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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
`
FORM 10-Q
| | | | | |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number: 001-39896
PLAYTIKA HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | |
Delaware | | 81-3634591 |
(State of other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
| | |
c/o Playtika Ltd. |
HaChoshlim St 8 |
Herzliya Pituach, Israel |
972-73-316-3251 |
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | PLTK | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5, 2022, the registrant had 412,397,599 shares of common stock, $0.01 par value per share, outstanding.
PLAYTIKA HOLDING CORP.
FORM 10-Q
INDEX
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| | Page |
PART I. | | |
ITEM 1. | | |
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ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
PART II. | | |
ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
ITEM 5. | | |
ITEM 6. | | |
SIGNATURES | | |
CAUTIONARY NOTE ABOUT FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our business strategy, plans and our objectives for future operations, are forward-looking statements. Further, statements that include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “present,” “preserve,” “project,” “pursue,” “will,” or “would,” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves significant risks, uncertainties and assumptions, including, but not limited to, the important factors discussed in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and industry. As a result, it is not possible for our management to assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.
Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include without limitation:
•our reliance on third-party platforms, such as the iOS App Store, Facebook, and Google Play Store, to distribute our games and collect revenues, and the risk that such platforms may adversely change their policies;
•our reliance on a limited number of games to generate the majority of our revenue;
•our reliance on a small percentage of total users to generate a majority of our revenue;
•our free-to-play business model, and the value of virtual items sold in our games, is highly dependent on how we manage the game revenues and pricing models;
•our inability to make acquisitions and integrate any acquired businesses successfully could limit our growth or disrupt our plans and operations;
•we may be unable to successfully develop new games;
•our ability to compete in a highly competitive industry with low barriers to entry;
•we have significant indebtedness and are subject to the obligations and restrictive covenants under our debt instruments;
•the impact of the COVID-19 pandemic on our business and the economy as a whole;
•our controlled company status;
•legal or regulatory restrictions or proceedings could adversely impact our business and limit the growth of our operations;
•risks related to our international operations and ownership, including our significant operations in Israel, the Ukraine and Belarus and the fact that our controlling stockholder is a Chinese-owned company;
•our reliance on key personnel;
•security breaches or other disruptions could compromise our information or our players’ information and expose us to liability; and
•our inability to protect our intellectual property and proprietary information could adversely impact our business.
Additional factors that may cause future events and actual results, financial or otherwise, to differ, potentially materially, from those discussed in or implied by the forward-looking statements include the risks and uncertainties discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Quarterly Report on Form 10-Q and our Annual Report of Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2022. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur, and reported results should not be considered as an indication of future performance. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Except as required by law, we undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In millions, except for per share data)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
ASSETS | (Unaudited) | | |
Current assets | | | |
Cash and cash equivalents | $ | 885.8 | | | $ | 1,017.0 | |
