Management's Discussion of Results of Operations (Excerpts)
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On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.
Overview This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the three months ended March 31, 2020, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our unaudited condensed consolidated financial statements and accompanying notes. Impact of the COVID-19 Pandemic The extent of the impact of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”), on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our employees, and the effect on the global economy, all of which are uncertain and cannot be predicted. Although we were able to successfully launch two new games, MLB Tap Sports Baseball 2020 and Disney Sorcerer’s Arena, in March 2020 and have been publishing updates and running live operations for our games while our global workforce has been working from home, we believe that if our employees are required to work from home for many months, it could ultimately negatively impact game development. We have also recently seen a reduction in CPIs (costs per install) and an increase in the daily active users in many of our games, but believe that this effect may be temporary and that the trend of increasing CPIs and declining daily and monthly active users may persist over the longer term. In addition, we may experience adverse impacts from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including restrictions on travel and in-person meetings. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition, results of operations or guidance is uncertain. The effects of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See “Risk Factors” included elsewhere in this report for further discussion of the possible impact of the COVID-19 pandemic on our business. Financial Results and Trends Revenue for the three months ended March 31, 2020 was $107.3 million, an 11.9% increase compared to the three months ended March 31, 2019, in which we reported revenue of $95.9 million. The increase was primarily related to an increase in revenue from Design Home, Covet Fashion and the Tap Sports Baseball franchise, the worldwide launches of Diner DASH Adventures and WWE Universe in the second quarter of 2019, and the worldwide launch of Disney Sorcerer’s Arena in the first quarter of 2020. These increases were partially offset by declining revenue on a year-over-year basis from catalog titles such as Kim Kardashian: Hollywood, Cooking Dash, Restaurant Dash with Gordon Ramsay, Deer Hunter 2018 (originally launched as Deer Hunter 2016), Diner Dash and Racing Rivals. We have concentrated our product development efforts towards developing games for smartphone and tablet devices. We generate the majority of our revenue from Apple’s iOS platform, which accounted for 62.8% and 60.6% of our total revenue for the three months ended March 31, 2020 and 2019, respectively. We generated the majority of this iOS-related revenue through the Apple App Store, which represented 57.6% and 52.9% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on the Apple App Store. In addition, we generated approximately 37.2% and 39.3% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, from the Android platform. We generated the majority of our Android-related revenue through the Google Play Store, which represented 31.9% and 34.1% of our total revenue for the three months ended March 31, 2020 and 2019, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our Android-related revenue from other platforms that distribute apps that run the Android operating system (e.g., the Amazon App Store) and through offers and advertisements in games distributed through the Google Play Store and other Android platforms. We currently publish titles primarily in four genres: lifestyle, casual, mid-core, and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game. Across genres, we view our titles as either growth games or catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements. We established our leadership position in the lifestyle genre through our acquisition of Crowdstar Inc. (“Crowdstar”) in November 2016 and its successful Covet Fashion title, and extended our leadership with our global release of Design Home in November 2016. We introduced key updates for Design Home in 2019 and the first three months of 2020, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, and meta game functionality, and are planning further key updates for this title, including the introduction of e-commerce functionality. The casual genre includes our Kim Kardashian: Hollywood title; we recently extended the term of our license agreement with Ms. Kardashian West for an additional 3.5 years through the end of 2023. The casual genre also includes our Cooking Dash and Diner DASH franchises, and our leadership position in this genre was bolstered by our worldwide launch of Diner DASH Adventures in June 2019. The mid-core genre includes our Disney Sorcerer’s Arena title that launched worldwide in March of 2020. Our leadership in the sports and outdoors category remains strong with our Tap Sports Baseball and Deer Hunter franchises. In March 2020, we furthered our leadership in this genre with the launch of MLB Tap Sports Baseball 2020 in more than 100 countries (prior versions of the Tap Sports Baseball franchise were only available in the United States, Canada, United Kingdom, Germany and Australia). MLB Tap Sports Baseball 2020 includes licensed content from Major League Baseball, or MLB, together with current and former MLB players pursuant to our continuing agreements with the Major League Baseball Players Association, and Major League Baseball Players Alumni Association, contains new features and content, including authentic major league stadiums, a skill-based home run mode and a new cover athlete. We expect to add to our portfolio of sports and outdoor titles through the worldwide release of the next iteration of our Deer Hunter franchise in the second half of 2020. We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on the Apple and Google storefronts when they were commercially released, which we believe is the result of us being a good partner of Apple and Google. We work closely with our celebrity and brand licensors to engage their social media audiences and build games that will resonate with their unique fan bases. For example, our Kim Kardashian: Hollywood title utilizes transmedia storytelling, leveraging Ms. Kardashian West’s built-in social media fan base to drive installs and awareness of the game, and then attempting to surprise and delight those fans with real-world events and other game content based on her life. Our goal is for the game content to become entwined with Ms. Kardashian West’s persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2020 which features all MLB clubs and uniforms, current and former MLB players and real MLB stadiums, or with our Disney Sorcerer’s Arena title, which includes characters from the Disney and Pixar universes. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity’s fan base. For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. We have also made significant investments in our proprietary analytics and revenue technology infrastructure. With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players. We aim to connect our analytics and revenue technology infrastructure to multiple elements of our business – from marketing to merchandising – in order to improve player retention and monetization. We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features and through enhancing our live operations. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space, particularly as brands continue to migrate budgets from web to mobile. Continuing to drive installs and awareness of our games through licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games. Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners. We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization. Across the globe, our industry is evidencing that hit titles generally remain higher in the top grossing charts for longer. We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business position us to take advantage of these trends, as evidenced by the continued strength and year-over-year growth of Design Home, Covet Fashion and the Tap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer periods of time. In addition, we plan to continue to invest in our creative leaders and the creative environments in which they and their teams work to increase our likelihood of creating significant hit growth games. Our net loss in the three months ended March 31, 2020 was $8.3 million versus net income of $663,000 in the three months ended March 31, 2019. This change was primarily due to an increase in sales and marketing expenses of $14.6 million, an increase in cost of revenue of $3.3 million, and an increase in research and development expenses of $3.0 million, partially offset by an increase in revenue of $11.4 million and a change from tax expense to a tax benefit of $1.3 million. See “—Results of Operations—Comparison of the Three Months Ended March 31, 2020 and 2019” below for further details. Our ability to achieve, sustain and increase profitability depends not only on our ability to grow our revenue, but also on our ability to manage our operating expenses. We increased our sales and marketing expenditures during the first three months of 2020 compared to the first three months of 2019. This increase largely related to higher marketing spend for most of our successful titles as well as for user acquisition expenditures related to the global launch of Disney Sorcerer’s Arena. Our increased sales and marketing expenses may impair our ability to achieve and sustain profitability if this spending does not result in increased revenues. Additionally, the largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation. In the remainder of 2020, we expect that our operating costs will increase as we invest in user acquisition for our games and continue to hire creative and project management talent in all of our offices worldwide. Cash and cash equivalents at March 31, 2020 totaled $114.7 million, a decrease of $12.3 million from the $127.1 million balance at December 31, 2019. This decrease was primarily related to $16.9 million of cash used in operating activities, $4.8 million of cash used in investing activities, partially offset by $9.5 million of cash provided by financing activities. Key Operating Metrics We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The three metrics that we use most frequently are Daily Active Users (DAU), Monthly Active Users (MAU), and Average Revenue Per Daily Active User (ARPDAU). Our methodology for calculating DAU, MAU, and ARPDAU may differ from the methodology used by other companies to calculate similar metrics. DAU is the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players have downloaded. MAU is the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention. ARPDAU is total free-to-play smartphone revenue – consisting of micro-transactions, advertisements and offers – for the measurement period divided by the number of days in the measurement period divided by the DAU for the measurement period. ARPDAU reflects game monetization. Under our revenue recognition policy, we recognize this revenue over the estimated average playing period of a