F-1/A 1 d753829df1a.htm F-1/A F-1/A
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As filed with the U.S. Securities and Exchange Commission on June 18, 2020.

Registration No. 333-238884

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

DOUBLEDOWN INTERACTIVE CO., LTD.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Republic of Korea

(State or other jurisdiction of

incorporation or organization)

 

7374

(Primary Standard Industrial

Classification Code Number)

 

Not Applicable

(I.R.S. Employer
Identification Number)

13F, Gangnam Finance Center

152, Teheran-ro Gangnam-gu

Seoul 06236, Republic of Korea

+82-2-501-7216

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Joseph A. Sigrist, Chief Financial Officer

c/o DoubleDown Interactive, LLC

605 5th Avenue, Suite 300

Seattle, Washington 98104

+1-206-408-1545

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Barbara A. Jones, Esq.

Greenberg Traurig, LLP

1840 Century Park East, Suite 1900

Los Angeles, California 90067

Tel: +1-310- 586-7700

 

Iksoo Kim, Esq.

Greenberg Traurig, LLP

23F, Seoul Finance Center

136 Sejongdae-ro, Jung-gu

Seoul 04520, Korea

Tel: +82-2-369-1010

 

Jin Hyuk Park, Esq.

Simpson Thacher & Bartlett LLP

35th Floor, ICBC Tower
3 Garden Road, Central
Hong Kong

Tel: +852-2514-7665

  

Arthur D. Robinson, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Tel: +1-212-455-7086

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment fled pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same of offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Amount
to be
Registered(2)
  Proposed
Maximum
Offering Price
per Share(3)
  Proposed
Maximum
Aggregate
Offering  Price(3)
  Amount of
Registration Fee(4)

Common shares, par value 10,000 per share(1)

  632,500   $380   $240,350,000   $31,198

 

 

 

(1)   American Depositary Shares, or ADSs, issuable upon deposit of the common shares registered hereby are being registered pursuant to a separate Registration Statement on Form F-6. 20 ADSs represent one common share.

 

(2)   Includes 82,500 common shares represented by ADSs, which the underwriters have an option to purchase.

 

(3)   Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.

 

(4)   $12,980 has been previously paid on a prior filing.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling shareholder may sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities, nor a solicitation of an offer to buy these securities, in any jurisdiction where the offer, solicitation, or sale is not permitted.

 

Subject to completion, dated June 18, 2020

Preliminary prospectus

11,000,000 American Depositary Shares

Representing 550,000 common shares

 

LOGO

 

This is the initial public offering of our common shares, par value 10,000 per share (which we refer to as our “common shares”), in the form of American Depositary Shares (which we refer to as “ADSs”). Twenty ADSs represent one common share. We are offering 5,500,000 ADSs, and the selling shareholder named in this prospectus is offering 5,500,000 ADSs. We will not receive any proceeds from the sale of ADSs by the selling shareholder. We currently expect the initial public offering price to be between $17 and $19 per ADS.

Prior to this offering, there has been no public market for our common shares or ADSs. Our ADSs have been approved for listing on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “DDI.”

We are organized under the laws of the Republic of Korea (“Korea”) and are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements. See “Prospectus summary—Emerging growth company status.” Our principal shareholder, DoubleU Games Co., Ltd., a Korean company, is expected to own approximately 60.2% of our shares following the offering, assuming all shares are sold in the offering. Consequently, we expect to be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See “Management–Corporate governance practices.”

Investing in our ADSs involves a high degree of risk. Before buying any of our ADSs, you should carefully read the discussion of material risks of investing in our ADSs in “Risk factors” beginning on page 15 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     
        Per ADS        Total  

Initial public offering price

     $                      $                

Underwriting discounts and commissions(1)

     $          $    

Proceeds to us (before expenses)

     $          $    

Proceeds to the selling shareholder (before expenses)

     $          $    

 

(1)   See “Underwriting—Commissions and discounts” for additional information regarding compensation payable to the underwriters.

The selling shareholder has granted the underwriters the option to purchase up to 1,650,000 additional ADSs from it at the public offering price, less underwriting discount, for 30 days after the date of this prospectus to cover over-allotments.

The underwriters expect to deliver the ADSs to purchasers on or about · , 2020.

 

J.P. Morgan   BofA Securities

Macquarie Capital

The date of this prospectus is · , 2020.


Table of Contents

Table of contents

 

     Page  

Cautionary note regarding forward-looking statements

     iv  

Prospectus summary

     1  

Risk factors

     15  

Use of proceeds

     41  

Dividend policy

     42  

Capitalization

     43  

Dilution

     44  

Selected consolidated financial information and operating data

     46  

Management’s discussion and analysis of financial condition and results of operations

     50  

Our business

     77  

Management

     98  

Principal and selling shareholders

     104  

Certain relationships and related party transactions

     106  

Description of securities

     109  

Korean foreign exchange controls and securities regulations

     115  

Description of American Depositary Shares

     118  

Shares eligible for future sale

     130  

Material tax considerations

     131  

Underwriting

     140  

Expenses related to the offering

     155  

Legal matters

     156  

Experts

     156  

Enforceability of civil liabilities

     156  

Where you can find more information

     157  

Bibliography of referenced industry sources

     158  

Index to consolidated financial statements

     F-1  

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by, or on behalf of, us or to which we have referred you to or otherwise authorized. Neither we nor any of the underwriters have authorized anyone to provide you with information that is different. We are offering to sell our ADSs, and seeking offers to buy our ADSs, only in jurisdictions where such offers and sales are permitted. The information in this prospectus is accurate only as of the date hereof, regardless of the time of delivery of this prospectus or any sale of our ADSs. Our business, financial condition, results of operations and prospects may have changed since that date. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ADSs means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our ADSs in any circumstances under which such offer or solicitation is unlawful.

 

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Before you invest in our ADSs, you should read the registration statement (including the exhibits thereto and documents incorporated by reference therein) of which this prospectus forms a part.

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus.

For investors in Korea: Pursuant to the laws of Korea, we have filed with the Financial Services Commission of Korea a separate securities registration statement in the Korean language for the benefit of Korean investors who may purchase common shares that are converted from ADSs in the secondary market after the completion of the offering described in this prospectus (“post-IPO Korean investors”). Certain information in such filing is applicable only to the post-IPO Korean investors and therefore is not included in this prospectus. The information contained in such filing does not and will not form a part of this prospectus. Accordingly, you must not rely on any information in such filing.

About this prospectus

As used in this prospectus, unless the context otherwise requires or otherwise states, (a) references to “we,” “us,” “our,” the “Company,” “our Company” and similar references refer to DoubleDown Interactive Co., Ltd., a corporation with limited liability organized under the laws of Korea, which is sometimes referred to in this prospectus as “DDI,” its Korean subsidiary, Double8 Games Co., Ltd. (“Double8 Games”), and its U.S. subsidiaries, DoubleUDiamond, LLC, a Delaware limited liability company (“DUD”), and DoubleDown Interactive, LLC, a Washington limited liability company (“DDI-US”), and (b) references to “DoubleU Games” or “DUG” refer to DoubleU Games Co., Ltd., a Korean company and our controlling shareholder.

The selling shareholder herein is STIC Special Situation Diamond Limited, which is a wholly-owned special purpose entity of STIC Special Situation Private Equity Fund, each of which is a limited liability entity organized under the laws of Korea. References herein to “STIC” refer to STIC Special Situation Private Equity Fund and its wholly-owned affiliate, unless the context otherwise requires.

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them. The terms “dollar,” “USD,” “US$” or “$” refer to the legal currency of the United States. Currency amounts in this prospectus are stated in dollars, unless otherwise indicated. Our reporting currency is the U.S. dollar, and our functional currency is the Korean Won, or KRW or “.” Convenience translations included in this prospectus of Korean Won into U.S. dollars have been made at the rate of 1,224.79 = US$1.00, as reported by the Board of Governors of the Federal Reserve System on June 1, 2020. Historical and current exchange rate information may be found at https://www.federalreserve.gov/releases/h10/current/default.htm.

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Our fiscal year ends on December 31 of each year as does our reporting year. Therefore, any references to 2019 and 2018 are references to the fiscal and reporting years ended December 31, 2019 and December 31, 2018, respectively. Our most recent fiscal year ended on December 31, 2019. See Note 2 to our consolidated financial statements for a discussion of the basis of presentation, functional currency and translation of financial statements.

Non-GAAP measures

In addition to U.S. GAAP measures, we also use Adjusted EBITDA, as described under “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP

 

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metrics and trends—Adjusted EBITDA,” and Adjusted EBITDA margin in various places in this prospectus. These financial measures are presented as supplemental disclosure and should not be considered in isolation of, as a substitute for, or superior to, the financial information prepared in accordance with U.S. GAAP, and should be read in conjunction with the financial statements included elsewhere in this prospectus. Adjusted EBITDA and Adjusted EBITDA margin may differ from similarly titled measures presented by other companies.

Please see “Selected consolidated financial information and operating data” for a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with U.S. GAAP.

Market and industry data

This prospectus contains references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. See “Bibliography of referenced industry sources.” Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us. In general, we believe there is less publicly available information concerning international social gaming industries than the same industries in the United States. Some data is also based on our good faith estimates, which are derived from our review of internal surveys or data, as well as the independent sources referenced above. Assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors.” These and other factors could cause future performance to differ materially from our assumptions and estimates. See “Cautionary note regarding forward-looking statements.”

 

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Cautionary note regarding forward-looking statements

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning our possible or assumed future results of operations, financial condition, business strategies and plans, market opportunity, competitive position, industry environment, and potential growth opportunities. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “design,” “target,” “aim,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “project,” “potential,” “goal” or other words that convey the uncertainty of future events or outcomes. You can also identify forward-looking statements by discussions of strategy, plans or intentions. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including, among others, those discussed in this prospectus under the headings “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Our business” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements in this prospectus.

You are cautioned not to place undue reliance on the forward-looking statements in this prospectus. The forward-looking statements contained in this prospectus are not guarantees of future performance and our actual results of operations and financial condition may differ materially from such forward-looking statements. In addition, even if our results of operations and financial condition are consistent with the forward-looking statements in this prospectus, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus speaks only as of the date of this prospectus. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important before deciding to invest in our ADSs. Therefore, you should read this entire prospectus carefully, including, in particular, the sections entitled “Risk factors” beginning on page 15 of this prospectus and “Management’s discussion and analysis of financial condition and results of operations,” and our consolidated financial statements and related notes, before making an investment decision. Some of the statements in this summary and elsewhere in this prospectus constitute forward-looking statements. See “Cautionary note regarding forward-looking statements.”

Our company

We are a leading developer and publisher of digital games on mobile and web-based platforms. We are the creators of multi-format interactive entertainment experiences for casual players. Our flagship game, DoubleDown Casino, has been in the top 20 grossing mobile games annually on Apple App Store since 2015, according to App Annie. Our newest game, DoubleDown Fort Knox, launched in April 2018, has already achieved over three million cumulative installations as of March 31, 2020. Our games cater to an expanding casual gaming audience around the world.

We have been an early pioneer in the social casino gaming segment of casual gaming and were among the initial publishers to launch a social casino game on the Facebook platform in 2010 with the release of DoubleDown Casino. As the market has shifted materially to mobile platforms in recent years, we have also embraced new distribution channels for our games, which have significantly expanded our overall reach and market opportunity. We currently offer four games, DoubleDown Casino, DoubleDown Fort Knox, DoubleDown Classic, and Ellen’s Road to Riches. Our games attract players of social casino and casual games, and have been installed over 100 million times to date. During 2019, an average of 2.8 million players played our games each month and for the three months ended March 31, 2020, an average of over 3 million players played our games each month.

Our market opportunity includes casual gaming globally, which includes slots, puzzle, card, match three and other similar games. Eilers & Krejcik estimated that the global market for mobile casual games was expected to be $22.1 billion in 2019, an increase of approximately 22% from 2018. Within the social casino segment of casual gaming, which includes free-to-play online slots, poker, table games, and bingo, DoubleDown Casino was ranked third in the top 10 game titles by revenue for the three months ended March 31, 2020, according to Eilers & Krejcik. The growth rate of the social casino market is estimated at 5% over the next four years and is projected to reach $6.8 billion by 2023, according to Eilers & Krejcik. As one of the leading players in social casino games today, we believe we are well-positioned to combine our social casino expertise with additional game elements to deliver entertaining playing experiences for our players.

We believe that success in casual gaming requires a combination of creativity and data science to acquire, engage, and retain players. We have a deep understanding of our players which allows us to hone our game development, content strategy, and live game operations. Our all-in-one approach that combines numerous pieces of content within a single game streamlines the player experience while our best-in-class gaming elements, including graphics, user interface, and meta-features, such as daily challenges and loyalty programs, keep our players engaged. Collectively, our players exhibit higher monetization compared to that of our social casino peers, which we believe reflects our successful approach. Our average revenue per daily active user, or ARPDAU, was $0.70 for the three months ended March 31, 2020, higher than the $0.53 average of three primary social casino peers during the same period based upon data from Eilers & Krejcik and the approximate $0.02 median of all mobile games during the three months ended June 30, 2019, according to Game Analytics.



 

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We believe our access to content is among the broadest in the gaming industry. In addition to our internally developed content, we also have access to content from International Game Technology PLC (“IGT”), one of the largest casino equipment suppliers in the world, and creator of well-known slot games such as Cleopatra, Wolf Run, and Megabucks, as well as from DoubleU Games, our controlling shareholder and a leading developer and publisher of social casino games based in Korea. Collectively, we have had access to over 2,000 slot titles through our partnerships with IGT and DUG and we have internally developed a catalogue of over 20 original slot titles. We continue to provide our players with a superior gaming experience by leveraging our three content pillars: DDI, IGT, and DUG.

Our financial performance has benefitted from the differentiated way in which we approach our market opportunity. Our revenue was $273.6 million in 2019, up from $266.9 million in 2018. Approximately 87% of our revenue was generated from the United States in 2019. Our net income was $36.3 million in 2019, up from $25.1 million in 2018. Our Adjusted EBITDA was $101.7 million in 2019, up from $85.1 million in 2018, with an Adjusted EBITDA margin of 37.2% and 31.9%, respectively. Our revenue was $76.1 million for the three months ended March 31, 2020, up from $68.3 million for the three months ended March 31, 2019. Our net income was $12.9 million for the three months ended March 31, 2020, up from $8.8 million for the three months ended March 31, 2019. Our Adjusted EBITDA was $25.3 million for the three months ended March 31, 2020, up from $24.7 million for the three months ended March 31, 2019, with an Adjusted EBITDA margin of 33.3% and 36.2%, respectively. See “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends” for a description of Adjusted EBITDA and for a reconciliation to net income, the most directly comparable financial measure calculated in accordance with U.S. GAAP.

Industry overview and market opportunity

A number of technology and consumer trends are driving significant change in digital gaming and expanding our market opportunity:

 

 

Growth of mobile platforms and entertainment increasingly consumed through mobile. According to data from Newzoo Online, the number of smartphone users was expected to grow by 10% to 3.2 billion users in 2019. According to data from eMarketer, an average U.S. adult spent an average time of 2 hours and 55 minutes per day on a smartphone in 2019; time spent on consuming content via mobile devices was expected to surpass time spent watching TV for the first time in 2019. Both hardcore (such as racing, shooting, etc.) and casual U.S. gamers, with average ages of 34 and 45, respectively, averaged over 10 hours per week on mobile gaming in 2018, according to the most recent data available from IDC. We believe this trend presents an opportunity for greater engagement with players on mobile devices.

 

 

Role of app stores as distribution and payment gateways. Developers are now able to distribute apps to global audiences and regularly update the apps with new content and features. App stores are now a popular destination for users to find and access content, and also serve as integrated payment systems where users can conveniently make purchases in a trusted and secure setting.

 

 

Success of the free-to-play model has widened appeal of gaming to the masses. Free-to-play games have significantly increased the revenue potential of mobile and web-based games by eliminating upfront barriers and facilitating purchases throughout the player lifecycle. Free-to-play games allow for a wider audience, increasing the number of potential paying players and enhancing the overall game experience by facilitating greater social interaction among players.



 

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We also believe that the competencies required to succeed in the market have evolved:

 

 

Scale is increasingly important. Only a small fraction of games reach meaningful scale. Through 2019, only 1,121 games of the more than one million games available on Apple App store and Google Play Store have generated revenue of over $5 million, according to App Annie. As games compete for limited playing time, gaming companies with an ability to invest significant amounts of resources to marketing, research and development, and ongoing costs are able to improve the probability of success.

 

 

Content is a key differentiator. Gaming companies face significantly higher costs to develop, market, and operate games. As greater resources are invested in these games, players have become more engaged and deeply invested in the games they play, resulting in higher switching costs.

 

 

Increasing longevity of games. Games have evolved into services, significantly extending the lifecycles of successful games. Facilitated by a shift in monetization strategy towards more in-game purchases, greater ability to update games post launch via app store platforms, and the incorporation of social aspects into the games, players stay engaged longer, which in turn drives higher and more stable monetization.

We believe that our market opportunity includes casual gaming globally, which includes slots, puzzle, card, match three and other similar games. Eilers & Krejcik defines casual games as games that have simple decision-making with the ability for players to start or stop playing at any time without heavily impacting the overall experience. Eilers & Krejcik estimated that the global market for mobile casual games was expected to be $22.1 billion in 2019, an increase of approximately 22% from 2018. The growth rate of the social casino market is estimated at 5% over the next four years and is projected to reach $6.8 billion by 2023, according to Eilers & Krejcik. We believe that casual and social casino genres are converging, blending elements into new games. As one of the leading players in social casino gaming today, we believe we are well-positioned to combine our social casino expertise with additional game elements to deliver entertaining playing experiences for our players.

Our value proposition to players

We believe that our games offer a compelling value proposition to players that drives their loyalty and continued engagement and monetization:

 

 

Proven library of content: We have a diverse library of content to entertain and engage players, including proven social casino gaming content developed by DUG; authentic, land-based casino content from IGT; and innovative, original content developed internally.

 

 

Cross-platform playability: Our players can play our games anytime and anywhere on mobile and web-based platforms. Our games are available on all major platforms including Apple App Store, Facebook, Google Play Store, and Amazon Appstore.

 

 

All-in-one approach: Each of our games provides a one-stop shop for gaming entertainment with diversified content. To play a multitude of our content, players are only required to download one game. The content choices available within each game allow the player to tailor the experience to their individual preferences, and the unified environment lowers the barrier to new content discovery, enhancing entertainment and engagement for players.

 

 

Enhanced player experience through DoubleDown Fort Knox: DoubleDown Fort Knox was designed to deliver a best-in-class mobile gaming experience for our players across all aspects of the game, including graphics,



 

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user interface, and meta-features. DoubleDown Fort Knox’s innovative features, including 3D game viewing as well as the option to play the game in both portrait and landscape mode, fully utilize the capabilities of high-end mobile devices and allow for more immersive player experiences.

Our strengths

All-in-one strategy offers scalability, player insights, and operational efficiency.

Our all-in-one approach allows our players to access our extensive library of slot content through a single game download. In addition, the all-in-one approach provides an enhanced understanding of our players, as all of their behaviors take place within the same game. By centralizing our content into fewer games, we can also adopt a more focused and efficient approach to user acquisition.

Exclusive access to deep content libraries and proven track record of developing new content.

We have exclusive access to hundreds of highly recognizable, branded land-based slot titles through our partnership with IGT which enables us to deliver an authentic casino floor experience to our players. Our parent company, DUG, also has deep experience in developing social casino games. In addition to IGT and DUG content, our in-house research and development team develops proprietary slot content. Collectively, we have had access to over 2,000 slot titles through our partnerships with IGT and DUG and we have internally developed a proprietary catalogue of over 20 original slot titles.

Comprehensive player lifecycle management.

We employ a rigorous, data-driven approach to player lifecycle management from user acquisition to ongoing engagement and monetization. We use internally-developed analytic tools to segment and target players and to optimize user acquisition spend across multiple channels.

Robust technology platform.

We operate on a centralized, cloud-based technology platform which enables us to consistently launch high-quality slot content and operate our games on a global level. Our robust infrastructure allows us to capture and analyze player data in real-time, which fuels our development and operations. In addition, we have proprietary porting capabilities that allow us to implement content from DUG and IGT quickly and efficiently, which enables our high velocity approach to content development. Our shared code base also increases speed to market for new content, features, and services while minimizing development costs, as we are able to roll-out software and content updates across all of our games simultaneously.

Deep talent pool and shareholder support.

We have a global development team with extensive experience across multiple geographies and functions. Our management team and employee base have a proven track record of creating and scaling social casino and casual games. Our talent pool of 280 employees is comprised of highly experienced engineers, creative artists, product managers, data scientists and market researchers. We also benefit from our controlling shareholder DUG, a leader in the social casino gaming industry, with whom we regularly engage to share best practices.



 

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Our strategies

Grow our player network.

We plan to develop new content and features within our existing games to grow the number of active players in our existing player segments. In addition, we intend to further develop additional content and features to cultivate new players from adjacent segments and new geographies. We also aim to efficiently deploy our marketing spend to attract new players to our platform.

Increase engagement and monetization of existing players.

We intend to improve engagement and monetization of our existing players by leveraging enhanced data insights gained from our analytic capabilities. We also aim to utilize our rich data to hone our development, marketing, and live game operations efforts to drive additional player engagement and monetization.

Grow DoubleDown Fort Knox, our newest game.

We intend to rapidly build-out our latest game, DoubleDown Fort Knox, which utilizes our all-in-one approach. We aim to leverage first-of-its-kind features, such as 3D slots and the option to play the game in both portrait and landscape mode, to target new players and drive paying player conversion.

Expand geographically.

We aim to expand geographically with both existing and new content. We believe we can further leverage our existing content to grow in regions that share familiarity with our current content and gameplay features, such as Australia and Western Europe. Additionally, we see an opportunity to offer localized slot content specially designed to appeal to players from additional geographies where we may be underpenetrated today, such as the Asia-Pacific region.

Develop new games targeting adjacent casual genres.

We plan to broaden our existing product offering with expanded casual game elements.

Pursue selective mergers and acquisitions.

We intend to pursue selective merger and acquisition opportunities to expand our capabilities and grow our industry and geographic footprint.

Summary risk factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk factors” following this prospectus summary. If any of these risks actually occur, our business, financial condition or results of operations would likely be materially and adversely affected. In such case, the trading price of our ADSs would likely decline, and you may lose all or part of your investment. These risk factors include, but are not limited to:

 

 

Our profitability may be affected by the rate and manner at which we successfully manage our current and future growth;



 

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We rely on a small percentage of our players for all of our revenue;

 

 

To date, we have been reliant upon our DoubleDown Casino game for substantially all of our revenue;

 

 

We rely substantially on third-party platforms to make our games available to players and to collect revenue;

 

 

Legal proceedings may have a material adverse impact on our business;

 

 

Social opposition to interactive gaming could limit our growth and impact the future of our business;

 

 

We rely on the ability to use the intellectual property of third parties, particularly IGT and DUG, for a substantial portion or our content and other features incorporated into our games;

 

 

Our business depends on our ability to protect proprietary information and our owned and licensed intellectual property;

 

 

The intellectual property rights of others may prevent us from developing new games and/or entering new markets, or may expose us to costly litigation;

 

 

Our success depends upon our ability to adapt to and offer games that keep pace with changing technology and evolving industry standards;

 

 

Data privacy and security laws and regulations could increase the cost of our operations and subject us to possible sanctions or penalties;

 

 

We operate in a highly competitive industry, and our success depends on our ability to effectively compete;

 

 

Our success depends on the security and integrity of the games we offer, and cyber-attacks, security breaches, or other disruptions could compromise our information or the information of our players and expose us to liability, which would cause our business and reputation to suffer;

 

 

If the use of mobile devices as gaming platforms and the proliferation of mobile devices generally do not increase, our business could be harmed;

 

 

Our business may be adversely impacted by reductions in discretionary consumer spending as a result of downturns in the economy or other factors beyond our control, including any impact from the recent coronavirus outbreak;

 

 

Escalations in tensions with North Korea could materially affect our Company and the market value of our ADSs;

 

 

DoubleU Games controls the direction of our business, and the concentrated ownership of our common shares will prevent you and other shareholders from influencing significant decisions;

 

 

DoubleU Games’ interests may conflict with our interests and the interests of our shareholders; and

 

 

We are a “foreign private issuer” as defined under the Securities Act of 1933, as amended, and, as a result, will qualify for, and intend to rely on, exemptions from certain NASDAQ corporate governance requirements.

Emerging growth company status

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (which we refer to as the



 

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“JOBS Act”). As such, we are eligible to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to, among other things:

 

 

present more than two years of audited financial statements and two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure in our registration statement of which this prospectus forms a part;

 

 

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”);

 

 

disclose certain executive compensation related items; and

 

 

seek shareholder non-binding advisory votes on certain executive compensation matters and golden parachute arrangements, to the extent applicable to our Company as a foreign private issuer.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.

The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Corporate information

Our Company was originally established as The8Games Co., Ltd., in Seoul, Korea in 2008, an interactive entertainment studio focused on the development and publishing of casual games and mobile applications. In 2016, DUG acquired a controlling stake in our Company and, in 2017, DUG acquired the remaining stake in our Company, making us a wholly-owned subsidiary of DUG. Later in 2017, DUG also acquired DDI-US through our Company, believing that our strengths could be highly complementary to DDI-US for creating more powerful social casino gaming content. We changed our name to DoubleDown Interactive Co., Ltd. in December 2019. In February 2020, we acquired Korea-based Double8 Games from DoubleU Games.

