What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-03 · 124 added, 215 removed, 273 unchanged (55% of the section changed)

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All forward-looking statements in this Annual Report on Form 10-K are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances, except as required by law.

We are a developer and publisher of free-to-play casual games for mobile and social platforms each of which incorporate our unique playAWARDS loyalty program.

Over our ten-year history, we developed a portfolio of free-to-play social casino games that are considered to be among the most innovative and unique in the genre.

They include the award-winning POP!

Slots , myVEGAS Slots , my KONAMI Slots, myVEGAS Blackjack and myVEGAS Bingo .

Our games are based on original content, real-world slot game content, as well as third-party licensed brands and are downloadable and playable for free on multiple social and mobile-based platforms, including the Apple App Store, Google Play Store, Amazon Appstore, and Facebook.

Each of our games is powered by our proprietary playAWARDS program and incorporates loyalty points that are earned by players as they engage with our games.

For the year ended December 31, 2021, these loyalty points could have been exchanged for real-world rewards from 95 awards partners representing more than 265 hospitality, entertainment, and leisure brands across 17 countries and four continents.

The rewards are provided by our collection of awards partners, all of whom provide their rewards at no cost to us, in exchange for product integration, marketing support, and participation in our loyalty program.

We are a developer and publisher of free-to-play casual games for mobile and social platforms.

Each of our legacy social casino games and our Tetris®-branded mobile game incorporate our unique playAWARDS loyalty program.

Over our eleven-year history, we developed a portfolio of free-to-play social casino games that are considered to be among the most innovative and unique in the genre.

We recently acquired Brainium, a developer and publisher of free-to-play casual games with industry leading user retention and engagement.

Our games include the award-winning POP!

Slots , myVEGAS Slots , my KONAMI Slots, myVEGAS Blackjack, myVEGAS Bingo, Tetris®, Solitaire, Spider Solitaire, Sudoku, and Mahjong.

Our games are based on original content as well as third-party licensed brands and are downloadable and playable for free on multiple social and mobile-based platforms, including the Apple App Store, Google Play Store, Amazon Appstore, and Facebook.

Each of our legacy social casino games and our Tetris®-branded mobile game is powered by our proprietary playAWARDS program and incorporates loyalty points that are earned by players as they engage with our games.

For the year ended December 31, 2022, these loyalty points could have been exchanged for real-world rewards from 96 awards partners representing more than 210 hospitality, entertainment, and leisure brands across 105 countries and six continents.

The rewards are provided by our collection of awards partners, with the majority of whom provide their rewards at no cost to us, in exchange for product integration, marketing support, and participation in our loyalty program.

The program is enabled by our playAWARDS platform which consists of a robust suite of tools that enable our awards partners to manage their rewards in real time, measure the value of our players’ engagement, and gain insight into the effectiveness and value they derive from the program.

Through our self-service platform, awards partners can launch new rewards, make changes to existing offers, and in real time see how players are engaging with their brands.

Through our self-service platform, awards partners can launch new rewards, make changes to existing rewards, and in real time see how players are engaging with their brands.

The platform tools also provide awards partners the ability to measure the off-line value our players generate as consumers and patrons of their real-world establishments.

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Qualified players are provided access to enhanced benefits that increase with each tier.

Higher tiers provide access to a VIP player portal whereby players can view and purchase special chip bundles, redeem loyalty points for a curated set of rewards, and communicate directly with a dedicated personal host.

Higher tiers provide access to a VIP player portal where players can view and purchase special chip bundles, redeem loyalty points for a curated set of rewards, and communicate directly with a dedicated personal host.

The VIP player portal, concierge, and host programs, enhance the in-game and real-world reward experience with both in-game and in-person, invitation-only special events.

We believe that the myVIP program drives increased player engagement and retention, and therefore extends each game's life-cycle and revenue potential.

We have primarily generated our revenue from the sale of virtual currency, which players can choose to purchase at any time to enhance their playing experience.

We have primarily generated our revenue from the sale of in-game virtual currency, which players can choose to purchase at any time to enhance their playing experience.

Once purchased, our virtual currency cannot be withdrawn from the game, transferred from one game to another or from one player to another, or be redeemed for monetary value.

Players who install our games receive free virtual currency upon the initial launch of the game, and they may also collect virtual currency free of charge at periodic intervals or through targeted marketing promotions.

Players may exhaust the free virtual currency and may choose to purchase additional virtual currency.

Additionally, players can send free “gifts” of virtual currency to their friends

Players may exhaust the free virtual currency

and may choose to purchase additional virtual currency.

Additionally, players can send free “gifts” of virtual currency to their friends on Facebook.

Our revenue from virtual currency has been generated world-wide, but is largely concentrated in North America.

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Advertisements can be in the form of an impression, click-throughs, banner ads, or offers, where players are rewarded with virtual currency or loyalty points for watching a short video.

While we historically have derived most of our revenue from the sale of in-game virtual currency, we introduced in-game advertising as a limited pilot program and expanded it throughout 2021 and 2022.

In addition, our Tetris®-branded mobile game and our Brainium games generate most of their revenue through in-game advertising.

Impact of COVID-19

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

We have followed guidance by the U.S., Israel, Hong Kong, and other applicable foreign and local governments to protect our employees and operations during the pandemic and have implemented a remote environment for our business.

We cannot predict the potential impacts of the COVID-19 pandemic and variants thereof or the distribution of vaccines on our business or operations, but we will continue to actively monitor the related issues and may take further actions that alter our business operations, including as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, players, partners, and stockholders.

In addition to the potential direct impacts to our business, the global economy has been, and is likely to continue to be, significantly weakened as a result of the actions taken in response to the COVID-19 pandemic and variants thereof, and future government intervention remains uncertain.

The COVID-19 pandemic and related containment and mitigation efforts, including social distancing, shelter-in-place, quarantine, and similar policies, practices, and governmental orders, have resulted in widespread disruption in global economies, productivity, and financial markets and have materially altered our day-to-day business operations.

