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Item 7. Management’s Discussion and Analysis

2024-03-12 compared with 2023-03-10 · 235 added, 146 removed, 251 unchanged (60% of the section changed)

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The discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K.

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this Annual Report on Form 10-K.

Actual results may differ materially from those contained in any forward-looking statements.

Unless the context otherwise requires, references to “we”, “us”, “our”, and “the Company” are intended to mean the business and operations of PLAYSTUDIOS, Inc.

and its consolidated subsidiaries.

This discussion contains forward-looking statements and involves numerous risks and uncertainties.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements.

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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.

Over our twelve-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.

In 2021 we added our Tetris®-branded mobile game and in late 2022 we acquired Brainium, a developer and publisher of free-to-play casual games.

Our games include the award-winning POP!

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

Slots , myVEGAS Slots , my KONAMI Slots, MGM Slots Live, myVEGAS Blackjack, myVEGAS Bingo, Tetris®, Solitaire, Spider Solitaire, Jumbline 2, 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 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.

The rewards are provided by our collection of rewards partners, with the majority of rewards partners providing 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 rewards 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, rewards 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 rewards partners the ability to measure the off-line value our players generate as consumers and patrons of their real-world establishments.

PLAYSTUDIOS' playAWARDS platform embodies all of the features, tools, and capabilities needed to deliver loyalty programs tailored for the games industry.

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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 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.

Higher tiers provide access to a myVIP 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.

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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.

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.

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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 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 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.

See “Risk Factors” for more information related to the COVID-19 pandemic.

Key Factors Affecting Our Performance

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• Investment in our playAWARDS and myVIP programs— In order to drive player engagement and retention we invest a significant amount of resources to enhance the playAWARDS and myVIP programs.

We continually evaluate these programs through an iterative feedback process with our players and awards partners and update them so that both our players and awards partners are able to optimize their personalized experience.

We continually evaluate these programs through an iterative feedback process with our players and rewards partners and update them so that both our players and rewards partners are able to optimize their personalized experience.

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

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Our players’ willingness to make in-game purchases is directly impacted by our ability to provide desirable rewards.

The real-world rewards we offer to our players are provided at no cost to us by our awards partners, and there is no obligation for us to pay or otherwise compensate either our awards partners or players for any player redemptions under our awards partner agreements.

Key Performance Indicators and Non-GAAP Measures

The real-world rewards we offer to our players are provided at no cost to us by our rewards partners, and there is no obligation for us to pay or otherwise compensate either our rewards partners or players for any player redemptions under our rewards partner agreements.

Key Performance Indicators

We manage our business by regularly reviewing several key operating metrics to track historical performance, identify trends in player activity, and set strategic goals for the future.

Our key performance metrics are impacted by several factors that could cause them to fluctuate on a quarterly basis, such as platform providers’ policies, seasonality, player connectivity, and the addition of new content to games.

Our key performance metrics are impacted by several factors

that could cause them to fluctuate on a quarterly basis, such as platform providers’ policies, seasonality, player connectivity, and the addition of new content to games.

We believe these measures are useful to investors for the same reasons.

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The key performance indicators and non-GAAP measures presented in this Annual Report on Form 10-K may differ from similarly titled measures presented by other companies and are not a substitute for financial statements prepared in accordance with U.S.

Key Performance Indicators

Key Performance Indicators - playGAMES

Daily Active Users (“DAU”)

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 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.

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

For Tetris and our free-to-play social casino games, we track DAU by the player ID, which is assigned for each game installed by an individual.

As such, an individual who plays two of these 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.

For our Brainium suite of casual games, we track 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.

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Monthly Active Users (“MAU”)

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.

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 non-Brainium games in the same month is counted as two MAU while an individual who plays the same non-Brainium 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 while 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.

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Daily Paying Users (“DPU”)

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

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.

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

The term "Average DPU" is defined 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.

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

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.

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

The term "Average Daily Payer Conversion" is defined as 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”)

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.

