DoubleDown Interactive(DDI) - 2022 Q3 - Quarterly Report

Condensed Consolidated Financial Statements This section presents the company's financial performance and position, highlighting significant losses, increased liabilities due to a loss contingency, and changes in cash flows and equity for the periods presented Condensed Consolidated Statements of Income and Comprehensive Income For the three and nine months ended September 30, 2022, DoubleDown Interactive Co., Ltd. reported significant net losses and operating losses, primarily driven by a substantial loss contingency, with revenue also decreasing and earnings per share turning negative | Metric (in thousands of U.S. Dollars, except per share amounts) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:--------------------------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Revenue | $78,801 | $87,007 | $244,857 | $276,902 | | Loss Contingency | $70,250 | — | $141,750 | $3,500 | | Total operating expenses | $124,140 | $59,216 | $313,496 | $201,759 | | Operating income (loss) | $(45,339) | $27,791 | $(68,639) | $75,143 | | Net income (loss) | $(23,999) | $22,833 | $(39,561) | $60,671 | | Basic Earnings per share | $(9.69) | $9.91 | $(15.97) | $27.03 | | Diluted Earnings per share | $(9.69) | $9.91 | $(15.97) | $27.03 | - The significant increase in operating expenses and the resulting operating loss and net loss for both the three and nine months ended September 30, 2022, were primarily driven by a substantial Loss Contingency of $70,250 thousand and $141,750 thousand, respectively, compared to minimal amounts in the prior year[3] Condensed Consolidated Balance Sheets As of September 30, 2022, the company's total assets increased, primarily due to a rise in cash and cash equivalents, while total liabilities saw a substantial increase mainly attributable to a significant loss contingency accrual, leading to a decrease in total shareholders' equity | Metric (in thousands of U.S. Dollars) | September 30, 2022 | December 31, 2021 | |:--------------------------------------|:-------------------|:------------------| | Cash and cash equivalents | $310,468 | $242,060 | | Total current assets | $338,031 | $270,752 | | Total assets | $1,029,990 | $969,808 | | Loss Contingency | $145,250 | — | | Total current liabilities | $171,404 | $20,804 | | Total liabilities | $216,945 | $105,930 | | Total shareholders' equity | $813,045 | $863,878 | - The significant increase in total liabilities from $105,930 thousand at December 31, 2021, to $216,945 thousand at September 30, 2022, is primarily due to the recognition of a $145,250 thousand Loss Contingency[7] Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased for the nine months ended September 30, 2022, primarily due to a net loss and negative foreign currency translation adjustments, partially offset by a capital reserve reallocation that shifted funds from additional paid-in capital to retained earnings | Metric (in thousands of U.S. Dollars) | As of January 1, 2022 | As of September 30, 2022 | |:--------------------------------------|:----------------------|:-------------------------| | Common stock | $21,198 | $21,198 | | Additional paid-in-capital | $671,831 | $619,470 | | Accumulated other comprehensive income| $23,033 | $11,761 | | Retained earnings | $147,816 | $160,616 | | Total shareholders' equity | $863,878 | $813,045 | - A capital reserve reallocation of $52,361 thousand occurred during the nine months ended September 30, 2022, decreasing additional paid-in capital and increasing retained earnings[11] - Net loss of $39,561 thousand and a foreign currency translation loss of $11,087 thousand significantly impacted shareholders' equity for the nine months ended September 30, 2022[11] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash flows from operating activities decreased compared to the prior year, despite a large adjustment for loss contingency, with investing activities showing a net outflow and financing activities having no cash flow, resulting in a lower net increase in cash and cash equivalents | Metric (in thousands of U.S. Dollars) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:--------------------------------------|:-------------------------------|:-------------------------------| | Net Income (loss) | $(39,561) | $60,671 | | Loss Contingency adjustment | $141,750 | $3,500 | | Net cash flows from operating activities | $71,696 | $77,584 | | Net cash flows (used in) investing activities | $(296) | $(125) | | Net cash flows from (used in) financing activities | — | $86,452 | | Net increase (decrease) in cash and cash equivalents | $68,408 | $159,875 | | Cash and cash equivalents at end of period | $310,468 | $223,062 | - Operating cash flows for the nine months ended September 30, 2022, were significantly influenced by a $141,750 thousand adjustment for loss contingency, offsetting the reported net loss[15] - Investing activities for the nine months ended September 30, 2022, included substantial purchases ($366,449 thousand) and sales ($366,293 thousand) of short-term investments, resulting in a net outflow of $296 thousand[15] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's business, revenue recognition, financial instruments, goodwill, debt, fair value measurements, income taxes, earnings per share, leases, comprehensive income, commitments, contingencies, and related party transactions Note 1: Description of business DoubleDown Interactive Co., Ltd. (DDI) is an interactive entertainment studio specializing in digital gaming content, primarily through its DDI-US subsidiary, controlled by DoubleU Games (67.1% ownership), which completed an IPO in September 2021, raising approximately $86.5 million, with a significant capital reserve reallocation of $52 million approved in August 2022, and facing concentration risk with major platforms - DoubleDown Interactive Co., Ltd. (DDI) was incorporated in 2008 in Seoul, Korea, and is focused on developing and publishing casual games and mobile applications, with DDI-US, acquired in 2017 for approximately $825 million, being the primary revenue-generating entity[17] - DoubleU Games Co., Ltd. (DUG) is the controlling shareholder, holding 67.1% of DDI's outstanding shares, while STIC Special Situation Private Equity Fund holds 20.2%, and IPO participants hold 12.7%[17] - DDI completed its Initial Public Offering (IPO) on September 2, 2021, selling 5,263,000 American Depositary Shares (ADSs) at $18.00 per ADS, generating net proceeds of approximately $86.5 million[19] - On August 30, 2022, a capital reserve reallocation of ₩70 billion (US$52 million) was approved, pursuant to Article 461-2 of the Korean Commercial Code[26] Revenue and Accounts Receivable Concentration by Platform | Platform | Three Months Ended Sep 30, 2022 (Revenue) | Three Months Ended Sep 30, 2021 (Revenue) | Nine Months Ended Sep 30, 2022 (Revenue) | Nine Months Ended Sep 30, 2021 (Revenue) | As of Sep 30, 2022 (A/R) | As of Dec 31, 2021 (A/R) | |:---------|:------------------------------------------|:------------------------------------------|:-----------------------------------------|:-----------------------------------------|:-------------------------|:-------------------------| | Apple | 54.1% | 52.1% | 54.2% | 51.3% | 56.8% | 55.6% | | Facebook | 24.2% | 25.6% | 24.2% | 26.2% | 22.7% | 23.7% | | Google | 18.6% | 19.1% | 18.7% | 19.2% | 17.2% | 17.5% | Note 2: Revenue from Contracts with Customers DDI recognizes revenue from player purchases of virtual currency in its free-to-play games based on the consumption of this currency, which is treated as a consumable good, with revenue disaggregated by platform (mobile and web) and geographical location (U.S. and International), where mobile and U.S. players contribute the majority of revenue, and contract liabilities represent deferred revenue for unconsumed virtual currency - Revenue from player purchases of virtual currency is recognized based on its consumption during gameplay, as virtual currency is considered a consumable good that cannot be redeemed for cash[32][33] Revenue Disaggregation by Platform (in thousands) | Platform | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:---------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Mobile | $59,150 | $63,676 | $184,033 | $200,997 | | Web | $19,651 | $23,331 | $60,824 | $75,905 | | Total | $78,801 | $87,007 | $244,857 | $276,902 | Revenue Disaggregation by Geographical Location (in thousands) | Location | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:--------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | U.S. | $70,044 | $76,047 | $214,394 | $240,141 | | International | $8,757 | $10,960 | $30,463 | $36,761 | | Total | $78,801 | $87,007 | $244,857 | $276,902 | Contract Assets and Liabilities (in thousands) | Metric | As of September 30, 2022 | As of December 31, 2021 | |:-------------------|:-------------------------|:------------------------| | Contract assets | $650 | $674 | | Contract liabilities | $2,166 | $2,246 | Note 3: Short-term investments The company held marketable securities, primarily bonds, for trading purposes, all of which were sold and converted to cash as of September 30, 2022 - The Company held marketable securities, primarily bonds, with the intention of selling them within 3-6 months, with gains or losses from these trading securities recognized in the Statements of Income[39] - As of September 30, 2022, all short-term investments were sold and converted to cash[39] Note 4: Goodwill and intangible assets Goodwill remained unchanged for the three months ended September 30, 2022, while intangible assets, primarily trademarks, decreased slightly due to ongoing amortization of purchased technology and software, with customer relationships and development costs fully amortized - There were no changes to the carrying amount of goodwill in the three months ended September 30, 2022[40] Intangible Assets (in thousands) | Intangible Asset | Useful life | Gross amount (Sep 30, 2022) | Accum. Amort (Sep 30, 2022) | Net Amount (Sep 30, 2022) | Gross amount (Dec 31, 2021) | Accum. Amort (Dec 31, 2021) | Net Amount (Dec 31, 2021) | |:---------------------|:------------|:----------------------------|:----------------------------|:--------------------------|:----------------------------|:----------------------------|:--------------------------| | Trademarks | indefinite | $50,000 | $— | $50,000 | $50,000 | $— | $50,000 | | Customer relationships | 4 years | $75,000 | $(75,000) | $— | $75,000 | $(75,000) | $— | | Purchased technology | 5 years | $45,423 | $(45,423) | $— | $45,423 | $(41,811) | $3,612 | | Development costs | 3 years | $9,486 | $(9,486) | $— | $9,486 | $(9,486) | $— | | Software | 4 years | $2,452 | $(2,404) | $48 | $2,463 | $(2,396) | $67 | | Total | | $182,361 | $(132,313) | $50,048 | $182,372 | $(128,693) | $53,679 | Amortization Expense (in thousands) | Period | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:-----------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Amortization Expense | $3.7 | $2,319 | $3,624 | $15,573 | Note 5: Debt The company has 4.60% Senior Notes due to a related party in 2024, with an outstanding balance of $34.8 million as of September 30, 2022 - The company has 4.60% Senior Notes due to a related party in 2024, with interest and principal due in full at maturity (May 27, 2024)[41] 4.60% Senior Notes Due to Related Party (in thousands) | Metric | As of September 30, 2022 | As of December 31, 2021 | |:--------------------------------------|:-------------------------|:------------------------| | 4.60% Senior Notes due to related party | $34,848 | $42,176 | | Total Long-term debt | $34,848 | $42,176 | Note 6: Fair value measurements The fair values of short-term financial instruments approximate their carrying values, with cash equivalents, primarily money market funds, totaling $310.5 million as of September 30, 2022, and the fair value of senior notes also approximating their carrying value - The carrying values of accounts receivable, prepaid expenses, other current assets, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature[43] - Cash equivalents (Level 1 estimate) were comprised of money market funds totaling $310.5 million as of September 30, 2022[44] - The fair value of senior notes (a Level 3 estimate) approximates carrying value due to the nature of the instruments and the lack of meaningful change to the company's credit profile[45] Note 7: Income taxes The company's effective tax rate for the three months ended September 30, 2022, was 17.0%, lower than the prior year, primarily due to a discrete tax provision and valuation allowance release related to a significant foreign currency exchange gain, while for the nine months, the effective tax rate was 21.6%, similar to the prior year, influenced by various factors including foreign rate differential, FDII deduction, and research tax credits - The income tax benefit of $4.9 million for the three months ended September 30, 2022, reflects an effective tax rate of 17.0%, a decrease from 23.9% in the prior year, primarily due to a discrete tax provision and offsetting valuation allowance release of $3.2 million related to a significant foreign currency exchange gain[48] - The income tax benefit of $10.9 million for the nine months ended September 30, 2022, reflects an effective tax rate of 21.6%, similar to the prior year, which is higher than the Korean statutory rate of 20% due to factors like foreign rate differential, FDII deduction, research tax credits, withholding taxes, state taxes, and a valuation allowance[49] - The company has provided a valuation allowance against net deferred tax assets that are not more likely than not to be realized[47] Note 8: Net Income per share Basic and diluted net income per share are calculated by dividing net income by the weighted-average number of common shares outstanding, with no potentially dilutive securities outstanding in either period presented - Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, while diluted net income per share includes dilutive common share equivalents[51] - There were no potentially dilutive securities outstanding in either period presented[51] Note 9: Leases The company leases corporate office space in Seattle, Washington (expiring October 2024) and Seoul, Korea (subleased from parent, expiring September 2023), with total operating lease right-of-use assets and liabilities decreasing from December 31, 2021, to September 30, 2022, and cash paid for operating lease liabilities remaining consistent at $2.4 million for the nine months ended September 30, 2022 and 2021 - The company is a lessee for corporate office space in Seattle, Washington (lease expires October 2024) and Seoul, Korea (sublease from parent, expires September 2023)[52][53] Operating Lease Information (in thousands) | Metric | As of September 30, 2022 | As of December 31, 2021 | |:----------------------------------------|:-------------------------|:------------------------| | Operating lease right-of-use asset | $5,241 | $7,764 | | Total operating lease right-of-use asset, net | $4,454 | $6,830 | | Short-term operating lease liabilities | $3,138 | $3,076 | | Long-term operating lease liabilities | $2,103 | $4,688 | | Total operating lease liabilities | $5,241 | $7,764 | - Cash paid for amounts included in the measurement of operating lease liabilities was $2.4 million for both the nine months ended September 30, 2022, and September 30, 2021[54] Note 10: Accumulated other comprehensive income Accumulated other comprehensive income (AOCI) decreased significantly for the nine months ended September 30, 2022, primarily due to substantial foreign currency translation losses, partially offset by minor pension adjustments, with foreign currency translation gains/losses not tax-effected as they are considered permanently reinvested Changes in Accumulated Other Comprehensive Income (AOCI) by Component (in thousands) | Component | Balance at Jan 1, 2022 | Foreign Currency Translation Gain/(Loss) | Actuarial Gain/(Loss), Net of Tax | Balance as of Sep 30, 2022 | |:----------------------------------------|:-----------------------|:-----------------------------------------|:----------------------------------|:---------------------------| | Currency Translation Adjustments | $24,311 | $(11,087) | — | $13,224 | | Defined Benefit Pension Plan | $(1,278) | — | $(185) | $(1,463) | | Total | $23,033 | $(11,087) | $(185) | $11,761 | - The company does not tax effect foreign currency translation gains/(losses) because such gains/(losses) are determined to be permanently reinvested[56] Note 11: Commitments and contingencies The company is involved in a significant class-action lawsuit (Benson) regarding the legality of its social casino games in Washington State, with a proposed class-wide settlement of $415 million pending court approval, where DDI-US contributes $145.25 million and IGT contributes $269.75 million, leading to an additional charge of $70.25 million in Q3 2022, bringing the total accrued loss contingency to $145.25 million, and DDI also has licensing agreements with DoubleU Games and IGT for game development and distribution - A class-action lawsuit (Benson) was filed on April 12, 2018, against DDI-US, alleging that the company's social casino games are not legal in the State of Washington[57] - On August 29, 2022, a proposed class-wide settlement for $415,000,000 was stipulated with DoubleDown Interactive, LLC and IGT, pending final court approval, with DoubleDown contributing $145.25 million and IGT contributing $269.75 million to the settlement fund[61] - The company recorded an additional charge of $70.25 million in the third quarter of 2022, reflecting the incremental charge to the loss contingency, bringing the aggregate accrual to $145.25 million[62] - DDI has an exclusive license agreement with DoubleU Games to develop and distribute certain social casino game titles, requiring royalty payments[63] - DDI has a Game Development, Distribution, and Services agreement with IGT, paying royalty rates of 7.5% for proprietary assets and 15% for third-party game assets, plus a monthly porting fee[64] Costs Incurred for IGT Agreement (in thousands) | Period | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:-----------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Costs incurred | $2,200 | $2,700 | $7,200 | $8,700 | Note 12: Related party transactions The company engages in various transactions with its parent company, DoubleU Games (DUG), including royalty, interest, and rent expenses, with amounts due to DUG encompassing senior notes, royalties, and lease liabilities Summary of Expenses Charged by DoubleU Games (in thousands) | Expense Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | |:-------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Royalty expense | $832 | $1,168 | $2,522 | $3,327 | | Interest expense | $431 | $501 | $1,356 | $1,521 | | Rent expense | $300 | $345 | $955 | $1,056 | | Other expense | $59 | $39 | $173 | $136 | Amounts Due to DoubleU Games (DUG) (in thousands) | Metric | As of September 30, 2022 | As of December 31, 2021 | |:--------------------------------------|:-------------------------|:------------------------| | 4.6% Senior Notes with related party | $34,848 | $42,176 | | Royalties and other expenses | $342 | $511 | | Short-term lease liability | $1,168 | $1,309 | | Accrued interest on 4.6% Senior Notes | $6,532 | $6,454 | | Long-term lease liability | $5 | $1,078 | Note 13: Defined benefit pension plan The company operates a funded defined benefit pension plan for its employees in Seoul, Korea, with a total benefit obligation of $3.4 million as of September 30, 2022, and December 31, 2021 - The company operates a funded defined benefit pension plan for employees located in Seoul, Korea, which is a final waged-based plan[68] - The total benefit obligation was $3.4 million as of both September 30, 2022, and December 31, 2021, included in other non-current liabilities[68]