overlapping 24-month offering periods, subject to certain rollover mechanism as defined in the ESPP. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with the Company. The initial offering period is from April 15, 2021 through November 19, 2023.

A total of 7,800,000 shares of the Company’s Class A common stock are available for sale under the ESPP. The number of shares of the Company’s Class A common stock that will be available for sale under the ESPP also includes an annual increase on the first day of each fiscal year beginning with fiscal year 2022, equal to the least of: (a) 7,800,000 shares, (b) one percent (1%) of the outstanding shares of all classes of the Company’s common stock as of the last day of the immediately preceding fiscal year, or (c) such other amount as the Company’s board of directors may determine.

2011 Equity Incentive Plan

The Company’s 2011 Equity Incentive Plan (the “2011 Plan”) provides for the grant of stock options to employees, consultants, and advisors of the Company. Options granted under the 2011 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted only to Company employees, including directors who are also employees. As noted above, immediately prior to the effectiveness of the 2021 Plan, the 2011 Plan was terminated, and no further awards will be granted thereunder. All outstanding awards will continue to be governed by their existing terms.

The Company recognized stock-based compensation expense for the periods indicated as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue	$	922	$	126	$	1,504	$	204
Sales and marketing	4,774		1,571		8,814		2,812
Research and development	20,110		6,823		40,148		10,692
General and administrative	8,919		2,348		41,362		5,654
Total	$	34,725	$	10,868	$	91,828	$	19,362

For the three and nine months ended September 30, 2021, total stock-based compensation expense included $0.3 million and $0.9 million, respectively, associated with awards that may be settled in stock of one of the Company’s subsidiaries.

Early Exercise of Stock Options—The 2011 Plan allowed, subject to the Board's approval for the early exercise of options granted. Under the terms of the 2011 Plan, option holders, upon early exercise, must sign a restricted stock purchase agreement that gives the Company the right to repurchase any unvested shares, at the original exercise price, in the event the optionees’ employment terminates for any reason. The right to exercise options before they are vested does not change existing vesting schedules in any way and the early exercised options may not be sold or transferred before they are vested. The repurchase right lapses over time as the shares vest at the same rate as the original option vesting schedule. The cash amounts received in exchange for these early exercised shares are recorded as a liability on the accompanying balance sheets and reclassified into common stock and additional paid-in-capital as the shares vest. The Company’s right to repurchase these shares lapses by 1/4th of the shares on the one year anniversary of the vesting start date and ratably each month over the next 36 months. The Company has 879,600 and 19,800 shares of Class A common stock subject to repurchase as of September 30, 2021 and December 31, 2020, respectively. The liability for the shares of Class A common stock subject to repurchase as of September 30, 2021 and December 31, 2020 was $2.4 million and $0.1 million, respectively, which was included in the accrued liabilities in the Company’s condensed consolidated balance sheets.

During 2020 and 2019, the Company provided financing to certain employees in the form of promissory notes to early exercise stock options. These promissory notes are partially collateralized by shares and, for accounting purposes, in-substance are nonrecourse. For accounting purposes, exercised options via nonrecourse promissory notes are not substantive and are continued to be treated as options. In February 2021, promissory notes issued to executive officers in the amount of $20.9 million were settled through either share repurchase, in the amount of $17.2 million, or cash payment, in the amount of $3.7 million. In connection with the repurchase of shares, the Company accelerated vesting of 60,968 shares of Class A common stock for one of the Company’s officers. The acceleration of vesting was accounted as an option modification with an immaterial impact to the stock-based compensation expense. As of September 30, 2021 and December 31, 2020, the Company had 2,884,999 and 8,022,499 shares of Class A common stock options, respectively, that were exercised via nonrecourse promissory notes, of which 841,563 and 4,136,677 shares, were unvested and subject to repurchase, respectively. The principal balances of nonrecourse promissory notes outstanding amounted to $15.1 million and $40.4 million as of September 30, 2021 and December 31, 2020, respectively.

11. Net Income (Loss) Per Share

Basic and diluted net income (loss) per share attributable to common stockholders is computed in conformity with the two-class method required for participating securities. The Company considers its convertible preferred stock, options exercised in exchange for nonrecourse promissory notes, early exercised unvested stock options and unvested restricted stock awards to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to convertible preferred stock, options exercised in exchange for nonrecourse promissory notes, early exercised unvested common stock options and unvested restricted stock awards as the holders of these instruments do not have a contractual obligation to share in the Company’s losses. Net income is attributed to common stockholders and participating securities based on their participation rights. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options.