Non-GAAP Measures

Adjusted EBITDA (“ AEBITDA ”) and AEBITDA Margin

Adjusted EBITDA, or AEBITDA, as used herein, is a non-GAAP financial performance measure that is presented as a supplemental disclosure and is reconciled to net income as the most directly comparable GAAP measure.

We define AEBITDA as net income before interest, income taxes, depreciation and amortization, restructuring and related costs (consisting primarily of severance and other restructuring related costs), stock-based compensation expense, changes in fair value of warrant liabilities, and other income and expense items (including special infrequent items, foreign currency gains and losses, and other non-cash items).

We also use AEBITDA Margin, another non-GAAP measure, which we calculate as the percentage of AEBITDA to revenue.

We use AEBITDA and AEBITDA Margin to monitor and evaluate the performance of our business operations, facilitate internal comparisons of our operating performance, and to analyze and evaluate decisions regarding future budgets and initiatives.

We believe that both measures are useful because they provide investors with information regarding our operating performance that is used by our management in its reporting and planning processes.

AEBITDA and AEBITDA Margin as calculated herein may not be comparable to similarly titled measures and disclosures reported by other companies.

The following table sets forth the reconciliation of AEBITDA and AEBITDA Margin to net income and net income margin, the most directly comparable GAAP measure (in thousands, except percentages):

Years Ended December 31,

2022 2021 2020

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

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

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)

— 7,500 1,427

Restructuring and related ( 2)

13,020 3,082 20,092

(980) 565 (392)

AEBITDA 38,253 39,546 57,974

GAAP Revenue 290,309 287,419 269,882

Margin as a % of revenue

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, 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.

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 active players.

Key Performance Indicators - playAWARDS

Available Rewards

Available Rewards is defined as the monthly average number of unique rewards available in our applications’ rewards stores.

A reward appearing in more than one application’s reward store is counted only once.

A reward is counted only once irrespective of the inventory available through that reward.

For example, one reward for a free night in a hotel room with ten rooms available for such free night is counted as one reward.

Available Rewards only include real-world partner rewards and exclude PLAYSTUDIOS digital rewards.

We use Available Rewards as a measure of the value and potential impact of the program for an interested player.

It is assumed that the greater the variety and breadth of rewards offered, the more likely players will be to ascribe value to the program.

Purchases is defined as the total number of rewards purchased for the period identified in which a player exchanges loyalty points for a reward.

Purchases are not adjusted for refunds.

Purchases only include purchases of real-world partner rewards and exclude any PLAYSTUDIOS digital rewards.

The Company does not receive any compensation or revenue from Purchases.

We use Purchases as a measure of audience interest and engagement with our playAWARDS platform.

Retail Value of Purchases

Retail Value of Purchases is defined as the cumulative retail value of all rewards listed as Purchases for the period identified.

The retail value of each reward listed as Purchases is the retail value as determined by the partner upon creation of the reward.

In the case where the retail value of a reward adjusts depending on time of redemption, the average retail value is used.

Retail Value of Purchases only include the retail value of real-world partner rewards and exclude the cost of any PLAYSTUDIOS branded merchandise.

We use Retail Value of Purchases to help us understand the real-world value of the rewards that are purchased by our players.

Results of Operations

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Operating loss $ (10,487) $ (28,081) $ 17,594 (62.7) %

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

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

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

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

Net loss $ (19,393) $ (17,783) $ (1,610) 9.1 %

Net loss margin (6.2) % (6.1) % (0.1)pp 1.6 %

pp = percentage points

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

Net Revenue by Segment

Year Ended December 31,

2023 2022 Change % Change

$ 306,714 $ 284,476 $ 22,238 7.8 %

4,172 5,833 (1,661) (28.5) %

Net revenue $ 310,886 $ 290,309 $ 20,577 7.1 %

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

Years Ended December 31,

2023 2022 Change % Change

United States $ 265,660 $ 253,556 $ 12,104 4.8 %

All other countries

45,226 36,753 8,473 23.1 %

Net revenue $ 310,886 $ 290,309 $ 20,577 7.1 %

playGAMES revenue was $306.7 million for the year ended December 31, 2023 compared to $284.5 million for year ended December 31, 2022.

