PlayStudios(MYPS) - 2023 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section warns readers about forward-looking statements and their inherent risks and uncertainties Part I - Financial Information This section presents the company's unaudited financial information, including statements and management's discussion Item 1. Financial Statements (Unaudited) This section presents PLAYSTUDIOS' unaudited condensed consolidated financial statements and notes, covering balance sheets, operations, and cash flows Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | ASSETS | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $129,807 | $134,000 | | Total current assets | $170,085 | $175,979 | | Total non-current assets | $174,614 | $176,030 | | Total assets | $344,699 | $352,009 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $34,591 | $34,151 | | Total non-current liabilities | $7,872 | $15,545 | | Total liabilities | $42,463 | $49,696 | | Total stockholders' equity | $302,236 | $302,313 | | Total liabilities and stockholders' equity | $344,699 | $352,009 | Condensed Consolidated Statements of Operations This section details the company's financial performance, showing revenues, expenses, and net income or loss Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenue | $75,858 | $72,127 | $233,774 | $210,931 | | Total operating costs and expenses | $79,579 | $75,305 | $241,548 | $234,550 | | Loss from operations | $(3,721) | $(3,178) | $(7,774) | $(23,619) | | Total other income, net | $5,382 | $5,044 | $5,808 | $1,353 | | Income (loss) before income taxes | $1,661 | $1,866 | $(1,966) | $(22,266) | | Income tax benefit | $2,139 | $1,763 | $2,437 | $6,186 | | Net income (loss) | $3,800 | $3,629 | $471 | $(16,080) | | Basic EPS | $0.03 | $0.03 | $— | $(0.13) | | Diluted EPS | $0.03 | $0.02 | $— | $(0.13) | Condensed Consolidated Statements of Comprehensive Loss This section presents the company's comprehensive income or loss, including net income and other comprehensive items Condensed Consolidated Statements of Comprehensive (Loss) Income (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $3,800 | $3,629 | $471 | $(16,080) | | Change in foreign currency translation adjustment | $(393) | $(159) | $(871) | $(561) | | Total other comprehensive loss | $(393) | $(159) | $(871) | $(561) | | Comprehensive income (loss) | $3,407 | $3,470 | $(400) | $(16,641) | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, reflecting net income, stock transactions, and other adjustments Changes in Stockholders' Equity (in thousands) | Metric | Balance as of Dec 31, 2022 | Net Income (Loss) | Exercise of Stock Options | Restricted Stock Vesting, net | Stock-based Compensation | Repurchase of Common Stock | Other Comprehensive Loss | Balance as of Sep 30, 2023 | | :------------------------- | :------------------------- | :---------------- | :------------------------ | :---------------------------- | :----------------------- | :------------------------- | :----------------------- | :------------------------- | | Total Stockholders' Equity | $302,313 | $471 | $2,920 | $(2,876) | $15,731 | $(15,452) | $(871) | $302,236 | Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $36,396 | $31,231 | | Net cash used in investing activities | $(21,855) | $(26,103) | | Net cash used in financing activities | $(17,767) | $(5,648) | | Foreign currency translation | $(967) | $(913) | | Net change in cash and cash equivalents | $(4,193) | $(1,433) | | Cash and cash equivalents at beginning of period | $134,000 | $213,502 | | Cash and cash equivalents at end of period | $129,807 | $212,069 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements NOTE 1—BACKGROUND AND BASIS OF PRESENTATION This note describes PLAYSTUDIOS' business, its loyalty program, and the basis for preparing the financial statements - PLAYSTUDIOS, Inc. develops and operates free-to-play online and mobile social gaming applications that incorporate a unique loyalty program offering 'real world' rewards. Revenue is generated through in-game virtual currency sales and advertising[33] - The condensed consolidated financial statements are prepared in accordance with US GAAP and SEC rules, including the accounts of PLAYSTUDIOS, Inc. and its consolidated subsidiaries[35] - The company qualifies as an 'emerging growth company' and has opted to use the extended transition period for complying with new or revised financial accounting standards[38][39] NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting policies used in preparing the condensed consolidated financial statements - The company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2023, which did not have a material impact on the condensed consolidated financial statements[42] NOTE 3—BUSINESS COMBINATIONS This note details the company's acquisitions of WonderBlocks Labs and Brainium Studios, including purchase prices and goodwill - PLAYSTUDIOS acquired WonderBlocks Labs, Inc. on August 2, 2022, for $3.564 million (cash and note conversion), aiming to enhance its playAWARDS model with Web3 features. This resulted in $1.176 million in goodwill[43][44][45] - The company acquired Brainium Studios LLC on October 12, 2022, for $75.254 million (cash and contingent consideration), a mobile game publisher. This acquisition generated $40.898 million in goodwill, expected to be deductible for federal income tax purposes[46][47] NOTE 4—RELATED-PARTY TRANSACTIONS This note describes transactions with related parties, specifically the joint marketing agreement with MGM Resorts International - MGM Resorts International, a stockholder with a board representative, has a joint marketing agreement with PLAYSTUDIOS, recorded as an indefinite-lived intangible asset of $1.0 million[49][50] NOTE 5—RECEIVABLES This note provides a breakdown of the company's trade and other receivables, including concentration of credit risk Receivables (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--------------- | :----------- | :----------- | | Trade receivables | $28,802 | $25,020 | | Other receivables | $699 | $1,996 | | Total receivables | $29,501 | $27,016 | Concentration of Credit Risk (Percentage of Total Receivables) | Counterparty | Sep 30, 2023 | Dec 31, 2022 | | :----------- | :----------- | :----------- | | Apple, Inc. | 47.8% | 33.6% | | Google, Inc. | 20.9% | 27.2% | NOTE 6—PREPAID EXPENSES AND OTHER CURRENT ASSETS This note details the components of prepaid expenses and other current assets, such as income tax receivable Prepaid Expenses and Other Current Assets (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Prepaid expenses | $4,168 | $5,148 | | Income tax receivable | $3,559 | $1,372 | | Other current assets | $3,050 | $8,443 | | Total | $10,777 | $14,963 | NOTE 7—FAIR VALUE MEASUREMENT This note presents financial liabilities measured at fair value, specifically public and private warrants Financial Liabilities Measured at Fair Value (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--------------- | :----------- | :----------- | | Public Warrants | $1,346 | $2,153 | | Private Warrants | $955 | $1,529 | | Total | $2,301 | $3,682 | NOTE 8—PROPERTY AND EQUIPMENT, NET This note details the company's property and equipment, net of accumulated depreciation, and related depreciation expense Property and Equipment, Net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Total property and equipment | $32,589 | $33,386 | | Less: accumulated depreciation | $(14,562) | $(15,854) | | Total property and equipment, net | $18,027 | $17,532 | - Depreciation expense for property and equipment was $1.2 million for the three months ended September 30, 2023 and 2022, and $4.2 million and $3.1 million for the nine months ended September 30, 2023 and 2022, respectively[55][57] NOTE 9—INTANGIBLE ASSETS AND INTERNAL-USE SOFTWARE, NET This note details intangible assets and internal-use software, including amortization and impairment charges Intangible Assets and Internal-Use Software, Net (in thousands) | Category | Sep 30, 2023 Net Carrying Amount | Dec 31, 2022 Net Carrying Amount | | :------------------------- | :-------------------------------- | :-------------------------------- | | Amortizable intangible assets | $73,717 | $76,231 | | Nonamortizable intangible assets (Marketing Agreement) | $1,000 | $1,000 | | Total intangible assets | $74,717 | $77,231 | - Intangible asset and internal-use software amortization was $10.3 million and $7.4 million for the three months ended September 30, 2023 and 2022, respectively, and $29.5 million and $22.2 million for the nine months ended September 30, 2023 and 2022, respectively[60] - The company recorded a $1.1 million non-cash impairment charge for