Glu Takes Financial Measures for 2009

January 5th, 2009 by Arjan Olsder Posted in Companies & M&A | No Comments »

2008 didn't even end, and Glu already announced some financial changes in order to stabilize their position in the market. With their latest measures the company seems to secure their business for 2009, but there is still a lot of work ahead…

The biggest measure taken by Glu is restructuring of the MIG acquisition deal. Glu needed to do a big payoff in Q1 of 2009 and analysts feared that the company would not be able to pay. As most of you know, Glu's CEO Greg Ballard already hinted toward a solution in the interview we did with him in December of 2008;

[Arjan] If Glu is not able to pay it's debts toward MIG in time, is there any chance we see an alternative like turning the acquisition into a merger (giving the old board of directors from MIG a substantial share of Glu) or do you rather give MIG back to it's former owner?

[Greg] As our CFO said on our recent earnings call, we are confident that our cash position is not at risk of reaching a level where it would materially impact our operations. There are a number of different ways to improve our liquidity. As for the scenario you've described, I can't comment on a hypothetical. We will share more information on this when it's appropriate.

The solution was reached by converting the entire $25 million of payments to cash and deferring $11 million of the payments to 2010. Glu also announced that Silicon Valley Bank has entered into a new credit facility with Glu that extends Glu's $8 million line of credit through December 2010.

Under the terms of the revised agreement with MIG, there will be no stock issued. All of the $25 million in earn out consideration and bonus obligations will be payable in cash on the following schedule: $14 million will be payable in 2009 in three instalments, with $6 million  payable on January 15, 2009, $3 million payable on April 1, 2009 and $5 million payable on July 1, 2009. The remaining $11 million  will be payable in 2010 in four equal quarterly instalments of $2.75 million. Glu issued to the former MIG shareholders secured promissory notes covering these payments, bearing interest at 7% per annum, making it a very expensive loan.

"The restructuring of the MIG payments and line of credit extension substantially improves Glu's liquidity. The restructuring of the MIG agreement is a testament to the MIG founders' commitment to contributing to Glu's long-term success," said Greg Ballard, chief executive officer. "With these developments, we can now focus on increasing shareholder value by improving our existing carrier business and building our presence on new high end handsets and platforms that are gaining traction in the mobile market."

"We are very pleased with the spirit of cooperation from the former MIG shareholders and Silicon Valley Bank," said Eric R. Ludwig, senior vice president and chief financial officer. "Combined with our previously announced cost reduction efforts, which will reduce our total non-GAAP operating expenses by approximately 19% from second quarter 2008 levels, we believe that we have the necessary working capital in place to focus on executing our business plan and driving Glu toward positive cash flows from operations in 2009.

Glu expects to be cash flow positive from operations for the year with total operating expenses expected to be approximately $57 million. Revenue for 2009 is expected to be down between 10 and 15 percent from 2008 revenue, primarily due to continuing declines in foreign exchange rates and increasing economic headwinds.

Mr. Ballard commented, "By taking our time to evaluate the emerging platforms and realign our resources, we've developed a sound strategy that builds on our approach of launching games in a globally coordinated cross-platform effort. We have already shifted more of our resources to higher end platforms such as iPhone, Android, nGage and Blackberry, which have demonstrated better game adoption rates than the traditional non-smartphone market."

Mr. Ludwig added, "We have continued to experience declines in foreign exchange rates, which have further impacted the fourth quarter of 2008 and will continue to be a factor in 2009. We also expect to record an incremental tax provision of approximately $250,000 in the fourth quarter of 2008 related to repatriating cash from China. That said, as we look out to our 2009 plan, we believe that our title releases on new platforms will drive increasing revenue from those handsets. We are focused on executing well through these economic and market headwinds and managing our total operating expenses to deliver positive cash flow in 2009."

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    Arjan Olsder is the Vice President of Pixalon Studios. Opinions expressed on this publication do not have to represent those of Pixalon Studios.


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