We have followed guidance by the U.S., Israel, Hong Kong, and other applicable foreign and local governments to protect our employees and operations during the pandemic.

We cannot predict potential future impacts of the COVID-19 pandemic or other future health epidemics or contagious disease outbreaks on our business or operations, but we will continue to actively monitor the related issues and may take further precautionary actions that alter our business operations, including as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, players, partners, and stockholders.

In addition to the potential direct impacts to our business, the global economy has been, and is likely to continue to be, significantly weakened as a result of the actions taken in response to the COVID-19 pandemic, and future government intervention remains uncertain.

A weakened global economy may impact our players and their purchasing decisions within our games, in particular as a result of the limitations associated with redeeming real-world rewards due to government-mandated or other restrictions on travel and other activities and limitations on our players’ discretionary spending, consumer activity during the pandemic and its impact on advertising investments, and the ability of our business partners, including our awards partners, to navigate this complex social, health, and economic environment, any of which could result in disruption to our business and results of our operations.

The duration and extent of the impact from the COVID-19 pandemic and variants thereof depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the existence of any additional waves of the COVID-19 pandemic and variants thereof, the extent and effectiveness of containment actions, progress towards widespread rapid testing, effective treatment alternatives, and the success and timing of vaccination efforts, and the impact of these and other factors on our employees, players, and business partners.

We have recently observed labor shortages, increasing competition for talent, and increasing employee attrition.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot accurately be predicted at this time, such as the severity and transmission rate of the virus, the existence of any additional waves of the COVID-19 pandemic and variants thereof, the extent and effectiveness of containment actions, progress towards widespread rapid testing, effective treatment alternatives, and the success and timing of vaccination efforts, and the impact of these and other factors on our employees, players, and business partners.

We have observed labor shortages, increasing competition for talent, and increasing employee attrition.

If we are not able to respond to and manage the impact of such events effectively, our business may be harmed.

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There are a number of factors that affect the performance of our business, and the comparability of our results from period to period, including:

• Third-Party Platform Agreements— We derive substantially all of our revenue from in-game purchases of virtual currency that are processed by platform providers such as the Apple App Store, Google Store, Amazon Appstore, and on Facebook.

• Third-Party Platform Agreements— Historically we derived substantially all of our revenue from in-game purchases of virtual currency that are processed by platform providers such as the Apple App Store, Google Store, Amazon Appstore, and on Facebook.

The platform providers charge us a transaction fee to process payments from our players for their purchase of in-game virtual currency.

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Our player acquisition strategy is centered on a payback period methodology, and we strive to optimize spend between the acquisition of new players and the reactivation of inactive players.

• Player Monetization—Our revenue has been primarily driven through the sale of virtual currency.

• Player Monetization— Our revenue to date has been primarily driven through the sale of virtual currency.

Paying players purchase virtual currency in our games because of the perceived value, which is dependent on the relative ease of obtaining equivalent virtual currency by simply playing our game.

The perceived value of our virtual currency can be

impacted by various actions that we take in our games including offering discounts for virtual currency or giving away virtual currency in promotions.

The perceived value of our virtual currency can be impacted by various actions that we take in our games including offering discounts for virtual currency or giving away virtual currency in promotions.

Managing game economies is difficult and relies on our assumptions and judgment.

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As a result, we continuously incur expenses to enhance and update these programs.

However, the results may not generate revenue and the enhancements may require additional significant modifications or be abandoned in their entirely.

However, the results may not generate revenue and the enhancements may require additional significant modifications or be abandoned in their entirety.

• Real-World Rewards— We currently offer real-world rewards relating to, among other things, dining, live entertainment shows, and hotel rooms, and we plan to continue to expand and diversify our rewards loyalty program in order to maintain and enhance the perceived value offering to our players.

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Daily Active Users (“DAU”)

DAU is defined as the number of individuals who played a game on a particular day.

Daily Active Users ("DAU") is defined as the number of individuals who played a game on a particular day.

We track DAU by the player ID, which is assigned for each game installed by an individual.

As such, an individual who plays two different games on the same day is counted as two DAU while an individual who plays the same game on two different devices is counted as one DAU.

Average DAU is calculated as the average of the DAU for each day during the period presented.

We use DAU as a measure of audience engagement to help us understand the size of the active player base engaged with our games on a daily basis.

As such, an individual who plays two different PLAYSTUDIOS games on the same day is counted as two DAU while an individual who plays the same PLAYSTUDIOS game on two different devices is counted as one DAU.

Brainium tracks DAU by app instance ID, which is assigned to each installation of a game on a particular device.

As such, an individual who plays two different Brainium games on the same day is counted as two DAU and an individual who plays the same Brainium game on two different devices is also counted as two DAU.

The term "Average DAU" is defined as the average of the DAU, determined as described above, for each day during the period presented.

We use DAU and Average DAU as measures of audience engagement to help us understand the size of the active player base engaged with our games on a daily basis.

Monthly Active Users (“MAU”)

MAU is defined as the number of individuals who played a game in a particular month.

As with DAU, an individual who plays two different games in the same month is counted as two MAU while an individual who plays the same game on two different devices is counted as one MAU.

Average MAU is calculated as the average of MAU for each calendar month during the period presented.

We use MAU as a measure of audience engagement to help us understand the size of the active player base engaged with our games on a monthly basis.

Monthly Active Users ("MAU") is defined as the number of individuals who played a game in a particular month.

As with DAU, an individual who plays two different PLAYSTUDIOS games in the same month is counted as two MAU while an individual who plays the same game on two different devices is counted as one MAU, and an individual who plays two different Brainium games on the same day is counted as two MAU and an individual who plays the same Brainium game on two different devices is also counted as two MAU.

The term "Average MAU" is defined as the average of the MAU, determined as described above, for each calendar month during the period presented.

We use MAU and Average MAU as measures of audience engagement to help us understand the size of the active player base engaged with our games on a monthly basis.

Daily Paying Users (“DPU”)

DPU is defined as the number of individuals who made a purchase in a mobile game during a particular day.

Daily Paying Users ("DPU") is defined as the number of individuals who made a purchase in a game during a particular day.

As with DAU and MAU, we track DPU based on account activity.

As such, an individual who makes a purchase in two different games in a particular day is counted as two DPU while an individual who makes purchases in the same game on two different devices is counted as one DPU.

Average DPU is calculated as the average of the DPU for each day during the period presented.

We use DPU to understand the size of our active player base that makes in-game purchases.

The term "Average DPU" is defined as as the average of the DPU, determined as described above, for each day during the period presented.

We use DPU and Average DPU to help us understand the size of our active player base that makes in-game purchases.

This focus directs our strategic goals in setting player acquisition and pricing strategy.

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Daily Payer Conversion is defined as DPU as a percentage of DAU on a particular day.

Average Daily Payer Conversion is calculated as the average DPU divided by average DAU for a given period.

We use Daily Payer Conversion to understand the monetization of our active players.

Daily Player Conversion is also sometimes referred to as "Percentage of Paying Users" or "PPU".

The term "Average Daily Payer Conversion" is defined as the the Average DPU divided by Average DAU for a given period.

We use Daily Payer Conversion and Average Daily Payer Conversion to help us understand the monetization of our active players.

Average Daily Revenue Per DAU (“ARPDAU”)

ARPDAU is defined for a given period as the average daily revenue per average DAU, and is calculated as game and advertising revenue for the period, divided by the number of days in the period, divided by the average DAU during the period.

Average Revenue Per DAU ("ARPDAU") is defined for a given period as the average daily revenue per Average DAU, and is calculated as game and advertising revenue for the period, divided by the number of days in the period, divided by the Average DAU during the period.

We use ARPDAU as a measure of overall monetization of our players.

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2022 2021 2020

Net income $ 10,737 $ 12,807 $ 13,614

Net (loss) income $ (17,783) $ 10,737 $ 12,807

Depreciation & amortization 35,562 27,398 22,192

Income tax expense (benefit) (258) (1,671) 3,975

Income tax benefit (5,835) (258) (1,671)

Stock-based compensation expense 17,727 4,455 3,519

Change in fair value of warrant liability (1,047) (13,933) —

Change in fair value of contingent consideration (2,411) — —

Special infrequent (1)

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Margin as a % of revenue

Net income margin 3.7 % 4.7 % 5.7 %

Net (loss) income margin (6.1) % 3.7 % 4.7 %

AEBITDA Margin 13.2 % 13.8 % 21.5 %

(1) Amounts reported (i) during the year ended December 31, 2020 represent charitable donations made by us related to the COVID-19 pandemic, and (ii) for the year ended December 31, 2021, a transaction bonus and a charitable contribution per the terms of the merger agreement related to our business combination with Acies Acquisition Corp.

(the “Merger Agreement”).

(2) Amounts reported during the years ended December 31, 2021, 2020 and 2019 consist of (i) severance-related costs, (ii) fees related to potential mergers and acquisitions, and (iii) for the year ended December 31, 2020, include $20.0 million resulting from the termination of the profit share provision of the MGM Marketing Agreement as further discussed in Note 4 — Related-Party Transactions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

(3) Amounts reported in “Other” include interest expense, interest income, foreign currency gains/losses, and non-cash gains/losses on the disposal of assets.

(1) Amounts reported (i) during the year ended December 31, 2021 represent a transaction bonus and a charitable contribution per the terms of the merger agreement related to our business combination with Acies Acquisition Corp.

(the “Merger Agreement”), and (ii) during the year ended December 31, 2020, represent charitable donations made by us related to the COVID-19 pandemic.

(2) Amounts reported (i) during the year ended December 31, 2022 represent a non-cash impairment charge related to the suspension of Kingdom Boss development, fees related to evaluating various merger and acquisition opportunities, and fees related to the Tender Offer for the Warrants, (ii) during the year ended December 31, 2021 represent severance-related costs and fees related to evaluating various merger and acquisition opportunities, and (iii) during the year ended December 31, 2020 include $20.0 million resulting from the termination of the profit share provision of the MGM Marketing Agreement as further discussed in Note 4 — Related-Party Transactions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Results of Operations

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Operating expenses 318,390 290,409 27,981 9.6 %

Operating (loss) income (2,990) 10,349 (13,339) (128.9) %

Net income 10,737 12,807 (2,070) (16.2) %

Operating loss (28,081) (2,990) (25,091) 839.2 %

Net (loss) income (17,783) 10,737 (28,520) (265.6) %

AEBITDA 38,253 39,546 (1,293) (3.3) %

Net income margin 3.7 % 4.7 % (1.0) (21.3) %

AEBITDA margin 13.8 % 21.5 % (7.7) (35.8) %

Net (loss) income margin (6.1) % 3.7 % (9.8)pp (264.9) %

AEBITDA margin 13.2 % 13.8 % (0.6)pp (4.3) %

pp = percentage points

Revenue and Key Performance Indicators (in thousands, except percentages and ARPDAU):

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Advertising 21,839 6,964 14,875 213.6 %

Other revenue 368 — 368 N/A

Other revenue 6,850 368 6,482 1761.4 %

Net revenue $ 290,309 $ 287,419 $ 2,890 1.0 %

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Net revenue increased $2.9 million, or 1.0%, to $290.3 million during the year ended December 31, 2022 compared to $287.4 million during the year ended December 31, 2021.

The increase was primarily driven by increases in both daily payer conversion and spending per player, despite an overall decrease in DAU and MAU.

Virtual currency revenue increased $12.0 million, or 4.5%, to $280.1 million during the year ended December 31, 2021 compared to $268.1 million during the year ended December 31, 2020, primarily driven by the global launches of myVEGAS Bingo and MGM Slots Live .