user, but our methodology for calculating our DAU does not align with our revenue recognition policy for micro-transactions and offers, under which we defer revenue. For example, if a title is introduced in the last month of a quarter, we defer a substantial portion of the micro-transaction and offer revenue to future months, but the entire DAU for the newly released title is included in the month of launch. We calculate DAU, MAU and ARPDAU for only our primary distribution platforms, Apple’s App Store, the Google Play Store and Amazon’s Appstore, as well as from Facebook for certain titles; we are not able to calculate these metrics across all of our distribution channels. In addition, the platforms that we include for purposes of this calculation have changed over time, and we expect that they will continue to change as our business evolves, but we do not expect that we will adjust prior metrics to take any such additions or deletions of distribution platforms into account. We believe that calculating these metrics for only our primary distribution platforms at a given period is generally representative of the metrics for all of our distribution platforms. Moreover, we rely on the data analytics software that we incorporate into our games to calculate and report the DAU, MAU and ARPDAU of our games, and we make certain adjustments to the analytics data to address inconsistencies between the information as reported and our DAU and MAU calculation methodology. We have estimated the DAU and MAU for certain older titles because the analytics tools incorporated into those titles are incompatible with newer device operating systems (e.g., iOS 13), preventing us from collecting complete data. For these titles, we estimate DAU and MAU by extrapolating from each affected title’s historical data using a fixed decay rate in light of the behavior of similar titles for which we had complete data. As of January 1, 2019, we began calculating DAU and MAU using the average of each month during the period rather than our historical practice of calculating these metrics based on the last month of the period. For example, DAU for the three months ended March 31, 2020 is calculated as an average of aggregate daily DAU for the months of January 2020, February 2020 and March 2020 calculated for all active smartphone free-to-play titles during those months across the distribution platforms for which we calculate the metric. We adopted this new methodology because we believe that it provides a more accurate representation of overall DAU and MAU for the applicable period and more closely aligns with the methodology used by other companies in the gaming industry to calculate similar metrics. The decrease in aggregate DAU and MAU for the three months ended March 31, 2020 as compared to the same period of the prior year was primarily related to fewer downloads across our portfolio of catalog games partially offset by an increase in aggregate DAU and MAU attributable to our new title launches in 2019, primarily Diner DASH Adventures, an earlier launch date of our MLB Tap Sports Baseball franchise in the first quarter of 2020, compared with the prior year, as well as higher downloads of our growth games. Our aggregate ARPDAU increased for the three months ended March 31, 2020 as compared to the same period of the prior year, as we improved monetization on certain titles, particularly through increased content updates and use of social features in those games. Future increases in our aggregate DAU, MAU and ARPDAU will depend on our ability to retain current players, attract new paying players, launch new games and expand into new markets and distribution platforms. We rely on a very small portion of our total users for nearly all of our revenue derived from in-app purchases. Since the launch of our first free-to-play titles in the fourth quarter of 2010, the percentage of unique paying users for our largest revenue-generating free-to-play games has typically been less than 5%, when measured as the number of unique paying users on a given day divided by the number of unique users on that day, though this percentage fluctuates, and it may be higher than 5% for certain of our games during specific, relatively short time periods, such as immediately following worldwide launch or the week following content updates, marketing campaigns or certain other events. Our revenue increased $11.4 million, or 11.9%, from $95.9 million for the three months ended March 31, 2019 to $107.3 million for the three months ended March 31, 2020, which was primarily comprised of a $12.4 million increase in our revenue from micro-transactions (in-app purchases), partially offset by a decrease of $1.0 million in our revenue from advertisements and offers. The increase in revenue from micro-transactions was primarily related to our growth games, namely Design Home, Covet Fashion, and the Tap Sports Baseball franchise, as well as the worldwide launch of new titles Diner DASH Adventures and WWE Universe in the second quarter of 2019 and Disney Sorcerer’s Arena in the first quarter of 2020. Revenue from our growth games increased by $8.8 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Revenue from the new titles launched in 2019 and 2020 was $9.3 million during the three months ended March 31, 2020. These increases were partially offset by a $6.7 million aggregate decline in revenue from catalog titles such as Kim Kardashian: Hollywood, Cooking Dash, Restaurant Dash with Gordon Ramsay, Diner Dash, Racing Rivals, and Deer Hunter 2018. The decrease in revenue from advertisements and offers was primarily due to the removal of pay-per-engagement offer wall advertisement units from Apple in 2019. During the three months