PLAYSTUDIOS, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. 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. 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. Factors that might cause such a discrepancy include, but are not limited to, those discussed elsewhere in this Annual Report on Form 10-K, particularly in the section titled “Risk Factors” set forth in Part I, Item 1A of this Annual Report on Form 10-K. 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. Overview We are a developer and publisher of free-to-play casual games for mobile and social platforms. 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, 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. 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. Our consumer-facing brand for our loyalty program is myVIP. The myVIP program is an aspirational benefits framework, with in-game mechanics and rewards features, along with a player development and hosting program. The program dynamically ranks and assigns players to tiers based on their accumulation of tier points, which are a proxy for their overall engagement with our games. The tier points are separate from and are not interchangeable with the loyalty points earned in the playAWARDS program. Qualified players are provided access to enhanced benefits that increase with each tier. 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. 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 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 on Facebook. Our revenue from virtual currency has been generated world-wide, but is largely concentrated in North America. 55 We also generate revenue from in-game advertising. 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. Key Factors Affecting Our Performance 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— 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. These platform fees are generally set at 30% of the in-game purchase. Each platform provider has broad discretion to set its platform fees and to change and interpret its terms of service and other policies with respect to us and other developers in its sole discretion, and those changes may be unfavorable to us. • Player Acquisition— Establishing and maintaining a loyal network of players and paying players is vital for our success. As such, we spend a significant amount on advertising and other forms of player acquisition, such as traditional marketing and advertising, email and push notifications, and cross promoting between our games in order to grow our player base. These expenditures are generally related to new content launches, game enhancements, and ongoing programs to drive new player acquisition and the reactivation of lapsed player engagement. 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 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. Managing game economies is difficult and relies on our assumptions and judgment. If we fail to manage our virtual economies properly or fail to promptly and successfully respond to any such disruption, our reputation may suffer and our players may be less likely to play our games and to purchase virtual currency from us in the future, which would cause our business, financial condition, and results of operations to suffer. • Investment in Game Development— In order to maintain interest from existing players and add new players and achieve our desired revenue growth, we must continually improve the content, offers, and features in our existing games and the release of new games. As a result, we invest a significant amount of our technological and creative resources to ensure that we support an appropriate cadence of innovative content that our players will find appealing. These expenditures generally occur in advance of the release of new content or the launch of a new game, and the resulting revenue may not exceed the development costs, or the game or feature may be abandoned in its entirety. • 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 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. 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. 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 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 56 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. In addition, we also present certain non-GAAP performance measures. These performance measures are presented as supplemental disclosure and should not be considered superior to or as a substitute for the consolidated financial statements prepared under U.S. GAAP. The non-GAAP measures presented in this Annual Report on Form 10-K should be read together with the consolidated financial statements and the respective related notes thereto included elsewhere in this Annual Report on Form 10-K. 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. GAAP. Key Performance Indicators - playGAMES Daily Active Users (“DAU”) 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. 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 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. 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 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 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. Daily Payer Conversion Daily Payer Conversion is defined as DPU as a percentage of DAU on a particular day. 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”) 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. 57 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 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 Comparison of the year ended December 31, 2023 versus the year ended December 31, 2022 The following table summarizes our consolidated results of operations for the years ended December 31, 2023 and 2022 (in thousands, except percentages): Years Ended December 31, 2023 2022 $ Change % Change Net revenue $ 310,886 $ 290,309 $ 20,577 7.1 % Operating expenses 321,373 318,390 2,983 0.9 % Operating loss $ (10,487) $ (28,081) $ 17,594 (62.7) % 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 Net Revenue by Segment Year Ended December 31, 2023 2022 Change % Change Net revenue playGAMES $ 306,714 $ 284,476 $ 22,238 7.8 % playAWARDS 4,172 5,833 (1,661) (28.5) % Net revenue $ 310,886 $ 290,309 $ 20,577 7.1 % 58 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 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) % Advertising 58,236 21,839 36,397 166.7 % Other revenue 549 1,017 (468) (46.0) % Net revenue $ 306,714 $ 284,476 $ 22,238 7.8 % Average DAU 3,524 1,917 1,607 83.8 % Average MAU 13,489 7,932 5,557 70.1 % Average DPU 27 29 (2) (6.9) % Average Daily Payer Conversion 0.8 % 1.5 % (0.7) pp (46.7) % ARPDAU (in dollars) $ 0.24 $ 0.41 $ (0.17) (41.5) % pp = percentage points 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. playAWARDS The following table shows net revenues and key performance indicators for our playAWARDS division (in thousands): Year Ended December 31, 2023 2022 Change % Change Net revenue $ 4,172 $ 5,833 $ (1,661) (28.5) % 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. 