intangible assets/internal-use software during the three and nine months ended September 30, 2023. A larger $8.4 million charge was recorded in the nine months ended September 30, 2022[61][62] - Subsequent to September 30, 2023, new licensing arrangements increased 'Intangible assets and internal-use software, net' by $32.0 million, with an offsetting minimum guarantee liability[63] NOTE 10—GOODWILL This note presents the company's goodwill balance, which remained unchanged during the reported periods Goodwill (in thousands) | Metric | Goodwill, Gross | Accumulated Impairment | Goodwill, Net | | :------------------------- | :-------------- | :--------------------- | :------------ | | Balance as of Dec 31, 2022 | $47,133 | $— | $47,133 | | Balance as of Sep 30, 2023 | $47,133 | $— | $47,133 | NOTE 11—WARRANT LIABILITIES This note details the company's warrant liabilities, including outstanding public and private warrants and a tender offer - As of September 30, 2023, there were approximately 5.4 million Public Warrants and 3.8 million Private Warrants outstanding, exercisable for Class A common stock at $11.50 per share[65][69] - In April 2022, the company launched a tender offer for warrants at $1.00 cash per warrant, resulting in 1.79 million Public Warrants tendered and $1.8 million paid. The Warrant Amendment was not approved[67][68][69] NOTE 12—ACCRUED LIABILITIES This note provides a breakdown of accrued liabilities, including payroll, user acquisition, and minimum guarantee obligations Accrued Liabilities (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Accrued payroll and vacation | $8,991 | $9,666 | | Accrued user acquisition | $5,867 | $4,183 | | Income taxes payable | $1,954 | $702 | | Minimum guarantee liability | $4,790 | $1,500 | | Other accruals | $3,811 | $5,422 | | Total accrued liabilities | $25,413 | $21,473 | NOTE 13—LEASES This note details the company's operating lease expenses and liabilities, including right-of-use assets and lease terms - Operating lease expense was $1.2 million for the three months ended September 30, 2023 (vs. $1.0 million in 2022) and $3.7 million for the nine months ended September 30, 2023 (vs. $2.9 million in 2022)[71] Operating Lease Liabilities (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Operating lease right-of-use assets, net | $10,212 | $15,562 | | Operating lease liabilities, current | $4,219 | $4,571 | | Operating lease liabilities, noncurrent | $6,545 | $11,660 | | Operating lease liabilities, total | $10,764 | $16,231 | | Weighted average remaining lease term, years | 3.2 | 4.0 | | Weighted average discount rate | 4.5% | 3.3% | NOTE 14—LONG-TERM DEBT This note describes the company's revolving credit facility, its terms, and financial covenants - PLAYSTUDIOS has a five-year revolving credit facility of $75.0 million (increased to $81.0 million in August 2022) for working capital, general corporate purposes, and permitted acquisitions. As of September 30, 2023, there were no outstanding balances[74][77][80] - The Credit Agreement includes financial covenants such as a Total Net Leverage Ratio of 3.50:1.00 and a Fixed Charge Coverage Ratio of 1.25:1.00[76] NOTE 15—REVENUE FROM CONTRACTS WITH CUSTOMERS This note disaggregates revenue by type (virtual currency, advertising) and by geographic region Revenue Disaggregated by Type (in thousands) | Revenue Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Virtual currency (over time) | $61,558 | $65,607 | $187,565 | $195,377 | | Advertising (point in time) | $14,190 | $3,807 | $41,608 | $11,364 | | Other revenue | $110 | $2,713 | $4,601 | $4,190 | | Total net revenue | $75,858 | $72,127 | $233,774 | $210,931 | Revenue Disaggregated by Geography (in thousands) | Geography | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $64,414 | $63,501 | $200,566 | $185,646 | | All other countries | $11,444 | $8,626 | $33,208 | $25,285 | | Total net revenue | $75,858 | $72,127 | $233,774 | $210,931 | NOTE 16—INCOME TAXES This note details the company's income tax benefit and effective tax rates, explaining deviations from the statutory rate - The company recorded an income tax benefit of $2.1 million for Q3 2023 (vs. $1.8 million in Q3 2022) and $2.4 million for the nine months ended September 30, 2023 (vs. $6.2 million in 2022)[84] - Effective tax rates were (128.8)% for Q3 2023 and 124.0% for the nine months ended September 30, 2023, differing from the 21% federal statutory rate due to factors like nondeductible stock compensation, warrant liability adjustments, and foreign taxes[84][144] NOTE 17—COMMITMENTS AND CONTINGENCIES This note outlines minimum guarantee obligations, legal proceedings, and restructuring expenses Minimum Guarantee Obligations (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Minimum guarantee liability-current | $4,790 | $1,500 | | Minimum guarantee liability-noncurrent | $— | $1,500 | | Total minimum guarantee obligations | $4,790 | $3,000 | | Weighted-average remaining contractual term (in years) | 1.3 | 2.0 | - The company has various legal proceedings, including a class action lawsuit alleging federal securities law violations and civil lawsuits/arbitration demands claiming games constitute illegal gambling. The company believes these claims are without merit and has not made accruals[88][89][91][92][93] - An internal reorganization plan initiated in February 2023 reduced global employee headcount by approximately 14%, incurring $0.2 million in Q3 2023 and $3.4 million year-to-date in restructuring costs, primarily for employee transition and severance[94][95] NOTE 18—STOCKHOLDERS' EQUITY This note describes the company's common stock classes, voting rights, and details of the stock repurchase program - Class A common stock holders have one vote per share, while Class B common stock holders have twenty votes per share. Class B shares are subject to 'sunset' provisions upon certain transfers or if the Founder Group's ownership falls below 20%[98][99] - As of September 30, 2023, the company repurchased 4.7 million Class A common shares for $20.0 million under a $50.0 million stock repurchase program. The board extended the program through November 10, 2024, and increased the remaining authorized amount to $50.0 million on November 1, 2023[101][102][103] NOTE 19—STOCK-BASED COMPENSATION This note details stock-based compensation expense by category and unrecognized compensation for options and RSUs Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Selling and marketing | $205 | $165 | $585 | $646 | | General and administrative | $1,975 | $1,767 | $7,086 | $6,319 | | Research and development | $2,164 | $1,622 | $6,720 | $6,598 | | Total stock-based compensation expense | $4,344 | $3,554 | $14,391 | $13,563 | | Capitalized stock-based compensation | $412 | $430 | $1,340 | $1,966 | - As of September 30, 2023, unrecognized stock-based compensation expense was approximately $0.5 million for stock options (0.9 years weighted-average vesting) and $39.3 million for restricted stock units (2.7 years weighted-average vesting)[104] NOTE 20—NET INCOME (LOSS) PER SHARE This note presents basic and diluted net income (loss) per share for Class A and Class B common stock Net Income (Loss) Attributable to Common Stockholders Per Share | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS (Class A) | $0.03 | $0.03 | $0.00 | $(0.13) | | Diluted EPS (Class A) | $0.03 | $0.02 | $0.00 | $(0.13) | | Basic EPS (Class B) | $0.03 | $0.03 | $0.00 | $(0.13) | | Diluted EPS (Class B) | $0.03 | $0.02 | $0.00 | $(0.13) | - Equity awards excluded from diluted EPS computation due to anti-dilutive effect for the nine months ended September 30, 2023, included 5.382 million Public Warrants, 3.822 million Private Warrants, and 15.000 million Earnout Shares[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on PLAYSTUDIOS' financial condition, operational results, key factors, and liquidity Overview This section provides an overview of PLAYSTUDIOS' business, including its free-to-play games and the playAWARDS loyalty program - PLAYSTUDIOS develops and publishes free-to-play casual games for mobile and social platforms, including social casino and Tetris® games, all incorporating the unique playAWARDS loyalty program[110] - The playAWARDS program allows players to earn loyalty points for 'real-world' rewards from various partners at no cost to the company, enhancing player engagement and retention[111][112] - Primary revenue sources are in-game sales of virtual currency (largely concentrated in North America) and in-game advertising[113][114] Key Factors Affecting Our Performance This section identifies critical factors influencing performance, such as third-party platform agreements and player acquisition - Third-Party Platform Agreements: Revenue is substantially derived from in-game purchases processed by platforms (Apple, Google, Amazon, Facebook), which charge transaction fees (typically 30%). Changes in platform policies or fees can unfavorably impact the company - Player Acquisition: Significant spending on advertising and marketing to grow and reactivate the player base, with a strategy focused on optimizing spend for new player acquisition and inactive player reactivation - Player Monetization: Revenue is primarily driven by virtual currency sales, whose perceived value is sensitive to in-game actions like discounts or promotions. Improper management of virtual economies can harm reputation and future purchases - Investment in Game Development: Continuous investment in new content, features, and games is crucial for player interest and revenue growth, with expenditures often preceding revenue generation and risk of abandonment - Investment in playAWARDS and myVIP programs: Resources are invested to enhance these loyalty programs to drive player engagement and retention, with ongoing expenses for updates and potential for non-revenue generating enhancements - Real-World Rewards: Offering desirable real-world rewards (dining, entertainment, hotel rooms) is vital for player willingness to make in-game purchases. These rewards are provided by partners at no cost to PLAYSTUDIOS Key Performance Indicators This section defines and presents key operational metrics like Daily Active Users, Monthly Active Users, and ARPDAU - Daily Active Users (DAU): Number of unique individuals playing a game on a particular day. Average DAU for Q3 2023 was 3,520 thousand, up 140.8% YoY - Monthly Active Users (MAU): Number of unique individuals playing a game in a particular month. Average MAU for Q3 2023 was 13,712 thousand, up 105.2% YoY - Daily Paying Users (DPU): Number of unique individuals making a purchase in a game on a particular day. Average DPU for Q3 2023 was 26 thousand, down 10.3% YoY - Daily Payer Conversion: DPU as a percentage of DAU. Average Daily Payer Conversion for Q3 2023 was 0.8%, down 1.2 percentage points YoY - Average Daily Revenue Per DAU (ARPDAU): Game and advertising revenue for the period, divided by days, divided by Average DAU. ARPDAU for Q3 2023 was $0.23, down 55.8% YoY Results of Operations This section analyzes the company's financial results, including revenue, operating expenses, and net income or loss Summarized Consolidated Results of Operations This section provides a summarized view of the company's consolidated financial performance, highlighting revenue and operating expenses Consolidated Results of Operations (in thousands, except percentages) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | $ Change (YoY) | % Change (YoY) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | $ Change (YoY) | % Change (YoY) | | :------------------- | :------------------------------ | :------------------------------ | :------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | :------------- | | Net revenue | $75,858 | $72,127 | $3,731 | 5.2% | $233,774 | $210,931 | $22,843 | 10.8% | | Operating expenses | $79,579 | $75,305 | $4,274 | 5.7% | $241,548 | $234,550 | $6,998 | 3.0% | | Operating loss | $(3,721) | $(3,178) | $(543) | 17.1% | $(7,774) | $(23,619) | $15,845 | (67.1)% | | Net income (loss) | $3,800 | $3,629 | $171 | 4.7% | $471 | $(16,080) | $16,551 | (102.9)% | | Net income (loss) margin | 5.0% | 5.0% | — pp | —% | 0.2% | (7.6)% | 7.8 pp | (102.6)% | - Net revenue increased by $3.7 million (5.2%) to $75.9 million in Q3 2023, primarily due to a $10.4 million increase in advertising revenue, offset by a $4.0 million decrease in virtual currency revenue. The increase in advertising revenue was driven by higher impression counts and the addition of Tetris® and Brainium game portfolios[124][126] - For the nine months ended September 30, 2023, net revenue increased by $22.8 million (10.8%) to $233.8 million, driven by a $30.2 million increase in advertising revenue, while virtual currency revenue decreased by $7.8 million[127] Cost of Revenue This section analyzes changes in the cost of revenue, primarily influenced by advertising revenue and royalty expenses - Cost of revenue decreased by $1.8 million (8.5%) to $19.9 million in Q3 2023, and by $5.4 million (8.5%) to $58.3 million for the nine months ended September 30, 2023. This reduction is primarily due to an increase in advertising revenue (which does not incur platform fees) and lower royalty expenses[129][130] Selling and Marketing This section details changes in selling and marketing expenses, primarily driven by user acquisition costs - Selling and marketing expenses decreased by $0.5 million (2.4%) to $18.8 million in Q3 2023, mainly due to a $1.0 million reduction in user acquisition costs. For the nine months, expenses decreased by $4.1 million (6.8%) to $55.3 million, driven by a $5.7 million reduction in user acquisition costs[131][132] Research and Development This section analyzes changes in research and development expenses, driven by IT services, employee costs, and stock compensation - Research and development expenses increased by $2.3 million (14.9%) to $17.4 million in Q3 2023, driven by higher IT services, employee costs, and stock-based compensation. For the nine months, expenses rose by $6.9 million (14.9%) to $53.5 million, primarily due to increased employee costs, IT services, and facilities costs[133][134] General and Administrative This section details changes in general and administrative expenses, primarily due to employee costs and stock-based compensation - General and administrative expenses increased by $0.9 million (9.0%) to $10.7 million in Q3 2023, mainly due to additional employee costs. For the nine months, expenses increased by $4.9 million (17.1%) to $33.7 million, driven by higher employee costs and stock-based compensation[135][136] Depreciation and Amortization This section analyzes changes in depreciation and amortization expenses, driven by recent acquisitions and additional intangible assets - Depreciation and amortization expenses increased by $3.0 million (34.4%) to $11.5 million in Q3 2023, and by $8.4 million (33.3%) to $33.7 million for the nine months ended September 30, 2023. This increase is primarily due to the amortization of intangible assets from the Brainium and WonderBlocks acquisitions and additional intangible assets[137][138][139] Restructuring Expenses This section details restructuring expenses, including impairment charges and costs related to internal reorganization - Restructuring expenses increased by $0.5 million in Q3 2023, primarily due to a $1.1 million non-cash impairment charge, partially offset by reduced M&A fees. For the nine months, expenses decreased by $3.9 million, mainly due to $6.3 million less in non-cash impairment charges and reduced Tender Offer costs, partially offset by $2.8 million related to internal reorganization[140][141] Other Income, Net This section presents other non-operating income and expenses, including changes in warrant liabilities and interest income Consolidated Non-Operating Income (in thousands, except percentages) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | $ Change (YoY) | % Change (YoY) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | $ Change (YoY) | % Change (YoY) | | :--------------------------------- | :------------------------------ | :------------------------------ | :------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | :------------- | | Change in fair value of warrant liabilities | $4,216 | $4,676 | $(460) | (9.8)% | $1,381 | $1,139 | $242 | 21.2% | | Interest income | $1,364 | $843 | $521 | 61.8% | $3,521 | $1,050 | $2,471 | 235.3% | | Other (expense) income | $(198) | $(475) | $277 | (58.3)% | $906 | $(836) | $1,742 | (208.4)% | | Total other income, net | $5,382 | $5,044 | $338 | 6.7% | $5,808 | $1,353 | $4,455 | 329.3% | Provision for Income Taxes This section details the company's income tax benefit and effective tax rates, explaining significant deviations from statutory rates - The company reported an income tax benefit of $2.1 million in Q3 2023 (effective tax rate of -128.8%) and $2.4 million for the nine months ended September 30, 2023 (effective tax rate of 124.0%). These rates differ significantly from the 21% federal statutory rate due to various adjustments including foreign taxes, R&D credits, warrant liability fair value changes, and non-deductible expenses[143][144][145] Non-GAAP Measures This section defines and reconciles non-GAAP Adjusted EBITDA to net income, providing insights into operational performance - Adjusted EBITDA (AEBITDA) is a non-GAAP measure defined as net income before interest, income taxes, depreciation and amortization, restructuring costs, stock-based compensation, changes in fair value of warrant liabilities, and other income/expense items[146] Reconciliation of AEBITDA to Net Income (Loss) (in thousands, except percentages) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $3,800 | $3,629 | $471 | $(16,080) | | Depreciation & amortization | $11,537 | $8,583 | $33,686 | $25,265 | | Income tax benefit | $(2,139) | $(1,763) | $(2,437) | $(6,186) | | Stock-based compensation expense | $4,344 | $3,554 | $14,391 | $13,563 | | Change in fair value of warrant liability | $(4,216) | $(4,676) | $(1,381) | $(1,139) | | Change in fair value of contingent consideration | $— | $— | $(950) | $— | | Restructuring and related | $1,280 | $796 | $7,112 | $10,968 | | Other, net | $(1,081) | $(367) | $(3,328) | $(212) | | AEBITDA | $13,525 | $9,756 | $47,564 | $26,179 | | Net income (loss) margin | 5.0% | 5.0% | 0.2% | (7.6)% | | AEBITDA Margin | 17.8% | 13.5% | 20.3% | 12.4% | Liquidity and Capital Resources This section discusses the company's cash position, cash flow activities, and sufficiency of capital for future operations - As of September 30, 2023, PLAYSTUDIOS had $129.8 million in cash and cash equivalents. The company believes existing cash, cash from operations, and borrowing capacity under its Credit Agreement are sufficient for at least the next 12 months[150] Summary of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $36,396 | $31,231 | | Net cash used in investing activities | $(21,855) | $(26,103) | | Net cash used in financing activities | $(17,767) | $(5,648) | | Effect of exchange rate on cash and cash equivalents | $(967) | $(913) | | Decrease in cash and cash equivalents | $(4,193) | $(1,433) | - Operating Activities: Provided $36.4 million in net cash for the nine months ended September 30, 2023, an increase from $31.2 million in the prior year, primarily due to improved financial performance[153] - Investing Activities: Used $21.9 million in net cash for the nine months ended September 30, 2023, a decrease from $26.1 million in the prior year, mainly due to $5.7 million less in property and equipment purchases, offset by increased internal-use software additions[155] - Financing Activities: Used $17.8 million in net cash for the nine months ended September 30, 2023, an increase from $5.6 million in the prior year, primarily due to $15.5 million in share repurchases not present in the prior period, partially offset by fewer minimum guarantee payments[157] Contractual Obligations, Commitments, and Contingencies This section outlines the company's deferred tax assets, including net operating loss carryforwards and R&D credits - As of September 30, 2023, the company had approximately $21.0 million in net deferred tax assets, including $8.7 million in net operating loss carryforwards and $3.2 million in R&D credits. A partial valuation allowance of $2.2 million is recorded against California research credit carryforwards[159] Critical Accounting Policies and Estimates This section confirms no material changes to critical accounting policies and estimates since the last annual report - No material changes to critical accounting policies and estimates were reported compared to the 2022 Annual Report on Form 10-K, except as described in Note 2—Summary Of Significant Accounting Policies[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines PLAYSTUDIOS' exposure to market risks, focusing on interest rate, investment, and foreign currency risks Interest Rate Risk This section discusses the company's exposure to interest rate risk, primarily from its revolving credit facility with floating rates - The company's exposure to interest rate risk primarily relates to its Credit Agreement, which has floating interest rates. No borrowings were outstanding under the Credit Agreement as of September 30, 2023, and December 31, 2022[162] Investment Risk This section addresses investment risk related to cash and cash equivalents, noting immaterial impact from interest rate changes - Cash and cash equivalents totaled $129.8 million as of September 30, 2023, primarily held in cash on hand and money market mutual funds. A hypothetical 100 basis point change in interest rates would have an immaterial impact on interest income due to the short-term nature of investments[163] Foreign Currency Risk This section details the company's exposure to foreign currency risk due to operating expenses denominated in various currencies - While revenue is primarily in U.S. Dollars, a significant portion of operating expenses (salaries, leases) are denominated in New Israeli Shekels (NIS) and other foreign currencies (HKD, EUR, MXN, RSD, SGD, VND). Fluctuations in exchange rates can negatively affect operating results[164][165] - Subsequent to September 30, 2023, the company entered into derivative contracts to hedge approximately $7.5 million in foreign currency purchases, primarily NIS, maturing within 12 months[167] Item 4. Controls and Procedures This section confirms the effectiveness of PLAYSTUDIOS' disclosure controls and procedures, with no material changes in internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance for timely and accurate reporting[168] - No changes in internal control over financial reporting occurred during the three months ended September 30, 2023, that materially affected or are reasonably likely to materially affect internal control over financial reporting[169] Part II - Other Information This section provides other information not covered in Part I, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings PLAYSTUDIOS is involved in ordinary course litigation, not expecting a material adverse effect on its business - The company is party to ordinary and routine litigation, but does not expect the outcome of any pending litigation to have a material adverse effect on its financial statements[171] Item 1A. Risk Factors This section updates risk factors, focusing on new risks related to managing business operations in Israel due to regional instability Risks Related to Managing Our Business Operations in Israel This section details risks to PLAYSTUDIOS' Israeli operations from regional instability, including employee call-ups - PLAYSTUDIOS has a significant number of employees in Tel Aviv, Israel, making its operations vulnerable to political, economic, and military instability in the region, including the ongoing war between Israel and Hamas[173] - Operations may be disrupted by employees being activated for military service, as occurred after October 7, 2023. While business continuity measures are in place, extended call-ups could materially affect business[177][178] - The company incurs significant operating expenses in New Israeli Shekels (NIS) and other foreign currencies, exposing it to currency exchange rate fluctuations that could harm financial condition and results of operations[179][180] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities, including shares for tax withholding and under its stock program Share Repurchases of Class A Common Stock (Quarter Ended September 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Dollar Value of Shares that May Yet be Purchased Under the Program at Period End (In thousands) | | :--------------------------------- | :----------------------------- | :--------------------------- | :-------------------------------------------------------------------------------- | | July 1, 2023 - July 31, 2023 | 905 | $4.80 | $30,000 | | August 1, 2023 - August 31, 2023 | 429,544 | $3.80 | $30,000 | | September 1, 2023 - September 30, 2023 | — | — | $30,000 | - The total number of shares purchased includes shares surrendered to satisfy tax withholding obligations upon the vesting of equity awards, which are considered repurchased under the Plan, not a publicly announced program[183] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period Item 4. Mine Safety Disclosures This item is not applicable to the company Item 5. Other Information No directors or officers reported adopting or terminating Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or officers reported adopting or terminating Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023[184] Item 6. Exhibits This section lists all exhibits filed as part of this Quarterly Report, including organizational documents, credit agreements, and certifications - Exhibits include the Certificate of Incorporation, Bylaws, Amendment No. 3 to Credit Agreement, Joinder Agreement, and certifications from the CEO and CFO[186] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q