ended March 31, 2020, Design Home, the Tap Sports Baseball franchise, and Covet Fashion, were our top three revenue-generating games and comprised 43.0%, 18.8% and 15.8%, respectively, of our revenue for the period. During the three months ended March 31, 2019, Design Home, the Tap Sports Baseball franchise, and Covet Fashion, were our top three revenue-generating games and represented 44.9%, 17.2% and 15.6% of our revenue for the period, respectively. No other game generated more than 10% of revenue during the quarters ended March 31, 2020 and 2019. International revenue (generated from distributors and advertising service providers whose principal operations are located outside the United States or, in the case of the digital storefronts, the revenue generated from end-user purchases made outside of the United States) increased by $249,000 from $23.0 million in the three months ended March 31, 2019 to $23.3 million in the three months ended March 31, 2020. Cost of Revenue Our cost of revenue increased $3.3 million, or 9.7%, from $34.5 million in the three months ended March 31, 2019 to $37.9 million in the three months ended March 31, 2020. This was primarily due to an increase of $3.6 million in platform commission fees resulting from a higher volume of revenue transactions through the digital storefronts and a $349,000 increase in hosting costs. This increase was partially offset by a $418,000 decrease in impairment of prepaid royalties and minimum guarantees, and a $364,000 decrease in amortization of intangible assets. The royalties we paid to licensors increased by $195,000, or 3.2%, from $6.1 million in the three months ended March 31, 2019 to $6.3 million in the three months ended March 31, 2020. The increase was due to a growth in revenue from royalty burdened titles. However, the rate of increase of our royalty payments was lower than the 11.9% increase in our revenue, which increased from $95.9 million in the three months ended March 31, 2019 to $107.3 million in the three months ended March 31, 2020. This was due to a larger percentage of our revenue being attributable to titles that are not royalty burdened, such as Design Home, Covet Fashion and Diner DASH Adventures. Research and Development Expenses Our research and development expenses increased $3.0 million, or 11.2%, from $26.5 million in the three months ended March 31, 2019 to $29.5 million in the three months ended March 31, 2020. This was primarily attributable to a net increase in payroll related costs of $2.5 million mainly due to the increase in headcount, payroll taxes and certain employee benefit costs and a $398,000 increase in allocated charges for equipment, facilities and depreciation. As a percentage of revenue, research and development expenses decreased slightly from 27.7% in the three months ended March 31, 2019 to 27.5% in the three months ended March 31, 2020. We expect our research and development expenditures to increase slightly in absolute dollars in the remainder of 2020, primarily due to expected increases in headcount. Sales and Marketing Expenses Our sales and marketing expenses increased $14.6 million, or 52.1%, from $28.1 million in the three months ended March 31, 2019 to $42.7 million in the three months ended March 31, 2020. This was primarily attributable to a $12.7 million increase in user acquisition and other marketing expenditures primarily related to a significant investment in user acquisition for Disney Sorcerer’s Arena and Diner DASH Adventures following these titles’ global launches in March 2020 and June 2019, respectively, as well as increased marketing expenditures for Design Home and the Tap Sports Baseball franchise, partially offset by lower user acquisition expenditures on our catalog titles, a $1.0 million increase in payroll related costs mainly due to the increase in headcount and certain employee benefit costs, a $496,000 increase in professional and consulting costs, and a $410,000 increase in allocated charges for equipment, facilities and depreciation. As a percentage of revenue, sales and marketing expenses increased from 29.3% in the three months ended March 31, 2019 to 39.8% in the three months ended March 31, 2020. We expect our sales and marketing expenses to increase significantly in the second quarter of 2020 as we seek to capitalize on the current favorable CPI environment to increase the daily active users of our recently launched titles, Disney Sorcerer’s Arena and MLB Tap Sports Baseball 2020, as well as our key existing titles, Design Home, Covet Fashion, Kim Kardashian: Hollywood and Diner DASH Adventures. We expect that our sales and marketing expenses will decrease sequentially in the third and fourth quarters of 2020. General and Administrative Expenses Our general and administrative expenses slightly increased by less than $100,000, or 0.5%, from $6.6 million in the three months ended March 31, 2019 to $6.7 million in the three months ended March 31, 2020. The small year-over-year increase was primarily attributable to a $454,000 increase in payroll related costs mainly due to the increase in headcount and certain employee benefit costs and a $338,000 increase in software and equipment related expenses, partially offset by a $490,000 decrease in stock based compensation expense mainly related to the decrease in vesting probability of certain performance-based equity awards and a $298,000 net decrease in allocated charges for equipment, facilities, and depreciation. As a percentage of revenue, general and administrative expenses decreased from 6.9% in the three months ended March 31, 2019 to 6.2% in the three months ended March 31, 2020. We expect our general and administrative expenses to increase in absolute dollars in