The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic EPS
Numerator:
Net income (loss) attributable to AppLovin	$	178	$	(89,688)	$	4,080	$	(106,415)
Less:
Income attributable to convertible preferred stock	—		—		(499)		—
Income attributable to options exercised via promissory notes	(1)		—		(49)		—
Income attributable to unvested early exercised options	—		—		(13)		—
Income attributable to unvested RSA’s	—		—		(7)		—
Net income (loss) attributable to common stock—Basic	$	177	$	(89,688)	$	3,512	$	(106,415)
Denominator:
Weighted-average shares used in computing net income (loss) per share—Basic	368,427,532		214,638,272		309,353,304		212,998,263
Net income (loss) per share attributable to common stock—Basic	$	0.00	$	(0.42)	$	0.01	$	(0.50)
Diluted EPS
Numerator:
Net income (loss) attributable to AppLovin	$	178	$	(89,688)	$	4,080	$	(106,415)
Less:
Income attributable to convertible preferred stock	—		—		(475)		—
Income attributable to options exercised via promissory notes	(1)		—		(47)		—
Income attributable to unvested early exercised options	—		—		(12)		—
Income attributable to unvested RSA’s	—		—		(7)		—
Net income (loss) attributable to common stock—Diluted	$	177	$	(89,688)	$	3,539	$	(106,415)
Denominator:
Weighted-average shares used in computing net income (loss) per share—Basic	368,427,532		214,638,272		309,353,304		212,998,263
Weighted-average dilutive stock options, RSUs, warrants and other convertible securities	15,897,253		—		18,073,488
Weighted-average shares used in computing net income (loss) per share—Diluted	384,324,785		214,638,272		327,426,792		212,998,263
Net income (loss) per share attributable to common stock—Diluted	$	0.00	$	(0.42)	$	0.01	$	(0.50)

The following table presents the forms of antidilutive potential common shares:


	As of September 30,
	2021	2020
Convertible preferred stock	—	109,090,908
Stock options exercised for promissory notes	2,884,999	7,862,499
Shares issuable upon conversion of Athena convertible security	334,946	—
Early exercised stock options	879,600	19,800
Unvested RSAs	242,316	1,908,687
Stock options	23,736	20,439,544
Unvested RSUs	2,828	—
ESPP	223,448	—
Total antidilutive potential common shares	4,591,873	139,321,438

12. Income Taxes

The Company is subject to income taxes in the U.S. and in foreign jurisdictions. The Company bases its interim tax accruals on an estimated annual effective tax rate applied to year-to-date income and record the discrete tax items in the period to which they relate. In each quarter, the Company updates its estimated annual effective tax rate and makes a year-to-date adjustment to its tax provision as necessary. The Company’s calendar year 2021 annual effective tax rate differs from the U.S. statutory rate primarily due to net excess tax benefits from stock-based compensation, foreign derived intangible income deduction, valuation allowance against losses which cannot be realized and the foreign tax rate differential.

On March 11, 2021, the American Rescue Plan Act (“ARPA”) was enacted. The ARPA contains numerous income tax provisions, such as expanding the definition of covered employees. The ARPA has no impact on the income tax provision (benefit) for the nine months ended September 30, 2021.

During the nine months ended September 30, 2021, there were no material changes to the Company's unrecognized tax benefits, and the Company does not expect material changes in its unrecognized tax benefits within the next twelve months.

13. Related Party Transactions

On February 12, 2021, the Company amended the Credit Agreement. See Note 8. In connection with this amendment, the Company paid $0.8 million in fees to KKR Capital Markets LLC, which is affiliated with KKR Denali, one of the Company’s principal stockholders.

On May 6, 2020, the Company amended the Credit Agreement. See Note 8. In connection with this amendment, the Company paid $1.5 million in fees to KKR Capital Markets LLC, which is affiliated with KKR Denali, one of the Company’s principal stockholders.

The Company had no other material related parties for the three and nine months ended September 30, 2021 and 2020.

14. Subsequent Events

In October 2021, the remaining 50% of the convertible security with a stated value of $20.0 million was converted into 324,156 shares of the Company's Class A common stock at a conversion price of $61.7 per share.

On October 6, 2021, the Company entered into a definitive agreement to acquire from Twitter, Inc. the MoPub business for approximately $1.05 billion in cash. The transaction is subject to customary closing conditions and is expected to close in 2022.

On October 25, 2021, the Company amended the Credit Agreement to increase the senior secured term loan facility by an aggregate principal amount of $1.50 billion. In connection with this amendment, the Company paid $1.4 million in fees to KKR Capital Markets LLC, who is affiliated with KKR Denali, one of the Company’s principal stockholders.

Due to the timing of these transactions, as of the date of issuance of these condensed consolidated financial statements, the Company is in the process of finalizing the valuation and related accounting for these transactions.

Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS