DoubleDown Interactive(DDI) - 2023 Q4 - Annual Report

PART I Item 3: Key Information This section outlines significant risks and uncertainties impacting the company's business, financial condition, and operations, including reliance on key games and platforms, legal challenges, and shareholder relationships Risk Factors This subsection details specific business, operational, legal, and geopolitical risks, including player reliance, platform dependence, intellectual property, and controlling shareholder relationships - The company relies on a small percentage of players for revenue, with the payer conversion rate at 6.4% in 2023, up from 5.4% in 2022[35][37] - The 'DoubleDown Casino' game generated the vast majority of revenue, accounting for 96.3% in 2023 and 96.7% in 2022[38] - The company settled the 'Benson case' class-action lawsuit, contributing $145.25 million to the settlement fund, with the final payment made in June 2023[61][63] - The company holds significant intellectual property licensing agreements with IGT and its controlling shareholder, DoubleU Games (DUG), for game content[48] - As of December 31, 2023, the company had outstanding loans from DoubleU Games totaling KRW 50 billion (approximately US$38.8 million), maturing in 2024[142] Item 4: Information on the Company This section provides a comprehensive overview of DoubleDown Interactive's business, including its history, corporate structure, operational strategies, key games, and regulatory environment History and Development of the Company The company, established in 2008 and acquired by DoubleU Games in 2017, expanded through strategic acquisitions and listed its ADSs on Nasdaq in 2021 - The company was established in Korea in 2008 and became a wholly-owned subsidiary of DoubleU Games (DUG) in 2017[170] - In October 2023, the company acquired SuprNation, a European iGaming operator, expanding into real-money gaming[170][172] - The company's American Depositary Shares (ADSs) began trading on The Nasdaq Stock Market under the symbol 'DDI' on August 31, 2021[172] Business Overview DoubleDown Interactive is a leading social casino game developer, leveraging a data-driven approach, proprietary and licensed content, and recent expansion into European iGaming - The company is a leading social casino game developer with over 117 million installations and an average of 1.8 million monthly players in 2023[174] Key Business Metrics (2023) | Metric | Value | | :--- | :--- | | Global Social Casino Market Size | ~$7.3 billion | | DoubleDown Casino Revenue Rank | 5th | | Average Monthly Players | 1.8 million | | Average Revenue Per Daily Active User (ARPDAU) | $1.09 | - The company's content strategy includes in-house development, licensing over 2,000 slot titles from IGT, and exclusive access to over 400 titles from DoubleU Games[178][183] - Primary competitors in the social casino space include Playtika, Aristocrat, SciPlay, and Take-Two Interactive[214] - The business is subject to evolving data privacy regulations like GDPR and CCPA, and potential scrutiny over social casino gaming[223][229][232] Organizational Structure As of December 31, 2023, DoubleDown Interactive Co., Ltd. operates through three wholly-owned principal subsidiaries Principal Operating Subsidiaries | Legal Entity Name | Jurisdiction | Percentage Interest Held | | :--- | :--- | :--- | | DoubleDown Interactive LLC | Washington | 100% | | SuprNation AB | Sweden | 100% | | Double8 Games Co., Ltd. | Republic of Korea | 100% | Property, Plants and Equipment The company leases its main facilities in Seoul, Seattle, and Malta, with the Seoul headquarters leased from its parent company, DoubleU Games - The company leases its principal Seoul office from DoubleU Games, with the current lease expiring on September 30, 2028[243] - Other key leased facilities include offices in Seattle, Washington, and Swieqi, Malta, with leases expiring in October 2024[243] Item 5: Operating and Financial Review and Prospects This section analyzes the company's financial condition and operating results, highlighting revenue trends, a significant net income turnaround in 2023 due to the absence of prior-year one-time charges, and liquidity Operating Results This subsection details the company's financial performance, showing a revenue decrease in 2023 but a significant net income turnaround due to the absence of prior-year one-time charges Consolidated Financial Results ($ in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | $308.9 | $321.0 | $363.2 | | Operating Income (Loss) | $118.2 | $(313.9) | $98.7 | | Net Income (Loss) | $100.9 | $(234.0) | $78.1 | | Adjusted EBITDA | $118.9 | $101.6 | $120.1 | - Revenue decreased by 3.8% in 2023 to $308.9 million, primarily due to changes in player behavior and economic concerns, with SuprNation contributing $4.3 million[290] - The significant increase in net income in 2023 resulted from the absence of 2022's $141.8 million Benson case loss contingency and $269.9 million goodwill impairment charge[307][314] - Sales and marketing expenses decreased by 31.0% in 2023 to $49.6 million, driven by reduced user acquisition advertising spend[301] Key Performance Indicators | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Average MAU (millions) | 1.7 | 2.2 | | Average DAU (millions) | 0.8 | 1.0 | | ARPDAU | $1.24 | $0.97 | | Payer Conversion Rate | 6.0% | 5.3% | Liquidity and Capital Resources The company's liquidity is primarily from operating cash flows, with $206.9 million in cash as of year-end 2023, despite a decrease due to the Benson case settlement payment Cash Flow Summary ($ in millions) | Cash Flow | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $20.8 | $50.8 | $96.1 | | Net cash used in investing activities | $(30.3) | $(67.8) | $(1.8) | | Net cash from financing activities | $0 | $0 | $86.0 | | Cash and cash equivalents at end of period | $206.9 | $217.4 | $242.1 | - Net cash from operating activities decreased to $20.8 million in 2023, primarily due to the $95.3 million Benson case settlement payment[353] - As of December 31, 2023, outstanding loans from DoubleU Games totaled KRW 50 billion (US$38.8 million), maturing on May 27, 2024[357] Critical Accounting Estimates This subsection outlines critical accounting estimates, including revenue recognition for virtual currency, annual goodwill and intangible asset impairment testing, and legal contingencies like the Benson case settlement - Revenue from virtual currency sales is recognized based on estimated consumption rates derived from historical player behavior[369][370] - Goodwill and indefinite-lived intangible assets are tested for impairment annually, resulting in a $269.9 million impairment charge in 2022[373][378] - The company accrued $141.8 million in 2022 and $3.5 million in 2021 for the Benson case legal settlement[384] Item 6: Directors, Senior Management and Employees This section details the company's leadership, including executive officers and directors, their compensation, board practices, and employee distribution as of year-end 2023 Directors and Senior Management The company's leadership comprises executive officers, including CEO In Keuk Kim and CFO Joseph A. Sigrist, and three independent directors, with detailed biographies provided Executive Officers and Directors | Name | Position(s) | | :--- | :--- | | In Keuk Kim | Chief Executive Officer; Director | | Joseph A. Sigrist | Chief Financial Officer; Director | | Haenam Kim | Chief Marketing Officer; Director | | Ki Chul Kim | Chief Data Officer; Director | | Yanghoon Cho | Independent Director | | Jaesung Chung | Independent Director | | Whanlim Kim | Independent Director | Compensation Aggregate compensation for directors and executive officers totaled $2,748,714 in 2023, including performance-based bonuses contingent on ADS trading price targets - Aggregate compensation for directors and executive officers for fiscal year 2023 was $2,748,714[399] - Performance-based cash bonuses granted in 2023 are contingent on service and the company's ADS trading price exceeding specified targets[403][404] Board Practices The seven-member Board of Directors, elected for three-year terms, oversees management, strategic plans, and risk, supported by an Audit Committee composed of three independent directors - The Board of Directors consists of seven members, each serving a three-year term[413] - The company's Audit Committee, composed of three independent directors, is responsible for financial oversight and auditor relations[418][419] Employees As of December 31, 2023, DoubleDown Interactive had approximately 240 full-time employees globally, distributed across Seoul, Seattle, and Malta, with no unions Employee Distribution (as of Dec 31, 2023) | Category | Number of Employees | | :--- | :--- | | Total Full-Time | ~240 | | By Location | | | Seoul | 129 | | Seattle | 54 | | Malta | 57 | | By Function | | | Technology & Content Development | 141 | | Marketing | 42 | | General Administration | 57 | Item 7: Major Shareholders and Related Party Transactions This section details the company's ownership structure, with DoubleU Games as the controlling shareholder, and significant related party transactions including licensing, services, and loans Major Shareholders The company's ownership is concentrated, with DoubleU Games Co., Ltd. as the controlling shareholder holding 67.1% of common shares Principal Shareholders' Ownership | Name of Beneficial Owner | Ownership Percentage | | :--- | :--- | | DoubleU Games Co., Ltd. | 67.1% | | STIC Special Situation Diamond Limited | 20.2% | | Bryant R. Riley | 8.9% | Related Party Transactions The company has significant related party transactions with DoubleU Games, including game licensing, development services, outstanding loans, and an office sublease - The company incurred $2.6 million in royalties in 2023 under a Game License Agreement with DoubleU Games[431] - A Game Development Services Agreement with DoubleU Games resulted in $1.4 million in service fees for 2023[431] - The company has indemnification agreements with executive officers and directors, with a maximum aggregate liability of $5 million per 12-month period[434] Item 8: Financial Information This section refers to the audited financial statements and details legal proceedings, notably the $145.25 million Benson case settlement paid in June 2023 - The company settled the 'Benson case' class-action lawsuit by contributing $145.25 million to a settlement fund, with the final payment made in June 2023[440] Item 10: Additional Information This section provides additional information on corporate governance, share structure, Korean exchange controls, and material Korean and U.S. federal income tax considerations, including potential PFIC status Memorandum and Articles of Association This subsection details corporate governance rules from the articles of incorporation and Korean Commercial Act, covering board powers, dividend policies, preemptive rights, and shareholder meeting procedures - Dividends are declared annually from net assets, requiring a legal reserve of at least 10% of cash dividends until it reaches half of stated capital[454] - Major corporate actions, including amending articles or transferring significant business, require a two-thirds majority special resolution from shareholders[464] Exchange Controls This subsection describes Korean Foreign Exchange Transaction Laws regulating non-resident investments, including reporting requirements for ADS issuance and custody for direct share holdings - Korean Foreign Exchange Transaction Laws regulate non-resident investments, granting the Ministry of Economy and Finance authority to impose emergency restrictions[481][482] Taxation This subsection summarizes Korean and U.S. federal income tax considerations, including Korean withholding taxes on dividends and capital gains, and the potential for the company to be classified as a Passive Foreign Investment Company (PFIC) - Dividends paid to non-resident holders are subject to a 22.0% Korean withholding tax, potentially reduced by tax treaties[496] - Capital gains from common share transfers are subject to Korean withholding tax, while ADSs transferred outside Korea are generally exempt[498][499] - The company's PFIC status is undetermined; if classified, U.S. holders could face adverse tax consequences, including higher tax rates and interest charges on excess distributions and gains[521][531][534] Item 11: Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from foreign exchange rate fluctuations and interest rate changes, though sensitivity analysis indicates no significant impact on net income - The company's primary market risks are foreign exchange risk, with USD revenues against KRW/EUR functional currencies, and interest rate risk on borrowings[552][553] - Sensitivity analysis indicates a 10% USD appreciation against KRW or EUR, or a 100-basis-point interest rate decrease, would not significantly impact net income as of December 31, 2023[552][553] PART II Item 15: Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported for 2023 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[567] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[568] Item 16C: Principal Accountant Fees and Services This section details fees paid to the company's independent registered public accounting firms, Samil PwC in 2023 and E&Y in 2022, with all services pre-approved by the audit committee Accountant Fees (in thousands) | Fee Type | 