Our average daily payer conversion rate increased 0.4 percentage points to 2.7% during the year ended December 31, 2021 from 2.3% during the year ended December 31, 2020.

Additionally, advertising revenue increased $5.2 million, or 299%, to $7.0 million during the year ended December 31, 2021 compared to $1.7 million during the year ended December 31, 2020.

The increase in advertising revenue was primarily driven by an increase in impression count with and focus on providing more opportunities for our players to engage with advertisements, including the addition of Tetris to our games portfolio.

The increase was primarily driven by increases in advertising and other revenue.

Virtual currency revenue decreased $18.5 million, or 6.6%, to $261.6 million during the year ended December 31, 2022 compared to $280.1 million during the year ended December 31, 2021, primarily driven by the decline in DPU.

Our Average Daily Payer Conversion rate decreased 1.2 percentage points to 1.5% during the year ended December 31, 2022 from 2.7% during the year ended December 31, 2021 due to the addition of Tetris® and the Brainium portfolio of games, which primarily operate with an advertising revenue model, as described below.

Advertising revenue increased $14.9

million, or 213.6%, to $21.8 million during the year ended December 31, 2022 compared to $7.0 million during the year ended December 31, 2021.

The increase in advertising revenue was primarily driven by an increase in impression count and focus on providing more opportunities for our players to engage with advertisements, including the addition of the Tetris®-branded mobile game to our games portfolio and the acquisition of the Brainium portfolio of casual games.

Operating Expenses

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Cost of Revenue

Cost of revenue increased by $0.2 million, or 0.2%, during the year ended December 31, 2021 compared to the year ended December 31, 2020.

Cost of revenue decreased by $6.2 million, or 6.8%, during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease was due to a decline in virtual currency revenue.

As a percentage of net revenue, cost of revenue decreased from 31.9% for the year ended December 31, 2021 to 29.4% for the year ended December 31, 2022.

The decrease was due to an increase in advertising revenue which does not incur platform fees and a reduction in royalty expenses associated with our revenue.

The decrease was due to an increase in advertising and other revenue which do not incur platform fees, and a reduction in royalty expenses associated with our revenue.

Selling and Marketing

Selling and marketing expenses increased by $1.8 million, or 2.2%, during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to increased user acquisition costs of $20.9 million.

Of the total user acquisition costs increase, $18.8 million related to the global launches of new games myVEGAS Bingo, MGM Slots Live, and Kingdom Boss and $2.1 million for existing games myVEGAS Mobile, POP!

Slots and my Konami .

Additionally, there were increases to the marketing payroll of $1.5 million and outside services of $0.4 million, offset by a reduction of $0.9 million in other marketing costs.

The increase was primarily due to $1.2 million of additional payroll expenses, $0.8 million of additional outside services, $0.7 million of additional stock-based compensation, and $0.3 million of other selling and marketing expenses.

This increase was partially offset by a reduction of user acquisition costs of $1.2 million.

As a percentage of net revenue, selling and marketing expenses increased from 27.5% for the year ended December 31, 2021 to 27.8% for the year ended December 31, 2022.

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Research and development expenses increased by $2.0 million, or 3.2%, during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to a $5.8 million increase of payroll expenses, $2.6 million increase of outside services related to the development of new games, $0.7 million due to the transaction bonus paid pursuant to the Merger Agreement, and $0.3 million in stock compensation.

The increase was primarily due to $6.2 million of additional stock-based compensation, $1.8 million of additional payroll expenses, and $0.3 million of other research and development expenses.

This increase was partially offset by a reduction of $6.3 million of outside services expenses.

As a percentage of net revenue, research and development expenses increased from 21.3% for the year ended December 31, 2021 to 21.8% for the year ended December 31, 2022.

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General and administrative expenses increased by $12.4 million, or 44.3%, during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to a $4.2 million transaction bonus and a $2.5 million charitable donation, both paid per the terms of the Merger Agreement, as well as a one-time charge for a $1.1 million increase in stock-based compensation related to the premium voting rights associated with the shares of Class B common stock and $2.2 million related to D&O insurance, offset by a decrease of $0.3 million in all other expenses.

The increase was primarily due to $7.0 million of additional payroll expenses, $6.8 million of additional stock-based compensation, $1.5 million of additional insurance expenses, $1.0 of additional legal expenses, and $2.8 million of other general and administrative costs.

This increase was partially offset by one-time charges of $4.2 million for bonuses related to the Acies Merger and $2.5 million related to charitable contributions

made during the year ended December 31, 2021.

As a percentage of net revenue, general and administrative expenses increased from 9.7% for the year ended December 31, 2021, to 13.9% for the year ended December 31, 2022.

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Depreciation and amortization expenses increased by $8.2 million, or 29.8%, during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to the launch of myVEGAS Bingo in March 2021, the licensing agreement associated with Tetris , and the global launch of Kingdom Boss in December 2021.

The increase was primarily due to $6.0 million of additional amortization of the license associated with our Tetris®-branded mobile game, $1.8 million in additional depreciation of fixed assets, and $1.4 million of amortization of intangible assets acquired in the Brainium and WonderBlocks acquisitions.

This increase was partially offset by a decrease of $1.0 million of amortization of internal use software as a result of the impairment of Kingdom Boss.

As a percentage of net revenue, depreciation and amortization expenses increased from 9.5% for the year ended December 31, 2021 to 12.2% for the year ended December 31, 2022.

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Restructuring Expenses

Restructuring expenses decreased by $17.0 million during the year ended December 31, 2021 compared to the year ended December 31, 2020.

The decrease is due to the prior year recognition of a one-time expense of $20.0 million resulting from the termination of the profit share provision of the MGM Marketing Agreement, partially offset by a $2.7 million increase in mergers and acquisition related expenses recognized in the current year.

As a percentage of net revenue, restructuring expenses decreased from 7.4% for the year ended December 31, 2020 to 1.1% for the year ended December 31, 2021.

Other Income (Expense), Net

The following table summarizes our consolidated non-operating income (expense) for the years ended December 31, 2021 and 2020 (in thousands, except percentages):

Years Ended December 31,

2021 2020 $ Change % Change

Change in fair value of warrant liabilities $ 13,933 $ — $ 13,933 N/A

Interest expense (235) (142) (93) 65.5 %

Other (expense) income (229) 929 (1,158) (124.7) %

Total other income, net $ 13,469 $ 787 $ 12,682 1611.4 %

The change in fair value of warrant liabilities is related to the warrants discussed in Note 3— Business Combination to our consolidated financial statements herein.

Interest expense for the years ended December 31, 2021 and 2020 is related to the unused commitment fees and debt issue costs associated with the Credit Agreement and the Private Venture Growth Capital Loan, respectively, as discussed in Note 13— Long-Term Debt to our consolidated financial statements herein.

Other (expense) income primary relates to gains or (losses) from foreign currency transactions with our foreign subsidiaries.

Provision for Income Taxes

Income tax benefit was approximately $0.3 million for the year ended December 31, 2021, as compared to an income tax benefit of $1.7 million for the year ended December 31, 2020.

The income tax benefit for the year ended December 31, 2021 reflected an effective income tax rate of negative 2.5%, which was less than the statutory tax rate of 21% primarily due to the fair value adjustment related to warrants issued which do not have a tax impact and research and development credits that may be used on our federal and state tax returns.

The decrease in our effective tax rate was partially offset by the recognition of uncertain tax benefits on research and development tax credits for tax years 2017 through 2021, as well as the recognition of additional state tax liabilities due to an updated nexus study.

The income tax benefit reflected an effective income tax rate of negative 15.0% for the year ended December 31, 2020, which was less than the statutory federal rate of 21.0% primarily due to benefits from the exercise of non-qualified stock options and research and development tax credits.

Comparison of the year ended December 31, 2020 versus the year ended December 31, 2019

The following table summarizes our consolidated results of operations for the years ended December 31, 2020 and 2019 (in thousands, except percentages):

Years Ended December 31,

2020 2019 $ Change % Change

Net revenue $ 269,882 $ 239,421 $ 30,461 12.7 %

Operating expenses 259,533 222,284 37,249 16.8 %

Operating income 10,349 17,137 (6,788) (39.6) %

Net income 12,807 13,614 (807) (5.9) %

AEBITDA 57,974 49,521 8,453 17.1 %

Net income margin 4.7 % 5.7 % (1.0) (17.5) %

AEBITDA margin 21.5 % 20.7 % 0.8 3.9 %

Revenue and Key Performance Indicators (in thousands, except percentages and ARPDAU):

Years Ended December 31,

2020 2019 $ Change % Change

Virtual currency $ 268,137 $ 231,726 $ 36,411 15.7 %

Advertising 1,745 383 1,362 355.6 %

Other revenue — 7,312 (7,312) (100.0) %

Net revenue $ 269,882 $ 239,421 $ 30,461 12.7 %

Average DAU 1,459 1,635 (176) (10.8) %

Average MAU 4,251 4,813 (562) (11.7) %

Average DPU 33 33 — — %

Average Daily Payer Conversion 2.3 % 2.0 % 0.3pp 15.0 %

ARPDAU (in dollars) $ 0.51 $ 0.39 $ 0.12 30.8 %

pp = percentage points

Revenue information by geography is summarized as follows (in thousands, except percentages):

Years Ended December 31,

2020 2019 $ Change % Change

United States $ 228,568 $ 200,418 $ 28,150 14.0 %

North America (excluding United States) 17,368 14,314 3,054 21.3 %

Other 23,946 24,689 (743) (3.0) %

Net revenue $ 269,882 $ 239,421 $ 30,461 12.7 %

Net revenue increased $30.5 million, or 12.7%, to $269.9 million during the year ended December 31, 2020 compared to $239.4 million during the year ended December 31, 2019.

The increase in net revenue is primarily due to a $36.4 million increase in the sale of virtual currency and $1.4 million increase in advertising revenue, offset by a $7.3 million decrease in game development service revenue due to the termination of the King Agreement in June 2019.

The increase in sale of virtual currency was driven by the increased spending per player as shown in the year-over-year increase in ARPDAU.

We believe this increase was due, in part, to shelter-in-place mandates issued in response to the COVID-19 pandemic.

The increase in player spending was partially offset by a decline in DAU and MAU during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease in players reflects the impact of the COVID-19 pandemic on the travel and tourism industries and the reduced availability of rewards offered in our playAWARDS program.

This decrease has reinforced our belief that our players place a significant value on the real-world rewards made available through our playAWARDS program.

We believe that the attractiveness of our playAWARDS program will improve as the impacts of the COVID-19 pandemic decrease and tourism resumes.

While DAU and MAU indicate the overall size of our player base, our primary focus is on expanding and maintaining the population of DPU.

Our average daily payer conversion rate increased 0.3 percentage points to 2.3% during the year ended December 31, 2020 from 2.0% during the year ended December 31, 2019.

Operating Expenses

The following table summarizes our consolidated operating expenses for the years ended December 31, 2020 and 2019 (in thousands, except percentages):

Years Ended December 31, % of Net Revenue

2020 2019 $ Change % Change 2020 2019

Operating expenses:

Cost of revenue $ 91,469 $ 80,267 11,202 14.0 % 33.9 % 33.5 %

Selling and marketing 57,124 59,931 (2,807) (4.7) % 21.2 % 25.0 %

Research and development 51,696 38,986 12,710 32.6 % 19.2 % 16.3 %

General and administrative 16,960 16,712 248 1.5 % 6.3 % 7.0 %

Depreciation and amortization 22,192 25,154 (2,962) (11.8) % 8.2 % 10.5 %

Restructuring expenses 20,092 1,234 18,858 1528.2 % 7.4 % 0.5 %

Total operating expenses $ 259,533 $ 222,284 37,249 16.8 % 96.2 % 92.8 %

Cost of Revenue

Cost of revenue increased by $11.2 million, or 14.0%, during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was due in part to a $10.9 million increase in payment processing fees, which represents a 15.7% increase year over year.

The increase is consistent with the increase in revenue from the sale of virtual currency, which grew by the same percentage amount.

The increase was also due to the recognition of $0.3 million in non-recurring profit share expense in 2020 resulting from our Marketing Agreement with MGM.

This was partially offset by a $0.9 million decrease in costs related to licensed games.

As a percentage of net revenue, cost of revenue increased slightly from 33.5% for the year ended December 31, 2019 to 33.9% for the year ended December 31, 2020.

The increase reflects the increase in revenue from virtual currency sales as a percentage of total net revenue during the year ended December 31, 2020.

Selling and Marketing

Selling and marketing expenses decreased by $2.8 million, or 4.7%, during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease was due to a $4.5 million decrease in total player acquisition spend, offset by a $2.1 million increase in spending on marketing expenses, such as traditional advertising TV and radio advertisement campaigns, as well as related overhead.

As a percentage of net revenue, selling and marketing expenses decreased from 25.0% for the year ended December 31, 2019 to 21.2% for the year ended December 31, 2020, which reflects the effectiveness of our player acquisition and pricing strategy.

Research and Development

Research and development expenses increased by $12.7 million, or 32.6%, during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was due to the development of the new games myVEGAS Bingo and Kingdom Boss of $4.6 million as well as to increases in payroll and outside services of $12.1 million related to increased development cadence for new games.

The increase was partially offset by a $2.5 million reduction in stock-based compensation expense.

As a percentage of net revenue, research and development expenses increased from 16.3% for the year ended December 31, 2019 to 19.2% for the year ended December 31, 2020.

General and Administrative

General and administrative expenses increased by $0.2 million, or 1.5%, during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was due to a $1.8 million increase in charitable donations related to the COVID-19 pandemic and a $0.3 million increase in payroll for general and administrative staff.

The increase was partially offset by a decrease in outside services of $0.8 million as well as a decrease in expenses related to travel of $1.1

As a percentage of net revenue, general and administrative expenses decreased from 7.0% for the year ended December 31, 2019 to 6.3% for the year ended December 31, 2020.

Depreciation and Amortization

Depreciation and amortization expenses decreased by $3.0 million, or 11.8%, during the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease was due to $2.4 million decrease in capitalized software amortization and $0.7 million decrease in intangible asset amortization, offset by $0.2 million increase in depreciation expense of property and equipment.

The decrease in capitalized software amortization was due to accelerated amortization recognized in 2019 as a result of the termination of the King Agreement.

As a percentage of net revenue, depreciation and amortization expenses decreased from 10.5% for the year ended December 31, 2019 to 8.2% for the year ended December 31, 2020.

Restructuring Expenses

Restructuring expenses increased by $9.9 million during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase is due to the recognition of a one-time expense of $20.0 million resulting from the termination of the profit share provision of the MGM Marketing Agreement, partially offset by a $1.1 million decrease in severance costs due to higher severance payments recognized in 2019.

The increase is due to $8.3 million of non-cash impairment charges related to the suspension of Kingdom Boss development and $2.2 million in fees related to various merger and acquisition opportunities, including the acquisitions of Brainium and WonderBlocks.

As a percentage of net revenue, restructuring expenses increased from 1.1% for the year ended December 31, 2021 to 4.5% for the year ended December 31, 2022.

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2022 2021 $ Change % Change

Interest expense (142) (264) 122 (46.2) %

Other income 929 716 213 29.7 %

Change in fair value of warrant liabilities $ 1,047 $ 13,933 $ (12,886) (92.5) %

Interest income (expense) 1,925 (235) 2,160 (919.1) %

Other income (expense) 1,491 (229) 1,720 (751.1) %

Total other income, net $ 4,463 $ 13,469 $ (9,006) (66.9) %

Interest expense for the years ended December 31, 2020 and 2019 is related to the unused commitment fees and debt issue costs associated with the Private Venture Growth Capital Loan, as discussed in Note 13— Long-Term Debt to our consolidated financial statements herein.

Other income primary relates to gains from foreign currency transactions with our foreign subsidiaries.

The change in fair value of warrant liabilities is related to the warrants discussed in Note 8— Warrant Liabilities to our consolidated financial statements herein.

Interest income (expense) is related to the unused commitment fees and debt issue costs associated with the Credit Agreement and the Revolver, respectively, as discussed in Note 13— Long-Term Debt to our consolidated financial statements herein.

Other income (expense) primarily relates changes in fair value of contingent consideration associated with business combinations, gains or (losses) from equity investments and gains or (losses) from foreign currency transactions with our foreign subsidiaries.

Provision for Income Taxes

Provision for income taxes resulted in a tax benefit of $1.7 million for the year ended December 31, 2020, compared to a tax expense of $4.0 million for the year ended December 31, 2019.

Our effective tax rate was (15.0%) for the year ended December 31, 2020, compared to our statutory tax rate of 21%.

Our effective tax rate for the year was reduced by 19.2% for the recognition of stock-based compensation expense and the other benefits from the exercise of Israeli non-qualified stock options.

Effective January 1, 2020, our Israel subsidiary made a check-the-box election to be treated as a disregarded entity for U.S.

federal income tax purposes.

Prior to January 1, 2020, benefits from the exercise of Israeli non-qualified stock options were not deductible.

The effective tax rate was further reduced by 9.1% for foreign tax credits generated from the payment of foreign income taxes by our Israel and Hong Kong subsidiaries.

We also elected to fully utilize our remaining federal R&D tax credit carryforward, resulting in a favorable 11.5% reduction to our effective tax rate.

Other effects of the check-the-box election resulted in a favorable 6.2% reduction to our effective tax rate.

The overall change in our effective tax rate was negatively impacted by 9.0% for the recognition of a valuation allowance due to the uncertainty of future foreign source taxable income and our ability to utilize the foreign tax credit.

Discussion of the recognition of our valuation allowance is further discussed in Note 14— Income Taxes to our consolidated financial statements.

Income tax benefit was approximately $5.8 million for the year ended December 31, 2022, as compared to an income tax benefit of $0.3 million for the year ended December 31, 2021.

The income tax benefit for the year ended December 31, 2022 reflected an effective income tax rate of 24.6%, which was greater than the statutory tax rate of 21% primarily due to benefits from the exercise of non-qualified stock options, state taxes, and research and development credits.

The increase in our effective tax rate was partially offset by the reduction of our foreign tax credit carryforward and conversion to foreign tax deductions, as well as a valuation allowance on a portion of our California research credits..

The income tax benefit reflected an effective income tax rate of negative 2.5% for the year ended December 31, 2021, which was less than the statutory federal rate of 21.0% primarily due to the fair value adjustment related to warrants issued which do not have a tax impact and research and development credits that may be utilized on our federal and state tax returns.

The decrease in the effective rate was partially offset by the recognition of uncertain tax benefits on research and development tax credits for tax years 2017 through 2021, as well as the recognition of additional state tax liabilities due to an updated nexus study.

Comparison of the year ended December 31, 2021 versus the year ended December 31, 2020

See Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2021 Annual Report on Form 10-K for our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Liquidity and Capital Resources

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Historically, we have funded our operations, including capital expenditures, primarily through cash flow from operating activities.

We believe that our existing cash and cash equivalents, the cash generated from

operations, and the borrowing capacity under our Credit Agreement as described below will be sufficient to fund our operations and capital expenditures for the foreseeable future.

We believe that our existing cash and cash equivalents, the cash generated from operations, and the borrowing capacity under our Credit Agreement as described below will be sufficient to fund our operations and capital expenditures for at least the next twelve (12) months.

However, we intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure, or acquire complementary businesses, personnel and technologies.

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(i) we must maintain a Total Net Leverage Ratio not to exceed 3.50:1.00 (subject to increase to 4.00:1.00 following consummation of certain material acquisitions) and (ii) we must maintain a Fixed Charge Coverage Ratio of not less than 1.25:1.00.

As of December 31, 2021, we have not drawn any amounts under the Credit Agreement.

The following table present a summary of our cash flows for the periods indicated (in thousands):

On May 13, 2022, the Company entered into the Amendment No.

1 to the Credit Agreement, which amended the Credit Agreement to, among other things, exclude from the definition of Fixed Charge Coverage Ratio certain funds, up to $15,000,000, expended or to be expended by the Company in connection with the Tender Offer as defined and described in Note 10 - Warrant Liabilities in the accompanying consolidated financial statements.

On August 9, 2022, the Company entered into the Amendment No.

2 to the Credit Agreement, which further amended the Credit Agreement (as amended by Amendment No.

1 to the Credit Agreement) to, among other things, (i) increase the total current available line of credit from $75 million to $81 million, (ii) change the basis for calculation of interest under the facility from LIBOR to SOFR, and (iii) exclude from the calculation of the Fixed Charge Coverage Ratio (A) up to $6 million for the acquisition of, and improvements to, the real property located at 10150 Covington Cross Drive, Las Vegas, Nevada 89144 incurred on or prior to the first anniversary of the effective date of Amendment No.

2 to the Credit Agreement, and (B) up to $20,000,000 for the repurchase or redemption of up to 10,996,631 warrants to purchase shares of Class A common stock of the Company, and shares of Class A common stock of the Company, on or before December 31, 2023, of which as of the date of Amendment No.

2 to the Credit Agreement, the Company had used $1,792,463 to redeem outstanding warrants to purchase Class A common stock in connection with the Tender Offer.

As of December 31, 2022, we do not have any outstanding amounts under the Credit Agreement.

The following table presents a summary of our cash flows for the periods indicated (in thousands):

Years Ended December 31,

2021 2020 2019

Net cash provided by operating activities $ 33,384 $ 33,876

Net cash used in investing activities (102,349) (56,936)

Net cash provided by (used in) financing activities 186,892 (3,635) (7,348)

Net cash (used in) provided by financing activities (9,571) 186,892

Effect of exchange rate on cash and cash equivalents (966) 743

Increase in cash and cash equivalents 164,575 17,905 3,422

(Decrease) increase in cash and cash equivalents $ (79,502) $ 164,575

Operating Activities

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During the year ended December 31, 2022, operating activities provided $33.4 million of net cash as compared to $33.9 million during the year ended December 31, 2021.

The decrease in net cash provided from operating activities was primarily due to a one-time charge for the $5.0 million transaction bonus and a $2.5 million charitable donation, paid per the terms of the Merger Agreement.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 .

During the year ended December 31, 2020, operating activities provided $48.4 million of net cash as compared to $36.1 million during the year ended December 31, 2019.

While net income decreased by $1.0 million during the year ended December 31, 2020, operating cash flows increased by $12.3 million during the period.

This was due to a one-time non-cash charge of $20.0 million from the termination of the profit share provision of the MGM Marketing Agreement that had no impact on operating cash flows during the period, as it was not paid as of December 31, 2020.

On June 21, 2021 and in connection with the PIPE Financing, the Company issued $20 million of Class A common stock to MGM related to the settlement of the termination of the profit share provision.

The increase in net cash provided from operating activities was primarily due to this favorable change in accrued liabilities.

The impact of this favorable change was partially offset by the $6.0 million decrease in deferred income tax expense.

The decrease in net cash provided from operating activities was slightly down, but generally flat.

Investing Activities

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During the year ended December 31, 2022, investing activities used $102.3 million of net cash as compared to $56.9 million during the year ended December 31, 2021.

The Company paid $13.0 million of upfront fees related to licensing agreements, $8.0 million in an advanced payment related to licensing agreements, and purchased $9.5 million of investments and notes receivables.

Capitalized cost of development games increased by $2.5 million, reflecting the development of myVEGAS Bingo and Kingdom Boss , both released in 2021 , while property and equipment purchases declined by $0.2 million between periods.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 .

During the year ended December 31, 2020, investing activities used $27.0 million of net cash as compared to $25.3 million during the year ended December 31, 2019.

Capitalized cost of development games increased by $4.2 million, reflecting the development of our games myVEGAS Bingo and Kingdom Boss , while property and equipment purchases declined by $2.5 million between periods, as the 2019 period reflected one-time leasehold improvements and purchases related to an increase in workforce.

The increase of cash used in investing activities was primarily due to the $70.4 million of cash paid related to the Brainium and WonderBlocks acquisitions and $10.0 million of additional property and equipment purchased in the year ended December 31, 2022 compared to the prior year.

The increase was partially offset by $21.0 million of cash paid related to licensing agreements and $8.5 million in notes receivable from third-party game developers during the year ended December 31, 2021.

Financing Activities

Our cash flow from financing activities primarily consists of proceeds from the Business Combination and PIPE Financing and exercise of stock options.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021.

During the year ended December 31, 2021, financing activities provided $186.9 million of net cash as compared to $3.6 million of net cash used in financing activities during the year ended December 31, 2020.

This increase is primarily due to $185.2 million of net proceeds from the Business Combination and PIPE Financing and $2.4 million of proceeds from the exercise of stock options offset by other payments of $0.7 million compared to the year ended December 31, 2020.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 .

During the year ended December 31, 2020, financing activities used $3.6 million of net cash as compared to $7.3 million during the year ended December 31, 2019.

This decrease is primarily due to less repurchases of common stock for retirement.

During the year ended December 31, 2022, financing activities used $9.6 million of net cash, while financing activities provided $186.9 million of net cash during the year ended December 31, 2021.

This increase is primarily due to the $5.0 million payment of minimum guarantee obligations and $4.3 million of share repurchases made during the year ended December 31, 2022 and $185.2 million of net proceeds received in connection with the Acies Merger and PIPE Financing during the year ended December 31, 2021.

Contractual Obligations, Commitments, and Contingencies

The following table summarizes our contractual obligations as of December 31, 2022 (in thousands):

Total Less than 1 year 2-3 Years 4-5 Years More than 5 years

Total Less than 1 year Years 2 and 3 Years 4 and 5 More than 5 years

Operating leases $ 17,442 $ 5,085 $ 7,693 $ 4,282 $ 382

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Total $ 20,442 $ 6,585 $ 9,193 $ 4,282 $ 382

Our capital requirements as of December 31, 2022, in connection with the WonderBlocks acquisition, ranges between $0.0 million and $2.5 million, subject to the satisfaction of certain product and financial milestones.

Our other long-term liabilities in the consolidated balance sheet include unrecognized tax benefits and related interest and penalties.

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Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

The preparation of these

consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources.

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The Company recognizes internal-use software development costs in accordance with Accounting Standards Codification (ASC) 350-40, Internal-Use Software .

Capitalized costs include consulting fees, payroll and payroll-related

costs, and stock-based compensation for employees who devote time to the Company’s internal-use software projects.

Capitalized costs include consulting fees, payroll and payroll-related costs, and stock-based compensation for employees who devote time to the Company’s internal-use software projects.

Capitalization begins when the preliminary project stage is complete and the Company commits resources to the software project and continues during the application development stage.

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The Company evaluates the useful lives of these assets and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Business Combinations

The Company applies the provisions of ASC 805, Business Combination and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships, acquired technology and acquired trademarks from a market participant perspective, useful lives and discount rates.

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.

Revenue Recognition

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Players may also purchase additional virtual currency through accepted payment methods offered by the respective platform.

Once a purchase is completed, the virtual currency is deposited into the player’s account and is not separately identifiable from previously purchased virtual currency obtained by the player for free.

Once a purchase is completed, the virtual currency is deposited into the player’s account and is not separately identifiable from previously purchased virtual currency or virtual currency obtained by the player for free.

Once obtained, virtual currency (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play.

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Additionally, certain of the Company’s games participate in an additional program which ranks players into different tiers based on tier points earned during a given time frame.

Tier points can be earned through a variety of player engagement activities, including but not limited to logging into our games, achieving multi-day log-in streaks, collecting hourly bonuses,

and purchasing virtual currency bundles.

Tier points can be earned through a variety of player engagement activities, including but not limited to logging into our games, achieving multi-day log-in streaks, collecting hourly bonuses, and purchasing virtual currency bundles.

Depending on the tier, players are granted access to special benefits at the Company’s discretion.

Similar to loyalty points that are redeemable into real-world rewards, the tier points are not awarded as a result of a contract with a customer since both paying and non-paying players can earn these tier points.

Similar to loyalty points that are redeemable for real-world rewards, the tier points are not awarded as a result of a contract with a customer since both paying and non-paying players can earn these tier points.

As a result, the tier points earned by players do not provide players with material rights and do not require any allocation to the transaction price of virtual currency.

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Offers are advertisements where the players are rewarded with virtual currency for watching a short video.

The Company has determined the advertising service provider to be its customer and displaying the advertisements within its games is identified as the single performance obligation.

The Company has determined the advertising service provider to be its customer and displaying the advertisements within its games is identified

as the single performance obligation.

Revenue from advertisements and offers are recognized at a point in time when the advertisements are displayed, or when the player has completed the offer as the advertising service provider simultaneously receives and consumes the benefits provided from these services.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis