PLAYSTUDIOS, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. The June 21, 2021 business combination with Acies was accounted for as a reverse recapitalization; prior-period results reflect Old PLAYSTUDIOS.
Business context
PLAYSTUDIOS develops free-to-play mobile and social games, primarily social casino titles. It earns revenue mainly from virtual-currency sales, with a smaller advertising component, and differentiates its games through playAWARDS real-world rewards and its myVIP program. Games are distributed through third-party platforms including Apple, Google, Amazon and Facebook.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $70.8 million | $77.9 million | $144.9 million | $136.2 million |
| Gross profit | $47.8 million | $51.2 million | $97.4 million | $89.8 million |
| Gross margin | 67.5% | 65.8% | 67.2% | 66.0% |
| Operating income (loss) | ($13.0 million) | $16.1 million | ($5.4 million) | $22.2 million |
| Net income (loss) | ($7.0 million) | $13.0 million | ($1.1 million) | $18.5 million |
| Adjusted EBITDA (non-GAAP) | $3.4 million | $22.5 million | $17.9 million | $36.0 million |
| Operating cash flow | Not presented quarterly | $15.1 million | $24.8 million |
Q2 revenue fell 9.1%, primarily as average daily active users (DAU) declined 19.1%, partly offset by higher monetization: average daily revenue per DAU rose 12.7% to $0.62 and daily payer conversion increased to 2.7% from 2.3%. For the six-month period, revenue rose 6.4% despite DAU declining 20.5%; payer conversion increased to 2.8% from 2.2% and ARPDAU rose to $0.64 from $0.47. Advertising revenue grew to $1.1 million in Q2 from $0.4 million and to $1.9 million for the half from $0.6 million.
Operating expense growth drove the swing to operating and net losses. Q2 selling and marketing increased 70.0%, R&D increased 48.5%, and G&A increased 225.3%. For the first half, total operating expenses rose 31.9%. Q2 net loss included a $5.8 million income-tax benefit; first-half net loss included a $4.5 million tax benefit. The filing reports a $0.1 million gain from the change in warrant fair value for both the quarter and half-year.
At June 30, cash and cash equivalents were $229.9 million, compared with $48.9 million at December 31, 2020. Current assets were $269.6 million and current liabilities $43.7 million. Total liabilities were $48.2 million, including $20.3 million of warrant liabilities; the filing reports no drawn debt. A new five-year revolving credit facility provides up to $75 million, subject to covenants. Operating cash flow was $15.1 million; investing activities used $21.2 million, including $13.2 million of additions to internal-use software and $7.5 million of notes receivable. Financing activities provided $187.2 million, principally from the business combination and PIPE financing.
Material changes and unusual items
- The June business combination and PIPE included $250 million of gross PIPE subscriptions; $20 million was used to settle the MGM profit-share buyout. Net proceeds from the business combination and PIPE reported in cash flows were $185.7 million after redemptions, cash consideration and transaction costs.
- Q2 selling and marketing increased mainly from user-acquisition spending, including the global launch of myVEGAS Bingo and the soft launch of Kingdom Boss. G&A included a $4.2 million transaction bonus, a $2.5 million charitable donation and $1.1 million of incremental compensation related to the Founder Group’s super-voting shares and options. A $5.0 million employee transaction bonus was paid in July.
- Q2 virtual-currency revenue declined 10.0%; for the first half it increased 5.4%. Management attributed the year-over-year Q2 comparison partly to unusually high engagement and monetization during 2020 COVID-19 lockdowns.
- Warrants are classified as liabilities and remeasured at fair value, which can cause non-cash earnings volatility. At June 30, warrant liabilities totaled $20.3 million.
Outlook, risks and contingencies
- No specific quantified revenue or earnings guidance is provided. Management said selling and marketing expense was expected to increase during the rest of 2021 to promote myVEGAS Bingo and Kingdom Boss; Kingdom Boss was expected to launch in the second half of 2021. G&A was expected to rise as a public company. The filing also states that projections contemplate lower Adjusted EBITDA in 2021, without providing a clear forecast value here.
- Management said existing cash, operating cash generation and available revolving capacity were expected to fund operations and capital expenditures for the foreseeable future, while noting potential future funding needs for growth, game development or acquisitions.
- Key business risks include declining player activity, reliance on app-store platforms and their fees and policies, competition and player-acquisition costs, game-development execution, dependence on real-world rewards and MGM relationships, COVID-19 effects, data privacy and cybersecurity, and foreign-exchange exposure. Apple and Google represented 57.8% and 26.3% of receivables, respectively, at June 30.
- The company identified a material weakness in internal control over financial reporting related to accounting for SPAC warrants and concluded disclosure controls were not effective as of June 30. Management described remediation efforts but gave no assurance they would be successful.
- TeamSava litigation in Israel seeks 27.3 million NIS. The company disputes the claims, intends to defend the matter, and said it could not reasonably estimate the likelihood or amount of loss; no accrual was recorded. Management did not expect ordinary-course pending litigation to have a material financial-statement effect.
- The company had a $75 million revolving facility with leverage and fixed-charge coverage covenants beginning with the quarter ending September 30, 2021; no amounts had been drawn at June 30. The dual-class structure gives Class B shares 20 votes each; the Founder Group held approximately 74.6% of voting power at closing.
Investor verification priorities
- Track DAU, payer conversion, ARPDAU and virtual-currency revenue to assess whether monetization can offset a shrinking active-player base.
- Assess returns and payback from elevated user-acquisition spending and the launches of myVEGAS Bingo and Kingdom Boss.
- Reconcile reported cash and business-combination proceeds to transaction costs, cash consideration, and the MGM settlement; monitor cash burn and any revolver usage or covenant compliance.
- Review progress remediating the warrant-accounting material weakness and any further warrant fair-value effects.
- Monitor the TeamSava claim, MGM agreement renewal and rewards availability, platform terms and fees, and potential dilution from warrants, options and earnout shares.