The following table shows net revenues and key performance indicators for our playGAMES division (in thousands, except percentages and ARPDAU):

Year Ended December 31,

2023 2022 Change % Change

Virtual currency $ 247,929 $ 261,620 $ (13,691) (5.2) %

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pp = percentage points

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

Years Ended December 31,

Net revenue increased $22.2 million, or 7.8%, to $306.7 million during the year ended December 31, 2023 compared to $284.5 million during the year ended December 31, 2022.

The increase was primarily due to full year realization of the Brainium portfolio of games, which was acquired in October 2022 as well as an increase in advertising revenue from the Tetris game.

The increase was offset by a $13.7 million decrease in virtual currency primarily driven by decreases in DPU and ARPDAU despite overall increases in DAU and MAU.

DAU and MAU increased 83.8% and 70.1%, respectively, compared to year ended December 31, 2022, driven by the addition of the Brainium portfolio of games.

Our daily conversion rate and ARPDAU both decreased compared to year ended December 31, 2022 due to addition of high-volume, low-monetizing Brainium portfolio of games and the Tetris application diluting both metrics.

The following table shows net revenues and key performance indicators for our playAWARDS division (in thousands):

Year Ended December 31,

2023 2022 Change % Change

United States $ 253,556 $ 250,252 $ 3,304 1.3 %

North America (excluding United States) 14,161 15,692 (1,531) (9.8) %

Other 22,592 21,475 1,117 5.2 %

Net revenue $ 4,172 $ 5,833 $ (1,661) (28.5) %

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 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.

Available Rewards (in units) 578 556 22 4.0 %

Purchases (in units) 1,760 2,224 (464) (20.9) %

Retail Value of Purchases

$ 105,847 $ 127,803 $ (21,956) (17.2) %

Net revenue decreased by $1.7 million, or 28.5%, due to the non-renewal of a licensing arrangement with a customer.

The key performance indicators presented above are used by management to assess the playAWARDS segment's operating performance, however are not indicative revenue metrics.

Operating Expenses

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As a percentage of net revenue, cost of revenue decreased from 29.4% for the year ended December 31, 2022 to 25.0% for the year ended December 31, 2023.

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.

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.

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 $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.

Selling and marketing expenses decreased by $6.5 million, or 8.0%, during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease was primarily due to a $8.4 million reduction of user acquisition costs.

This increase was partially offset by a $1.1 million increase of payroll expenses and $0.8 million increase of other selling and marketing expenses.

As a percentage of net revenue, selling and marketing expenses decreased from 27.8% for the year ended December 31, 2022 to 23.9% for the year ended December 31, 2023.

Research and Development

Research and development expenses increased by $7.0 million, or 11.0%, during the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

The increase was primarily due to an increase in additional payroll expenses of $3.8 million, an increase of IT expenses of $2.0 million, an increase in facilities costs of $1.0 million, and an increase in other research and development expenses of $0.2 million.

As a percentage of net revenue, research and development expenses increased from 21.8% for the year ended December 31, 2022 to 22.6% for the year ended December 31, 2023.

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General and administrative expenses increased by $4.8 million, or 11.9%, during the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

The increase was primarily due to $4.6 million of additional payroll expenses and $0.2 million of other general and administrative costs.

As a percentage of net revenue, general and administrative expenses increased from 13.9% for the year ended December 31, 2022, to 14.5% for the year ended December 31, 2023.

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Depreciation and amortization expenses increased by $9.7 million, or 27.3%, during the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

See Note 8— Internal-Use Software, Net and Note 9— Goodwill and Intangible Assets in our consolidated financial statements.

The increase was primarily due to the acquisitions of Brainium and WonderBlocks, increased amortization as a result of additional licenses, and additional depreciation of property and equipment.

As a percentage of net revenue, depreciation and amortization expenses increased from 12.2% for the year

ended December 31, 2022 to 14.6% for the year ended December 31, 2023.

See Note 10— Intangible Assets and Internal-Use Software, Net .

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 $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.

Other Income (Expense), Net

The following table summarizes our consolidated non-operating income (expense) for the years ended December 31, 2022 and 2021 (in thousands, except percentages):

Restructuring expenses decreased by $4.4 million during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease was primarily due to $6.3 million less of non-cash impairment charges and a decrease of $1.6 million related to fees for various merger and acquisition opportunities.

This decrease was offset by an increase of $2.6 million related to management restructurings and severance and an increase of $0.7 million related to other restructuring expenses.

As a percentage of net revenue, restructuring expenses decreased from 4.5% for the year ended December 31, 2022 to 2.8% for the year ended December 31, 2023.

Other Income, Net

The following table summarizes our consolidated other income, net for the years ended December 31, 2023 and 2022 (in thousands, except percentages):

Years Ended December 31,

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Change in fair value of warrant liabilities $ 2,596 $ 1,047 $ 1,549 147.9 %

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

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

Interest income, net 4,858 1,925 2,933 152.4 %

Other income, net 513 1,491 (978) (65.6) %

Total other income, net $ 7,967 $ 4,463 $ 3,504 78.5 %

The change in fair value of warrant liabilities is related to the warrants discussed in Note 12— 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.

Interest income, net is related to interest earned on cash and cash equivalents offset by fees and expenses associated with the Credit Agreement as discussed in Note 15— Long-Term Debt to our consolidated financial statements herein.

Other income, net primarily relates to gains or (losses) from equity investments.

Provision for Income Taxes

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.

Income tax expense was approximately $16.9 million for the year ended December 31, 2023, as compared to an income tax benefit of $5.8 million for the year ended December 31, 2022.

The income tax expense for the year ended December 31, 2023 reflected an effective income tax rate of negative 669.7%, which was less than the statutory tax rate of 21% primarily due to the recording of a valuation allowance on deferred tax assets, the effect of additional foreign taxes paid related to a settlement with the Israel Tax Authority, impacts from foreign branch income, and other nondeductible expenses.

The decrease in our effective tax rate was partially offset by benefits from the exercise of non-qualified stock options, changes to the fair value adjustment of the warrant liability, and the deduction of foreign taxes paid.

The income tax benefit reflected an effective income tax rate of 24.6% for the year ended December 31, 2022, which was greater than the statutory federal rate of 21.0% 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, 2022 versus the year ended December 31, 2021

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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2022 Annual Report on Form 10-K for our results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021, with the exception of Net Revenue by Segment , which is detailed below.

Net Revenue by Segment

Year Ended December 31,

2022 2021 Change % Change

$ 284,476 $ 287,419 $ (2,943) (1.0) %

5,833 — 5,833 100.0 %

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

playGAMES revenue was $284.5 million for the year ended December 31, 2022 compared to $287.4 million for year ended December 31, 2021.

The following table shows net revenues and key performance indicators for our playGAMES division:

Year Ended December 31,

2022 2021 Change % Change

Virtual currency $ 261,620 $ 280,087 $ (18,467) (6.6) %

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

Other revenue 1,017 368 649 176.4 %

Net revenue $ 284,476 $ 287,419 $ (2,943) (1.0) %

Average DAU 1,917 1,244 673 54.1 %

Average MAU 7,932 4,111 3,821 92.9 %

Average DPU 29 34 (5) (14.7) %

Average Daily Payer Conversion 1.5 % 2.7 % (1.2)pp (44.4) %

ARPDAU (in dollars) $ 0.41 $ 0.63 (0.22) (34.9) %

pp = percentage points

Net revenue decreased $2.9 million, or 1.0%, to $284.5 million during the year ended December 31, 2022 compared to $287.4 million during the year ended December 31, 2021.

The decrease was primarily driven by $18.5 million decrease in virtual currency primarily driven by decreases in DPU and ARPDAU despite overall increases in DAU and MAU.

DAU and MAU increased 54.1% and 92.9%, respectively, compared to year ended December 31, 2021, driven by the addition of the Brainium portfolio of games.

This decrease was offset by the acquisition of the Brainium portfolio of games, which was acquired in October 2022 as well as an increase in advertising revenue from the Tetris game.

Our daily conversion rate and ARPDAU both decreased compared to year ended December 31, 2021 due to addition of high-volume, low-monetizing Brainium portfolio of games and the Tetris application diluting both metrics.

The following table shows net revenues and key performance indicators for our playAWARDS division:

Year Ended December 31,

2022 2021 Change % Change

Net revenue $ 5,833 $ — $ 5,833 100.0 %

Available Rewards (in units) 556 477 79 16.6 %

Purchases (in units) 2,224 1,970 254 12.9 %

Retail Value of Purchases (in dollars) 127,803 114,426 13,377 11.7 %

Net revenue increased by $5.8 million due to a licensing arrangement with a customer.

The key performance indicators presented above are used by management to assess the playAWARDS segment's operating performance, however are not indicative revenue metrics.

Comparison of our Segment Results of Operations

The following table presents adjusted earnings before interest, taxes, depreciation, and amortization ("AEBITDA").

AEBITDA is our reportable segment GAAP measure, which we utilize as the primary profit measure for our reportable segments.

See Note 3—Segment Reporting in the accompanying consolidated financial statements for additional information.

Consolidated AEBITDA is a non-GAAP measure, discussed within “Non-GAAP Measures” below.

Comparison of the year ended December 31, 2023 versus the year ended December 31, 2022

Year Ended December 31,

2023 2022 Change % Change

playGAMES $ 88,676 $ 58,999 $ 29,677 50.3 %

playAWARDS (10,379) (5,189) (5,190) 100.0 %

Corporate and other (16,005) (15,557) (448) 2.9 %

Consolidated AEBITDA

$ 62,292 $ 38,253 $ 24,039 62.8 %

Segment AEBITDA Margin:

28.9 % 20.7 % 8.2 % 39.4 %

(248.8) % (89.0) % (159.8) % 179.7 %

playGAMES AEBITDA was $88.7 million for the year ended December 31, 2023 compared to $59.0 million for year ended December 31, 2022, an increase of 50.3%.

playGAMES AEBITDA margin was 28.9% for the year ended December 31, 2023 compared to 20.7% for year ended December 31, 2022.

The current year benefited from the full years' realization of Brainium's portfolio of games acquired in October 2022 and an increase in revenue from the Tetris game, both which do not incur significant platform fees driving a reduction in cost of sales, and a reduction in overall user acquisition expenses.

These increases were offset by the increase in payroll and benefits from Brainium and other general and administrative expenses.

playAWARDS AEBITDA was $(10.4) million for the year ended December 31, 2023 compared to $(5.2) million for year ended December 31, 2022.

The decrease in AEBITDA can be attributed to lower net revenue and an increase in employee costs associated with the myVIP program and the further advancement of the playAWARDS platform.

Comparison of the year ended December 31, 2022 versus the year ended December 31, 2021

Year Ended December 31,

2022 2021 Change % Change

playGAMES $ 58,999 $ 57,865 $ 1,134 2.0 %

playAWARDS (5,189) (8,990) 3,801 (42.3) %

Corporate and other (15,557) (9,329) (6,228) 66.8 %

Consolidated AEBITDA

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

Segment AEBITDA Margin:

20.7 % 20.1 % 0.6 % 3.0 %

(89.0) % nm nm nm

nm - not meaningful

playGAMES AEBITDA was $59.0 million for the year ended December 31, 2022 compared to $57.9 million for year ended December 31, 2021.

The increase in playGAMES AEBITDA was driven by the increase in net revenues from the Tetris game as well as consolidation of the Brainium portfolio of games.

These products generate net revenues from advertising, which has lower cost of sales and higher margins.

The increase was offset by a decline in net revenues from virtual currencies.

playAWARDS AEBITDA was $(5.2) million for the year ended December 31, 2022 compared to $(9.0) million for December 31, 2021.

The increase in AEBITDA was primarily driven by a licensing arrangement with a customer that commenced in 2022.

Non-GAAP Measures

Consolidated AEBITDA and Consolidated AEBITDA Margin

Consolidated AEBITDA, as used herein, is a non-GAAP financial performance measure that is presented as a supplemental disclosure and is reconciled to net income as the most directly comparable GAAP measure.

We define Consolidated AEBITDA as net income before interest, income taxes, depreciation and amortization, restructuring and related costs (consisting primarily of severance and other restructuring related costs), stock-based compensation expense, changes in fair value of warrant liabilities, and other income and expense items (including special infrequent items, foreign currency gains and losses, and other non-cash items).

We also use Consolidated AEBITDA Margin, another non-GAAP measure, which we calculate as Consolidated AEBITDA as a percentage of net revenue.

We use Consolidated AEBITDA and Consolidated AEBITDA Margin to monitor and evaluate the performance of our business operations, facilitate internal comparisons of our operating performance, and to analyze and evaluate decisions regarding future budgets and initiatives.

We believe that both measures are useful because they provide investors with information regarding our operating performance that is used by our management in its reporting and planning processes.

Consolidated AEBITDA and Consolidated AEBITDA Margin as calculated herein may not be comparable to similarly titled measures and disclosures reported by other companies.

The following table sets forth the reconciliation of Consolidated AEBITDA and Consolidated AEBITDA Margin to net income and net income margin, the most directly comparable GAAP measure (in thousands, except percentages):

Years Ended December 31,

2023 2022 2021

$ 310,886 $ 290,309 $ 287,419

Net (loss) income $ (19,393) $ (17,783) $ 10,737

Net (loss) income margin (6.2) % (6.1) % 3.7 %

Depreciation & amortization 45,259 35,562 27,398

Income tax expense (benefit) 16,873 (5,835) (258)

Stock-based compensation expense 18,722 17,727 4,455

Change in fair value of warrant liability (2,596) (1,047) (13,933)

Change in fair value of contingent consideration (950) (2,411) —

Special infrequent (1)

Restructuring and related ( 2)

8,584 13,020 3,082

(4,207) (980) 565

Consolidated AEBITDA

$ 62,292 $ 38,253 $ 39,546

Consolidated AEBITDA Margin

20.0 % 13.2 % 13.8 %

(1) Amounts reported during the year ended December 31, 2021 represent a $5.0 million transaction bonus and a $2.5 million charitable contribution per the terms of the Merger Agreement.

(2) Amounts reported include mergers and acquisition related expenses, management restructuring and severance, assets impairments and write-downs, and extraordinary expenses related to the war in Israel and other various nonrecurring expenses.

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

Liquidity and Capital Resources

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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.

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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.

On August 16, 2023, the Company, a subsidiary of the Company, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, entered into an Amendment No.

3 to Credit Agreement (the “Amendment No.

3”), to, among other things, exclude from the Restricted Payments covenant certain repurchases of Equity Interests of the Company deemed to occur upon the exercise, settlement or vesting of stock options, warrants or other equity-based awards if and to the extent such Equity Interests represent a portion of the exercise price of, or satisfy any tax withholding obligations with respect to, such options, warrants or other equity-based awards.

As of December 31, 2023, we do not have any outstanding amounts under the Credit Agreement.

3 unchanged sentences

Net cash used in investing activities (32,306) (102,349)

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

Net cash used in financing activities

(20,184) (9,571)

Effect of exchange rate on cash and cash equivalents (345) (966)

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

Decrease in cash and cash equivalents $ (1,111) $ (79,502)

Operating Activities

1 unchanged sentence

During the year ended December 31, 2023, operating activities provided $51.7 million of net cash as compared to $33.4 million during the year ended December 31, 2022.

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

The increase in net cash provided from operating activities primarily related to the full year realization of the Brainium portfolio of games as well as increased advertising revenue from the Tetris game.

Investing Activities

1 unchanged sentence

During the year ended December 31, 2023, investing activities used $32.3 million of net cash as compared to $102.3 million during the year ended December 31, 2022.

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.

The decrease 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 $5.6 million of additional property and equipment purchased in the year ended December 31, 2022 compared to the current year.

The decrease was partially offset by $4.4 million of cash paid related to licensing agreements in the current year and $1.6 million of other investing activities.

Financing Activities

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022.

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.

During the year ended December 31, 2023, financing activities used $20.2 million of net cash, while financing activities used $9.6 million of net cash during the year ended December 31, 2022.

This increase is primarily due to an increase of share repurchases made during the year ended December 31, 2022.

Contractual Obligations, Commitments, and Contingencies

3 unchanged sentences

Minimum guarantee obligations 31,760 7,760 12,000 12,000 —

Other licensing agreements

7,400 7,400 — — —

Total $ 49,815 $ 19,740 $ 16,317 $ 13,758 $ —

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.

4 unchanged sentences

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.

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.

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.

Actual results may differ from these estimates under different assumptions or conditions.

10 unchanged sentences

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 Company applies the provisions of ASC 805, Business Combinations 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.

3 unchanged sentences

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).

ASU 2014-09 combined with all subsequent amendments, which is collectively ASC 606, Revenue from Contracts with Customers, provides guidance outlining a single five-step comprehensive revenue model in accounting for revenue from contracts with customers which supersedes all existing revenue recognition guidance, including industry-specific guidance.

ASU 2014-09 also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

On January 1, 2019, the Company adopted the new accounting standard and related amendments (collectively, the “new revenue accounting standard”) using the modified retrospective method.

The Company determines revenue recognition by:

• identifying the contract, or contracts, with a customer;

• identifying the performance obligations in each contract;

• determining the transaction price;

• allocating the transaction price to the performance obligations in each contract;

• recognizing revenue when, or as, the Company satisfies performance obligations by transferring the promised goods or services.

Our revenue recognition policies described in Note 2— Summary Of Significant Accounting Policies requires us to make significant judgments and estimates, which include the consumption period.

The amount of outstanding purchased virtual currency at each reporting date is based on player behavior because the Company is unable to distinguish between the consumption of purchased or free virtual currency.

Virtual Currency

8 unchanged sentences

Players can earn loyalty points through a variety of activities, including but not limited to playing the Company’s games, engaging with in-game advertising, engaging with marketing emails, and logging into the game.

The loyalty points can be redeemed for rewards offered by the Company’s awards partners.

There is no obligation for the Company to pay or otherwise compensate the Company’s awards partners for any player redemptions under the Company’s awards partner agreements.

The loyalty points can be redeemed for rewards offered by the Company’s rewards partners.

There is no obligation for the Company to pay or otherwise compensate the Company’s rewards partners for any player redemptions under the Company’s rewards partner agreements.

In addition, both paying and non-paying players can earn loyalty points.

Therefore, the loyalty points earned by players are marketing offers and do not provide players with material rights.

Therefore, the loyalty points earned by

players are marketing offers and do not provide players with material rights.

Accordingly, the loyalty points 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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Therefore, the Company concluded that it is the principal and as a result, revenues are reported gross of payment processing fees.

Payment processing fees are recorded as a component of “Cost of revenue” in the accompanying Consolidated Statements of Operations.

Payment processing

fees are recorded as a component of “Cost of revenue” in the accompanying Consolidated Statements of Operations.

The Company reports its advertising revenue net of amounts retained by advertising service providers.

9 unchanged sentences

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