Our agent for service of process in the United States is DoubleDown Interactive, LLC, 605 5th Avenue, Suite 300, Seattle, Washington 98104. Our principal executive offices are located at 13F, Gangnam Finance Center, 152, Teheran-ro Gangnam-gu, Seoul 06236, Korea. Our main telephone number is +82-2-501-7216. Our internet website is https://doubledowninteractive.com. The information contained in, or that can be accessed through,



 

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our website is not incorporated by reference into, and is not a part of, this prospectus. You should not consider any information on our website to be part of this prospectus or in decides whether to purchase our ADSs. We have included our website address in this prospectus solely for informational purposes.

Trademarks

The names and marks, DoubleDown Casino, DoubleDown Classic, DoubleDown Fort Knox, and other trademarks, trade names and service marks of DDI appearing in this prospectus are the property of DDI. This prospectus also contains additional trademarks, trade names and service marks belonging to other companies. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.



 

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The Offering

 

Issuer

DoubleDown Interactive Co., Ltd.

 

Offering price

We currently expect the initial public offering price to be between $17 and $19 per ADS.

 

ADSs offered by us

5,500,000 ADSs.

 

ADSs offered by the selling shareholder

5,500,000 ADSs (or 7,150,000 ADSs if the underwriters exercise in full their option to purchase additional ADSs).

 

Common shares to be
outstanding immediately
after this offering

2,489,522 common shares.

 

Underwriters’ option to
purchase additional
ADSs

The selling shareholder has granted to the underwriters an option to purchase up to 1,650,000 additional ADSs from the selling shareholder at the initial public offering price less the underwriting discounts and commissions, for a period of 30 days from the date of this prospectus.

 

The ADSs

20 ADSs represent one common share. The ADSs are evidenced by American depositary receipts (ADRs) issued by Citibank, N.A., as depositary. The depositary’s agent, the custodian, will be the holder of the common shares underlying the ADSs, and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary, and owners and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the common shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement, as amended, if you continue to hold your ADSs.

 

Depositary

Citibank, N.A.

 

Use of proceeds

We expect to receive net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us of approximately $88.0 million, based on an assumed public offering price of $18 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds from this offering for working capital and general corporate purposes. See “Use of proceeds.”


 

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  We will not receive any proceeds from the sale of our ADSs by the selling shareholder in this offering.

 

Lock-up

We and our existing shareholders have agreed with the underwriters not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, any of our securities for a period of 180 days following the closing of the offering of the ADSs, subject to certain exceptions. See “Underwriting” for more information.

 

Listing

Our ADSs have been approved for listing on the NASDAQ Global Select Market under the symbol “DDI.”

 

Risk factors

Investing in our ADSs involves a high degree of risk. For a discussion of factors you should carefully consider before making an investment decision, see “Risk factors” beginning on page 15.

 

 

Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs.

 

 



 

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Summary consolidated financial information and operating data

The following tables present the summary consolidated financial information and operating data for DoubleDown Interactive Co., Ltd. and its subsidiaries for our fiscal years ended December 31, 2019 and 2018, and the three months ended March 31, 2020 and 2019. The summary consolidated income statement data for the years ended December 31, 2019 and 2018 and the summary consolidated balance sheet data as of December 31, 2019 and 2018 are derived from the audited consolidated financial statements of DoubleDown Interactive Co., Ltd. and its subsidiaries, prepared in accordance with U.S. GAAP, included in this prospectus. The summary consolidated income statement data for the three months ended March 31, 2020 and 2019 and the summary consolidated balance sheet data as of March 31, 2020 are derived from the unaudited condensed consolidated financial statements of DoubleDown Interactive Co., Ltd. and its subsidiaries, prepared in accordance with U.S. GAAP, included in this prospectus.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. The information set forth below should be read together with “Selected consolidated financial information and operating data,” “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements of DoubleDown Interactive Co., Ltd. and the accompanying notes beginning on page F-1 in this prospectus.

Years ended December 31, 2019 and December 31, 2018

 

   

Summary consolidated income statement data

(in millions)

   Year ended December 31,  
           2019             2018  

Revenue

   $  273.6     $ 266.9  

Operating expenses:

    

Cost of revenue(1)

     99.6       104.0  

Sales and marketing(1)

     35.8       39.9  

Research and development(1)

     19.3       20.1  

General and administrative(1)

     17.2       17.8  

Depreciation and amortization

     33.4       30.1  
  

 

 

 

Total operating expenses

     205.3       211.9  
  

 

 

 

Operating income

     68.3       55.0  

Interest expense

     (26.6     (30.4

Interest income

     0.5       0.3  

Gain on foreign currency transactions

     4.1       2.4  

Gain on foreign currency remeasurement of intercompany item

     3.2       7.2  

Other income (expense), net

     0.3       (0.2

Income tax expense

     (13.5     (9.2
  

 

 

 

Net income

   $  36.3     $ 25.1  

 

 

 

   

Summary other data

(in millions, except ARPDAU and percentages)

   Year ended December 31,  
           2019             2018  

Adjusted EBITDA(2)

   $  101.7     $ 85.1  

Net income margin(3)

     13.3     9.4%  

Adjusted EBITDA margin(2)

     37.2     31.9%  

Average MAU(4)

     2.8       3.3  

Average DAU(4)

     1.2       1.3  

ARPDAU(4)

   $  0.64     $ 0.57  

Mobile penetration(5)

     67.5     64.6%  

 

 


 

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Reconciliation of non-GAAP measures
(in millions
, except percentages)

   Year ended December 31,  
           2019             2018  

Net income

   $  36.3     $ 25.1  

Income tax expense

     13.5       9.2  

Income before tax

     49.8       34.3  

Adjustments for:

    

Depreciation and amortization

     33.4       30.1  

Interest expense

     26.6       30.4  

Foreign currency transaction/remeasurement (gain) loss

     (7.3     (9.6

Other income (expense), net

     (0.8     (0.1

Adjusted EBITDA

   $  101.7     $ 85.1  

Adjusted EBITDA margin

     37.2     31.9%  

 

 

 

   

Summary consolidated balance sheet data
(in millions)

   As of December 31,  
           2019              2018  

Cash and cash equivalents

   $  42.4      $ 31.0  

Total assets

   $ 815.4      $ 820.3  

Total liabilities

   $ 434.7      $ 490.4  

Total equity

   $  380.7      $ 329.9  

 

 

 

(1)   Excluding depreciation and amortization.

 

(2)   We define Adjusted EBITDA as operating income before interest expense, income tax expense, depreciation and amortization, foreign currency transaction and remeasurement gains and losses, and other income (expense), net (including interest income). Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period. Management has presented the performance measure Adjusted EBITDA because it monitors performance at a consolidated level and believes that this measure is relevant to an understanding of the Company’s financial performance. In addition, we believe this metric provides useful information in understanding our operating performance and trends in our business. Adjusted EBITDA is not a defined performance measure in U.S. GAAP. The Company’s definition of Adjusted EBITDA may not be comparable with similarly titled performance measures and disclosures by other entities. See also “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends—Adjusted EBITDA.”

 

(3)   Net income margin represents net income as a percentage of revenue, which is the most directly comparable GAAP measure to Adjusted EBITDA margin described above.

 

(4)   See the definitions of the key performance indicators in “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends.”

 

(5)   Mobile penetration represents the percentage of revenue sourced from the Google, Apple, and Amazon platforms.


 

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Three months ended March 31, 2020 and March 31, 2019

 

   

Summary consolidated income statement data

(in millions)

 

   Three months ended March 31,  
           2020             2019  

Revenue

   $ 76.1     $   68.3  

Operating expenses:

    

Cost of revenue(1)

     26.9       25.5  

Sales and marketing(1)

     14.5       7.1  

Research and development(1)

     4.3       5.8  

General and administrative(1)

     5.0       5.2  

Depreciation and amortization

     8.0       8.4  
  

 

 

 

Total operating expenses

     58.7       52.0  
  

 

 

 

Operating income

     17.4       16.3  

Interest expense

     (6.1     (6.7

Interest income

     0.1       0.0  

Gain on foreign currency transactions

     0.8       0.1  

Gain on foreign currency remeasurement of intercompany item

     4.2       2.8  

Other income (expense), net

     0.1       (0.2

Income tax expense

     (3.6     (3.5
  

 

 

 

Net income

     $  12.9     $ 8.8  

 

 

 

   

Summary other data

(in millions, except ARPDAU and percentages)

 

   Three months ended March 31,  
           2020             2019  

Adjusted EBITDA(2)

     $  25.3     $ 24.7  

Net income margin(3)

     16.9     12.8%  

Adjusted EBITDA margin(2)

     33.3     36.2%  

Average MAU(4)

     3.0       2.9  

Average DAU(4)

     1.2       1.2  

ARPDAU(4)

     $  0.70     $ 0.62  

Mobile penetration(5)

     69.9     66.7%  

 

 

 

   

Reconciliation of non-GAAP measures
(in millions, except percentages)

   Three months ended March 31,  
           2020             2019  

Net income

     $12.9     $ 8.8  

Income tax expense

     3.6       3.5  

Income before tax

     16.5       12.3  

Adjustments for:

    

Depreciation and amortization

     8.0       8.4  

Interest expense

     6.1       6.7  

Foreign currency transaction/remeasurement (gain) loss

     (5.1)       (2.9

Other income (expense), net

     (0.2)       0.2  

Adjusted EBITDA

     $25.3     $ 24.7  

Adjusted EBITDA margin

     33.3     36.2%  

 

 


 

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Summary consolidated balance sheet data

(in millions)

 

   As of March 31,  
   2020  

Cash and cash equivalents

   $ 36.5  

Total assets

   $   809.2  

Total liabilities

   $ 405.8  

Total equity

   $ 403.4  

 

  

 

 

 

 

(1)   Excluding depreciation and amortization.

 

(2)   We define Adjusted EBITDA as operating income before interest expense, income tax expense, depreciation and amortization, foreign currency transaction and remeasurement gains and losses, and other income (expense), net (including interest income). Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period. Management has presented the performance measure Adjusted EBITDA because it monitors performance at a consolidated level and believes that this measure is relevant to an understanding of the Company’s financial performance. In addition, we believe this metric provides useful information in understanding our operating performance and trends in our business. Adjusted EBITDA is not a defined performance measure in U.S. GAAP. The Company’s definition of Adjusted EBITDA may not be comparable with similarly titled performance measures and disclosures by other entities. See also “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends—Adjusted EBITDA.”

 

(3)   Net income margin represents net income as a percentage of revenue, which is the most directly comparable GAAP measure to Adjusted EBITDA margin described above.

 

(4)   See the definitions of the key performance indicators in “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends.”

 

(5)   Mobile penetration represents the percentage of revenue sourced from the Google, Apple, and Amazon platforms.

 



 

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Risk factors

An investment in our ADSs involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our businesses and an investment in our ADSs, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our businesses, prospects, liquidity, financial condition, and results of operations could be materially and adversely affected, in which case the value of our ADSs could decline significantly and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary note regarding forward-looking statements.”

Risks related to our business and industry

Our profitability may be affected by the rate at which we grow our business. The inability to successfully manage our current and future growth may materially and adversely affect our results of operations and financial condition.

We have grown the business since the acquisition of DDI-US from IGT in 2017 and we intend to continue to expand the scope and geographic relevance of the games we provide. Our total revenue increased to $273.6 million for the year ended December 31, 2019, from approximately $266.9 million in 2018. Achieving our growth strategy will depend, in large part, upon the rate at which we are able to attract and retain paying players to our games, create engaging content, and expand geographically.

Our ability to increase the number of players of our games will depend on continued player adoption of online social casino and other forms of casual online gaming. Growth in the online gaming industry and the level of demand for and market acceptance of our games are subject to a high degree of uncertainty. We expect that the overall number of our customers and the amount they are willing to invest in our games will fluctuate from time to time. The rate at which we acquire paying players may be affected by increased competition, general economic conditions, or other factors. In addition, we may not be successful in providing sufficient incentives and creating engaging content to retain our existing customers and attract new customers. If we are unable to successfully acquire, retain, and monetize players who make purchases in our games, our operations and financial condition will be adversely affected and our profitability may decline.

In addition, we hope to grow our player base through geographic expansion of our markets, particularly in Asia-Pacific and Western Europe. However, significant growth in such markets may not be successful if we do not plan the timing of the expansion appropriately, understand the social and other factors driving player participation in such markets so that we can adapt our content accordingly, and effectively navigate the regulatory environment in which we may be required to operate. If we are unable to properly and prudently manage our operations as we continue to grow, if the quality of our games deteriorates, or if we are unable to provide suitable incentives and content, our name and reputation could be severely harmed, and our business, prospects, financial condition, and results of operations could be adversely affected.

We rely on a small percentage of our players for all of our revenue.

Our games are available to players for free, and we generate revenue from players only if they voluntarily purchase virtual chips above and beyond the level of free virtual chips provided periodically as part of the games. In particular, we monitor the number of players who make a purchase to assess any periodic changes in behavior and associated trends. Average MPUs, or the average number of players who made a purchase at least once in a month, has decreased slightly from 2018 to 2019, but has been offset by a gradual increase in our average monthly revenue per paying player. Further, our overall payer conversion rate during fiscal years 2018

 

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and 2019 has increased from 5.0% in 2018 to 5.2% in 2019. Our paying players may stop making purchases in our games or playing our games altogether at any time. In order to sustain or increase our revenue levels, we must increase the amount our players spend in our games and/or increase the number of players who purchase virtual chips. To retain paying players, we must devote significant resources so that the games they play retain their interest and motivate them to purchase virtual chips through incentives and engaging content. If the average amount spent by our paying players declines, if we fail to offer games that sufficiently incentivize players to purchase our virtual chips, or if we fail to properly manage the economics of free versus paid chips, our business, financial condition, and results of operations could be materially and adversely affected.

Our DoubleDown Casino game has generated substantially all of our revenue, and we intend to continue to refresh content and launch new games in order to attract and retain a significant number of paying players to grow our revenue and sustain our competitive position.

Historically, DoubleDown Casino has accounted for substantially all our revenue (2019: 96.3%; 2018: 96.9%), and we expect that this dependency will continue for the foreseeable future while we endeavor to further diversify our portfolio through the addition of new games, such as DoubleDown Fort Knox. See “Our business—Our games.” Our growth will depend, in part, on our ability to consistently refresh content for our existing games to promote engagement with our players, as well as launch new games that achieve significant popularity. However, as we add new games to our portfolio, certain of our players may leave existing games, such as DoubleDown Casino, and move to a new offering, such as DoubleDown Fort Knox. As we refresh content and develop new games, we expend significant resources in research and development, analytics, marketing, and others to design, test, and launch refreshed content and our new games.

Our ability to successfully and timely design, test, and launch our games and provide refreshed content, as well as attract and retain paying players, largely depends on our ability to, among other things:

 

 

analyze player demographics and effectively respond to changing player interests and preferences and the competitive landscape;

 

 

enhance existing games with refreshed content and develop new games that, in each case, are interesting and compelling and that incentivize players to purchase virtual chips on a regular basis;

 

 

effectively develop new social and geographic markets for our games;

 

 

minimize delays and cost overruns on development and launch of refreshed content for existing games and of new games; and

 

 

expand our proprietary portfolio of games through organic growth and licensed third-party content.

If we do not successfully extend the life of our existing games and launch games that attract and retain a significant number of paying players, our market share, reputation, and financial results could be harmed. In addition, if the popularity of any of our most successful games decreases significantly, it would have a material adverse effect on our results of operations, cash flows, and financial condition. We cannot assure that our initiatives to improve our player experience will always be successful.

We rely substantially on third-party platforms to make our games available to players and to collect revenue.

Our games are distributed through several main platform providers, including Apple, Facebook, Google, and Amazon, which also provide us valuable information and data, such as the rankings of our games. Substantially all of our revenue is generated by players using those platforms. Consequently, our expansion and prospects depend on our continued relationships with these providers, and any emerging platform providers that are widely adopted by our target player base in the geographic markets in which we operate.

 

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We are subject to the standard terms and conditions that these platform providers have for application developers, which govern the promotion, distribution and operation of games and other applications on their platforms, and which the platform providers can change unilaterally on short or no notice. Our business would be harmed if:

 

 

the platform providers discontinue or limit our access to their platforms;

 

 

governments or private parties, such as internet providers, impose bandwidth restrictions, increase charges, or restrict or prohibit access to those platforms;

 

 

the platforms modify their current discovery mechanisms, communication channels available to developers, respective terms of service, or other policies, including fees;

 

 

the platforms adopt changes or updates to their technology that impede integration with other software systems, such as Adobe Flash or others, or otherwise require us to modify our technology or update our games in order to ensure players can continue to access our games and content with ease;

 

 

the platforms impose restrictions or make it more difficult for players to buy our virtual chips; or

 

 

the platforms develop their own competitive offerings.

If alternative platforms increase in popularity, we could be adversely impacted if we fail to create compatible versions of our games in a timely manner, or if we fail to establish a relationship with such alternative platforms. Likewise, if our existing platform providers alter their operating platforms or browsers, we could be adversely impacted as our offerings may not be compatible with the altered platforms or browsers or may require significant and costly modifications in order to become compatible. If our platform providers were to develop competitive offerings, either on their own or in cooperation with one or more competitors, our growth prospects could be negatively impacted. If our platform providers do not perform their obligations in accordance with our platform agreements, we could be adversely impacted.

In the past, some of these providers’ platforms have been unavailable for short periods of time or experienced issues with certain features. If such events occur on a prolonged basis or other similar issues arise that impact players’ ability to download our games, access social features, or purchase virtual chips, it could have a material adverse effect on our revenue, operating results, and reputation.

Legal proceedings may materially adversely affect our business and our results of operations, cash flows, and financial condition.

We have been party to, are currently party to, and in the future may become subject to additional, legal proceedings in the operation of our business, including, but not limited to, with respect to consumer protection, gaming-related matters, employee matters, alleged service and system malfunctions, alleged intellectual property infringement, and claims relating to our contracts, licenses, and strategic investments.

For example, in 2015, a plaintiff commenced a putative class action in the United States District Court for the Western District of Washington against Churchill Downs Incorporated, one of our competitors, alleging that Churchill Downs’ virtual game platform, “Big Fish Casino,” violated Washington’s Recovery of Money Lost at Gambling Act (“WRMLGA”) and Consumer Protection Act (“CPA”). The District Court dismissed plaintiff’s action. On March 28, 2018, the United States Court of Appeals for the Ninth Circuit reversed the District Court’s holding, concluding that, because Big Fish Casino’s virtual chips are a “thing of value,” Big Fish Casino falls under the WRMLGA. The Ninth Circuit remanded the action to the District Court for further proceedings consistent with its opinion. On March 4, 2020, plaintiff’s motion for class certification was denied by the District Court without prejudice to refile. Additional class actions have been commenced against other of our competitors on similar

 

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grounds, certain of which, including Churchill Downs, have announced settlements in recent weeks which remain subject to court approval.

In April 2018, a putative class action lawsuit, Benson, et al. v. DoubleDown Interactive, LLC, et al., was filed against DDI-US in the United States District Court for the Western District of Washington based upon the theory, like Big Fish Casino, that the use of the DoubleDown Casino Facebook and mobile applications violated the WRMLGA and CPA. The plaintiffs make their allegations on behalf of themselves and “all persons in the United States who purchased and lost chips by wagering at the DoubleDown Casino.” Plaintiffs seek to recover, on behalf of themselves and the class, among other things, (i) all money they wagered and lost playing DDI-US games; and (ii) treble damages. Plaintiffs also seek injunctive and/or declaratory relief as necessary to protect the interests of Plaintiff and the class. On November 13, 2018, the District Court denied DDI-US’s motion to compel arbitration. DDI-US filed an appeal to the United States Court of Appeals for the Ninth Circuit, arguing that plaintiff’s action should have been dismissed because their individual cases are subject to the arbitration agreement in the applicable Terms of Use. On October 3, 2019, the Ninth Circuit held DDI-US’s appeal in abeyance pending resolution of a similar appeal before the Ninth Circuit in Wilson v. Huuuge, Inc. On December 20, 2019, the Ninth Circuit rendered its decision in the Wilson case, affirming the District Court’s denial of Huuuge’s motion to compel arbitration. On January 29, 2020, DDI-US’s appeal to the Ninth Circuit was denied and the case was remanded to the District Court for further proceedings. On June 17, 2020, the Company filed a motion in the United States District Court for the Western District of Washington, which, if granted, would certify certain questions of state law to the Washington State Supreme Court for interpretation in accordance with applicable state law. No date for a hearing on the motion has been set. Discovery has commenced and is continuing. See “Our business—Legal proceedings.”

We may incur significant expense defending this lawsuit or any other lawsuit to which we may be a party. If the plaintiffs were to obtain a judgment in their favor in this lawsuit, then our operating results could be materially negatively impacted, and we could, among other things, be restricted from operating social casino games in Washington. Additional legal proceedings targeting our social casino games and claiming violations of state or federal laws could also occur in other states, based on the unique and particular laws of each jurisdiction. We cannot predict the likelihood, timing, or scope of the consequences of such an outcome, or the outcome of any other legal proceedings to which we may be a party, any of which could have a material adverse effect on our results of operations, cash flows, or financial condition.

Certain social opposition to interactive gaming or potential issues relating to social casino games could adversely impact our business and limit the growth of our operations.

There is certain opposition in some jurisdictions to interactive online gaming, including social casino games. In September 2018, the World Health Organization added “gaming disorder” to the International Classification of Diseases, defining the disorder as a pattern of behavior characterized by impaired control over gaming and an increase in the priority of gaming over other interests and daily activities. Some states or countries have anti-gaming groups that specifically target social casino games. Such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casino games specifically. These could result in a prohibition on interactive online gaming or social casino games altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations, all of which could have an adverse effect on our results of operations, cash flows, and financial condition. We cannot predict the likelihood, timing, scope, or terms of any such legislation or regulation or the extent to which they may affect our business.

On September 17, 2018, 15 international gambling regulators, plus the Washington State Gambling Commission, signed a declaration expressing concern “with the risks posed by the blurring of lines between gambling and other forms of digital entertainments such as video gaming,” including, among others, social casino gaming.

 

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The regulators committed to work together to analyze the characteristics of video games and social gaming, and to engage in an informed dialogue with the video game and social gaming industries to ensure the appropriate and efficient implementation of applicable laws and regulations. The regulators also indicated they would work closely with their consumer protection enforcement agencies. We cannot predict the likelihood, timing, scope, or terms of any actions taken as a result of the declaration.

Consumer protection concerns regarding games such as ours have been raised in the past and may again be raised in the future. These concerns include (i) whether social casino games may be shown to serve as a gateway for adolescents to monetary gambling, and (ii) a concern that social casino gaming companies are using big data and advanced technology to predict and target “vulnerable” users who may spend significant time and money on social casino games in lieu of other activities. Such concerns could lead to increased scrutiny, including the potential imposition of a regulatory framework, over the manner in which our games are designed, developed, distributed, and presented. It is difficult for us to monitor and enforce age or other jurisdictional restrictions with respect to players who download or play our games, as we rely on third-party distribution platforms such as Apple App Store, Facebook, Google Play Store, and Amazon Appstore. We cannot predict the likelihood, timing, or scope of any concern reaching a level that will impact our business, or whether, as a result, we would suffer any adverse impacts to our results of operations, cash flows, financial condition, and reputation.

We rely on the ability to use the intellectual property rights of third parties, and we may lose the benefit of some of the intellectual property licensed to us if the license agreements are terminated.

Substantially all of the content and related intellectual property incorporated into our games are licensed from third parties, in particular IGT and DUG. Since June 2017, we have been party to a Game Development, Distribution and Services Agreement with IGT (which we refer to as the “IP License Agreement”), pursuant to which we are granted the right to develop and distribute certain IGT game titles and related intellectual property. Under the IP License Agreement, we expect, but cannot guarantee, that we will be able to continue to receive those rights on favorable or reasonable terms. In addition, although IGT has the right to terminate the IP License Agreement for cause, we will retain exclusive, perpetual, and irrevocable use of any IGT intellectual property already used by us (excluding third party rights that IGT no longer has rights to itself), except in limited circumstances. See “Our business—Intellectual property.” In addition, we have licensing arrangements with our controlling shareholder, DUG, since March 2018, pursuant to which we are granted an exclusive license to develop and distribute certain of their social casino game titles and sequels, subject to our payment of customary terms and license fees. As of March 31, 2020, we license approximately 24 game titles that are actively offered to players. As amended to date, the agreement remains in effect until either DUG no longer holds an interest, directly or indirectly, in DDI, or DDI no longer holds an interest, directly or indirectly, in DDI-US. In such event, the agreement provides that the parties will mutually renegotiate the terms of the agreement. We expect, but cannot guarantee, that we will be able to continue to receive those rights on favorable or reasonable terms. See “Our business—Intellectual property.”

The future success of our business will depend, in part, on our ability to retain or expand intellectual property licenses. We cannot assure that these third-party licenses will continue to be available to us on commercially reasonable terms, if at all. Further, existing and future license arrangements containing royalty provisions could cause us to incur impairment charges in connection with minimum guarantees. To address these risks, we have increased our research and development capabilities in order to create proprietary intellectual property, including content, although there is no guarantee we will be able to create content that receives sufficient acceptance from the market or that is developed in a timely manner. In the event that we are unable to create such content and, in addition, if we lose the benefit of, or cannot renew and/or expand existing licenses with IGT and DUG, we may be required to discontinue or limit our use of certain game titles and related technologies that include or incorporate the licensed intellectual property.

 

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Our business depends on the protection of our proprietary information and our owned and licensed intellectual property.

We believe that our success depends in part on protecting our owned and licensed intellectual property in the United States and other countries. Our intellectual property includes certain patents, trademarks and copyrights relating to our games, and proprietary or confidential information that is not subject to formal intellectual property protection. Much of our intellectual property that is significant to our business is owned by DoubleU Games or IGT and licensed to us, and we do not control the protection and maintenance of such intellectual property from third parties, and must rely on them to protect and maintain such intellectual property. Our success may depend, in part, on our and our licensors’ ability to protect the trademarks, trade dress, names, logos, or symbols under which we market our games and to obtain and maintain patent, copyright, and other intellectual property protection for the technologies, designs, software, and innovations used in our games and our business. We cannot assure that we will be able to build and maintain consumer value in our proprietary trademarks and copyrights or otherwise protect our technologies, designs, software, and innovations or that any patent, trademark, copyright, or other intellectual property right will provide us with competitive advantages.

We also rely on trade secrets and proprietary knowledge. We enter into confidentiality agreements with our employees and independent contractors regarding our trade secrets and proprietary information, but we cannot assure that the obligation to maintain the confidentiality of our trade secrets and proprietary information will be honored by such individuals.

In the future we may make claims of infringement against third parties or make claims that third-party intellectual property rights are invalid or unenforceable. These claims could cause us to incur greater costs and expenses in the protection of our intellectual property and could potentially negatively impact our intellectual property rights, for example, by causing one or more of our intellectual property rights to be ruled or rendered unenforceable or invalid.

Despite our efforts to protect our intellectual property rights, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors or other third parties.

The intellectual property rights of others may prevent us from developing new games and/or entering new markets, or may expose us to liability or costly litigation.

Our success depends in part on our ability to continually adapt our games to incorporate new technologies as well as intellectual property related to game mechanics and procedures, and to expand into markets that may be created by these new developments. If technologies are protected by the intellectual property rights of our competitors or other third parties, we may be prevented from introducing games based on these technologies or expanding into markets created by these technologies.

We cannot assure that our business activities and games will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. A successful claim of infringement by a third party against us, our games or one of our licensees in connection with the use of our technologies, game mechanics or procedures, or an unsuccessful claim of infringement made by us against a third party or its products or games, could adversely affect our business or cause us financial harm. Any such claim and any resulting litigation, should it occur, could:

 

 

be expensive and time-consuming to defend or require us to pay significant amounts in damages;

 

 

result in invalidation of our proprietary rights or render our proprietary rights unenforceable;

 

 

cause us to cease making, licensing, or using games that incorporate the intellectual property;

 

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require us to redesign, reengineer, or rebrand our games or limit our ability to bring new games to the market in the future;

 

 

require us to enter into costly or burdensome royalty, licensing, or settlement agreements in order to obtain the right to use a product or process;

 

 

impact the commercial viability of the games that are the subject of the claim during the pendency of such claim; or

 

 

require us to stop offering the infringing games.

Our success depends upon our ability to acquire and retain players, as well as adapt to and offer games that keep pace with changing technology and evolving industry standards.

Our ability to acquire and retain players is largely driven by our success in maintaining and increasing the quantity and quality of games in our portfolio. To satisfy players, we need to continue to improve their online gaming experience and innovate and introduce games that our players find more rewarding to play than those of our competitors. This will require us to, among other things, continue to improve our technology, game mechanics, and procedures to optimize search results for our games, tailor our game offerings to additional geographic and demographic market segments, and improve the user-friendliness of our games, while working to minimize the risk that players will be diverted from our existing games to one of our new games resulting in reduced purchases by those players. Our ability to anticipate or respond to changing technology and evolving industry standards and to develop and introduce new and enhanced games on a timely basis, or at all, is a significant factor affecting our ability to remain competitive and expand and attract new players. We cannot assure that we will have the financial and technical resources needed to introduce new games on a timely basis, or at all.

Further, as technological or regulatory standards change and we modify our games to comply with those standards, we may need players to take certain actions to continue playing, such as downloading a new game, performing age-gating checks or accepting new terms and conditions. Players may stop using our games at any time, including if the quality of the player experience on our games and our support capabilities in the event of a problem do not meet their expectations or keep pace with the quality of the player experience generally offered by competitive games and services.

Our players depend on our support organization to resolve any issues relating to our games. Our ability to provide effective support is largely dependent on our ability to attract, resource, and retain employees who are not only qualified to support players of our games, but are also well versed in our games. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to sell virtual chips within our games to existing and prospective players, and adversely impact our results of operations, cash flows, and financial condition.

Our global operations expose us to business and legal risks, which could restrict or limit our ability to execute our strategy.

Substantially all of our revenues are currently generated through DDI-US in the United States. Our headquarters and significant game development operations are based in Seoul, Korea. We are subject to risks customarily associated with such global operations, including: the complexity of laws, regulations, and markets in the countries in which we operate; the uncertainty of enforcement of remedies in certain jurisdictions; the effect of currency exchange rate fluctuations; export control laws; the impact of foreign labor laws and disputes; the ability to attract and retain key personnel; the economic, tax, and regulatory policies of local governments; compliance with applicable anti-money laundering, anti-bribery, and anti-corruption laws, including the Foreign Corrupt Practices Act, The Improper Solicitation and Graft Act of Korea, and other anti-corruption laws that generally prohibit persons and companies and their agents from offering, promising,

 

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authorizing, or making improper payments to foreign government officials for the purpose of obtaining or retaining business; and compliance with applicable sanctions regimes regarding dealings with certain persons or countries. Certain of these laws also contain provisions that require accurate recordkeeping and further require companies to devise and maintain an adequate system of internal accounting controls.

If we adopt policies and controls that are ineffective or an employee or intermediary fails to comply with the applicable regulations, we may be subject to criminal and civil sanctions and other penalties. Any such violation could disrupt our business and adversely affect our reputation, results of operations, cash flows, and financial condition. In addition, our business operations could be interrupted and negatively affected by terrorist activity, political unrest, or other economic or political uncertainties. Moreover, countries, including in particular Korea and the United States, could impose tariffs, quotas, trade barriers, and other similar restrictions that adversely impact the international nature of our business.

Further, our ability to expand successfully in other countries involves other risks, including difficulties in integrating local operations, risks associated with entering jurisdictions in which we may have little experience and the day-to-day management of a growing and increasingly geographically diverse company. We may not realize the operating efficiencies, competitive advantages or financial results that we anticipate from our investments in countries other than Korea and the United States.

Data privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to possible sanctions and other penalties.

We collect, process, store, use, and share data, some of which contains limited personal information. Consequently, our business is subject to a number of U.S. and international laws and regulations governing data privacy and security, including with respect to the collection, storage, use, transmission, sharing, and protection of personal information and other consumer data. Such laws and regulations may be inconsistent among countries or conflict with other rules.

We are subject to U.S. federal and state and foreign laws related to the privacy and protection of player data. Such regulations, such as the General Data Protections Regulation (“GDPR”) from the European Union (“EU”) and the California Consumer Privacy Act, which became effective on January 1, 2020, are new, untested laws and regulations that could affect our business, and the potential impact is unknown. See “Our business— Regulation of the industry.” We believe we have been and continue to be in compliance with the requirements of the GDPR since the regulation went into effect in 2018. In general, we do not store personal private information given that all payment processing occurs through third-party platforms, such as Facebook, PayPal, Apple, and Google. However, we may store limited personal information if a player enables a Facebook log-in or signs up for our DoubleDown Casino loyalty program.

There currently are a number of other proposals related to data privacy and security pending before several legislative and regulatory bodies. For example, the European Union is contemplating the adoption of the Regulation on Privacy and Electronic Communications (the “e-Privacy Regulation”). While this regulation was planned to take effect simultaneously with GDPR, it is currently still being debated and discussed by the EU member states. The e-Privacy Regulation focuses on the privacy of electronic communications and, in that respect, it contains new rules for direct marketing activities. It is highly likely that these rules will lead to new consent requirements.

Efforts to comply with these and other data privacy and security restrictions that may be enacted could require us to modify our data processing practices and policies, incorporate privacy by design into our games, and will significantly increase the cost of our operations. Failure to comply with such restrictions could subject us to criminal and civil sanctions and other penalties. In part due to the uncertainty of the legal climate, complying with regulations, and any applicable rules or guidance from self-regulatory organizations relating to privacy, data

 

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protection, information security, and consumer protection, may result in substantial costs and may necessitate changes to our business practices, which may compromise our growth strategy, adversely affect our ability to attract or retain players, and otherwise adversely affect our business, financial condition, and operating results.

Any failure or perceived failure by us to comply with our posted privacy policies or terms of use, our privacy-related obligations to players or other third parties, or any other legal obligations or regulatory requirements relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our players to lose trust in us, and otherwise materially and adversely affect our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to us may limit the adoption and use of, and reduce the overall demand for, our games.

Additionally, if third parties we work with violate applicable laws, regulations, or agreements, such violations may put our players’ data at risk, could result in governmental investigations or enforcement actions, fines, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our players to lose trust in us, and otherwise materially and adversely affect our reputation and business. Further, public scrutiny of, or complaints about, technology companies or their data handling or data protection practices, even if unrelated to our business, industry, or operations, may lead to increased scrutiny of technology companies, including us, and may cause government agencies to enact additional regulatory requirements or to modify their enforcement or investigation activities, which may increase our costs and risks.

Security breaches or other disruptions could compromise our information or the information of our players. If we sustain cyber-attacks or other security incidents that result in data breaches, we could suffer a loss of players and associated revenue, increased costs, exposure to significant liability, reputational harm, and other negative consequences.

Our business sometimes involves the storage, processing, and transmission of certain proprietary, confidential, and personal information of our players. We also maintain certain other proprietary and confidential information relating to our business and personal information of our personnel. Despite our security measures, our information technology may be subject to cyber-attacks, viruses, malicious software, break-ins, theft, computer hacking, employee error or malfeasance, or other security breaches. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise sensitive personal, proprietary, or confidential information, create system disruptions, or cause shutdowns. They also may be able to develop and deploy malicious software programs that attack our systems or otherwise exploit any security vulnerabilities.

Our systems and the data stored on those systems may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, coordinated attacks by activist entities, misplaced or lost data, human errors, or other similar events that could negatively affect our systems, the data stored on those systems, and the data of our business partners. Further, third parties, such as hosted solution providers, that provide services to us, could also be a source of security risks in the event of a failure of their own security systems and infrastructure. An increasing number of online services have disclosed security breaches, some of which have involved sophisticated and highly targeted attacks on portions of their services. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not foreseeable or recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach or incident that we experience could result in unauthorized access to, misuse of, or unauthorized acquisition of our or our players’ data, the loss,

 

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corruption or alteration of this data, interruptions in our operations, or damage to our computers or systems or those of our players or third-party platforms. Any of these could expose us to claims, litigation, fines, and potential liability.

The costs to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service, and loss of existing or potential suppliers or players. As threats related to cyber-attacks develop and grow, we may also find it necessary to make further investments to protect our data and infrastructure, which may impact our operations. Although we have insurance coverage for protecting against cyber-attacks, it may not be sufficient to cover all possible claims, and we may suffer losses that could have a material adverse effect on our business. We could also be negatively impacted by existing and proposed laws and regulations, and government policies and practices related to cybersecurity, data privacy, data localization, and data protection in the United States, Korea, the European Union, and other countries.

If an actual or perceived breach of our security occurs, public perception of the effectiveness of our security measures for our games and content could be harmed, and we could lose players. Data security breaches and other data security incidents may also result from non-technical means, for example, actions by employees or contractors. Any compromise of our security could result in a violation of applicable privacy and other laws, regulatory or other governmental investigations, enforcement actions, and legal and financial exposure, including potential contractual liability that is not always limited to the amounts covered by our insurance. Any such compromise could also result in damage to our reputation and a loss of confidence in our security measures. Any of these effects could have a material adverse impact on our results of operations, cash flows, and financial condition.

If the use of mobile devices as gaming platforms and the proliferation of mobile devices generally do not increase, our business could be adversely affected.

The number of people using mobile devices has increased significantly over time and we expect that this trend will continue. However, the mobile market, particularly the market for mobile games, may not grow in the way we anticipate. Approximately 68% of our revenue for the year ended December 31, 2019 and 65% for the year ended December 31, 2018 was attributable to mobile device use. If the mobile devices on which our games are available decline in popularity or become obsolete faster than anticipated, we could experience a decline in revenue and may not achieve the anticipated return on our development efforts. Any such decline in the growth of the mobile market or in the use of mobile devices for games could harm our business, financial condition, or results of operations.

We operate in a highly competitive industry, and our success depends on our ability to effectively compete.

Online gaming is a rapidly evolving industry with low barriers to entry. Businesses can easily launch online or mobile platforms and applications at nominal cost by using commercially available software or partnering with various established companies in these markets, but may not offer the same level of sophistication or capabilities as our games. The market for our games is also characterized by rapid technological developments, frequent launches of new games and content, changes in player needs and behavior, disruption by innovative entrants, and evolving business models and industry standards. As a result, our industry is constantly changing games and business models in order to adopt and optimize new technologies, increase cost efficiency, and adapt to player preferences.

We face competition for leisure time and discretionary spending of our players. Other forms of leisure activities, such as offline, traditional online, personal computer and console games, television, movies, sports, and the internet, offer much larger and more well-established options for consumers. Consumer tastes and preferences for leisure activities are also subject to sudden or unpredictable change due to new innovations. If consumers

 

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do not find our games to be compelling or if other existing or new leisure activities are perceived by our players to offer greater variety, affordability, interactivity, and overall enjoyment, our business could be materially and adversely affected.

We also compete with online gaming companies, including those that offer social casino games such as Playtika, Zynga, SciPlay, Aristocrat, and others, and some of these companies have a base of existing players that is larger than ours. In addition, our controlling shareholder, DoubleU Games, also creates and markets online games and represents a potential source of competition for talent, content development, and players. The interests of DoubleU Games may, from time to time, conflict or compete with our interests. Some of our current and potential competitors, including DoubleU Games, enjoy substantial competitive advantages, such as greater financial, technical, and other resources and, in some cases, the ability to rapidly combine online platforms with traditional staffing solutions. These companies may use these advantages to develop different platforms and services to compete with our games, spend more on advertising and marketing, invest more in research and development or respond more quickly and effectively than we do to new or changing opportunities, technologies, standards, regulatory conditions, or player preferences or requirements. If we are not able to respond to and manage competitive pressure on our business effectively, it could adversely impact our results of operations, cash flows, and financial condition.

If we do not successfully invest in, establish and maintain awareness of our games, if we incur excessive expenses promoting and maintaining our games, or if our games contain defects or objectionable content, our business, financial condition, results of operations, or reputation could be harmed.

We believe that establishing and maintaining our awareness of our games is critical to developing and maintaining favorable relationships with players, platform providers, advertisers, and content licensors, as well as competing for key management and technical talent. Increasing awareness and recognition of our games is particularly important in connection with our strategic focus on developing games based on our own intellectual property and successfully cross-promoting our games. In addition, globalizing and extending awareness and recognition of our games require significant investment and extensive management time to execute successfully. Although we make significant sales and marketing expenditures in connection with the launch of our games, these efforts may not succeed in increasing awareness of our existing or new games. In addition, if a game contains objectionable content or the messaging functionality of our games is abused, our reputation could be damaged. Despite reasonable precautions, some consumers may be offended by certain of our game content or by treatment of other players. If consumers believe that a game we published contains objectionable content, consumers could refuse to play it and could pressure the platform providers to remove the game from their platforms. Further, if we fail to increase and maintain awareness and consumer recognition of our games, our potential revenues could be limited, our costs could increase, and our business, financial condition, results of operations, or reputation could suffer.

Our applications enable us to track certain performance metrics with internal and third-party tools and we do not independently verify such metrics. Certain of our performance metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and adversely affect our business.

We track certain performance metrics, including the number of active and paying players of our games. Our all-in-one app strategy, in particular, provides us with large amounts of data on users and participation rates, among other things. Our performance metrics tools have a number of limitations and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we report. If the internal or third-party tools we use to track these metrics undercount or overcount performance or contain algorithm or other technical errors, the data we report may not be accurate.

 

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In addition, limitations or errors with respect to how we measure data (or the data that we measure) may affect our understanding of certain details of our business, which could affect our longer-term strategies.

Furthermore, our performance metrics may be perceived as unreliable or inaccurate by players, analysts, or business partners. If our performance metrics are not accurate representations of our business, player base, or traffic levels, if we discover material inaccuracies in our metrics, or if the metrics do not provide an accurate measurement of our business, our reputation may be harmed and our business, prospects, financial condition, and results of operations could be materially and adversely affected.

We rely on information technology and other systems, and any failures in our systems or errors, defects, or disruptions in our games could diminish our reputation, subject us to liability, disrupt our business, and adversely impact our results.

We rely on information technology systems that are important to the operation of our business, some of which are managed by third parties. These third parties are typically under no obligation to renew agreements and there is no guarantee that we will be able to renew these agreements on commercially reasonable terms, or at all. These systems are used to process, transmit, and store electronic information, to manage and support our business operations, and to maintain internal control over our financial reporting. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, and regulations. We could encounter difficulties in developing new systems, maintaining and upgrading current systems, and preventing security breaches. Among other things, our systems are susceptible to damage, outages, disruptions, or shutdowns due to fire, floods, power loss, break-ins, cyber-attacks, network penetration, denial of service attacks, and similar events. Any failures in our computer systems or telecommunications services could affect our ability to operate our games or otherwise conduct business.

Portions of our information technology infrastructure, including those operated by third parties, may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource-intensive. We have no control over third parties that provide services to us and those parties could suffer problems or make decisions adverse to our business. We have contingency plans in place to prevent or mitigate the impact of these events. However, such disruptions could materially and adversely impact our ability to deliver games to players and interrupt other processes. If our information systems do not allow us to transmit accurate information, even for a short period of time, to key decision-makers, the ability to manage our business could be disrupted and our results of operations, cash flows, and financial condition could be materially and adversely affected. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, results of operations, cash flows, and financial condition.

Substantially all of our games rely on data transferred over the internet, including wireless internet. Access to the internet in a timely fashion is necessary to provide a satisfactory player experience to the players of our games. Third parties, such as telecommunications companies, could prevent access to the internet or limit the speed of our data transmissions, with or without reason, causing an adverse impact on our player experience that may materially and adversely affect our reputation, competitive position, results of operations, cash flows, and financial condition. In addition, telecommunications companies may implement certain measures, such as increased cost or restrictions based on the type or amount of data transmitted, that would impact consumers’ ability to access our games, which could materially and adversely affect our reputation, competitive position, results of operations, cash flows, and financial condition. Furthermore, internet penetration may be adversely

 

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affected by difficult global economic conditions or the cancellation of government programs to expand broadband access.

Our games and other software applications and systems, and the third-party platforms upon which they are made available, could contain undetected errors.

Our games and other software applications and systems, as well as the third-party platforms upon which they are made available, could contain undetected errors, bugs, flaws, corrupted data, defects, and other vulnerabilities that could adversely affect the performance of our games. For example, these errors could prevent the player from making in-app purchases of virtual chips, which could harm our operating results. They could also harm the overall game-playing experience for our players, which could cause players to reduce their playing time or in game purchases, discontinue playing our games altogether, or not recommend our games to other players. Such errors could also result in our games being non-compliant with applicable laws or create legal liability for us.

Some of these errors may only become apparent after a game is launched, particularly as we often launch new content and release new features to existing games under tight time constraints. Any such errors may be exploited by cheating programs and other forms of misappropriation, disrupt our operations, adversely affect the gaming experience of our players, harm our reputation, cause our players to stop playing our games, divert our resources, and delay market acceptance of our games, any of which could result in legal liability to us or harm our business, financial condition, or results of operations.

We may use open source software in a manner that could be harmful to our business.

We use open source software in connection with our technology and games on a limited basis. The original developers of the open source code provide no warranties on such code. Moreover, some open source software licenses require players who distribute open source software as part of their proprietary software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. We try to use open source software in a manner that will not require the disclosure of the source code to our proprietary software or prevent us from charging fees to our players for use of our proprietary software. However, we cannot guarantee that these efforts will be successful, and thus, there is a risk that the use of such open source code may ultimately preclude us from charging fees for the use of certain software, require us to replace certain code used in our games, pay a royalty to use some open source code, make the source code of our games publicly available, or discontinue certain games. Our results of operations, cash flows, and financial condition could be adversely affected by any of the above requirements.

Our inability to complete potential acquisition opportunities and integrate those businesses successfully could limit our growth or disrupt our plans and operations.

In the future, we may pursue additional strategic acquisitions to further expand our operations. Our ability to succeed in implementing our strategy will depend to some degree upon our ability to identify and complete commercially viable acquisitions. We cannot assure that acquisition opportunities will be available on acceptable terms, or at all, or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions.

We may not be able to successfully integrate any businesses that we acquire or do so within the intended timeframes. We could face significant challenges in managing and integrating our acquisitions and our combined operations, including acquired assets, operations, and personnel. In addition, the expected cost synergies associated with such acquisitions may not be fully realized in the anticipated amounts or within the contemplated timeframes or cost expectations, which could result in increased costs and have an adverse effect on our prospects, results of operations, cash flows, and financial condition.

 

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Our business may be adversely impacted by reductions in discretionary consumer spending as a result of downturns in the economy, global pandemics, or other factors beyond our control.

Consumer demand for entertainment and social casino games, such as ours, is sensitive to downturns in the economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, effects of declines in consumer confidence in the economy, public health concerns or pandemics, such as the COVID-19 coronavirus, the impact of high energy and food costs, the increased cost of travel, decreased disposable consumer income and wealth, political and regulatory uncertainty, or fears of war and future acts of terrorism could further reduce customer demand for the games that we offer and the amounts, if any, our players are willing to spend. These factors could impose practical limits on pricing and negatively impact our results of operations and financial condition.

With respect to COVID-19, we have followed guidance by the Korean government and the state government in Washington to protect our employees and our operations during the pandemic and have effectively implemented a remote environment for our business. To date, we have not incurred any interruptions in operations. We continuously monitor performance and other industry reports to assess the risk of future negative impacts should the disruption of the economy progress.

The online gaming industry, in particular, has been identified in industry and media reports, such as Eilers & Krejcik and AppsFlyer, as an unintended beneficiary of this pandemic as people are quarantined in their homes, and we are not an exception to this benefit. Our DAU and number of payers have increased since the stay-at-home orders began across the United States. We expect this benefit to continue throughout the period of varying quarantine restrictions. However, there is no guarantee that these near-term trends will continue, particularly if quarantine or stay-at-home orders are not eased in coming months or if the pandemic experiences a second wave of infections. Consequently, any change in this current trend resulting in a diversion of player discretionary income to other uses, including for essential items, could adversely impact our cash flows, operating results, and financial condition.

We rely on skilled employees with creative and technical backgrounds.

We rely on our highly skilled, technically trained, and creative employees to develop new technologies and create innovative games. Such employees, particularly game designers, engineers, and project managers with desirable skill sets are in high demand, and we devote significant resources to identifying, hiring, training, successfully integrating, and retaining these individuals. A lack of skilled technical workers could delay or negatively impact our business plans, ability to compete, results of operations, cash flows, and financial condition.

Our results of operations, cash flows, and financial condition could be affected by natural events in the locations in which we or our key platform providers or content suppliers operate.

We may be impacted by severe weather and other geological events, including hurricanes, earthquakes, floods or tsunamis that could disrupt our operations or the operations of our key platform providers or content suppliers. Natural disasters or other disruptions at any of our facilities, those of our key providers, such as Apple, Google, Facebook, and Amazon, or those of our content suppliers, may impair the operation, development or provision of our games. While we insure against certain business interruption risks, we cannot assure that such insurance will compensate us for any losses incurred as a result of natural or other disasters. Any serious disruption to our operations, or those of our key providers or suppliers could have a material adverse effect on our results of operations, cash flows, and financial condition.

 

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Our results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance.

Our results of operations can fluctuate due to seasonal trends and other factors. Player activity is generally slower in the second and third quarters of the year, particularly during the summer months. Certain other seasonal trends and factors that may cause our results to fluctuate include:

 

 

holiday and vacation seasons;

 

climate and weather conditions that could cause players to pursue other activities;

 

economic and political conditions; and

 

the timing of the release of new games or refreshed content, including those of our competitors.

Consequently, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full fiscal year. We cannot assure that the seasonal trends and other factors that have impacted our historical results will repeat in future periods as we do not have the ability to influence these factors.

We are subject to a variety of laws worldwide, many of which are still untested and still developing and which could subject us to further extensive governmental regulation, claims, or otherwise, as well as federal, state, and local laws affecting business in general, which may harm or restrict our business.

We are subject to a variety of laws in the United States, Korea, and other jurisdictions, including laws regarding consumer protection, intellectual property, virtual items and currency, export, and national security, all of which are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside of Korea and the United States. It is also likely that as our business grows and evolves and our games are played in larger volume in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources, modify our games, or block users from a particular jurisdiction, each of which would harm our business, financial condition, and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results.

It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States, Korea, and elsewhere that could restrict the online and mobile industries, including player privacy, advertising, taxation, gaming, copyright, distribution, and antitrust. Our ability to access potentially key markets in the future, such as Korea and China, which currently restrict or otherwise limit entry for social casino gaming companies, will be dependent in part upon changes to the current legal and regulatory environment.

Furthermore, the growth and development of electronic commerce, social gaming, and virtual items and currency may lead to more stringent consumer protection laws that may impose additional burdens on or limitations on operations of companies such as ours conducting business through the internet and mobile devices. If scrutiny and regulation of our industry increases, we will be required to devote additional legal and other resources to addressing such regulation. Such new compliance costs or jurisdictional restrictions on our ability to offer online games could have a material adverse effect on our business, financial condition, and operating results. See “Our business—Regulation of the industry.”