the remainder of 2020, primarily due to increases in headcount and certain facilities related expenses. Interest and Other Income/(Expense), Net Interest and other income, net, changed from net income of $764,000 in the three months ended March 31, 2019 to net expense of $65,000 in the three months ended March 31, 2020. This was primarily attributable to lower investment and interest income earned on money market funds and higher foreign currency losses related to the revaluation of certain account balances during the three months ended March 31, 2020. Income Tax Benefit/(Expense) Our income tax provision changed from an income tax expense of $178,000 in the three months ended March 31, 2019 to an income tax benefit $1.3 million in the three months ended March 31, 2020. This change was primarily due to changes in pretax income in the United States and certain foreign entities, and changes in tax rates. The provision for income taxes differs from the amount computed by applying the statutory U.S. federal rate principally due to the effect of our non-U.S. operations, non-deductible stock-based compensation expense, and change in foreign withholding taxes. Liquidity and Capital Resources Since our inception, we have generally incurred recurring losses and negative annual cash flows from operating activities. We had an accumulated deficit of $439.9 million as of March 31, 2020. Operating Activities In the three months ended March 31, 2020, net cash used in operating activities was $16.9 million, which was primarily due to an increase of $13.5 million in accounts receivable mainly due to the timing of payments from our customers, an $8.3 million net loss, a $6.3 million increase in prepaid royalties, a $2.9 million decrease in accrued royalties, a $1.8 million decrease in accrued compensation mainly related to bonus payments in the first quarter of 2020 related to 2019 performance, and a $901,000 decrease in operating lease liabilities due to rental payments on leases. These decreases were partially offset by a $7.5 million increase in accounts payable and other accrued liabilities mainly due to the timing of payments to our vendors and non-cash adjustments including $6.4 million of stock based compensation expense, $1.3 million of depreciation expense, $996,000 of non-cash lease expense, and $888,000 of amortization of intangible assets during the three months ended March 31, 2020. In the three months ended March 31, 2019, net cash used in operating activities was $2.4 million, which was primarily due to a decrease in accrued compensation of $10.3 million mainly related to bonus payments paid in the first quarter of 2019 related to 2018 performance, an increase of $7.4 million in accounts receivable mainly due to the timing of payments from our customers and a decrease of $3.3 million in deferred revenues. These decreases were partially offset by an increase of $7.3 million in accounts payable and other accrued liabilities mainly due to the timing of payments to our vendors, a $1.1 million decrease in deferred platform commission fees and non-cash adjustments including $6.8 million of stock based compensation expense, $1.3 million of amortization of intangible assets and $1.1 million of depreciation expense. Investing Activities In the three months ended March 31, 2020, we used $4.8 million of cash in investing activities related to leasehold improvements and equipment purchases. In the three months ended March 31, 2019, we used $1.2 million of cash in investing activities primarily related to leasehold improvements and equipment purchases of $1.1 million. Financing Activities In the three months ended March 31, 2020, net cash generated from financing activities was $9.5 million which was primarily due to $11.2 million in proceeds received from option exercises and purchases under our employee stock purchase plan partially offset by $1.7 million of taxes paid related to net share settlement of equity awards. In the three months ended March 31, 2019, net cash used in financing activities was $1.0 million which was primarily due to $4.0 million of taxes paid related to net share settlement of RSUs partially offset by $3.0 million in proceeds received from option exercises and purchases under our employee stock purchase plan. Sufficiency of Current Cash and Cash Equivalents Our cash and cash equivalents were $114.7 million as of March 31, 2020. Cash and cash equivalents held outside of the United States in various foreign subsidiaries were $3.0 million as of March 31, 2020, most of which were held by our Canadian and Indian subsidiaries. Under current tax laws and regulations, if cash and cash equivalents held outside the United States are distributed to the United States in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes. We have not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries because these earnings are intended to be reinvested indefinitely. However, if any such balances were to be repatriated, additional U.S. federal income tax payments could result. Computation of the potential deferred tax liabilities associated with unremitted earnings deemed to be indefinitely reinvested is not practicable. We expect to fund our operations, grow our business and satisfy our contractual obligations during the next 12 months primarily through our cash and cash equivalents, including cash generated from operations. We believe our cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this report; however, our cash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, revenue that is lower than we currently anticipate, greater than expected operating expenses, particularly with respect to our research and development and sales and marketing initiatives, use of cash to pay minimum guaranteed royalties, use of cash to pay operating lease obligations, use of cash to fund our foreign operations, and the impact of foreign currency rate changes, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries or any investments or acquisitions that we may decide to pursue. We expect to continue to use cash to fund operating lease obligations and minimum guaranteed royalty payments during the remainder of 2020 as milestone payments become due on games we publish and/or develop that incorporate third party licensed property, and may also use cash to fund investments and/or the purchase price of any acquisitions. If the games we develop based on such licensing arrangements fail to perform in accordance with our expectations, we may not fully recoup these minimum guaranteed royalty payments. If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital. However, we may be unable to do so on terms that are favorable to us or at all. Contractual Obligations The amount of tenant improvement allowance expected to be received in the second quarter of 2020 for one of our office leases is netted off from the future obligations amount. We have entered into license and publishing agreements with various celebrities and other owners of brands, properties and other content to develop and publish games and other software applications for mobile devices. These agreements typically require us to make non-refundable, but recoupable payments of minimum guaranteed royalties or license fees as upfront payments or over the term of the agreement. Off-Balance Sheet Arrangements At March 31, 2020, we did not have any significant off-balance sheet arrangements requiring disclosure under Item 303(a)(4)(ii) of Regulation S-K, other than those listed in our contractual obligations table above. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information in this section should be read in connection with the information on financial market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2019. Our market risk profile has not changed significantly during the three months ended March 31, 2020. Interest Rate and Credit Risk Our exposure to interest rate risk relates primarily to our investment portfolio and the potential losses arising from changes in interest rates. We are potentially exposed to the impact of changes in interest rates as they affect interest earned on our investment portfolio. As of March 31, 2020, substantially all of our cash and cash equivalents of $114.7 million was held in operating bank and money market accounts earning nominal interest. Accordingly, we do not believe that a 10% change in interest rates would have a significant impact on our interest income/(expense), net, operating results or liquidity related to these amounts. The primary objectives of our investment activities are, in order of importance, to preserve principal, provide liquidity and maximize income without significantly increasing risk. We do not currently use or plan to use derivative financial instruments in our investment portfolio. As of March 31, 2020, and December 31, 2019, our cash and cash equivalents were maintained by financial institutions in the United States, Canada, Hong Kong and India and our current deposits are likely in excess of insurance limits. Our accounts receivable primarily relate to revenue earned from digital storefront operators and advertising platforms. We perform ongoing credit evaluations of our customers’ and the digital storefronts’ financial condition but generally require no collateral from them. At March 31, 2020, Apple, Google, and Tapjoy accounted for 63.1%, 21.6% and 11.1% of total accounts receivable, respectively. At December 31, 2019, Apple, Google, and Tapjoy accounted for 47.2%, 28.5% and 17.8% of total accounts receivable, respectively. No other customer or digital storefront represented more than 10% of the Company’s total accounts receivable as of these dates. Foreign Currency Exchange Risk We transact business in more than 100 countries in more than 30 different currencies, and in 2019 and the first three months of 2020, some of these currencies fluctuated significantly. Our revenue is usually denominated in the functional currency of the distributor while the operating expenses of our operations outside of the United States are maintained in their local currency, with the significant operating currencies consisting of the Indian Rupee and the Canadian Dollar. Although recording operating expenses in the local currency of our foreign operations mitigates some of the exposure of foreign currency fluctuations, variances among the currencies of our customers and our foreign operations relative to the United States Dollar, or USD, could have and have had a material impact on our results of operations. Our foreign currency exchange gains and losses have been generated primarily from fluctuations in the Indian Rupee versus the USD and the Canadian Dollar versus the USD. At month-end, non-functional currency-denominated accounts receivable and intercompany balances are marked to market and unrealized gains and losses are included in interest and other income/(expense), net. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive loss in stockholders’ equity. We have in the past experienced, and in the future expect to experience, foreign currency exchange gains and losses on our accounts receivable and intercompany receivables and payables. Foreign currency exchange gains and losses could have a material adverse effect on our business, operating results and financial condition. To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in the foreseeable future. Inflation We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.