2023 (Samil PwC) | 2022 (E&Y) | | :--- | :--- | :--- | | Audit Fees | $1,166 | $1,174 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $157 | | Other Fees | $0 | $2 | Item 16F: Change in Registrant's Certifying Accountant The company appointed Samil PricewaterhouseCoopers (PwC) as its auditor for fiscal year 2023, replacing Ernst & Young LLP (EY), due to a mandatory auditor rotation for its controlling shareholder - The company appointed Samil PricewaterhouseCoopers (PwC) as its auditor for fiscal year 2023, replacing Ernst & Young LLP (EY)[578][581] - The change was prompted by a mandatory auditor rotation for the company's controlling shareholder, DoubleU Games, under Korean law[579] Item 16G: Corporate Governance As a foreign private issuer, the company follows Korean corporate governance practices, which differ from NASDAQ standards regarding board independence, shareholder quorum, and committee composition - As a foreign private issuer, the company follows Korean corporate governance practices, which differ from NASDAQ rules regarding board independence, shareholder quorum, and committee composition[585] Item 16K: Cybersecurity The company maintains a cybersecurity program overseen by the CEO and board, based on NIST CSF and ISO 27001, with no material cyber-attack impacts to date - The company has a cybersecurity program based on recognized standards like the NIST Cybersecurity Framework and ISO 27001[589][591] - The board of directors oversees cybersecurity risk and receives regular updates, with no material cyber-attack impacts to date[590][592][593] PART III Item 18: Financial Statements This section presents the company's audited consolidated financial statements for 2021-2023, prepared under U.S. GAAP, including statements of operations, balance sheets, cash flows, and detailed notes Consolidated Statements of Operations The company reported $308.9 million in revenue for 2023, with operating income recovering to $118.2 million and net income reaching $100.9 million, a significant turnaround from 2022's loss Consolidated Statements of Operations Highlights (in thousands of U.S. dollars) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | $308,864 | $321,027 | $363,205 | | Total operating expenses | $190,673 | $634,900 | $264,472 | | Operating income (loss) | $118,191 | $(313,873) | $98,733 | | Net income (loss) | $100,928 | $(233,978) | $78,108 | Consolidated Balance Sheets As of December 31, 2023, total assets were $803.3 million, with liabilities significantly decreasing to $75.5 million due to the clearing of a loss contingency accrual, and shareholders' equity increasing to $727.9 million Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $206,911 | $217,352 | | Goodwill | $396,704 | $379,072 | | Total assets | $803,344 | $792,052 | | Liabilities & Equity | | | | Total current liabilities | $68,505 | $116,482 | | Total liabilities | $75,454 | $165,826 | | Total shareholders' equity | $727,890 | $626,226 | Consolidated Statements of Cash Flows Net cash from operating activities was $20.8 million in 2023, decreasing due to a $95.3 million legal settlement payment, while cash and cash equivalents ended at $206.9 million Consolidated Statements of Cash Flows Highlights (in thousands of U.S. dollars) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash flows from operating activities | $20,833 | $50,791 | $96,105 | | Net cash flows (used in) investing activities | $(30,269) | $(67,830) | $(1,806) | | Net cash flows from financing activities | $0 | $0 | $86,041 | | Net (decrease) in cash and cash equivalents | $(10,441) | $(24,708) | $178,872 | | Cash and cash equivalents at end of period | $206,911 | $217,352 | $242,060 | Notes to Consolidated Financial Statements The notes detail accounting policies, recent acquisitions, related party debt, income tax, legal contingencies including the Benson case, and significant revenue concentration with major platforms - In October 2023, the company acquired SuprNation AB for €34.3 million (approximately $36.5 million) cash, plus potential performance-based payments[637] - A $269.9 million goodwill and intangibles impairment charge was recognized in 2022, with no impairment in 2023 or 2021[654] - The company has significant revenue concentration with Apple (55.0%), Google (18.2%), and Facebook (16.8%) for the year ended December 31, 2023[648] - The company settled the Benson case, making a final payment in June 2023 that cleared the $95.25 million accrual from year-end 2022[707]