59 Operating Expenses The following table summarizes our consolidated operating expenses for the years ended December 31, 2023 and 2022 (in thousands, except percentages): Years Ended December 31, % of Net Revenue 2023 2022 $ Change % Change 2023 2022 Operating expenses: Cost of revenue $ 77,800 $ 85,400 $ (7,600) (8.9) % 25.0 % 29.4 % Selling and marketing 74,360 80,819 (6,459) (8.0) % 23.9 % 27.8 % Research and development 70,298 63,315 6,983 11.0 % 22.6 % 21.8 % General and administrative 45,072 40,274 4,798 11.9 % 14.5 % 13.9 % Depreciation and amortization 45,259 35,562 9,697 27.3 % 14.6 % 12.2 % Restructuring expenses 8,584 13,020 (4,436) (34.1) % 2.8 % 4.5 % Total operating expenses $ 321,373 $ 318,390 $ 2,983 0.9 % 103.4 % 109.7 % Cost of Revenue Cost of revenue decreased by $7.6 million, or 8.9%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was due to a decline in virtual currency revenue. 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 revenue which does not incur platform fees, and a reduction in royalty expenses associated with our revenue. Selling and Marketing 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 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. General and Administrative 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 $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. Depreciation and Amortization 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 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 60 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 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, 2023 2022 $ Change % Change Change in fair value of warrant liabilities $ 2,596 $ 1,047 $ 1,549 147.9 % 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, 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 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. 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 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 Net revenue playGAMES $ 284,476 $ 287,419 $ (2,943) (1.0) % playAWARDS 5,833 — 5,833 100.0 % Net revenue $ 290,309 $ 287,419 $ 2,890 1.0 % 61 playGAMES 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. playAWARDS 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. 62 Comparison of the year ended December 31, 2023 versus the year ended December 31, 2022 Year Ended December 31, 2023 2022 Change % Change AEBITDA 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: playGAMES 28.9 % 20.7 % 8.2 % 39.4 % playAWARDS (248.8) % (89.0) % (159.8) % 179.7 % playGAMES 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 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 AEBITDA 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: playGAMES 20.7 % 20.1 % 0.6 % 3.0 % playAWARDS (89.0) % nm nm nm nm - not meaningful playGAMES 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. 63 playAWARDS 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 Revenue $ 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 % Adjustments: 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) — — 7,500 Restructuring and related ( 2) 8,584 13,020 3,082 Other (3) (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. 64 Liquidity and Capital Resources As of December 31, 2023, we had cash and cash equivalents of $132.9 million, which consisted of cash on hand and money market mutual funds. 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 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. Accordingly, we may need to engage in equity or debt financings to secure additional funds or we may decide to do so opportunistically. Debt On June 24, 2021, in connection with the Closing, Old PLAYSTUDIOS terminated and replaced its then existing revolving credit facility with Silicon Valley Bank (the “Revolver”). We, one of our subsidiaries, JPMorgan Chase Bank, N.A., as administrative agent and JPMorgan Chase Bank, N.A., Silicon Valley Bank and Wells Fargo Securities, LLC, as joint bookrunners and joint lead arrangers entered into a credit agreement (the “Credit Agreement”) which provides for a five year revolving credit facility in an aggregate principal amount of $75 million. Borrowings under the Credit Agreement may be borrowed, repaid, and re-borrowed by us, and are available for working capital, general corporate purposes, and permitted acquisitions. Commitment fees and interest rates are determined on the basis of either a Eurodollar rate or an Alternate Base Rate plus an applicable margin. The applicable margins are initially 2.50%, in the case of Eurodollar loans, and 1.50%, in the case of Alternate Base Rate loans. The applicable margin is subject to adjustment based upon our Total Net Leverage Ratio (as defined in the Credit Agreement). Eurodollar rates and the Alternate Base Rate are subject to floors of 0.00% and 1.00%, respectively. The Credit Agreement contains various affirmative and negative financial and operational covenants applicable to us and our subsidiaries. We are also obligated to comply with two financial maintenance covenants as of the end of each fiscal quarter, commencing with the quarter ended September 30, 2021: (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. 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. 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. 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. 65 Cash Flows The following table presents a summary of our cash flows for the periods indicated (in thousands): Years Ended December 31, 2023 2022 Net cash provided by operating activities $ 51,724 $ 33,384 Net cash used in investing activities (32,306) (102,349) Net cash used in financing activities (20,184) (9,571) Effect of exchange rate on cash and cash equivalents (345) (966) Decrease in cash and cash equivalents $ (1,111) $ (79,502) Operating Activities Year Ended December 31, 2023 Compared to Year Ended December 31, 2022. 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 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 Year Ended December 31, 2023 Compared to Year Ended December 31, 2022. 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 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, 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 The following table summarizes our contractual obligations as of December 31, 2023 (in thousands): Total Less than 1 year Years 2 and 3 Years 4 and 5 More than 5 years Operating leases $ 10,655 $ 4,580 $ 4,317 $ 1,758 $ — 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 other long-term liabilities in the consolidated balance sheet include unrecognized tax benefits and related interest and penalties. As of December 31, 2023, we had gross unrecognized tax benefits of $0.3 million and an additional $0.1 million for interest and penalties classified as long-term liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table. Critical Accounting Policies and Estimates 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. GAAP. 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 66 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. Internal-Use Software 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. 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. Capitalization ceases when the software has been tested and is ready for its intended use. Qualified costs incurred during the post-implementation/post-operation stage of the Company’s software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality. Costs that cannot be separated between maintenance of, and minor upgrades and enhancements to, internal-use software are expensed as incurred. Capitalized internal-use software development costs are amortized on a straight-line basis over a three-year estimated useful life. The Company believes that a straight-line basis for amortization best represents the pattern through which the Company derives value from internal-use software. 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 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. 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 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 The Company develops and operates free-to-play games which are downloaded and played on social and mobile platforms. Players may collect virtual currency free of charge through the passage of time or through targeted marketing promotions. Additionally, players can send free “gifts” of virtual currency to their friends through interactions with certain social platforms. 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 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. When virtual currency is consumed in our games, the player could “win” and would be awarded additional virtual currency or could “lose” and lose the future use of that virtual currency. As the player does not receive any additional benefit from our games, nor is the player entitled to any additional rights once the player’s virtual currency is substantially consumed, the Company has concluded that the virtual currency represents consumable goods. 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 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 67 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. 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. Depending on the tier, players are granted access to special benefits at the Company’s discretion. 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. The Company has the performance obligation to display and provide access to the virtual currency purchased by the Company’s player within the game whenever the player accesses the game until the virtual currency is consumed. Payment is required at the time of purchase and the transaction price is fixed. The transaction price, which is the amount paid for the virtual currency by the player, is allocated entirely to this single performance obligation. As virtual currency represents consumable goods, the Company recognizes revenue as the virtual currency is consumed over the estimated consumption period. Since the Company is unable to distinguish between the consumption of purchased or free virtual currency, the Company must estimate the amount of outstanding purchased virtual currency at each reporting date based on player behavior. The Company has determined through a review of player behavior that players who purchase virtual currency generally are not purchasing additional virtual currency if their existing virtual currency balances have not been substantially consumed. As the Company can track the duration between purchases of virtual currency for individual players, the Company is able to reliably estimate the period over which virtual currency is consumed. Based upon an analysis of players’ historical play behavior, the timing difference between when virtual currency is purchased by a player and when such virtual currency is consumed in gameplay is relatively short, currently one to seven days with an average consumption period of approximately one day. The Company recognizes revenue from in-game purchases of virtual currency over this estimated average period between when the virtual currency is purchased and consumed. If applicable, the Company records the unconsumed virtual currency in “Deferred revenue” and records the prepaid payment processing fees associated with this deferred revenue in “Prepaid expenses”. The Company continues to gather detailed player behavior and assess this data in relation to its revenue recognition policy. To the extent the player behavior changes, the Company reassesses its estimates and assumptions used for revenue recognition prospectively on the basis that such changes are caused by new factors indicating a change in player behavior patterns. Advertising Revenue The Company has contractual relationships with various advertising service providers for advertisements within the Company’s games. Advertisements can be in the form of an impression, click-throughs, banner ads, or offers. 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. 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. The price can be determined by the applicable evidence of the arrangement, which may include a master contract or a third-party statement of activity. The transaction price is generally the product of the advertising units delivered (e.g. impressions, videos viewed) and the contractually agreed upon price per advertising unit. Further, the price per advertising unit can also be based on revenue share percentages stated in the contract. The number of advertising units delivered is determined at the end of each month so there is no uncertainty about the transaction price. Payment terms are stipulated as a specific number of days subsequent to end of the month, ranging from 45 to 60 days. Principal Agent Considerations The Company’s games are played on various social and mobile third-party platforms for which such third parties collect monies from players and remit net proceeds after deducting payment processing fees. The Company is primarily responsible for providing access to the virtual currency, has control over the content and functionality of games before they are accessed by players, and has the discretion to establish the pricing for the virtual currency. Therefore, the Company concluded that it is the principal and as a result, revenues are reported gross of payment processing fees. Payment processing 68 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. Income Taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes , which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its consolidated financial statements or tax returns. Under ASC 740, the Company determines deferred tax assets and liabilities based on the temporary difference between the consolidated financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which it expects the differences to be recovered or settled. The Company establishes valuation allowances when necessary, based on the weight of the available positive and negative evidence, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company accounts for uncertain tax positions in accordance with ASC 740, which requires companies to adjust their consolidated financial statements to reflect only those tax positions that are more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the issue. ASC 740 prescribes a comprehensive model for the consolidated financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. We have elected to account for the impact of the global intangible low-taxed income (GILTI) inclusion and base erosion anti-avoidance tax (BEAT) based on the period cost method. Recent Accounting Pronouncements See Note 2— Summary Of Significant Accounting Policies to our consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.