 

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Changes in tax laws or tax rulings, or the examination of our tax positions, could materially affect our financial condition and results of operations.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In 2017, the United States enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others: (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base), and (iv) a one-time tax on accumulated offshore earnings held in cash and cash equivalents and illiquid assets, with the latter taxed at a lower rate. Because these tax law changes are relatively new, we are still evaluating the impact that they may have on our business and results of operations in the future. Although at this time we do not expect that the changes will have an overall significant adverse impact on our business and financial condition, we cannot assure you that our business and results of operations will not be adversely affected by these or other changes to tax laws.

Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws and related regulatory guidance. However, the tax benefits that we intend to eventually derive could be undermined due to changing tax laws. In addition, the taxing authorities in Korea and the United States regularly examine income and other tax returns and we expect that they may examine our income and other tax returns. The ultimate outcome of these examinations cannot be predicted with certainty.

Our insurance may not provide adequate levels of coverage against claims.

We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Moreover, any loss incurred could exceed policy limits and policy payments made to us may not be made on a timely basis. Such losses could adversely affect our business prospects, results of operations, cash flows and financial condition.

Risks related to doing business in Korea

Escalations in tensions with North Korea could have a material effect on us and the market value of our ADSs.

We are incorporated in Korea and certain of our operations are located in Korea. As a result, we are subject to geopolitical uncertainties and risks involving Korea and North Korea.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In particular, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapons and ballistic missile programs as well as its hostile military actions against Korea. For example, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and has conducted several rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Korean government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the Korean government also closed the inter-Korea Gaesong Industrial Complex in response to North Korea’s fourth nuclear test in

 

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January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea. Recently, a series of bilateral summit meetings were held between Korea and North Korea in April, May, and September 2018 and between the United States and North Korea in June 2018 and February and June 2019. The United States-North Korea meeting in February 2019 ended abruptly and without an agreement after the United States refused to lift sanctions until North Korea relinquished all of its nuclear weapons. In June 2019, the United States and North Korea had another one-day summit at the Korean Demilitarized Zone, following which both sides announced a resumption of denuclearization talks. However, in December 2019, North Korea announced its intention to resume missile testing, heightening tensions.

Further tensions in North Korean relations may develop due to events such as North Korea’s leadership crisis, breakdown in high-level inter-Korea contacts, or any military hostilities. Alternatively, tensions may be resolved through reconciliatory efforts, which include peace talks, alleviation of sanctions, or reunification. There can be no assurance that future negotiations will result in a final agreement on North Korea’s nuclear program, including critical details such as implementation and timing, or that the level of tensions between Korea and North Korea will not escalate. Any further increase in tensions could have a material adverse effect on the Korean economy and on our business, financial condition, and results of operations and could lead to a decline in the market value of our ADSs.

It may not be possible for investors to enforce U.S. judgments against us.

Our headquarters facility is located in Seoul, Korea. In addition, two of our directors are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult for U.S. investors to serve process within the United States upon us (other than our subsidiaries) or our directors and officers or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in Korea (i) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or (ii) would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.

Risks related to our relationship with DoubleU Games

As a foreign private issuer, we intend to follow “home country” practice even though we may be considered a “controlled company” under NASDAQ corporate governance rules since DoubleU Games will continue to be our majority shareholder after the offering and will have voting control over key decisions affecting our Company and our shareholders.

After the consummation of the offering, DoubleU Games will hold approximately 60.2% of our shares, assuming all shares are sold in the offering. See “Certain relationships and related party transactions—Joint Investment Agreement.” We have not entered into any voting agreement with DoubleU Games with respect to its voting of our shares in the future. Consequently, DoubleU Games, as our major shareholder, will be able to exercise voting control over most decisions upon which shareholders are entitled to vote.

As a result, we will be a “controlled company” within the meaning of the NASDAQ corporate governance rules. Under the NASDAQ rules, a company of which more than 50% of the voting power is held by an individual,

 

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group, or another company, is a “controlled company” and may elect not to comply with certain NASDAQ corporate governance standards, including the requirements that:

 

 

a majority of its board of directors consist of independent directors;

 

 

its director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee that is comprised entirely of independent directors and that it adopt a written charter or board resolution addressing the nominations process; and

 

 

it has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

However, as a “foreign private issuer,” NASDAQ corporate governance rules allow us to follow our “home country,” Korea, rules and practice with respect to appointments to our board of directors and committees. We intend to follow home country practice as permitted by NASDAQ rather than rely on the “controlled company” exception to the corporate governance rules. Two members of our board of directors will be considered “independent” under NASDAQ corporate governance rules at the time of this offering, although we do intend to phase-in an additional independent director for our Audit Committee as permitted by NASDAQ.

The interests of DoubleU Games may differ significantly from those of our Board and our other shareholders. As a result, decisions by DoubleU Games could materially affect our continuing activities, including the sale of our Company to a third party or the ability of our shareholders to obtain a premium on any such sale or on a sale by DoubleU Games of all or part of its shareholding.

Our relationship with DoubleU Games could create potential conflicts of interest in management decisions, which could adversely impact our shareholders.

Although we have substantial contractual arrangements with our controlling shareholder, DoubleU Games, no person is serving concurrently as a director of both companies. Consequently, we have not entered into any agreement intended to govern any conflicts of interest between the two companies. However, under the Korean Commercial Code, or KCC, if a company, such as DDI, intends to enter into any arrangement with any of its major shareholders, such as DUG, such company is required to disclose the intended arrangement to its board of directors and obtain a resolution from the board approving such arrangement. Such approval requires the consent of not less than two-thirds of the board members. Under the KCC, a person would constitute a company’s major shareholder if such person holds 10% or more of equity interests in such company (without taking into account any non-voting shares issued by the company) or makes de facto influence on such company’s key managerial decisions (such as appointment and removal of directors and statutory auditors). Accordingly, in order for the Company and DUG to enter into any arrangement, the Company must seek and obtain a resolution from its board of directors approving the intended arrangement. Given the current board structure, the Company’s board resolution would be adopted independently from DUG. To date, the Company and DUG have entered into certain license agreements and loan agreements, all of which have been approved by the Company’s board in accordance with the KCC.

Further, unlike U.S. corporate law, Korean law does not recognize the concept of the controlling shareholder’s fiduciary duty to a company or any of such company’s minority shareholders. Under the KCC, only such company’s directors owe a fiduciary duty to the company. However, to the extent such controlling shareholder provides any instruction to a director of such company and any action or inaction taken by such director based on such instruction is found to be in violation of law, such action or inaction taken by the director may be regarded as that taken by such controlling shareholder. In such a case, the controlling shareholder would be required to indemnify the company for any loss incurred as a result of such action or inaction.

 

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We are subject to certain loan agreements with DoubleU Games that could impede our available working capital and adversely impact our business operations and growth strategy.

We entered into several loans with DoubleU Games as our lender in 2018 and 2019 in the aggregate principal amount, as of March 31, 2020, of US$82 million (KRW100 billion). These loans mature in 2024, subject to certain prepayment rights. Each loan has a fixed interest rate of 4.60% per annum, with a default interest rate of an additional 5.0% per annum. Interest accrues quarterly, commencing as of May 2019, and is due and payable in full upon maturity. Further, if we are unable to repay the loans at maturity in 2024, we may not be able to continue our operations if we are unable to secure additional financing or otherwise restructure the loans. Although these loans are unsecured, we could nonetheless be forced by DoubleU Games to liquidate our operations and dissolve. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Short-term and long-term borrowings.”

A significant portion of our intellectual property portfolio is subject to license agreements with DoubleU Games and our operations could be adversely affected by the amount of royalty payments we are required to make under the agreements.

We are subject to a number of licensing and research and development agreements with DoubleU Games. Prior to the consummation of the offering, DoubleU Games controlled approximately 67.7% of our shares and, following the consummation of the offering, will control approximately 60.2%. DoubleU Games has granted us exclusive rights during the term of the agreements for development and distribution of social casino game titles and sequels in social online gaming. As of March 31, 2020, we license approximately 24 slot gaming intellectual property rights from DoubleU Games that are actively offered to end users through our games. We are obligated to pay royalties and license fees to DoubleU Games in connection with these rights. The agreement remains in effect until either DUG no longer holds an interest, directly or indirectly, in DDI, or DDI no longer holds an interest, directly or indirectly, in DDI-US. In such event, the agreement provides that the parties will mutually renegotiate the terms of the agreement. If the parties decide to terminate, it could materially adversely affect our ability to continue to use and exploit these rights and the associated gaming content we distribute through our channels. In such event, our business operations, including our revenues and profitability, could be materially harmed unless and until we are able to create or acquire new revenue streams of comparable financial impact. In addition, our reputation would suffer from the loss of this content and we could lose all or a substantial portion of our players for an indefinite period.

Risks related to this offering and ownership of our common shares and ADSs

We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common shares and ADSs may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements in the registration statement for the emerging growth company’s initial public offering of common equity securities, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements, and not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements. We have elected to adopt these reduced disclosure requirements.

 

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Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement declared effective under the Securities Act of 1933, as amended (the “Securities Act”) or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We would cease to be an “emerging growth company” upon the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year during which our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities, or (iv) as of the end of any fiscal year in which the market value of our common shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year (and we have been a public company for at least 12 months and have filed at least one annual report on Form 20-F).

We cannot predict if investors will find our ADSs less attractive as a result of our taking advantage of these exemptions. If some investors find our ADSs less attractive as a result of our choices, there may be a less active trading market for our ADSs and our stock price may be more volatile.

As a “foreign private issuer” we are permitted, and intend, to follow certain home country corporate governance and other practices instead of otherwise applicable SEC and stock exchange requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

Our status as a foreign private issuer exempts us from compliance with certain SEC laws and regulations and certain regulations of NASDAQ, including certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. Two members of our board of directors will be considered “independent” under NASDAQ corporate governance rules at the time of this offering, although we do intend to phase-in an additional independent director for our Audit Committee as permitted by NASDAQ. In addition, we will not be required under the Exchange Act to file current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we will generally be exempt from filing quarterly reports with the SEC. Also, we are not required to provide the same executive compensation disclosures regarding the annual compensation of our five most highly compensated senior executives on an individual basis as are required of U.S. domestic issuers. As a foreign private issuer, we are permitted to disclose executive compensation on an aggregate basis and need not supply a Compensation Discussion & Analysis, as is required for domestic companies. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act.

The requirements of being a public company require significant resources and management attention and affect our ability to attract and retain executive management and qualified board members.

As a public company following this offering, we will incur legal, accounting, and other expenses that we did not previously incur. We will be subject to the Exchange Act, including the reporting requirements thereunder, the

 

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Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the NASDAQ rules, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” Further, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors.

Pursuant to Section 404 of the Sarbanes-Oxley Act, once we are no longer an emerging growth company, we may be required to furnish an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of complying with Section 404 of the Sarbanes-Oxley Act will significantly increase, and management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. We may need to hire more employees in the future or engage outside consultants to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, which will further increase our cost and expense. In addition, enhanced legal and regulatory regimes and heightened standards relating to corporate governance and disclosure for public companies result in increased legal and financial compliance costs and make some activities more time-consuming.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

If we fail to put in place appropriate and effective internal control over financial reporting and disclosure controls and procedures, we may suffer harm to our reputation and investor confidence level.

We are in the early stages of the process of designing, implementing, and testing our internal control over financial reporting, which process is time consuming, costly, and complex. If we fail to implement the requirements of Section 404(b) of the Sarbanes-Oxley Act in the required timeframe once we are no longer an emerging growth company, we may be subject to sanctions or investigations by regulatory authorities, including the SEC and NASDAQ. Furthermore, if we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our ADSs could decline, and we could be subject to sanctions or investigations by regulatory authorities. Failure to implement or maintain effective internal control over financial reporting and disclosure controls and procedures required of public companies could also restrict our future access to the capital markets.

An active trading market for our ADSs may not develop or be sustained.

Prior to the completion of this offering, there has been no public market for our common shares or our ADSs. Although our ADSs have been approved for listing on the NASDAQ Global Select Market under the symbol “DDI,” an active trading market for our ADSs may never develop or be sustained following this offering. If an active trading market does not develop or is not sustained, you may have difficulty selling your ADSs at an attractive price, or at all. An inactive market may also impair our ability to raise capital by selling our common shares or ADSs, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our common shares or ADSs as consideration.

 

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The price of our ADSs may fluctuate substantially.

The price for our ADSs in this offering will be determined by us and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. You may not be able to sell your ADSs at or above the initial public offering price or at any other price or at the time that you would like to sell. You should consider an investment in our ADSs to be risky, and you should invest in our ADSs only if you can withstand a total loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our ADSs to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

 

 

actual or anticipated fluctuations in our financial condition and operating results;

 

 

our failure to develop and market new games;

 

 

actual or anticipated changes in our growth rate relative to our competitors;

 

 

competition from existing games or new games that may emerge;

 

 

announcements by us, our collaborators, or our competitors of significant acquisitions, strategic partnerships, joint ventures, strategic alliances, or capital commitments;

 

 

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

 

issuance of new or updated research or reports by securities analysts;

 

 

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

 

ADS price and volume fluctuations attributable to inconsistent trading volume levels of our ADSs;

 

 

additions or departures of key personnel;

 

 

disputes or other developments related to proprietary rights;

 

 

announcement or expectation of additional equity or debt financing efforts;

 

 

equity sales by us, our insiders or our other shareholders; and

 

 

general economic and market conditions.

These and other market and industry factors may cause the market price and demand for our ADSs to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their ADSs and may otherwise negatively affect the liquidity of our ADSs. In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

If you purchase ADSs in this offering, you will experience immediate dilution.

If you purchase ADSs in this offering, you will experience immediate dilution of $18.12 per ADS in the net tangible book value of your ADSs after giving effect to the offering at an assumed initial public offering price of $18.00 per ADS (which is the midpoint of the price range set forth on the cover page of this prospectus) because the price that you pay will be substantially greater than the net tangible book value per ADS that you acquire. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus titled “Dilution.”

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price of our ADSs and trading volume could decline.

The trading market for our ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If few or no securities or industry analysts cover us, the trading price for our ADSs would be negatively impacted. If one or more of the analysts who covers us downgrades our ADSs, publishes incorrect or unfavorable research about our business, ceases coverage of our Company, or fails to publish reports on us regularly, demand for our ADSs could decrease, which could cause the price of our ADSs or trading volume to decline.

We do not currently intend to pay dividends on our common shares for the foreseeable future.

We currently do not intend to pay any dividends to holders of our common shares for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Any determination to pay dividends in the future will be at the discretion of our board of directors and subject to limitations under applicable law. Therefore, you are not likely to receive any dividends on your ADSs for the foreseeable future, and the success of an investment in our ADSs will depend upon any future appreciation in its value. Moreover, any ability to pay dividends will be restricted by the terms of the current term loan and may be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. Consequently, investors may need to sell all or part of their holdings of our common shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which our shareholders have purchased our ADSs. Investors seeking cash dividends should not purchase our ADSs.

Holders of ADSs have fewer rights than shareholders under Korean law, and their voting rights are limited by the terms of the deposit agreement.

The rights of shareholders under Korean law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records, and exercising appraisal rights, are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of our common shares underlying the ADSs, only the depositary can exercise those rights under Korean law in connection with the deposited shares. ADS holders will not be able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights through the depositary.

Holders of ADSs may exercise their voting rights only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from them in the manner set forth in the deposit agreement, the depositary will make efforts to vote the shares underlying the ADSs in accordance with the instructions of ADS holders. The depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote.

If Korea experiences certain economic, political or other events, the government may restrict holders of our ADSs and the depositary from converting and remitting dividends and other amounts in U.S. dollars.

Under the Korean Foreign Exchange Transaction Law, if the Korean government deems that certain emergency circumstances, including sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilizing the balance of payments or substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restrictions as requiring Korean or foreign investors to obtain prior approval from the Minister of Economy and Finance of Korea for the acquisition of Korean securities or the

 

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repatriation of interest, dividends, or sales proceeds arising from disposition of such securities or other transactions involving foreign exchange.

We may be subject to securities class actions, which may harm our business and operating results.

Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and damages and divert management’s attention from other business concerns, which could seriously harm our business, results of operations, financial condition, or cash flows.

We may also be called on to defend ourselves against lawsuits relating to our business operations. Some of these claims may seek significant damage amounts due to the nature of our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. A future unfavorable outcome in a legal proceeding could have an adverse impact on our business, financial condition, and results of operations. In addition, current and future litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs, and a diversion of management’s attention and resources that are needed to successfully run our business.

We may amend the deposit agreement without consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or withdrawing the underlying common shares.

We may agree with the depositary to amend the deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a material right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices will be limited to selling the ADSs or withdrawing the underlying common shares. No assurance can be given that a sale of ADSs could be made at a price satisfactory to the holder in such circumstances. See “Description of American Depositary Shares” for more information.

The right of holders of ADSs to participate in any future rights offerings may be limited, which may cause dilution to their holdings and holders of ADSs may not receive cash dividends if it is impractical to make them available to them.

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to our ADS holders in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to ADS holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

The depositary has agreed to pay ADS holders the cash dividends or other distributions it or the custodian receives on our common shares or other deposited securities after deducting its fees and expenses. However, because of these deductions, ADS holders may receive less, on a per share basis with respect to their ADS than they would if they owned the number of shares or other deposited securities directly. ADSs holders will receive these distributions in proportion to the number of common shares the ADSs represent. In addition, the depositary may, at its discretion, decide that it is not lawful or practical to make a distribution available to any

 

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holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and ADS holders will not receive such distribution.

Holders of ADSs may not receive distributions on our common shares or any value for them if it is illegal or impractical to make them available to such holders.

The depositary of our ADSs has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other deposited securities after deducting its fees and expenses. Holders of ADSs will receive these distributions in proportion to the number of our common shares that such ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit distributions on our common shares to holders of ADSs. This means that holders of ADSs may not receive the distributions we make on our common shares if it is illegal or impractical to make them available to such holders. These restrictions may materially reduce the value of our ADSs.

Holders of ADSs may be subject to limitations on transfer of their ADSs.

ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer, or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our common shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs, or the deposit agreement, which may include any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently, and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

 

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If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation, or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

Dividend payments and the amount you may realize upon a sale of our common shares or ADSs that you hold will be affected by fluctuations in the exchange rate between the U.S. dollar and the Korean Won.

Cash dividends, if any, in respect of our common shares represented by our ADSs will be paid to the depositary in Korean Won and then converted by the depositary into U.S. dollars, subject to certain conditions. Accordingly, fluctuations in the exchange rate between the Korean Won and the U.S. dollar will affect, among other things, the amounts a holder of ADSs will receive from the depositary in respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Korea of our common shares obtained upon surrender of ADSs, and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar value of dividends and sales proceeds received by holders of our common shares.

 

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Use of proceeds

We estimate that the net proceeds to us from our sale of 5,500,000 of our ADSs in this offering will be approximately $88.0 million (based on an assumed initial public offering price of $18.00 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and the estimated offering expenses of approximately $11.0 million payable by us.

We will not receive any proceeds from the sale of our ADSs by the selling shareholder.

We intend to use the net proceeds from this offering for working capital and general corporate purposes.

Each $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per ADS (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $5.2 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions payable by us. We may also increase or decrease the number of ADSs we are selling in this offering. An increase (decrease) of 1,000,000 of ADSs offered by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $16.9 million, assuming the assumed initial public offering price of $18.00 per ADS (which is the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the underwriting discounts and commissions payable by us. The as-adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

We believe that our funds and the proceeds from this offering will be sufficient to continue our business and operations as currently conducted through 2021; however, changing circumstances may cause us to consume capital significantly faster than we currently anticipate. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our development and commercialization efforts, whether or not we enter into strategic collaborations or partnerships, and our general operating costs and expenditures.

We have no agreements or commitments for particular uses of the net proceeds from this offering, and our management may exercise discretion over the terms and timing of any future transaction in light of the changing needs of our business.

 

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Dividend policy

We currently intend to retain our future earnings, if any, to finance the development and expansion of our businesses and, therefore, do not intend to pay cash dividends on our common shares for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, and such other factors as our board of directors deems relevant in its sole discretion. See “Description of securities—Dividends.”

If we pay any dividends on our common shares, we will pay those dividends which are payable in respect of the common shares underlying our ADSs to the depositary, as the registered holder of such common shares, and the depositary then will pay such amounts to our ADS holders in proportion to the common shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our common shares, if any, will be paid in U.S. dollars. See “Description of American Depositary Shares.”

 

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Capitalization

The following table sets forth our capitalization as of March 31, 2020:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect (i) to issuances of equity securities after the balance sheet date in connection with the exercise of all outstanding warrants and the conversion of equity-linked debt securities prior to the closing of this offering and (ii) to repayment in full of the short-term debt after the balance sheet date; and

 

 

on a pro forma, as adjusted, basis to give effect to the above and the issuance of 5,500,000 ADSs in this offering at an assumed initial public offering price of $18.00 per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth in this prospectus.

You should read the following table in conjunction with the sections titled “Use of proceeds,” “Selected consolidated financial information and operating data” and “Management’s discussion and analysis of financial condition and results of operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

       

March 31, 2020

(in thousands, except share amounts)

   Actual*      Pro forma*      Pro forma
as adjusted*
 

Cash and cash equivalents

   $  36,512      $  20,153      $  108,154  
  

 

 

 

Short-term debt

     16,359        0        0  

Long-term debt with related party

     81,793        81,793        81,793  

2.5% Convertible bonds

     184,574        0        0  

2.5% Non-convertible bonds

     61,294        0        0  

Common shares, par value 10,000 per share—200,000,000 shares authorized; 1,192,725 shares issued and outstanding, actual; 2,214,522 shares issued and outstanding, pro forma; and 2,489,522 shares issued and outstanding, pro forma, as adjusted

     10,603        18,961        21,210  

Additional paid-in capital

     344,916        582,426        668,178  

Accumulated other comprehensive income

     18,972        18,972        18,972  

Retained earnings

     28,945        28,945        28,945  
  

 

 

 

Total shareholders’ equity

   $  403,436      $  649,303      $  737,305  
  

 

 

 

Total capitalization

   $  747,456      $  731,096      $  819,098  

 

 

 

*   Based upon the exchange rate of 1,222.60 = US$1.00, at March 31, 2020, as used in the condensed consolidated financial statements (unaudited) included elsewhere in this prospectus.

 

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Dilution

If you invest in the ADSs, you will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per ADS paid by the purchasers of the ADSs and the pro forma as adjusted net tangible book value (deficit) per ADS immediately after, and giving effect to, the offering. Dilution results from the fact that the offering price per ADS is substantially in excess of the net tangible book value per ADS attributable to the existing shareholders for our presently outstanding shares.

Our historical net tangible book value (deficit) per share is determined by dividing our total tangible assets, less total liabilities, by the actual number of outstanding common shares. The historical net tangible book deficit of our common shares as of March 31, 2020 was $(339.6) million, or $(284.74) per share. On a pro forma basis, giving effect to issuances of equity securities after March 31, 2020 in connection with the exercise and/or conversion of 1,021,797 outstanding equity-linked securities prior to closing of the offering, our historical net tangible book value per share would have been $(42.33) as of March 31, 2020.

The pro forma, as adjusted net tangible book value (deficit) as of March 31, 2020 was $(5.8) million, or $(2.31) per common share. The pro forma, as adjusted net tangible book value gives effect to the above issuances and the sale of the ADSs in this offering at an assumed initial public offering price of $18.00 per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth in this prospectus. The pro forma as adjusted net tangible book value per common share after the offering is calculated by dividing the pro forma as adjusted net tangible book value of $(5.8) million by 2,489,522, which is equal to the pro forma, as adjusted issued and outstanding common share of the Company as of March 31, 2020. The difference between the initial public offering price and the pro forma as adjusted net tangible book value (deficit) per ADS represents an immediate increase in the net tangible book value of $2.00 per ADS to existing shareholders and immediate dilution of $18.12 per ADS to new investors purchasing ADSs in this offering.

The following table (unaudited) illustrates this dilution to new investors:

 

   

Assumed initial public offering price per ADS

   $ 18.00  

Net tangible book value per common share before this offering (as of March 31, 2020)

   $ (284.74)  

Increase in net tangible book value per common share attributable to existing investors due to the issuance of common shares after March 31, 2020

   $ 242.41  

Pro forma net tangible book value per common share as of March 31, 2020

   $ (42.33)  

Increase in net tangible book value per ADS attributable to new investors in this offering

   $ 2.00  

Pro forma, as adjusted net tangible book value per ADS after offering

   $ (0.12)  

Dilution per share to new investors per ADS

   $ 18.12  

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per ADS after this offering by $0.10, and dilution in pro forma net tangible book value per ADS to new investors by $0.90, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

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If the underwriters exercise in full their option to purchase additional ADSs, and based on an assumed initial public offering price of $18.00 per ADS (the midpoint of the price range set forth on the cover page of this prospectus), the pro forma, as adjusted net tangible book value after this offering would be approximately $(0.12) per ADS, the increase in the pro forma net tangible book value per ADS attributable to new investors would be approximately $2.00 per ADS and the dilution to new investors purchasing ADSs in this offering would be approximately $18.12 per ADS.

The following table summarizes on the pro forma basis described above, as of March 31, 2020, the differences between the number of common shares underlying the ADSs purchased from us, the total consideration paid to us in cash and the average price per common share underlying the ADSs that existing stockholders and new investors paid. The calculation below is based on an assumed initial public offering price of $18.00 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

       
     Common shares      Total consideration
paid to us
     Average
price Per
common
share
 
      Number      Percent     

Amount

(in millions)

     Percent  

Existing shareholders

     1,939,522        77.9%      $ 0.0        0.0%      $ 0.00  

New investors

     550,000        22.1%      $ 99.0        100.0%      $ 360.00  

Total

     2,489,522        100.0%           100.0%     

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $360.00 per common share which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $0.275 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 0.3 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by (0.3) percentage points, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 50,000 common shares underlying the ADSs offered by us, as set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $16.9 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 16.1 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by (23.8) percentage points, assuming that the assumed initial public offering price is the midpoint of the range set forth on the cover page of this prospectus.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional ADSs. If the underwriters’ option to purchase additional ADSs were exercised in full, DUG would own 60.2%, STIC would own 14.4%, and the investors purchasing ADSs in this offering would own 25.4% of the total number of common outstanding immediately after completion of this offering.

 

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Selected consolidated financial information and operating data

The following sets forth our selected consolidated financial information and operating data as of and for each of the years ended December 31, 2019 and December 31, 2018 and three month periods ended March 31, 2020 and March 31, 2019.

You should read the following selected consolidated financial information and operating data in conjunction with, and it is qualified in its entirety by reference to our audited consolidated financial statements and the related notes thereto for the years ended December 31, 2019 and December 31, 2018, our unaudited condensed consolidated financial statements and the related notes thereto for the three months ended March 31, 2020 and March 31, 2019, and the sections entitled “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations,” which are included elsewhere in this prospectus.

Years ended December 31, 2019 and December 31, 2018

 

   

Selected consolidated income statement data

(in millions)

   Year ended December 31,  
           2019             2018  

Revenue

   $  273.6     $ 266.9  

Operating expenses:

    

Cost of revenue(1)

     99.6       104.0  

Sales and marketing(1)

     35.8       39.9  

Research and development(1)

     19.3       20.1  

General and administrative(1)

     17.2       17.8  

Depreciation and amortization

     33.4       30.1  
  

 

 

 

Total operating expenses

     205.3       211.9  
  

 

 

 

Operating income

     68.3       55.0  

Interest expense

     (26.6     (30.4

Interest income

     0.5       0.3  

Gain on foreign currency transactions

     4.1       2.4  

Gain on foreign currency remeasurement of intercompany item

     3.2       7.2  

Other income (expense), net

     0.3       (0.2

Income tax expense

     (13.5     (9.2
  

 

 

 

Net income

   $  36.3     $ 25.1  

 

 

 

   

Selected other data

(in millions, except ARPDAU and percentages)

   Year ended December 31,  
           2019             2018  

Adjusted EBITDA(2)

   $  101.7     $ 85.1  

Net income margin(3)

     13.3     9.4%  

Adjusted EBITDA margin(2)

     37.2     31.9%  

Average MAU(4)

     2.8       3.3  

Average DAU(4)

     1.2       1.3  

ARPDAU(4)

   $  0.64     $ 0.57  

Mobile penetration(5)

     67.5     64.6%  

 

 

 

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Reconciliation of non-GAAP measures

(in millions, except percentages)

   Year ended December 31,  
           2019             2018  

Net income

   $  36.3     $ 25.1  

Income tax expense

     13.5       9.2  

Income before tax

     49.8       34.3  

Adjustments for:

    

Depreciation and amortization

     33.4       30.1  

Interest expense

     26.6       30.4  

Foreign currency transaction/remeasurement (gain) loss

     (7.3     (9.6

Other income (expense), net

     (0.8     (0.1

Adjusted EBITDA

   $  101.7     $ 85.1  

Adjusted EBITDA margin

     37.2     31.9%  

 

 

 

   

Selected Balance Sheet Data
(in millions)

   As of December 31,  
           2019              2018  

Cash and cash equivalents

   $  42.4      $ 31.0  

Total assets

     815.4        820.3  

Total liabilities

     434.7        490.4  

Total equity

   $  380.7      $ 329.9  

 

 

 

(1)   Excluding depreciation and amortization.

 

(2)   We define Adjusted EBITDA as operating income before interest expense, income tax expense, depreciation and amortization, foreign currency transaction and remeasurement gains and losses, and other income (expense), net (including interest income). Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period. Management has presented the performance measure Adjusted EBITDA because it monitors performance at a consolidated level and believes that this measure is relevant to an understanding of the Company’s financial performance. In addition, we believe this metric provides useful information in understanding our operating performance and trends in our business. Adjusted EBITDA is not a defined performance measure in U.S. GAAP. The Company’s definition of Adjusted EBITDA may not be comparable with similarly titled performance measures and disclosures by other entities. See also “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends—Adjusted EBITDA.”

 

(3)   Net income margin represents net income as a percentage of revenue, which is the most directly comparable U.S. GAAP measure to Adjusted EBITDA margin described above.

 

(4)   See the definitions of the key performance indicators in “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends.”

 

(5)   Mobile penetration represents the percentage of revenue sourced from the Google, Apple, and Amazon platforms.

 

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Three months ended March 31, 2020 and March 31, 2019

 

   

Selected consolidated income statement data

(in millions)

   Three months ended March 31,  
           2020             2019  

Revenue

   $ 76.1     $ 68.3  

Operating expenses:

  

Cost of revenue(1)

     26.9       25.5  

Sales and marketing(1)

     14.5       7.1  

Research and development(1)

     4.3       5.8  

General and administrative(1)

     5.0       5.2  

Depreciation and amortization

     8.0       8.4  
  

 

 

 

Total operating expenses

     58.7       52.0  
  

 

 

 

Operating income

     17.4       16.3  

Interest expense

     (6.1     (6.7

Interest income

     0.1       0.0  

Gain on foreign currency transactions

     0.8       0.1  

Gain on foreign currency remeasurement of intercompany item

     4.2       2.8  

Other income (expense), net

     0.1       (0.2

Income tax expense

     (3.6     (3.5
  

 

 

 

Net income

   $ 12.9     $ 8.8  

 

 

 

   

Selected other data

(in millions, except ARPDAU and percentages)

   Three months ended March 31,  
           2020              2019  

Adjusted EBITDA(2)

   $ 25.3      $ 24.7  

Net income margin(3)

     16.9%        12.8%  

Adjusted EBITDA margin(2)

     33.3%        36.2%  

Average MAU(4)

     3.0        2.9  

Average DAU(4)

     1.2        1.2  

ARPDAU(4)

   $ 0.70      $ 0.62  

Mobile penetration(5)

     69.9%        66.7%  

 

 

 

   

Reconciliation of non-GAAP measures

(in millions, except percentages)

   Three months ended March 31,  
           2020             2019  

Net income

   $ 12.9     $ 8.8  

Income tax expense

     3.6       3.5  

Income before tax

     16.5       12.3  

Adjustments for:

    

Depreciation and amortization

     8.0       8.4  

Interest expense

     6.1       6.7  

Foreign currency transaction/remeasurement (gain) loss

     (5.1     (2.9

Other income (expense), net

     (0.2     0.2  

Adjusted EBITDA

   $ 25.3     $ 24.7  

Adjusted EBITDA margin

     33.3%       36.2%  

 

 

 

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Selected consolidated balance sheet data
(in millions)

   As of March 31,  
   2020  

Cash and cash equivalents

   $ 36.5  

Total assets

   $ 809.2  

Total liabilities

   $ 405.8  

Total equity

   $ 403.4  

 

 

 

(1)   Excluding depreciation and amortization.

 

(2)   We define Adjusted EBITDA as operating income before interest expense, income tax expense, depreciation and amortization, foreign currency transaction and remeasurement gains and losses, and other income (expense), net (including interest income). Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period. Management has presented the performance measure Adjusted EBITDA because it monitors performance at a consolidated level and believes that this measure is relevant to an understanding of the Company’s financial performance. In addition, we believe this metric provides useful information in understanding our operating performance and trends in our business. Adjusted EBITDA is not a defined performance measure in U.S. GAAP. The Company’s definition of Adjusted EBITDA may not be comparable with similarly titled performance measures and disclosures by other entities. See also “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends—Adjusted EBITDA.”

 

(3)   Net income margin represents net income as a percentage of revenue, which is the most directly comparable U.S. GAAP measure to Adjusted EBITDA margin described above.

 

(4)   See the definitions of the key performance indicators in “Management’s discussion and analysis of financial condition and results of operations— Other key performance indicators and non-GAAP metrics and trends.”

 

(5)   Mobile penetration represents the percentage of revenue sourced from the Google, Apple, and Amazon platforms.

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following in conjunction with the sections of this prospectus entitled “Cautionary note regarding forward-looking statements,” “Risk factors,” “Selected consolidated financial information and operating data,” and “Our business,” and the historical consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk factors” and elsewhere in this prospectus.

Our business

We are a leading developer and publisher of digital games on mobile and web-based platforms. We are the creators of multi-format interactive entertainment experiences for casual players. Our flagship game, DoubleDown Casino, has been in the top 20 grossing mobile games annually on Apple App Store since 2015, according to App Annie. Our newest game, DoubleDown Fort Knox, launched in April 2018, has already achieved over three million cumulative installations as of March 31, 2020.

We have been an early pioneer in the social casino gaming segment and were among the initial publishers to launch a social casino game on the Facebook platform in 2010 with the release of DoubleDown Casino. As the market has shifted materially to mobile platforms in recent years, we have also embraced new distribution channels for our games, which has significantly expanded our overall reach and market opportunity. We currently offer four games, DoubleDown Casino, DoubleDown Fort Knox, DoubleDown Classic, and Ellen’s Road to Riches. Our games attract players of social casino and casual games, and have been installed over 100 million times to date. During 2019, an average of 2.8 million players played our games each month, and for the three months ended March 31, 2020, an average of over 3 million players played our games each month. We believe that success in casual gaming requires a combination of creativity and data science to acquire, engage, and monetize players, and we have invested in our platform to build capabilities in game development and live game operations to capitalize on our opportunity.

All of our games are downloadable and playable for free on mobile platforms, and two of our games, DoubleDown Casino and Ellen’s Road to Riches, are also available on web platforms. We designed our games to provide free virtual chips to players at various time intervals based on our players’ playing behaviors and patterns. We generate substantially all of our revenue from the sale of additional virtual chips, which players can choose to purchase at any time to enhance their playing experience. Our virtual chips cannot be withdrawn from the game, transferred from one game to another or from one player to another, or be redeemed for monetary value. We also generate a small portion of our revenue from our recently-launched subscription model, which allows subscribers to further enhance their gaming experience by gaining early access to new content and earning free virtual chips at a faster rate.

We have achieved consistent revenue growth and strong profitability. Our revenue was $273.6 million in 2019, up from $266.9 million in 2018. Our net income was $36.3 million in 2019, up from $25.1 million in 2018. Our Adjusted EBITDA was $101.7 million in 2019, up from $85.1 million in 2018. Our revenue was $76.1 million for the three months ended March 31, 2020, up from $68.3 million for the three months ended March 31, 2019. Our net income was $12.9 million for the three months ended March 31, 2020, up from $8.8 million for the three months ended March 31, 2019. Our Adjusted EBITDA was $25.3 million for the three months ended March 31, 2020, up from $24.7 million for the three months ended March 31, 2020. See “Management’s discussion and

 

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analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends” below for a description of Adjusted EBITDA and for a reconciliation to net income, the most directly comparable financial measure calculated in accordance with U.S. GAAP.

Recent developments

The global pandemic associated with COVID-19 has caused major disruption to all aspects of the global economy and societies in recent months, particularly as quarantine and stay-at-home orders have been imposed by all levels of government. We have followed guidance by the Korean government and the state government in Washington to protect our employees and our operations during the pandemic and have effectively implemented a remote environment for our business. To date, we have not incurred any interruptions in operations. We continuously monitor performance and other industry reports to assess the risk of future negative impacts should the disruption of the economy progress.

The online gaming industry, in particular, has been identified in industry and media reports, such as Eilers & Krejcik and AppsFlyer, as an unintended beneficiary of this pandemic as people are quarantined in their homes, and we are not an exception to this benefit. Our DAU and number of payers have increased since the stay-at-home orders began across the United States. We expect this benefit to continue throughout the period of varying quarantine restrictions. However, there is no guarantee that these near-term trends will continue, particularly if quarantine or stay-at-home orders are not eased in coming months or if the pandemic experiences a second wave of infections. Consequently, any change in this current trend resulting in a diversion of player discretionary income to other uses, including for essential items, could adversely impact our cash flows, operating results, and financial condition.

 

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Our history

We have a long and storied history in social casino and broader mobile gaming that reflects our decade-long leadership position in the industry. We were established in Seoul, Korea in 2008 as an independent interactive entertainment studio focusing on development and publishing of casual games and mobile applications. We were fully acquired by a leading social casino business, DUG, in 2017. DUG later acquired DDI-US through our Company, which has now become our primary operating subsidiary. DDI-US has achieved a number of key milestones since its founding in 2010.

 

 

LOGO

$273.6 million Revenue (2019) $101.7 million Adj. EBITDA (2019) >5% Payer conversion Cumulative revenue ($) Established DDI & Launched DDC on Facebook 2010 1 million MAU 0.5 million DAU 4th most user recommended Facebook game 2011 Acquired by IGT & Launched DDC on Apple / Google 2012 Began introducing IGT’s land-based slot content & 50 million+ cumulative installs achieved in 2013 2013 2014 $1 billion+ cumulative revenue & Top 20 gaming app 2015 Launched Loyalty program on DDC 2016 Acquired by & Launched DoubleDown Classic, DoubleDown Fort Knox, and Ellen & Tech platform revamp 2017 2018 2.8 million MAU 1.2 million DAU 110 million cumulative installs $2 billion+ cumulative revenue & Launched 2019

Our cohort dynamics

The success of our business model depends on our ability to acquire, retain and monetize players over time. We have a history of driving sustained monetization, or player spend, within our games. We measure this by tracking annual cohorts of players. We define an annual cohort as all of the game installs in a given year. We then track the total revenue amount of all players in each cohort over time. If a player installs a different game in two different years or the same game on two different devices, they may, in certain circumstances, be included in two different cohorts.

 

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We believe that cohort behavior provides insight into the overall revenue retention dynamics of our business, reflecting our ability to convert players into paying players and drive monetization of our games over time. In 2019, 89% of our revenue was generated by installations prior to 2019 and our 2010 to 2018 cohorts experienced a 92% revenue retention in 2019, demonstrating our ability to consistently retain and monetize players. The chart below represents our quarterly gross player purchases by yearly installations subsequent to our acquisition by DUG in June 2017.

 

 

LOGO

Our Stable and Predictable Income Driven by Our Ability to Retain and Monetize Players Over Time Revenue by user cohort 85% 1Q20 revenue generated by 2010 – 2018 cohorts (US$mm) $80 $70 $60 $50 $40 $30 $20 $10 $0 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2018 2019 2020

Our marketing efficiency

 

       
Year ended December 31,    2016      2017      2018  

DoubleDown Casino payback period (days)*

     477        199        123  

New players contributing in payback period (%)

     4.8        2.9        2.9  

 

    

 

 

 

 

*   Based on available data, management estimates the payback period in 2019 to be less than 180 days.

We acquire players efficiently and at scale through organic and paid channels. We measure the effectiveness of our marketing strategy using average payback period, whether they were acquired through organic or paid channels. We define average payback period as the amount of time it takes for the cumulative revenue generated by all of the players in a given install period to exceed the dollar amount spent on sales and marketing during the same install period. The payback periods shown are the number of days required to generate revenue equal to the cost of a new install for the stated cohort. As noted in the above table, this measurement of our marketing efficiency is based solely on results for DoubleDown Casino, which currently provides substantially all of our revenue.

Our payback period fluctuates based on our total cost of acquiring new players for a given period and our ability to subsequently monetize those players. In recent years, we have experienced decreases in our payback period as our monetization of players has increased, resulting in a corresponding decrease in the percentage of players required in a given cohort to account for cumulative revenues in the payback period. In addition, in the three-year period from 2016 through 2018, the average lead time to initial purchase in the payback period for a given cohort has remained relatively stable at approximately 40 days. Following our acquisition by DUG in 2017, we have shifted more third-party marketing initiatives in-house and have made significant investments in modernizing our technology platform that have allowed us to improve our paid marketing efforts, better predict the monetization potential of new players, and monitor new player acquisition cost across marketing channels in real-time. We believe these investments position us to invest more resources in sales and marketing in the near-term while

 

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maintaining payback periods near the lower end of historical ranges. The new technology platform has also enabled us to improve monetization through dynamic and more targeted in-game offers, contributing to further reductions in the payback period. Our ability to effectively manage our new player acquisition cost, which represents fees paid to our marketing partners for new installs, is a key competitive advantage to our business.

Other key performance indicators and non-GAAP metrics and trends

In addition to the measures presented in our consolidated financial statements, we use the following key performance indicators and non-GAAP financial metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

 

   
    Three months ended  
    

(Unaudited)

 
     March 31,
2020
    Dec. 31,
2019
    Sept. 30,
2019
    June 30,
2019
    March 31,
2019
    Dec. 31,
2018
    Sept. 30,
2018
    June 30,
2018
    March 31,
2018
 

Average MAU (000s)

    3,004       2,791       2,844       2,779       2,873       3,013       3,099       3,411       3,729  

Average DAU (000s)

    1,195       1,168       1,154       1,169       1,221       1,208       1,225       1,330       1,423  

Payer Conversion Rate (%)

    5.0%       5.0%       5.0%       5.3%       5.3%       5.1%       5.1%       5.1%       4.8%  

ARPDAU ($)

  $ 0.70     $ 0.64     $ 0.64     $ 0.64     $ 0.62     $ 0.62     $ 0.59     $ 0.55     $ 0.51  

Adjusted EBITDA ($ in millions)(1)

  $ 25.3     $ 27.2     $ 24.7     $ 25.1     $ 24.7     $ 23.0     $ 22.1     $ 21.7     $ 18.3  

Adjusted EBITDA margin (%)(1)

    33.3%       39.3%       36.4%       36.9%       36.2%       33.4%       33.2%       32.6%       28.2%  

 

   

 

 

 

 

(1)   For a reconciliation of net income to Adjusted EBITDA, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

Average monthly active users (MAU)

We define Monthly Active Users, or MAU, as the average number of players who played one of our games in a particular month during the period presented. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data and registration for our loyalty program to limit the occurrence of double counting. Average MAU for a period is the average of MAUs for each month for the period presented.

MAU is one key indicator of the scale of our player base and the potential number of paying players. Our MAU has fluctuated as we have reduced investment in our web platform and moderated our sales and marketing spend as we made investments to modernize our technology platform. We expect MAU to continue to fluctuate in the future, with the potential to increase in the near-term, as we adjust our sales and marketing spend, create new content in new and existing market segments, and invest in new games. We also expect external factors to further cause MAU to fluctuate, including market growth, shift to mobile comprising a larger portion of our active player base, and competition.

Average daily active users (DAU)

We define Daily Active Users, or DAU, as the average number of players who played one or more of our games on each day during the period presented. As with MAU, an individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. Average DAU for a period is the average of the monthly average DAUs for the period presented. Our use of third-party data and registration for our loyalty

 

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program enables us to limit the occurrence of double counting. DAU is one key indicator of our ability to drive engagement of our player base. Our DAU has fluctuated over time in line with MAU trends.

Payer conversion rate

We define payer conversion rate as the percentage of MAU that made at least one purchase in a month during the same period. Payer conversion rate is a key indicator of our ability to monetize our active player base. Our payer conversion rate has remained relatively stable over time due to the ongoing engagement of our active players and the consistent introduction of new content and features into our games. Increases in payer conversion in recent periods have been driven by increases in our mobile penetration and the release of DoubleDown Fort Knox, which has exhibited payer conversion almost twice that of our other games.

Average revenue per daily active user (ARPDAU)

We define ARPDAU as quarterly revenue divided by quarterly average DAU. ARPDAU is a key indicator of our ability to monetize our paying players. Our ARPDAU has increased over time as we have increased our player engagement, payer conversion, and monetization of paying players. Increases in our monetization of paying players has been driven by several factors, including enhanced meta-features in our games, higher registration rates for our player loyalty program, greater variety of content across our games that appeals to a wider range of players, and significant investments in our technology platform that enables the release of new content more quickly and improves our live game operations capabilities.

Adjusted EBITDA

We define Adjusted EBITDA as operating income before interest expense, income tax expense, depreciation and amortization, foreign currency transaction and remeasurement gains and losses, and other income (expense), net (including interest income). Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA for a period by revenue for the same period. Management has presented the performance measure Adjusted EBITDA because it monitors performance at a consolidated level and believes that this measure is relevant to an understanding of the Company’s financial performance. In addition, we believe this metric provides useful information in understanding our operating performance and trends in our business. Adjusted EBITDA is not a defined performance measure in U.S. GAAP. The Company’s definition of Adjusted EBITDA may not be comparable with similarly titled performance measures and disclosures by other entities. For a reconciliation of Adjusted EBITDA to net income, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

Key factors affecting our performance

Monetizing our active players

While our games are free-to-play, we generate substantially all of our revenue from players’ purchases of in-game virtual chips. Our financial performance will be dependent on our ability to increase monetization of existing paying players and our effectiveness in converting more active players to paying players. Our players’ willingness to pay for the virtual chips is driven by our ability to deliver engaging content and meta-features combined with our sales and marketing strategies. Our subscription model is designed to further improve our monetization of active players.

 

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Sustaining and growing our player network

Establishing and maintaining a loyal network of players is vital for our business as the size of the network determines our maximum addressable audience for engagement and purchase of virtual chips. In order to grow our player network, we will spend on sales and marketing across various user acquisition channels and invest in content development to attract and engage players. In the near-term, as the market backdrop for user acquisition channels continues to be favorable, we may increase spend on sales and marketing as a percentage of revenue to grow our player network. The scale of our player network is determined by a number of factors, including our ability to strengthen player engagement by producing content that players play regularly and our effectiveness in acquiring new players, both of which may in turn affect our financial performance.

Strategic relationships with DUG and IGT

We have access to over 2,000 slot titles from DUG and IGT in addition to our self-developed titles. Our parent company, DUG, has expertise in developing social casino games, which are available to us on an exclusive basis. We have a long-term relationship with IGT, which includes exclusive access to IGT’s library of highly recognizable authentic land-based content. Slot titles that we license from DUG and IGT generally require ongoing royalty payments. Our strategic relationships with DUG and IGT also allow for valuable knowledge sharing across numerous aspects of our operations. Our financial results may be affected by our relationship with DUG and IGT and our ability to create self-developed titles.

International growth and expansion

We currently generate most of our revenue from the United States, though we plan to expand our reach internationally over time, particularly in Asia-Pacific and Western Europe. Our international expansion will require us to devote additional resources to marketing, user acquisition, and localization of content. Our financial performance may be impacted by our geographic expansion initiatives.

Investments in our technology platform

As we further develop the content and features for our games, we plan to continue investing in technology infrastructure. A robust technology platform will enable us to further scale our business and improve the efficiency of our operations. A powerful technology platform also allows for more agile product development and optimized live game operations, which further supports our growth. Continued investment in our technology platform may affect our financial performance.

Relationships with third-party distribution platforms

We derive nearly all of our revenue from the sale of our virtual chips through third-party distribution platforms such as Apple App Store, Facebook, Google Play Store, and Amazon Appstore. These platforms have policies that may impact our reachability to our potential audience. Apple, Facebook, Google, and Amazon have discretion to amend their terms of service which might affect our current operations and in turn impact our financial performance. As we expand to new markets, we anticipate similar relationships with additional distribution partners that could similarly impact our performance.

 

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Summarized consolidated results

Revenue

We generate substantially all of our revenue from the sale of in-game virtual chips, which players of our games can use to enhance their game-playing experience. We also generate a small portion of our revenue from our recently-launched subscription model, which offers early access to new slot contents and daily bonus virtual chips to certain of our DoubleDown Fort Knox users for a monthly subscription fee. Purchases of virtual chips by individual players are made on mobile and web-based platforms, such as the Apple, Facebook, Google, and Amazon platforms. These platforms typically charge us a fixed percentage fee for their payment processing and other services, and remit payments to us net of their fees. We recognize revenue on a gross basis for amounts we charge to players and record a corresponding cost of revenue for the amount paid to our platform partners.

Operating expenses

Operating expenses consist primarily of cost of revenue, sales and marketing expenses, research and development expenses, general and administrative expenses, and depreciation and amortization, each as more fully described below.

Cost of revenue

Cost of revenue includes payment processing fees, royalties, customer service, and hosting fees. Platform providers (such as Apple, Facebook, Google, and Amazon) charge a transactional payment processing fee to accept payments from our players for in-app consumable virtual goods purchased. Royalty fees are incurred and paid in accordance with the license agreements of the applicable intellectual property. Customer service consists of salaries, bonuses, benefits, and general and administrative expenses incurred to operate this service to our players. Depreciation and amortization expenses are excluded from cost of revenue and are separately presented on the consolidated statements of income and comprehensive income.

We expect cost of revenue to fluctuate proportionately with revenue; however, such proportionality may fluctuate as a percentage of revenue depending on our mix of games with royalty-bearing content.

Sales and marketing

Sales and marketing consists of costs related to advertising, player acquisition, engagement and retention, including costs related to salaries, bonuses, benefits, severance payments, and other compensation.

We plan to continue to invest in sales and marketing to retain and acquire users. However, sales and marketing expenses may fluctuate as a percentage of revenue depending on the timing and efficiency of our performance marketing.

Research and development

Research and development, or R&D, consists of salaries, bonuses, benefits, severance payments, and other compensation related to engineering, research, maintenance, development, and ongoing technical support.

We expect R&D expenses will increase in absolute dollars as our business expands and as we increase our personnel headcount to support the expected growth in our technical development and operating activities.

 

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General and administrative

General and administrative consists of salaries, bonuses, benefits, severance payments, and other compensation for all our corporate support functional areas including our executives. In addition, general and administrative expenses include outsourced professional services such as consulting, legal and accounting services, taxes and dues, insurance premiums, as well as costs associated with maintaining our property and infrastructure.

We expect general and administrative expenses will increase in absolute dollars due to the additional administrative and regulatory burden of becoming a public company.

Depreciation and amortization

Depreciation and amortization expenses primarily relate to the amortization of identifiable intangible assets, such as technology development, game development, software, and customer relationships, associated with our acquisition of DDI-US in 2017. For the game development we acquired as part of our acquisition of DDI-US, the costs incurred up to initial launch, that are directly attributable to the design and testing of such games, are capitalized and recorded as intangible assets, and amortized as depreciation and amortization expenses over a period of 36 months. Depreciation expense also includes the depreciation of property and equipment, each of which is computed using the straight-line method based on the depreciable amount of the assets over their respective useful lives.

Other income and other expenses

Our other income consists of interest revenues earned on our cash and cash equivalents, gains on foreign currency transactions, and gains on foreign currency remeasurement of intercompany item.

Our other expenses consist primarily of interest expenses, which include interests payable on our 3.50% Senior Note and notes from DoubleU Games, as well as interest in respect of the convertible bonds and non-convertible bonds with warrants issued to STIC. Our other expenses also include fees paid to lenders in connection with the annual refinancing of our 3.50% Senior Note. See “—Liquidity and capital resources—Short-term and long-term borrowings.”

Income tax expense

Income tax expense consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, as well as deferred income taxes and changes in the related assessment of the recoverability of deferred tax assets reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under current U.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our operations in Korea do not report income taxes as we have sufficient net operating loss carryforwards for local tax purposes. Our annual effective tax rate fluctuates based on our financial results, as well as the product mix and geographic breakdown of operations and sales. Additionally, future effective tax rates are subject to the tax regimes in which we operate remaining consistent with their current arrangements.

 

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Results of operations

Summarized consolidated results of operations

 

     
     Year ended
December 31,
    Change  
($ in millions)    2019     2018    

2019 vs. 2018

 

Revenue

   $ 273.6     $ 266.9     $ 6.7       2.5%    

Operating expenses

     205.3       211.9     $ (6.6     (3.1)%    

Operating income

   $ 68.3     $ 55.0     $ 13.3       24.2%    

Net income

     36.3       25.1     $ 11.2       44.6%    

Adjusted EBITDA(1)

   $ 101.7     $ 85.1     $ 16.6       19.5%    

Operating margin

     25.0     20.6     4.4 pp      nm    

Adjusted EBITDA margin(1)

     37.2     31.9     5.3 pp      nm    

 

 
     
     Three months
ended March 31,
    Change  
($ in millions)    2020     2019     2020 vs. 2019  

Revenue

   $ 76.1     $ 68.3     $ 7.8       11.4%    

Operating expenses

     58.7       52.0     $ 6.7       12.9%    

Operating income

   $ 17.4     $ 16.3     $ 1.1       6.7%    

Net income

     12.9       8.8     $ 4.1       46.6%    

Adjusted EBITDA(1)

   $ 25.3     $ 24.7     $ 0.6       2.4%    

Operating margin

     22.9     23.9     (1.0 )pp      nm    

Adjusted EBITDA margin(1)

     33.3     36.2     (2.9 )pp      nm    

 

 

 

(1)   For reconciliation of net income to Adjusted EBITDA, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

nm=not meaningful.

pp=percentage points.

Year ended December 31, 2019 compared to year ended December 31, 2018 and three months ended March 31, 2020 compared to three months ended March 31, 2019

Revenue and key performance indicators

 

     
     Year ended
December 31
     Change  
($ in millions)    2019      2018      2019 vs 2018  

Revenue

          

Mobile

   $ 184.7      $ 172.4      $ 12.3       7.1%  

Web

     88.9        94.5      $ (5.6     (5.9)%  

Total revenue

   $ 273.6      $ 266.9      $ 6.7       2.5%  

 

 

 

     
     Three months ended
March 31
     Change  
($ in millions)    2020      2019      2020 vs 2019  

Revenue

           

Mobile

   $ 53.2      $ 45.5      $ 7.7        16.9%  

Web

     22.9        22.8      $ 0.1        0.4%  
  

 

 

 

Total revenue

   $ 76.1      $ 68.3      $ 7.8        11.4%  

 

 

 

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Revenue information by geography(1)

 

     
     Year ended
December 31
     Change  
($ in millions)    2019      2018      2019 vs 2018  

Revenue

          

US(1)

   $ 237.7      $ 222.7      $ 15.0       6.7%  

International

     35.9        44.2      $ (8.3     (18.8)%  
  

 

 

 

Total revenue

   $ 273.6      $ 266.9      $ 6.7       2.5%  

 

 

 

     
     Three months ended
March 31,
     Change  
($ in millions)   

2020

     2019      2020 vs 2019  

Revenue

           

US(1)

   $ 71.1      $ 63.7      $ 7.4        11.6%  

International

     5.0        4.6      $ 0.4        8.7%  
  

 

 

 

Total revenue

   $ 76.1      $ 68.3      $ 7.8        11.4%  

 

 

 

(1)    

Revenue by geography is an estimate based on available information. When location data cannot be validated, the location is assumed to be in the United States.

Key performance indicators

 

     
     Year ended
December 31
     Change  
(in millions, except ARPDAU and percentage)    2019      2018      2019 vs 2018  

Key performance indicator

          

Mobile penetration

     67.5%        64.6%        2.9pp       nm  

Average MAU

     2.8        3.3        (0.5     (15.1)%  

Average DAU

     1.2        1.3        (0.1     (7.7)%  

ARPDAU

   $ 0.64      $ 0.57      $ 0.07       12.3%  

 

 

 

     
     Three months ended
March 31,
     Change  

(in millions, except ARPDAU and percentage)

  

2020

     2019      2020 vs 2019  

Key performance indicator

           

Mobile penetration

     69.9%        66.7%        3.2pp        nm  

Average MAU

     3.0        2.9        0.1        3.4%  

Average DAU

     1.2        1.2               nm  

ARPDAU

   $ 0.70      $ 0.62      $ 0.08        12.9%  

 

 

nm=not meaningful.

pp=percentage points.

Our revenue increased by 2.5% from $266.9 million in 2018 to $273.6 million in 2019, primarily due to the continuing popularity of DoubleDown Casino and the growth of DoubleDown Fort Knox. Revenue increased 11.4% to $76.1 million from $68.3 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The $7.8 million increase was due to our continued efforts to monetize our players, continuing popularity of our games, and positive return on our user acquisition advertising business strategy.

 

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Approximately 67.5% of our revenue was attributable to players on mobile platforms in 2019 compared with 64.6% in 2018, an increase of 2.9 percentage points. For the three months ended March 31, 2020, 69.9% of our revenue was attributable to players on mobile platforms compared to 66.7% for the three months ended March 31, 2019. The increase in mobile penetration for the year ended December 31, 2019 and for the three months ended March 31, 2020 was related to our strength in mobile user acquisition and game content that optimizes the experience for the mobile user and the continued shift in players migrating from web to mobile platforms to play our games.

Average MAU decreased 15.1% and average DAU decreased 7.7% for the year ended December 31, 2019 compared to 2018. Average MAU increased 3.4% for the three months ended March 31, 2020 and average DAU remained flat compared to the three months ended March 31, 2019.

The decline in average MAU and average DAU for the year ended December 31, 2019 compared to 2018 was primarily related to the Company’s decision to reduce marketing expense related to user acquisition, which began in the second half of 2018 and extended into 2019. This decision was partially in response to market factors, including higher user acquisition costs for mobile gaming companies that we observed during the period. As a result, we shifted our focus to optimizing paying user spend in lieu of increasing the total number of players, which resulted in a 12.3% increase in ARPDAU for the year ended December 31, 2019 compared to 2018 and a 12.9% increase for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

While MAU and DAU are indicators of the scale of our player base and the potential number of paying players, we consider these metrics to be more reflective of the Company’s decisions on how to allocate marketing spend and less significant to our revenue than the total amount that paying users spend. We review and assess the impact of our marketing spend, in particular, on these metrics and makes adjustments as we consider necessary to grow total revenue.

Other metrics

 

     
     Year ended
December 31
    Change  
      2019     2018     2019 vs 2018  

Average MPUs (in thousands)(1)

     146       167       (21     (12.6)%  

Average monthly revenue per payer(2)

   $ 155.8     $ 134.1     $ 21.7       16.2%  

Payer conversion rate

     5.2     5.0     0.2 pp      nm     

 

 

 

 

 

     
     Three months ended
March 31,
    Change  
      2020     2019     2020 vs 2019  

Average MPUs (in thousands)(1)

     150       152       (2     (1.3)%  

Average monthly revenue per payer(2)

   $ 168.9     $ 149.3     $ 19.6       13.1%  

Payer conversion rate

     5.0     5.3     (0.3 )pp      nm     

 

 

 

(1)    

We define average MPUs as the average number of players who made a purchase at least once in a month during the applicable time period. However, as with our calculation of average MAU, an individual who plays two different games or from two different devices may, in certain circumstances be counted as multiple MPUs. We use third-party data and registration for our loyalty program to assist us in the limiting occurrences of multiple-counting.

(2)   

Average monthly revenue per payer is calculated by dividing the average monthly revenue for the period by the average MPUs in that period.

nm=not   meaningful.
pp=percentage   points.

In addition to the key performance indicators noted above, we also monitor the number of players who make a

purchase to assess any periodic changes in behavior and associated trends. Average MPUs declined 12.6% for the year ended December 31, 2019 when compared to 2018. We believe the decline in Average MPU is

 

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attributable to the fluctuations and our efforts to minimize duplication within the payer count. The increase in average monthly revenue per payer of 16.2% for the year ended December 31, 2019 when compared to 2018 is an indicator that our payers are engaged and the desire to continue play time drives additional purchases. The growth of 0.2 percentage points in player conversion rate highlights that new users are engaged and monetizing quickly.

For the three months ended March 31, 2020, Average MPU declined slightly when compared to March 31, 2019. As with December 31, 2019, fluctuations are expected as we continue to minimize multiple counting. Average monthly revenue per payer increased 13.1%, with a decline in our payer conversion rate of 0.3 percentage points. Overall, we believe our average monthly revenue per payer is driven by an increase in playing time, enhanced meta-features, variety of in-game content, and other engagement and retention strategies.

Operating expenses

Cost of revenue

 

       
     Year ended
December 31,
     Change      Percentage of revenue  
($ in millions)    2019      2018      2019 vs. 2018      2019      2018      2019
vs.
2018
change
 

Cost of revenue(1)

                    

Platform

   $ 81.3      $ 79.2      $ 2.1        2.7%        29.7%        29.7%        0.0pp  

Data center

     1.8        3.4        (1.6)        (47.1)        0.7        1.3        (0.6)pp  

Royalty

     15.5        20.6        (5.1)        (24.8)        5.7        7.7        (2.0)pp  

Customer service

     1.0        0.8        0.2        25.0        nm        nm        nm  
  

 

 

          

Total cost of revenue

   $ 99.6      $ 104.0      $ (4.4)        (4.2)%        36.4%        39.0%        (2.6)pp  

 

 

 

       
     Three months ended
March 31,
     Change      Percentage of revenue  
($ in millions)    2020      2019      2020 vs. 2019      2020      2019      2020
vs.
2019
change
 

Cost of revenue(1)

                   

Platform

   $ 22.7      $ 20.3      $ 2.4       11.8%        29.8%        29.7%        0.1pp  

Data center

     0.5        0.5        0.0       0.0%        0.7%        0.7%        nm  

Royalty

     3.4        4.5        (1.1     24.4%        4.5%        6.6%        (2.1)pp  

Customer service

     0.3        0.2        0.1       0.5%        nm        nm        nm  
  

 

 

          

Total cost of revenue

   $ 26.9      $ 25.5      $ 1.4       5.5%        35.3%        37.3%        (2.0)pp  

 

 

 

(1)    

Excluding depreciation and amortization.

nm=not meaningful.

pp=percentage points.

Cost of revenue decreased by 4.2% from $104.0 million in 2018 to $99.6 million in 2019, primarily as a result of a reduction in the royalty fee negotiated with IGT at the beginning of 2019, the success of our internally developed slots changing the mix of royalty-bearing content within our games, and technology efficiencies resulting in a decrease in data center costs. Cost of revenue as a percentage of revenue decreased by 2.6 percentage points from 39.0% in 2018 to 36.4% in 2019, consistent with our revenue growth and the decreases in costs.

 

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Cost of revenue increased 5.5% to $26.9 million for the three months ended March 31, 2020 from $25.5 million for the three months ended March 31, 2019. The increase was a result of higher platform fees due to higher revenue for the three months ended March 31, 2020, offset by a decrease in royalty fee to IGT, which was primarily affected by game mix within the comparative periods. Cost of revenue as a percentage of revenue decreased 2.0 percentage points to 35.3% for the three months ended March 31, 2020 from 37.3% for the three months ended March 31, 2019.

Sales and marketing

 

       
     Year ended
December 31,
     Change      Percentage of revenue  
($ in millions)    2019      2018     

2019 vs. 2018

     2019      2018      2019
vs.
2018
change
 

Sales and marketing(1)

   $ 35.8      $ 39.9      $ (4.1     (10.3)%        13.1%        14.9%        (1.8)pp  

 

 

 

       
     Three months ended
March 31,
     Change      Percentage of revenue  
($ in millions)    2020      2019      2020 vs. 2019      2020      2019      2020
vs.
2019
change
 

Sales and marketing(1)

   $ 14.5      $ 7.1      $ 7.4        104.2%        19.1%        10.4%        8.7pp  

 

 

 

(1)    

Excluding depreciation and amortization.

pp=percentage points.

Sales and marketing expenses decreased by 10.3% from $39.9 million in 2018 to $35.8 million in 2019, primarily due to a reduction in user acquisition advertising spend for DoubleDown Classic and Ellen’s Road to Riches in 2019, which was partially offset by an increase in spend on DoubleDown Fort Knox. Total user acquisition advertising costs in 2018 was $31.6 million, representing 11.8% of revenue in 2018 and $28.5 million in 2019, representing 10.4% of revenue in 2019, and a decrease of 1.4 percentage points from 2018, which reflects the effectiveness of our player engagement strategies within the games to increase player purchases and management of total spend to ensure positive return on investment. Total sales and marketing expenses as a percentage of revenue decreased by 1.8 percentage points from 14.9% in 2018 to 13.1% in 2019.

Sales and marketing expenses for the three months ended March 31, 2020 increased $7.4 million over the comparative period, primarily due to the increase in user acquisition costs. Total user acquisition advertising costs increased $7.7 million to $13.0 million for the three months ended March 31, 2020 from $5.3 million for the three months ended March 31, 2019. The increase in investment to acquire new users was based on positive return on investment metric trends observed in the second half of 2019. Other sales and marketing costs decreased $0.3 million from the three months ended March 31, 2020 due to change in personnel related expenses over the comparative period.

 

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Research and development

 

       
     Year ended
December 31,
     Change      Percentage of revenue  
($ in millions)    2019      2018      2019 vs. 2018      2019      2018      2019
vs.
2018
change
 

Research and development(1)

   $ 19.3      $ 20.1      $ (0.8     (4.0)%        7.0%        7.5%        (0.5)pp  

 

 

 

       
     Three months ended
March 31,
     Change      Percentage of revenue  
($ in millions)    2020      2019      2020 vs. 2019      2020      2019      2020
vs.
2019
change
 

Research and development(1)

   $ 4.3      $ 5.8      $ (1.5     (25.9)%        5.7%        8.5%        (2.8)pp  

 

 
(1)    

Excluding depreciation and amortization.

pp=percentage points.

Research and development expenses decreased by 4.0% from $20.1 million in 2018 to $19.3 million in 2019, primarily due to the decrease of research and development costs for Ellen’s Road to Riches, with all other research and development related expenses remaining flat. Research and development as a percentage of revenue decreased by 0.5 percentage points from 7.5% in 2018 to 7.0% in 2019.

Research and development expenses decreased 25.9% for the three months ended March 31, 2020 compared to the comparative period of 2019, which included research and development costs for Ellen’s Road to Riches. Comparatively, all other research and development related expenses remained flat. As a percentage of revenue, research and development decreased by 2.8 percentage points from 8.5% to 5.7%.

General and administrative

 

       
     Year ended
December 31,
     Change      Percentage of revenue  
($ in millions)    2019      2018      2019 vs. 2018      2019      2018      2019
vs.
2018
change
 

General and administrative(1)

   $ 17.2      $ 17.8      $ (0.6     (3.4)%        6.3%        6.7%        (0.4)pp  

 

 

 

       
     Three months ended
March 31,
     Change      Percentage of revenue  
($ in millions)    2020      2019      2020 vs. 2019      2020      2019      2020
vs.
2019
change
 

General and administrative(1)

   $ 5.0      $ 5.2      $ (0.2     (3.8)%        6.6%        7.6%        (1.0)pp  

 

 

 

(1)    

Excluding depreciation and amortization.

pp=percentage points.

General and administrative expenses decreased by 3.4% from $17.8 million in 2018 to $17.2 million in 2019, due to a reduction in administrative, professional, and outside services, including legal fees. General and administrative expenses as a percentage of revenue decreased by 0.4 percentage points from 6.7% in 2018 to 6.3% in 2019.

 

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General and administrative expenses were relatively unchanged with a single percentage point decrease as a percentage of revenue for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. There were no key drivers for the comparable period.

Depreciation and amortization

 

     
     Year ended
December 31,
     Change  
($ in millions)    2019      2018      2019 vs. 2018  

Depreciation and amortization

   $ 33.4      $ 30.1      $ 3.3        10.9%  

 

 

 

     
     Three months ended
December 31,
     Change  
($ in millions)    2020      2019      2020 vs. 2019  

Depreciation and amortization

   $ 8.0      $ 8.4      $ (0.4     (4.8)%  

 

 

Depreciation and amortization increased by 10.9% from $30.1 million in 2018 to $33.4 million in 2019, primarily resulting from the change in estimate for the useful life of our developed technology from five years to three years.

Depreciation and amortization decreased 4.8% for the three months ended March 31, 2020 compared to the corresponding period in 2019 primarily due to certain intangible assets becoming fully amortized during the period.

Other income and other expenses

 

     
     Year ended
December 31,
    Change  
($ in millions)    2019     2018     2019 vs 2018  

Other income

        

Gain on foreign currency transaction

   $ 4.1     $ 2.4     $ 1.7       70.8%  

Gain on foreign currency remeasurement of intercompany item

     3.2       7.2       (4.0     (55.6)%  

Interest income

     0.5       0.3       0.2       66.7%  

Miscellaneous income

     0.3       nm       0.3       nm  
  

 

 

 

Total other income

   $ 8.1     $ 9.9     $ (1.8     (17.2)%  

Other expenses

        

Interest expense

   $ 26.6     $ 30.4     $ (3.8     12.5%  

Miscellaneous expenses

     nm       0.2       (0.2     (100.0)%  
  

 

 

 

Total other expenses

   $ 26.6     $ 30.6     $ (4.0     (13.1)%  
  

 

 

 

Total other income/(expense), net

   $ (18.5   $ (20.7   $ (2.2     (11.1)%  

 

 

 

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Table of Contents
     
     Three months ended
March 31,
    Change  
($ in millions)    2020     2019     2020 vs 2019  

Other income

        

Gain on foreign currency transaction

   $ 0.9     $ 0.1     $ 0.8       800.0%  

Gain on foreign currency remeasurement of intercompany item

     4.2       2.8     $ 1.4       50.0%  

Interest income

     nm       nm       nm       nm  

Miscellaneous income

     0.2       0.0     $ 0.2       nm  
  

 

 

 

Total other income

   $ 5.3     $ 2.9     $ 2.4       82.8%  

Other expenses

        

Interest expense

   $ 6.1     $ 6.7     $ (0.6     (9.0)%  

Miscellaneous expenses

     0.0       0.2     $ (0.2     (100.0)%  
  

 

 

 

Total other expenses

     6.1     $ 6.9     $ (0.8     (11.6)%  
  

 

 

 

Total other income/(expense), net

   $ (0.8   $ (4.0   $ (3.2     (80.0)%  

 

 

Other income/expenses decreased 11% from $20.7 million in 2018 to $18.5 million in 2019, primarily due to a reduction in interest expense and gain on foreign currency remeasurement, offset by gains on foreign currency transaction. Interest expense decreased due to the reduction in principal on our 3.50% Senior Note. See “—Liquidity and capital resources—Short-term and long-term borrowings.” Gain on foreign currency remeasurement declined primarily due to the change in ending balances denominated in USD for intercompany item. Gain on foreign currency transaction increased primarily due to favorability in the exchange rate for transactions denominated in USD at DDI.

Other income/expenses decreased $3.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily related to the reduction in intercompany related activity and small changes in foreign exchange rates.

Income tax expense

 

     
     Year ended
December 31,
     Change  
($ in millions)    2019      2018      2019 vs. 2018  

Income tax expense

   $ 13.5      $ 9.2      $ 4.3        46.7%  

 

 

 

     
     Three months ended
March 31,
     Change  
($ in millions)    2020      2019      2020 vs. 2019  

Income tax expense

   $ 3.6      $ 3.5      $ (0.1     (2.9)%  

 

 

Income tax expense increased by 46.7% from $9.2 million in 2018 to $13.5 million in 2019, primarily due to an increase in taxable income primarily related to our revenue growth. Our effective income tax rate of 27.2% and 26.9% for the year ended 2019 and 2018, respectively, differed from our statutory tax rate of 20.0% primarily due to foreign rate differential, withholding taxes offset by tax credits, and an increase in the valuation allowance on Korean deferred tax assets.

Income tax expense of $3.6 million for the three months ended March 31, 2020 reflected an effective tax rate of 22.0%, which was lower than the effective tax rate of 28.7% for the three months ended March 31, 2019. The decrease in rate was primarily related to a lower net loss in 2019 in Korea, which is not recognized due to a valuation allowance.

 

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For further information regarding our income tax expenses, see Note 6: Income taxes of the notes to our audited consolidated financial statements and Note 6: Income taxes of the notes to our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus.

Net income

Net income increased by 45.0%, or $11.2 million, from $25.1 million in 2018 to $36.3 million in 2019, primarily due to our revenue increase of $6.7 million and operating expense reduction of $6.6 million. Our operating margin increased by 4.4 percentage points, from 20.6% in 2018 to 25% in 2019.

For the three months ended March 31, 2020, net income increased 6.7% from the same period in 2019. Our operating margin decreased by 1 percentage point to 22.9% from 23.9% primarily related to increase in sales and marketing expenses which was partially offset by increased revenue.

Adjusted EBITDA

Adjusted EBITDA increased by 19.5% from $85.1 million in 2018 to $101.7 million in 2019, primarily due to our increase in revenue and reduction in operating expenses. Adjusted EBITDA margin increased from 31.9% in 2018 to 37.2% in 2019 with 4.6% basis improvement from cost of revenue and general and administrative cost saving initiatives.

Adjusted EBITDA for the three months ended March 31, 2020 increased 2.4% from $24.7 million for the three months ended March 31, 2019 to $25.3 million for the three months ended March 31, 2020, primarily related to the $7.8 million increase in revenue, a reduction in research and development expenses of $1.5 million, offset by the $7.5 million increase in sales and marketing and $1.3 million increase in cost of revenue, which is primarily related to an increase in platform fees. Adjusted EBITDA margin decreased 2.9 percentage points from 36.2% to 33.4% primarily related to the increase in sales and marketing expenses.

For a reconciliation of net income to Adjusted EBITDA, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

Quarterly results of operations supplemental data

The following table sets forth our unaudited quarterly statements of operating income and Adjusted EBITDA and other data for each of the nine most recent quarters in the period ended March 31, 2020. We have prepared the quarterly results of operations data on a consistent basis with the audited financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly results of operations data reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The statements of operating income and Adjusted EBITDA data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of results for a full year or for any future period.

 

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    Three months ended  
    

(Unaudited)

 
($ in millions)   March 31,
2020
    Dec. 31,
2019
    Sept. 30,
2019
    June 30,
2019
    March 31,
2019
    Dec. 31,
2018
    Sept. 30,
2018
    June 30,
2018
    March 31,
2018
 

Revenue

  $ 76.1     $ 69.3     $ 67.9     $ 68.1     $ 68.3     $ 68.8     $ 66.8     $ 66.4     $ 64.9  

Operating expenses:

                 

Cost of revenue

    26.9       24.0       24.8       25.3       25.5       26.5       25.8       26.3       25.4  

Sales and marketing

    14.5       10.6       10.1       8.0       7.0       10.2       8.1       9.8       11.8  

Research and development

    4.3       4.3       4.5       4.6       5.8       5.5       5.2       3.8       5.5  

General and administrative

    5.0       3.2       3.7       5.1       5.2       3.6       5.5       4.8       3.9  

Depreciation and amortization

    8.0       8.3       8.4       8.4       8.4       7.7       7.6       7.5       7.4  
 

 

 

 

Total operating expenses

  $ 58.7     $ 50.4     $ 51.5     $ 51.4     $ 52.0     $ 53.5     $ 52.2     $ 52.2     $ 54.0  

 

 

Operating income

  $ 17.4     $ 18.9     $ 16.3     $ 16.7     $ 16.3     $ 15.3     $ 14.6     $ 14.2     $ 10.9  

Adjusted EBITDA(1)

  $ 25.3     $ 27.2     $ 24.7     $ 25.1     $ 24.7     $ 23.0     $ 22.1     $ 21.7     $ 18.3  

Adjusted EBITDA margin(1)

    33.3%       39.3%       36.4%       36.9%       36.2%       33.4%       33.2%       32.6%       28.2%  

 

 

 

(1)   For a reconciliation of net income to Adjusted EBITDA, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

Liquidity and capital resources

Introduction

We have funded our operations primarily through cash flows from operating activities. We manage our liquidity risk by maintaining adequate cash reserves and credit facilities, and by continuously monitoring our cash forecasts and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Based on our current plans and market conditions, we believe that cash flows generated from our operations, the proceeds from this offering, and borrowing capacity under our current term loan will be sufficient to satisfy our anticipated cash requirements in the ordinary course of business for the foreseeable future. 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. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

Cash flows

The following table presents a summary of our cash flows for the periods indicated:

 

   
     Year ended
December 31,
 
($ in millions)    2019     2018  

Net cash flows provided by operating activities

   $ 76.7     $ 74.5  

Net cash flows used in investing activities

     (0.2     (3.2

Net cash flows used in financing activities

     (61.8     (46.7

Net foreign exchange difference

     (3.2     (1.7
  

 

 

 

Net increase (decrease) in cash and cash equivalents

     11.5       22.9  

Cash and cash equivalents at the beginning of the period

     30.9       8.1  
  

 

 

 

Cash and cash equivalents at the end of the period

   $ 42.4     $ 31.0  

 

 

 

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     Three months ended
March 31,
 
($ in millions)    2020     2019  

Net cash flows provided by operating activities

   $ 14.1     $ 11.7  

Net cash flows used in investing activities

     (2.0     (0.1

Net cash flows used in financing activities

     (16.7     (11.5

Net foreign exchange difference

     (1.3     (0.3
  

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5.9     (0.2

Cash and cash equivalents at the beginning of the period

     42.4       30.9  
  

 

 

 

Cash and cash equivalents at the end of the period

   $ 36.5     $ 30.7  

 

 

Operating activities

Net cash flows provided by operating activities increased from $74.5 million in 2018 to $76.7 million in 2019, primarily due to stable growth from DoubleDown Casino and improvement of Adjusted EBITDA.

For the three months ended March 31, 2020, net cash flows provided by operating activities increased by $2.4 million over the comparative period primarily due to the increase in revenue, offset by lower operating expenses in research & development.

Investing activities

Net cash flows used in investing activities decreased from $3.2 million in 2018 to $0.2 million in 2019, primarily due to 2018 capitalization of costs incurred from developed technology intangibles.

For the three months ended March 31, 2020, net cash flows used in investing activities increased $1.9 million over the comparative period due to the acquisition of Double8 Games from DoubleU Games in February 2020.

Financing activities

Net cash flows used in financing activities increased from $46.7 million in 2018 to $61.8 million in 2019, primarily due to the reduction in principal on our 3.50% Senior Note.

For the three months ended March 31, 2020, net cash flows used in financing activities increased $5.2 million compared to the three months ended March 31, 2019 due to additional payments made on our borrowing arrangements.

Short-term and long-term borrowings

In conjunction with our acquisition of DDI-US in 2017, a group of Korean lenders agreed to provide annual term senior secured credit facilities (the “2017 Senior Credit Facilities”) in an aggregate principal amount of KRW315 billion (US$257.2 million), comprised of a senior revolving credit facility in the aggregate principal amount of KRW15 billion (US$12.2 million) and a senior term loan facility in an aggregate principal amount of KRW300 billion (US$244.9 million), pursuant to a credit agreement dated May 24, 2017, between us and the lenders thereto.

We refinanced the 2017 Senior Credit Facilities in 2018, and on May 24, 2019, we entered into a new credit agreement (the “3.50% Senior Note”) with KEB Hana Bank and National Fisheries Cooperative Association, as lenders, in the aggregate principal amount of KRW80 billion (US$65.3 million), with a one-year term. The first withdrawal was made on May 27, 2019. The proceeds of the 3.50% Senior Note were used to provide funds to us

 

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for the repayment of the then outstanding balance on the refinanced 2017 Senior Credit Facilities. The 3.50% Senior Note provides for a fixed interest rate of 3.50% per annum, payable quarterly, commencing August 2019. A quarterly principal repayment of KRW20 billion (US$16.3 million) is also required. The 3.50% Senior Note ranks senior in priority to the accounts of DDI-US and DUD. DoubleU Games has provided a guarantee of all amounts that become due and payable under the 3.50% Senior Note, including principal, interest, delinquent interest, and enforcement and collection fees. An event of default under the 3.50% Senior Note would be triggered upon occurrence of certain customary events, including a change of control. For purposes of the 3.50% Senior Note, a change of control would occur in the event of any of the following: (i) DoubleU Games ceases to hold, directly or indirectly, 100% of the voting power of all of our outstanding common shares, provided that after this offering, DoubleU Games does not hold directly or indirectly more than 40% of the voting power of all outstanding common shares or ceases to have the power to appoint or elect at least half of our directors; (ii) we cease to hold, directly or indirectly, 100% of the voting power of all outstanding shares of DUD; or (iii) DUD ceases to hold, directly or indirectly, 100% of the voting power of all outstanding shares of DDI-US. On April 23, 2020, the 3.50% Senior Note was repaid in full.

In addition, DoubleU Games has extended five loans to us in an aggregate principal amount as of March 31, 2020 of KRW100 billion (US$81.6 million) on May 25, 2018, August 27, 2018, November 26, 2018, February 25, 2019, and May 27, 2019 (collectively, the “4.6% Senior Notes”). Each note matures on May 27, 2024, subject to the right of prepayment in whole or in part without a prepayment penalty, following repayment of all outstanding amounts under the 3.50% Senior Note and conversion or redemption of all of the Bonds described below and under “Certain relationships and related party transactions—Joint Investment Agreement—Equity-linked securities.” Each note has a fixed rate of interest at 4.6% per annum and accrues quarterly, commencing May 2019, and is not payable until maturity. The notes have a default interest rate of an additional 5.0% per annum.

Equity-linked securities. On May 26, 2017, we issued (i) an aggregate principal amount of KRW210 billion (US$171.5 million) in 2.5% Convertible Bonds and (ii) an aggregate principal amount of KRW90 billion (US$73.5 million) in 2.5% Non-convertible Bonds with warrants to STIC in connection with our acquisition from IGT. We collectively refer to the 2.5% Convertible Bonds and the 2.5% Non-convertible Bonds with warrants as the “Bonds.” The Bonds have a stated fixed coupon rate of 2.5% per annum, payable quarterly on the 25th day of February, May, August, and November, with a term of seven years (May 26, 2024), subject to a right of the third party to require redemption of the Bonds, in whole or in part, after five years (May 26, 2022). In order to exercise the early redemption right, we must be notified by the third party within 30 days before the early redemption date specified in such notice. All or a portion of the convertible bonds may be converted into our common shares or exercise the warrants at any time during the period commencing on the earlier of (i) date of repayment of the amount outstanding under the 2017 Senior Credit Facilities or (ii) one year from the issuance date of the Bonds, and ending on the date that is one month prior to the maturity date of the Bonds. The conversion price of the convertible bonds, as well as the exercise price of the warrants, is KRW293,600 (US$239.71) per common share, subject to certain adjustments for anti-dilution protection. See “Certain relationships and related party transactions—Joint Investment Agreement—Equity-linked securities.”

On May 15, 2020, DoubleU Games purchased the 2.5% Non-convertible Bonds with warrants from STIC and, in conjunction therewith, exercised the warrants by surrendering the 2.5% Non-convertible Bonds with warrants for 306,539 common shares at the exercise price of KRW293,600 (US$239.71). On May 25, 2020, STIC converted 50.3% of the 2.5% Convertible Bonds into 360,000 common shares at the initial conversion price of KRW293,600 (US$239.71). On June 4, 2020, STIC converted the remaining 2.5% Convertible Bonds into 355,258 common shares at the initial conversion price.

 

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See Note 4: Debt to our audited consolidated financial statements and Note 1: Basis of presentation and summary of significant accounting policies—Subsequent events to our unaudited condensed consolidated financial statements for the three month periods ended March 31, 2020 and March 31, 2019 included in this prospectus.

Our principal commitments consist of obligations under our operating leases. The following table sets forth our principal commitments as of March 31, 2020:

 

   
     Payments due by period  
($ in millions)    Total      Less than
1 year
     1-3 years      4-5 years      More than
5 years
 

Operating lease obligations

   $ 13.7      $ 3.2      $ 7.3      $ 3.2      $ 0.0  

 

 

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms. The table above does not include obligations under agreements that we can cancel without a significant penalty.

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements in 2018, 2019, or the three months ended March 31, 2020.

Quantitative and qualitative disclosures about market risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.

Exchange rate risk

We operate globally and, as such, we are subject to foreign exchange risk in our commercial operations, as well as in our investments and borrowings. Our functional currency is the Korean Won and most of our operations and revenues are in U.S. dollars. Our investments in our non-Korean subsidiaries, including DUD and DDI-US, are also subject to currency risk. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs, and same currency assets in relation to same-currency liabilities. Where foreign exchange risk cannot be mitigated through operational means, we may use foreign currency forward-exchange contracts or swaps to manage that risk. The fair values of our financial instruments are analyzed at year-end to determine their sensitivity to foreign exchange rate changes. In this sensitivity analysis, assuming that a change in one currency’s rate relative to the U.S. dollar would have an effect on another currency’s rates relative to the U.S. dollar, if the U.S. dollar were to appreciate against the Korean Won by 10%, as of March 31, 2020, the expected adverse impact on our net income would not be significant.

Interest rate risk

We are subject to interest rate risk on our borrowings. We manage interest rate risk in the aggregate, focusing on our immediate and intermediate liquidity needs. We borrow mainly on a long-term, fixed-rate basis. The fair values of our financial instruments are analyzed at year-end to determine their sensitivity to interest rate changes. In this analysis, and assuming a shift in the interest rate curve for all maturities and all instruments, if there were a 100 point decrease in interest rates as of March 31, 2020, the expected adverse impact on our net income would not be significant.

 

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Critical accounting policies and estimates

Our significant accounting policies are set forth in Note 2 to our audited consolidated financial statements, which are included in this prospectus. The preparation of our consolidated financial statements requires our management to make critical estimates and assumptions that affect the amounts reported in our consolidated financial statements. These estimates and assumptions are periodically re-evaluated by management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from those estimates and assumptions.

We have identified the following accounting policies as the most critical to an understanding of our financial position and results of operations, because the application of these policies requires significant and complex management estimates, assumptions and judgments, and the reporting of materially different amounts could result if different estimates or assumptions were used or different judgments were made:

Revenue recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We refer to this standard as ASC 606.

We adopted ASC 606 on January 1, 2018 for all revenue contracts with our customers using the modified retrospective approach. The adoption of ASC 606 had no impact on our consolidated financial statements other than incremental disclosures provided herein.

Our social and mobile apps operate on a free-to-play model, whereby game players may collect virtual currency free of charge through the passage of time or through targeted marketing promotions. If a game player wishes to obtain virtual currency above and beyond the level of free virtual currency available to that player, the player may purchase additional virtual currency. 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 game player for free.

Once obtained, virtual currency (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than gameplay within our apps. When virtual currency is played on any of our games, the game player could “win” and would be awarded additional virtual currency or could “lose” and lose the future use of that virtual currency. We have concluded that our virtual currency represents consumable goods, because the game player does not receive any additional benefit from the games and is not entitled to any additional rights once the virtual currency is substantially consumed.

Control transfers when the virtual currency is consumed for gameplay. We recognize revenue from player purchases of virtual currency based on the consumption of this currency. We determined through a review of play behavior that game players generally do not purchase additional virtual currency until their existing virtual currency balances have been substantially consumed.

Based on an analysis of customers’ historical play behavior, purchase behavior, and the amount of virtual currency outstanding, we are able to estimate the rate that virtual currency is consumed during gameplay. Accordingly, revenue is recognized using a user-based revenue model with the period between purchases representing the timing difference between virtual currency purchase and consumption. This timing difference is relatively short.

We continuously gather and analyze detailed customer play behavior and assess this data in relation to our judgments used for revenue recognition.

 

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We generate a small portion of our revenue from subscription services. All monthly subscription fees are prepaid and non-refundable for a one-month period and auto-renew until the end customer terminates the service with the platform provider the subscription services originated. The subscription revenue is recognized on a daily basis beginning on the original date of purchase and has no impact on a customer purchased virtual currency.

Goodwill and indefinite-lived intangible assets

Goodwill consists of the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in a business combination. Our indefinite-lived intangible assets were acquired in a business combination and recorded at fair value.

We assess the carrying value of our goodwill and other indefinite-lived assets for potential impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

When assessing goodwill for impairment, we may elect to first utilize a qualitative assessment to evaluate if a more detailed quantitative impairment test is necessary. An impairment charge is recorded based on the excess of the reporting unit’s carrying amount over its fair value. In determining fair value of our reporting unit in connection with our annual goodwill impairment test, we perform a blended analysis of the present value of future discounted cash flows and a market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business.

In determining fair value of indefinite-lived intangible assets for purposes of our annual impairment test, we use the relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. The amount of impairment of indefinite-lived intangible assets is measured by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

We have identified a single reporting unit based on our management structure. There were no impairments of our indefinite-lived intangible assets or goodwill to date.

Finite-lived intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses.

Finite-lived intangible assets are amortized over their useful economic life and assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operating to which the assets relate to the carrying amount. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in estimates.

The amortization expense on intangible assets with finite lives is recognized in the statement of income and comprehensive income in depreciation and amortization.

 

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A summary of the amortization period applied to the Company’s finite-lived intangible assets is, as follows:

 

   
      Useful life  

Purchased developed technology

     5 years  

Development costs

     3 years  

Software

     4 years  

Customer relationships

     4 years  

 

 

Development costs for new app development are capitalized and recognized as an intangible asset when the preliminary development stage has been completed, management commits to funding the project, it is probable that the project will be completed, and the software will be used for its intended function.

Following initial recognition of the development costs as an asset, the asset is carried at cost less any accumulated amortization and accumulated impairment losses. Amortization of the asset begins when development is complete, and the asset is available for use. It is amortized over the period of expected future benefit. Amortization is recorded in depreciation and amortization.

Recent accounting guidance

ASU No. 2017-11

The Financial Accounting Standards Board (“FASB“) issued Accounting Standards Update (“ASU“) No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities From Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” in 2017 that simplifies the guidance for equity-linked financial instruments (free-standing or embedded) with down-round features that reduce the exercise price when the pricing of a future round of financing is lower. The standard was effective for us beginning January 1, 2020, with early adoption permitted. We early-adopted the standard using a full retrospective approach effective January 1, 2017.

In May 2017, we issued an aggregate principal amount of KRW210 billion (US$171.5 million) of 2.5% Convertible Bonds due 2024 and aggregate principal amount of KRW90 billion (US$73.5 million) of 2.5% Non-convertible Bonds due 2024 with detachable warrants to purchase 306,540 shares of our common stock at an initial conversion price of KRW293,600 (US$239.71) per share. Both the 2.5% Convertible Bonds and the detachable warrants contain a provision commonly referred to as “down-round” protection, as well as certain standard anti-dilution provisions.

The warrants were not considered liabilities within the scope of ASC 480. In addition, they also met both the requirements of (1) being considered indexed to the Company’s own stock and (2) the qualifications for equity classification. Therefore, the warrants were recorded within stockholders’ equity. There are no provisions pursuant to which the Company could be obligated to pay cash or other assets to settle the warrants; settlement is in shares only, and all settlement provisions contemplate payment of an amount based on the difference between the fair value and a fixed exercise price for a fixed number of shares; subject to down-round and standard anti-dilution adjustments. Due to the adoption of ASU 2017-11, the presence of the down-round protection feature of the warrants does not preclude equity classification. Instead, the down-round protection feature of the warrants would be recognized as a dividend and as a reduction of income available to common shareholders, which would result in a reduction to our basic net income per share when triggered. As we apply the treasury stock method for calculated diluted earnings per share, this amount would be added back to income available to common stockholders.

 

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The 2.5% Convertible Bonds (and the 2.5% Non-convertible Bonds) are not within the scope of ASC 480 and are not required to be accounted for at fair value. In addition, the Company elected to not carry the Bonds at fair value.

The Company evaluated the terms of the 2.5% Convertible Bonds in accordance with ASC Topic No. 815–40, “Derivatives and Hedging - Contracts in Entity’s Own Stock” and determined that the underlying common stock is indexed to our common stock. We determined that the embedded conversion and other features did not meet the definition of a liability and therefore did not bifurcate the conversion and other features and account for it as a separate derivative liability. In addition, the 2.5% Convertible Bonds contain a contingent beneficial conversion feature that may be triggered if the conversion price is reduced upon a down-round in the future, subject to accounting under ASC 470-20-25-6. The contingent beneficial conversion cannot be cash-settled, is not beneficial upon issuance, and there was no premium upon issuance. Contingent beneficial conversion features are not accounted for until and unless they are triggered. Accordingly, no accounting for the conversion feature is necessary until that time. However, if the beneficial conversion feature is triggered, it would be measured using the number of shares to be received by the holder based on the adjusted conversion price multiplied by the stock price at the commitment date, and recognized as accretion of the debt commencing at the date the down-round provision is triggered.

Leases

The FASB issued ASU No. 2016-02, Leases (Topic 842), in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, “ASC 842”) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability, on a discounted basis, with a corresponding right-of-use-asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 and applied the lessee package of practical expedients.

Financial instruments — credit losses

The FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” in June 2016, and has since modified the standard with several ASUs (collectively, the “new credit loss standard”). The new credit loss standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For our impacted instruments, which include accounts and other receivables, we are required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance was effective for us beginning January 1, 2020. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements, and we do not expect it to significantly impact future consolidated financial statements.

Fair value measurements

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The

 

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new guidance was effective for us beginning January 1, 2020. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements, and we do not expect it to significantly impact future consolidated financial statements.

Income taxes

In December 2019, the FASB issued ASU 2019-12, which is intended to simplify the accounting for income taxes. This update removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. Early adoption of the new standard is permitted for companies for periods for which financial statements have not yet been issued. We adopted this new guidance on January 1, 2020, and it did not have a material effect on our consolidated financial statements.

Emerging growth company status

We are an “emerging growth company,” as defined in Section 2(a) of the JOBS Act. As such, we are eligible to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to, among other things:

 

 

present more than two years of audited financial statements and two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure in our registration statement of which this prospectus forms a part;

 

 

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

 

disclose certain executive compensation related items; and

 

 

seek shareholder non-binding advisory votes on certain executive compensation matters and golden parachute arrangements, to the extent applicable to our Company as a foreign private issuer.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.

The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

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Our business

Overview

Our mission is to become one of the world’s leading global gaming companies by delivering differentiated content and playing experiences to our players.

We are a leading developer and publisher of digital games on mobile and web-based platforms. We are the creators of multi-format interactive entertainment experiences for casual players. Our flagship game, DoubleDown Casino, has been in the top 20 grossing mobile games annually on Apple App Store since 2015, according to App Annie. Our newest game, DoubleDown Fort Knox, launched in April 2018, has already achieved three million cumulative installations as of March 31, 2020.

We have been an early pioneer in the social casino gaming segment of casual gaming and were among the initial publishers to launch a social casino game on the Facebook platform in 2010 with the release of DoubleDown Casino. As the market has shifted materially to mobile platforms in recent years, we have also embraced new distribution channels for our games, which have significantly expanded our overall reach and market opportunity. We currently offer four games, DoubleDown Casino, DoubleDown Fort Knox, DoubleDown Classic and Ellen’s Road to Riches. Our games attract players of social casino and casual games, and have been installed over 100 million times to date. During 2019, an average of 2.8 million players played our games each month and for the three months ended March 31, 2020, an average of over 3 million players played our games each month.

Our market opportunity includes casual gaming globally, which includes slots, puzzle, card, match three and other similar games. Eilers & Krejcik estimated that the global market for mobile casual games was expected to be $22.1 billion in 2019, an increase of approximately 22% from 2018. Within the social casino segment of casual gaming, which includes free-to-play online slots, poker, table games, and bingo, DoubleDown Casino was ranked third in the top 10 game titles by revenue for the three months ended March 31, 2020, according to Eilers & Krejcik. The growth rate of the social casino market is estimated at 5% over the next four years and is projected to reach $6.8 billion by 2023, according to Eilers & Krejcik. As one of the leading players in social casino today, we believe we are well-positioned to combine our social casino expertise with additional game elements to deliver entertaining playing experiences for our players.

We believe that success in casual gaming requires a combination of creativity and data science to acquire, engage and retain players. We have a deep understanding of our players which allows us to hone our game development, content strategy, and live game operations. Our all-in-one approach that combines numerous pieces of content within a single game streamlines the player experience while our best-in-class gaming elements, including graphics, user interface, and meta-features, such as daily challenges and loyalty programs, keep our players engaged. Collectively, our players exhibit higher monetization compared to that of our social casino peers, which we believe reflects our successful approach. Our ARPDAU was $0.70 for the three months ended March 31, 2020, higher than the $0.53 average of three primary social casino peers in the same period based upon data from Eilers & Krejcik and the approximate $0.02 median of all mobile games during the three months ended June 30, 2019, according to Game Analytics.

We believe our access to content is among the broadest in the gaming industry. In addition to our internally-developed content, we also have access to content from IGT, one of the largest casino equipment suppliers in the world, and creator of well-known slot games such as Cleopatra, Wolf Run, and Megabucks, as well as from DoubleU Games, our controlling shareholder and a leading developer and publisher of social casino games based in Korea. Since 2008, we have had access to over 2,000 slot titles through our partnerships with IGT and DUG and we have internally developed a catalogue of over 20 original slot titles. We continue to provide our players with a superior gaming experience by leveraging our three content pillars: DDI, IGT, and DUG.

 

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Our financial performance has benefitted from the differentiated way in which we approach our market opportunity. Our revenue was $273.6 million in 2019, up from $266.9 million in 2018. Approximately 87% of our revenue in 2019 was generated from the United States. Our net income was $36.3 million in 2019, up from $25.1 million in 2018. Our Adjusted EBITDA was $101.7 million in 2019, up from $85.1 million in 2018, with an Adjusted EBITDA margin of 37.2% and 31.9%, respectively. Our revenue was $76.1 million for the three months ended March 31, 2020, up from $68.3 million for the three months ended March 31, 2019. Our net income was $12.9 million for the three months ended March 31, 2020, up from $8.8 million for the three months ended March 31, 2019. Our Adjusted EBITDA was $25.3 million for the three months ended March 31, 2020, up from $24.7 million for the three months ended March 31, 2019, with an Adjusted EBITDA margin of 33.3% and 36.2%, respectively. See “Management’s discussion and analysis of financial condition and results of operations—Other key performance indicators and non-GAAP metrics and trends” for a description of Adjusted EBITDA, For a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated in accordance with U.S. GAAP, see “Selected consolidated financial information and operating data—Reconciliation of non-GAAP measures.”

The roots of our business

Our Company was originally established as The8Games Co., Ltd., in Seoul, Korea in 2008, an interactive entertainment studio focused on the development and publishing of casual games and mobile applications. In 2016, DUG acquired a controlling stake in our Company and the remaining stake was acquired by DUG in 2017, making us a wholly-owned subsidiary. Later in 2017, DUG also acquired DDI-US through our Company, believing that our strengths are highly complementary to DDI-US for creating more powerful social casino gaming content. We hold DDI-US through DoubleUDiamond LLC, which is our wholly-owned subsidiary that fully owns DDI-US. We changed our name to DoubleDown Interactive Co., Ltd. in December 2019.

 

 

LOGO

DoubleU Games Co., Ltd. (DUG) Parent entity 100% DoubleDown Interactive Co., Ltd. (DDI) Listing entity Korea 100% US DoubleUDiamond LLC (DUD) DDI’s wholly-owned subsidiary which fully owns DDI-US 100% DoubleDown Interactive LLC (DDI-US) U.S. operating entity, acquired by DUG in 2017

Through the acquisition of DDI-US, we have transformed into one of the world’s leading social casino publishers. DDI-US, our principal operating subsidiary, has been one of the early pioneers of social casino games on mobile and web-based platforms since the origination of the genre in the late-2000s. DDI-US was founded in 2010 with the launch of its flagship game, DoubleDown Casino. The company was among the initial

 

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publishers to launch a social casino game on Facebook, where DoubleDown Casino rapidly gained popularity and became the fourth most user-recommended Facebook game across all genres in 2011, according to Facebook. DoubleDown Casino was subsequently launched on the Apple and Google platforms in 2012, which greatly expanded its distribution and player reach. In addition to being an industry pioneer, DDI-US has also proven to be an early innovator. For example, DDI-US was among the first to leverage authentic land-based content in mobile and web-based games. DDI-US was also the first to introduce a tournament feature with the introduction of Social Slot Tournament in 2011, which offered a real-time competitive environment for players to play against other players instead of against the house. With constant innovation, our games continue to perform well over time.

Prior to our acquisition of DDI-US in 2017, it had been a wholly-owned subsidiary of IGT since 2012, which at the time was the global leader in the design, development, and manufacture of gaming machines. Following IGT’s acquisition, DDI-US began to leverage IGT’s expansive selection of land-based casino content, which we continue to utilize through an exclusive licensing agreement, to release proven slot titles that enrich the authentic playing experience of our games.

Since our acquisition of DDI-US in 2017, DUG has brought our Company powerful casino content and the operating expertise of an early mover and leader in social casino gaming. DUG’s strong execution capabilities in post-merger integration have delivered a seamless assimilation post-acquisition and optimized synergies. Particularly, DUG’s operating know-how has helped us enhance our data analytics, incorporate best-in-class meta-features into our games, and develop more efficient marketing and user acquisition capabilities.

Our proprietary capabilities, coupled with the exclusive access to IGT’s content and DUG’s content and capabilities, give rise to three fundamental pillars through which we provide our players with high-quality content and superior gaming experiences.

 

 

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Ourthree-pillars Double Down INTERACTIVE Proven original social casino content and creative technological competencies DOUBLEU GAMES Exclusive original social casino content and proven execution capabilities IGT Proven and exclusive authentic land-based content

 

 

Proven creative and technological competencies of DDI: We have a sophisticated approach in developing original slot content and have demonstrated our innovation and creativity across social casino and casual mobile games. Furthermore, our centralized slot research and development function can quickly and efficiently incorporate slot content from IGT and DUG through a process known as “porting,” in which existing slot content from a third-party library is adapted into our games. Our technological competencies extend to live game operations,

 

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our use of data and analytics to tailor the gaming experience on a player segment-specific level to improve user acquisition, drive increased gameplay, and boost player spending in the in-game economy.

 

 

Proven and exclusive authentic land-based content from IGT: IGT offers us access to over 2,000 slot titles that we can port into our games. We closely monitor their land-based market performance and select top-performing titles to incorporate into our games. Content from IGT features iconic slot titles and authentic casino gameplay mechanics that appeal to a large audience of loyal players, with a particular focus on those who enjoy land-based slot machines. Current and future land-based slot titles from IGT provide a large and growing pipeline of slot content.

 

 

Exclusive original social casino content and proven execution capabilities from DUG: DUG has built a collection of over 300 original slot titles that have been optimized for social casino experiences. We have exclusive access to DUG’s growing slot content that appeals to both authentic and casual players. In addition, DUG provides expertise in operating social casino mobile games, which enables us to improve execution across numerous aspects of our business including game development, marketing and user acquisition, and live game operations.

Industry overview and market opportunity

Gaming has gained widespread popularity over the last decade and has become one of the largest forms of entertainment globally. Consumer spending on gaming was projected to be approximately $152 billion in 2019, according to data from Newzoo 2019, which would be more than double the actual combined consumer spending in 2019 on music and at the global cinematic box office, $28.2 billion and $42.2 billion, respectively, according to IFPI and MPAA. As consumers spend an increasing amount of time and money on digital devices, digital gaming has become the fastest growing segment within gaming according to ResearchandMarkets.com. According to Newzoo 2019, it was estimated that there will be 2.5 billion gamers in 2019. This has been driven by a number of technology and consumer trends:

 

 

Growth of mobile platforms and entertainment increasingly consumed through mobile. According to data from Newzoo Online, the number of smartphone users was expected to grow by 10% to 3.2 billion users in 2019. Furthermore, more people are using their mobile devices to enjoy convenient access to digital content at all times. According to data from eMarketer, an average U.S. adult spent an average time of 2 hours and 55 minutes per day on a smartphone in 2019; time spent on consuming content via mobile devices was expected to surpass time spent watching TV for the first time in 2019. Both hardcore (such as racing, shooting, etc.) and casual U.S. gamers, with average ages of 34 and 45, respectively, averaged over 10 hours per week on mobile gaming in 2018, according to the most recent data available from IDC. We believe this trend presents an opportunity for greater engagement with players on mobile devices.

 

 

Role of app stores as distribution and payment gateways. Developers are now able to distribute apps to global audiences and regularly update the apps with new content and features. App stores are now a popular destination for users to find and access content, and also serve as integrated payment systems where users can conveniently make purchases in a trusted and secure setting. According to App Annie, mobile games accounted for 72% of total revenue worldwide across Apple App Store, Google Play Store, and other third-party platforms in 2019.

 

 

Success of the free-to-play model has widened appeal of gaming to the masses. Free-to-play games have significantly increased the revenue potential of mobile and web-based games by eliminating upfront barriers and facilitating purchases throughout the player lifecycle. Free-to-play games allow for a wider audience, increasing the number of potential paying players and enhancing the overall game experience by facilitating greater social interaction among players. Through offering a variety of in-game purchase options, players

 

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can spend according to their entertainment value derived from the game which allows developers to maximize revenue from their existing player base.

We also believe that the competencies required to succeed in the market have evolved:

 

 

Scale is increasingly important. While developer tools and app store distribution have lowered the technical barriers to entry, long-term success generally favors larger gaming companies. Only a small fraction of games reaches meaningful scale. Through 2019, only 1,121 games of more than a million games available on Google Play Store and Apple App Store generated over $5 million of revenue, according to App Annie. As games compete for limited playing time, gaming companies with an ability to invest significant amounts of resources to marketing, research and development, and ongoing costs are able to improve the probability of success. There is also a virtuous cycle whereby top-ranked games drive greater organic growth, which promotes higher social engagement and sharing. This translates to a potential larger player base which provides more data from which more effective user acquisition and engagement strategies can be formulated.

 

 

Content is a key differentiator. Gaming companies face significantly higher costs to develop, market, and operate games. As greater resources are invested in these games, players have become more engaged and deeply invested in the games they play, resulting in higher switching costs. We believe both new and existing games have shown a higher inclination towards proven and recognizable content as a key form of differentiation to improve the likelihood of success in the long-term.

 

 

Increasing longevity of games. Games have evolved into services, significantly extending the lifecycles of successful games. According to data from SensorTower and Cowen and Company, the top 20 grossing games on Apple App Store were first released an average of over four years ago. It is generally considered more efficient to grow an existing game with an established player base than to develop a new game and acquire players. Facilitated by a shift in monetization strategy towards more in-game purchases, greater ability to update games post-launch via app store platforms, and the incorporation of social aspects into the games, players stay engaged longer, which in turn drives higher and more stable monetization. As the lifecycles of games continue to increase, we believe that strong, data-driven live operations capabilities are crucial to optimize games to drive long-term and sustainable value.

We believe that our market opportunity includes casual gaming globally, which includes slots, puzzle, card, match three and other similar games. Eilers & Krejcik defines casual games as games that have simple decision-making with the ability for players to start or stop playing at any time without heavily impacting the overall experience. Eilers & Krejcik estimated that the global market for mobile casual games was expected to be $22.1 billion in 2019, an increase of approximately 22% from 2018. The growth rate of the social casino market is estimated at 5% over the next four years and is projected to reach $6.8 billion by 2023, according to Eilers & Krejcik. We believe that casual and social casino genres are converging, blending elements into new games. As one of the leading players in social casino gaming today, we believe we are well-positioned to combine our social casino expertise with additional game elements to deliver entertaining playing experiences for our players. Our management and development teams have experience developing both social casino and casual games.

Our value proposition to players

Each of our games is targeted at a broad and diverse set of players, ranging from social casino enthusiasts to casual gamers. Our games are evergreen in nature, in known formats, self-directed in pace and session length, and incorporate a regular cadence of in-game events. We believe that our gameplay style unlocks an audience that has historically been underserved by gaming, as our data reflects our average player skews female, older, and with higher income compared to the gaming industry average according to data from the Entertainment Software Association, thereby potentially supporting higher retention and monetization.

 

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While the majority of our players engage with our authentic land-based casino content, we believe significant opportunity exists in broader casual and social segments. Our all-in-one approach to each game allows for all types of players to engage with our content within the same game. In addition, we believe that DoubleDown Fort Knox, which offers higher resolution graphics, additional innovative meta-features, and a mobile-first experience compared to our initial game, DoubleDown Casino, will expand the range of player segments we address. Our diversity of content within one game, ranging from authentic to casual, appeals to numerous types of players. Our longest-standing game, DoubleDown Casino contains over 200 titles.

Our All-in-One Approach

 

 

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Authentic Casual Double Diamond Blackjack Remletto BingoLand slots Social casino land slots Social casino slots Card/table Bingo 128 21 37 21 1 200+ total titles within DoubleDown Casino

We believe that our games offer a compelling value proposition to players that drives their loyalty and continued engagement and monetization:

 

 

Proven library of content: We have a diverse library of content to entertain and engage players, including proven social casino gaming content developed by DUG; authentic, land-based casino content from IGT; and innovative, original content developed internally. DUG and IGT’s content libraries include widely-known titles with strong player affinities that drive player interest and engagement. The breadth of our content allows us to target a wide spectrum of player segments. Based on continual analysis of in-market performance of DUG titles and IGT land-based machines, we are able to carefully select top performing content to port to our games.

 

 

Cross-platform playability: Our players can play our games anytime and anywhere on mobile and web-based platforms. Our games are available on all major platforms including Apple App Store, Facebook, Google Play Store, and Amazon Appstore. The accessibility of our games allows players to engage with our content in their preferred format.

 

 

All-in-one approach: Each of our games provides a one-stop shop for gaming entertainment with diversified content. We believe that users prefer fewer apps on their smartphones, not more. According to a 2017 comScore study, smartphone and tablet users, age 18 or older, spent 96% of their time on their personal top ten apps. To play a multitude of our content, players are only required to download one game. The content choices available within each game allow the player to tailor the experience to their preferences, and the unified environment lowers the barrier to new content discovery, enhancing entertainment and engagement for our players. Additionally, players are able to earn rewards and spend currency in one environment rather than being fragmented across multiple apps, thereby enhancing loyalty.

 

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Enhanced player experience through DoubleDown Fort Knox: DoubleDown Fort Knox was designed to deliver a best-in-class mobile gaming experience for our players across all aspects of the game including graphics, user interface, and meta-features. In addition to high-resolution graphics, we believe that DoubleDown Fort Knox is the only social casino game that provides 3D game viewing as well as the option to play the game in both portrait and landscape mode. These features fully utilize the capabilities of high-end mobile devices and allow for more immersive player experiences. DoubleDown Fort Knox’s compelling suite of meta-features includes frequent challenges for players with a range of rewards such as additional virtual chips and a variety of enhanced bonuses. We believe these innovative elements create an engaging game that appeals to a wider base of players than our other games.

Our data-driven approach

We employ a data-driven approach throughout our business, from new game strategy to live operations of existing games. We have been operating in this manner for over ten years, and have developed a system of analysis leveraging our longevity and depth of player information. Our analytic capabilities allow for real-time and more accurate analysis, thereby reducing our reliance on third-party providers. We continually analyze and test granular changes to features, content, and live game operations to hone our offering.

 

 

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Proprietary data insights and analytics Iterative design of game elements to achieve results Feature development Data analytics Live game operations Content strategy Optimization of meta-features on player-segment level High-velocity release cadence based on market performance

Feature development

We build features that are designed to enhance the gaming experience for our players and drive engagement and monetization. Prior to full launch, we employ a variety of testing processes, including alpha testing, beta testing, and targeted launches, to estimate granular impacts on player behavior. Based on our analysis of test results, we are able to predict whether implementation of the feature will drive increased playing time or session frequency, or generate additional purchases in the in-game economy for particular player segments. We hone our features in an iterative process prior to full release. We develop features to continue to grow our player base, increase our current players’ engagement with our games, and boost player monetization within our games. For example, to drive higher monetization of players, we tested an enhanced jackpot feature designed to provide greater jackpot wins during a limited period of time. Our testing confirmed that such a

 

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feature motivated higher wager levels and related purchases. As a result, the Jackpot Happy Hour feature was introduced to all players in DoubleDown Casino.

Content strategy

We release new content with a high velocity cadence, typically every 1.5 weeks. Fresh content is important in heightening player engagement, providing new opportunities for players to utilize virtual chips, and motivating additional purchases. We continually analyze in real-time how our slot titles are performing across our games to provide insights into which content in our development pipeline is optimal to introduce next. We extend our performance analysis to all in-market titles, and our development speed enables us to be a fast-follower for any type of content gaining traction in the market. If our data analytics show a particular style of content driving increases in monetization or number of playing sessions per player, we believe we can quickly and efficiently introduce related content. For example, our decision to expand the scope of our content beyond authentic slot titles to include more original social casino content was based on the strong positive data trends seen in the performance of initial content launches of this type.

Live game operations

We use our data and analytics to tailor the application of meta-features on a player segment-specific level to improve user acquisition, drive increased gameplay, and boost spend in the in-game economy. Based on our real-time analysis of how a specific player reacts to specific changes in gameplay mechanics or communications, we can tailor the gaming experience of the player or the special offers the player receives. We can utilize these insights to optimize our user acquisition spend, gameplay mechanics, and monetization efforts to other players with similar behavior. Our customized analytics improve over time as we optimize these live operations functions daily. Our data-driven live game operations is a core capability that we believe helps to boost our marketing efficiency and increase engagement and monetization of existing players. For example, we are able to deliver optimized purchase offers to first-time payers based on initial playing behavior of each new player cohort.

Our strengths

All-in-one strategy offers scalability, player insights, and operational efficiency

Our all-in-one approach allows our players to access our extensive library of slot content through a single game download. We believe that by consolidating players of multiple slot titles into fewer games, we have built a larger and more connected player base, fostering a stronger sense of loyalty among players and promoting higher levels of engagement with our content. Additionally, we believe that the singular environment of our games facilitates discovery of new content and leads to increases in the number of playing sessions over time. For 2019, the average number of playing sessions per day increased 21% compared to 2018.

The all-in-one approach provides an enhanced understanding of our players as all of their behaviors take place within the same game. We leverage our proprietary, in-house developed analytic tools to capture rich data insights we can leverage throughout our entire game development and operation process. Additionally, our players self-select slot content that they want to play within our game, thereby revealing their preferences and playing style over time, which we can utilize to effectively introduce new content and features for further monetization opportunities.

By centralizing our content into fewer games, we can also adopt a more focused and efficient approach to user acquisition. Our all-in-one approach improves our marketing efficiency, promotes awareness of our games, and reduces cannibalization across multiple games.

 

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Exclusive access to deep content libraries and proven track record of developing new content

We believe our content library, underpinned by our three pillars for content access and development, is among the deepest in casual gaming and allows us to target a wide audience of players globally. We have exclusive access to hundreds of highly recognizable, branded land-based slot titles through our partnership with IGT which enables us to deliver an authentic casino floor experience to our players. In addition to deep content libraries of IGT-developed slots such as Cleopatra, Wolf Run, and Megabucks, the IP License Agreement with IGT allows us to gain access to other iconic third-party slots, such as Wheel of Fortune. Our parent company, DUG, also has deep experience in developing social casino games. More than 300 titles are available to us exclusively, further enriching our content library. Both IGT and DUG’s content further extends the range of player segments we can address, which we believe is a competitive advantage over our peers.

In addition to IGT and DUG content, our in-house research and development team develops proprietary slot content. Collectively, we have had access to over 2,000 slot titles through our partnerships with IGT and DUG and we have internally developed a proprietary catalogue of over 20 original slot titles.

Comprehensive player lifecycle management

We employ a rigorous, data-driven approach to player lifecycle management from user acquisition to ongoing engagement and monetization. We use internally-developed analytic tools to segment and target players and to optimize user acquisition spend across multiple channels. Once a player is acquired, our proprietary analytic tools dissect their playing behavior on a granular level. We build a sophisticated understanding of our players that allows us to tailor game mechanics, features, and offers to drive increased gameplay or number of playing sessions. Greater engagement from our players has a flywheel effect of further improving our data analytics and ability to retain those players through customized game elements. As the players progress in their lifecycle, we also use our data analytics capabilities to boost monetization. We strategically deploy personalized special offers and tune gameplay to drive additional player spend. We believe our comprehensive, data-driven approach to managing players throughout the entirety of their lifecycle drives better monetization than our competitors, resulting in ARPDAU of $0.70, higher than the average of three primary social casino peers of $0.53 based upon data from Eilers & Krejcik, for the three months ended March 31, 2020.

Robust technology platform

We operate on a centralized, cloud-based technology platform which enables us to consistently launch high-quality slot content and operate our games on a global level. Our robust infrastructure allows us to capture and analyze player data in real-time, which fuels our development and operations. In addition, we have proprietary porting capabilities that allow us to implement content from DUG and IGT quickly and efficiently, which enables our high velocity approach to content development. Our shared code base also increases speed to market for new content, features, and services while minimizing development costs, as we are able to roll-out software and content updates across all of our games simultaneously. Lastly, our high-capacity servers minimize loading time and service outage risks, contributing to a streamlined and consistent gaming experience for our players.

Deep talent pool and shareholder support

We have a global development team with extensive experience across multiple geographies and functions. Our management team and employee base have a proven track record of creating and scaling social casino and casual games. For example, in 2016, our senior management launched Catch Monsters, a casual game for the Facebook platform. Our talent pool of 280 employees is comprised of highly experienced engineers, creative artists, product managers, data scientists and market researchers. We also benefit from our controlling

 

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shareholder DUG, a leader in the social casino gaming industry, with whom we regularly engage to share best practices.

Our strategies

Grow our player network

We aim to expand our player base by utilizing our data-driven approach to player segmentation and acquisition. We plan to develop new content and features within our existing games to grow the number of active players in our existing player segments. In addition, we intend to further develop additional content and features to cultivate new players from adjacent segments and new geographies. We also aim to efficiently deploy our marketing spend to attract new players to our platform. We believe that our investments in our platform to enhance our marketing capabilities can accelerate our user acquisition efforts going forward.

Increase engagement and monetization of existing players

We intend to improve engagement and monetization of our existing players by leveraging enhanced data insights gained from our analytic capabilities. We believe these insights will enable us to continually increase attractiveness of our content and improve the in-game experience of our existing players. We also aim to utilize our rich data to hone our development, marketing, and live game operations efforts to drive additional player engagement and monetization.

Grow DoubleDown Fort Knox, our newest game

We intend to rapidly build-out our latest game, DoubleDown Fort Knox, which utilizes our all-in-one approach. We aim to leverage first-of-its-kind features, such as 3D slots and the option to play the game in both portrait and landscape mode, to target new players and drive paying player conversion. We aim to continue to demonstrate best-in-class payer conversion, having already achieved 7.7% for this game in 2019. We aim to continuously cultivate and develop innovative meta-features that resonate well with both our existing and new players.

Expand geographically

We aim to expand geographically with both existing and new content. We believe we can further leverage our existing content to grow in regions that share familiarity with our current content and gameplay features, such as Asia-Pacific and Western Europe. Additionally, we see an opportunity to offer localized slot content specially designed to appeal to players from additional geographies where we may be underpenetrated today, such as the Asia-Pacific region.

Develop new games targeting adjacent casual genres

We plan to broaden our existing product offering with expanded casual game elements. Through a combination of self-developed content and content accessible from IGT and DUG, we aim to continue to enrich our product offerings and further penetrate the casual gaming segment. We intend to continue to utilize expertise shared from our parent company, DUG, in the development process.

Pursue selective mergers and acquisitions

We intend to pursue selective merger and acquisition opportunities to expand our capabilities and grow our industry and geographic footprint. Our management team has a demonstrated track record of execution and

 

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integration for strategic mergers and acquisitions, having been successful in integrating content and capabilities from our controlling shareholder, DUG. We believe we can further maximize the value of acquired assets by leveraging our scalable platform and deep talent pool.

Our games

DoubleDown Casino (launched in April 2010)

 

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Start screen

 

Lobby

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Slot game start screen   Hall of Fame History showing player ranking

Double Down casino connecting Rolling in more gold cash the ages Megabucks park diamond super stacks high limit wheel of fortune double diamond spin bar Megabucks hall of fame jackpot of the month $1,991,330,916,805

DoubleDown Casino, our flagship game, targets social casino gamers who value authentic Vegas-style gameplay. The game replicates the land-based casino environment and utilizes our internally-developed slot titles, as well as those from IGT and DUG. A pioneer in the social casino gaming industry, DoubleDown Casino was first introduced in April 2010 on Facebook and achieved 10 million cumulative downloads in just 23 months. In February 2012, the DoubleDown Casino mobile app was launched on Apple App Store, Google Play Store, and Amazon Appstore. In 2018, we fully renewed the game by incorporating additional content, including from DUG, along with additional engaging in-app features such as High Limit Room, Jackpot Happy Hour, vouchers and coupon systems, and more granular membership segmentation. DoubleDown Casino features 186 free-to-play slots as of March 31, 2020. Almost a decade after its initial launch, DoubleDown Casino remains one of the most recognized social casino games, and ranked third in the top 10 social casino game titles by revenue for the three months ended March 31, 2020, according to Eilers & Krejcik.

 

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DoubleDown Fort Knox (launched in April 2018)    

 

 

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Start screen   Lobby   Slot game start screen   Time-based bonuses

Double Down fort knox Cleopatra gold 6,268,847 1,200 SPIN 300,00,00 Lucky cat wheel of fortune 17:59 8 1,000,00 collect 250,000 50,000

DoubleDown Fort Knox, offered as a mobile app on Apple App Store and Google Play Store, is designed to attract players who prefer more casual and dynamic gameplay. DoubleDown Fort Knox utilizes our next-generation technology platform with high-resolution graphics that allows for a more immersive player experience, which appeals to a younger player demographic and caters to players with high-end mobile devices. For instance, among games from the top ten social casino publishers, DoubleDown Fort Knox is the only game that offers 3D game viewing feature. We also believe we were the first to bring technology to market allowing gameplay in both portrait and landscape mode. We believe DoubleDown Fort Knox’s suite of meta-features is competitively robust, including daily bingo challenges and progress boosters. Additionally, we believe we are among the first to introduce a supplementary subscription revenue model for DoubleDown Fort Knox in August 2018, where players can subscribe to a premium account offering early access to new content and the ability to earn free virtual chips at a faster rate. DoubleDown Fort Knox features 79 slots and has recorded over three million cumulative installations as of March 31, 2020.

DoubleDown Classic (launched in July 2017)

 

 

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Start screen

 

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Double down classic slots new Wheel of fortune new triple lucky four leaf clolen jackpot triple lucky 7 super free games 20 Hot hot games high limit jackpots all games last played

 

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Slot game start screen   Daily Bonus

35,00 Free game$ bar buy credits max bet Daily bonus daily bonus rewards good luck day 1 1 day steak! Spin now

DoubleDown Classic focuses on players with a strong appetite for classic wheel-based slot games, who prefer an old-fashioned, mechanical, reel-based gaming experience. In this game, players can find some of the most traditional and popular 3-reel and 5-reel slots seen in land-based casinos, which are designed to maximize authenticity of the gaming experience. DoubleDown Classic is offered through Apple App Store and Google Play Store, with over 1.6 million cumulative installations as of March 31, 2020.

Ellen’s Road to Riches (launched in November 2017)

 

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Start screen

 

Lobby

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Slot game start screen   Rewards of Daily Challenges

Ellen’s road to riche$ slots Ellen’s on special delivery ellen air Ellen’s Daily Challenges Complete all challenges 20,000,000 get 50 symbols in on my way! In progress get 1 Epic win play bonus game(s) in ellen’s on

Ellen’s Road to Riches utilizes content from the popular American TV show, The Ellen DeGeneres Show by Warner Bros Interactive Entertainment. Players can meet various guests as they advance through the levels within the game, which is designed to promote a sense of achievement and increase player engagement. Ellen’s Road to

 

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Riches is serviced on both web and mobile platforms including Apple App Store, Google Play Store, and Amazon Appstore, with over 2.4 million cumulative installations as of March 31, 2020.  

Technology infrastructure

We operate our games on robust technology infrastructure. We utilize an Amazon Web Service-based data infrastructure that enables stable and agile data management. We designed our platform with multiple layers of redundancy to guard against data loss and to deliver high availability. Our data centers are currently located in Virginia and California. Our high capacity servers support our data and analytics capabilities.

Our technology platform enables us to port new content ourselves. Our systematic ability to port gaming content from both DUG and IGT has enabled us to customize content for our gaming environment, so that we can provide a more consistent interface with improved aesthetics to ensure a seamless experience for our players.

We operate using a shared code base. Our shared code base improves speed to market and minimizes development costs. Our shared global architecture enables every innovation and upgrade to our infrastructure to be simultaneously available to all of our games and development teams. We are able to continuously incorporate learnings across our platform to optimize performance.

Our platform partners

Our games are primarily distributed, marketed, and promoted through third party platform providers, primarily Apple App Store, Facebook, Google Play Store, and Amazon Appstore. Most of the virtual chips we sell are purchased using the payments processing systems of these platform providers. These platforms generally charge us approximately 30% of the gross receipts they collect from our players.

Our use of mobile and web-based platforms and data derived from such platforms is subject to each platform provider’s standard terms and conditions for application developers, which govern the promotion, distribution and operation of games and other applications on their platforms. Our platform providers have the ability to make unilateral changes to their platforms, their terms of service, the amounts of or method by which our players obtain content and make payments, how they are paid, and any other aspect of their platforms and services. Those changes may negatively impact how our games work, how players interact with our games, and our ability to attract and monetize players.

Technology and content development

We have a dedicated technology and content development team that works to expand our player reach, and impact with new, innovative games. Since the acquisition of DDI-US from IGT in 2017, we have endeavored to strengthen our in-house development capabilities to enable us to be less reliant on third-party licensing arrangements, primarily with IGT and DUG, by developing proprietary intellectual property. We consider it important to create new and innovative games, such as DoubleDown Fort Knox, on a continuing basis in order to attract and retain players and, ultimately, to increase our market share.

Our development operations are based in our Seattle office, where we maintain a game and slot content development center, and in our Seoul headquarters facility, which includes a Korea game development center. The Seattle center has approximately 70 employees who focus on the design, development, testing and delivery of our social casino games. The Korea center has approximately 87 employees who focus on the integration of our gaming platform with other internet applications and platforms. Our expenditures on technology and content development were approximately $19.3 million in 2019 and approximately $20.1 million in 2018. We anticipate that our expenditures will increase 10~15% annually over the next three to five years.

 

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Marketing

We focus our marketing efforts on acquiring new players and retaining existing players. We acquire players both organically and through paid channels. Our paid marketing includes performance marketing and dynamic media buying on Facebook, Google, and other channels such as mobile ad networks. Underlying our paid marketing efforts are our data analytics that allow us to estimate the expected value of a player and adjust our user acquisition spend to a targeted payback period. Our broad capabilities in promotions allow us to tailor promotional activity around new releases, exe