Short-term bank deposits | 222.1 | | | 100.1 | |
Restricted cash | 2.0 | | | 2.0 | |
Accounts receivable | 139.7 | | | 143.7 | |
Prepaid expenses and other current assets | 97.2 | | | 72.9 | |
Total current assets | 1,346.8 | | | 1,335.7 | |
Property and equipment, net | 105.6 | | | 103.3 | |
Operating lease right-of-use assets | 98.8 | | | 89.4 | |
Intangible assets other than goodwill, net | 419.3 | | | 417.3 | |
Goodwill | 829.3 | | | 788.1 | |
Deferred tax assets, net | 40.6 | | | 38.3 | |
Investments in unconsolidated entities | 17.8 | | | 17.8 | |
Other non-current assets | 30.7 | | | 13.4 | |
Total assets | $ | 2,888.9 | | | $ | 2,803.3 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | |
Current liabilities | | | |
Current maturities of long-term debt | $ | 12.2 | | | $ | 12.2 | |
Accounts payable | 41.9 | | | 45.7 | |
Operating lease liabilities, current | 20.0 | | | 17.2 | |
Accrued expenses and other current liabilities | 457.4 | | | 494.6 | |
Total current liabilities | 531.5 | | | 569.7 | |
Long-term debt | 2,420.3 | | | 2,422.9 | |
Contingent consideration | 30.0 | | | 28.7 | |
Employee related benefits and other long-term liabilities | 3.1 | | | 23.7 | |
Operating lease liabilities, long-term | 87.9 | | | 82.3 | |
Deferred tax liabilities | 56.1 | | | 53.7 | |
Total liabilities | 3,128.9 | | | 3,181.0 | |
Commitments and contingencies (Note 11) | | | |
Stockholders' equity (deficit) | | | |
Common stock of $0.01 par value; 1,600.0 shares authorized; 412.2 and 411.1 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 4.1 | | | 4.1 | |
Additional paid-in capital | 1,072.0 | | | 1,032.9 | |
Accumulated other comprehensive income | 18.6 | | | 3.2 | |
Accumulated deficit | (1,334.7) | | | (1,417.9) | |
Total stockholders' deficit | (240.0) | | | (377.7) | |
Total liabilities and stockholders’ deficit | $ | 2,888.9 | | | $ | 2,803.3 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except for per share data)
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Revenues | | | | | $ | 676.9 | | | $ | 638.9 | |
Costs and expenses | | | | | | | |
Cost of revenue | | | | | 186.9 | | | 183.0 | |
Research and development | | | | | 112.7 | | | 85.2 | |
Sales and marketing | | | | | 179.7 | | | 140.1 | |
General and administrative | | | | | 77.2 | | | 100.3 | |
Total costs and expenses | | | | | 556.5 | | | 508.6 | |
Income from operations | | | | | 120.4 | | | 130.3 | |
Interest expense and other, net | | | | | 27.5 | | | 75.7 | |
Income before income taxes | | | | | 92.9 | | | 54.6 | |
Provision for income taxes | | | | | 9.7 | | | 18.9 | |
Net income | | | | | 83.2 | | | 35.7 | |
Other comprehensive income (loss) | | | | | | | |
Foreign currency translation | | | | | (3.3) | | | (9.9) | |
Change in fair value of derivatives | | | | | 18.7 | | | (0.1) | |
Total other comprehensive income (loss) | | | | | 15.4 | | | (10.0) | |
Comprehensive income | | | | | $ | 98.6 | | | $ | 25.7 | |
| | | | | | | |
Net income per share attributable to common stockholders, basic | | | | | $ | 0.20 | | | $ | 0.09 | |
Net income per share attributable to common stockholders, diluted | | | | | $ | 0.20 | | | $ | 0.09 | |
Weighted-average shares used in computing net income per share attributable to common stockholders, basic | | | | | 412.0 | | | 406.5 | |
Weighted-average shares used in computing net income per share attributable to common stockholders, diluted | | | | | 412.5 | | | 409.5 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share capital | | | | | | | |
| Shares | | Amount | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Retained earnings (Accumulated deficit) | | Total stockholders' equity (deficit) |
Balances at January 1, 2022 | 411.1 | | | $ | 4.1 | | | $ | 1,032.9 | | | $ | 3.2 | | | $ | (1,417.9) | | | $ | (377.7) | |
Net income | — | | | — | | | — | | | — | | | 83.2 | | | 83.2 | |
Stock-based compensation | — | | | — | | | 40.5 | | | — | | | — | | | 40.5 | |
Issuance of shares upon vesting of RSUs | 1.1 | | | * | | (*) | | — | | | — | | | * |
Income tax withholding related to vesting of restricted stock units and other | — | | | — | | | (1.4) | | | — | | | — | | | (1.4) | |
Other comprehensive income | — | | | — | | | — | | | 15.4 | | | — | | | 15.4 | |
Balances at March 31, 2022 | 412.2 | | | $ | 4.1 | | | $ | 1,072.0 | | | $ | 18.6 | | | $ | (1,334.7) | | | $ | (240.0) | |
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| Shares | | Amount | | Additional paid-in capital | | Accumulated other comprehensive loss | | Retained earnings (Accumulated deficit) | | Total stockholders' equity (deficit) |
Balances at January 1, 2021 | 391.1 | | | $ | 3.9 | | | $ | 462.3 | | | $ | 16.7 | | | $ | (1,726.4) | | | $ | (1,243.5) | |
Net income | — | | | — | | | — | | | — | | | 35.7 | | | 35.7 | |
Issuance of common stock in the IPO, net of underwriting commission and offering costs | 18.5 | | | 0.2 | | | 467.5 | | | — | | | — | | | 467.7 | |
Stock-based compensation | — | | | — | | | 24.3 | | | — | | | — | | | 24.3 | |
Issuance of shares upon vesting of RSUs | * | | * | | (*) | | — | | | — | | | — | |
Other comprehensive loss | — | | | — | | | — | | | (10.0) | | | — | | | (10.0) | |
Balances at March 31, 2021 | 409.6 | | | $ | 4.1 | | | $ | 954.1 | | | $ | 6.7 | | | $ | (1,690.7) | | | $ | (725.8) | |
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* Represents an amount less than 0.1 or $0.1
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
Cash flows from operating activities | | | |
Net income | $ | 83.2 | | | $ | 35.7 | |
Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation | 10.8 | | | 9.9 | |
Amortization of intangible assets | 28.7 | | | 23.3 | |
Stock-based compensation | 39.8 | | | 24.3 | |
Amortization of loan discount | 2.1 | | | 26.1 | |
Change in fair value of contingent consideration | (22.1) | | | — | |
Change in deferred tax, net | (4.1) | | | 0.3 | |
Loss from foreign currency | 2.1 | | | 3.3 | |
Non-cash lease expenses | (1.1) | | | (2.1) | |
Capital gain from sale of investment | — | | | (1.2) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 4.0 | | | (54.4) | |
Prepaid expenses and other current and non-current assets | (19.8) | | | 6.6 | |
Accounts payable | (3.5) | | | (7.5) | |
Accrued expenses and other current and non-current liabilities | (62.0) | | | (120.7) | |
Net cash provided by (used in) operating activities | 58.1 | | | (56.4) | |
Cash flows from investing activities | | | |
Purchase of property and equipment | (13.0) | | | (7.5) | |
Capitalization of internal use software costs | (13.5) | | | (13.3) | |
Purchase of intangible assets | (2.4) | | | (3.3) | |
Short-term bank deposits | (122.1) | | | (50.0) | |
Payments for business combination, net of cash acquired | (29.3) | | | — | |
Other investing activities | — | | | 2.2 | |
Net cash used in investing activities | (180.3) | | | (71.9) | |
Cash flows from financing activities | | | |
Proceeds from bank borrowings, net | — | | | 880.7 | |
Repayments on bank borrowings | (4.8) | | | (951.0) | |
Proceeds from issuance of unsecured notes | — | | | 176.9 | |
Proceeds from issuance of common stock, net | — | | | 470.4 | |
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Payment of tax withholdings on stock-based payments | (1.4) | | | — | |
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Net cash provided by (used in) financing activities | (6.2) | | | 577.0 | |
Effect of exchange rate changes on cash and cash equivalents | (2.8) | | | (5.9) | |
Net change in cash, cash equivalents and restricted cash | (131.2) | | | 442.8 | |
Cash, cash equivalents and restricted cash at the beginning of the period | 1,019.0 | | | 523.6 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 887.8 | | | $ | 966.4 | |
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| Three months ended March 31, |
| 2022 | | 2021 |
Supplemental cash flow disclosures | | | |
Cash paid for income taxes | $ | 24.8 | | | $ | 21.4 | |
Cash paid for interest | $ | 27.7 | | | $ | 35.6 | |
Cash received for interest | $ | 0.1 | | | $ | — | |
Non-cash financing and investing activities | | | |
Right-of-use assets acquired under operating leases | $ | 14.1 | | | $ | 11.2 | |
Contingent consideration related to business acquisition | $ | 30.0 | | | $ | — | |
Capitalization of stock-based compensation costs | $ | 0.7 | | | $ | — | |
Accrued offering costs | $ | — | | | $ | 0.3 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In millions, unless specified otherwise)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and organization
Playtika Holding Corp. (“Playtika”) and its subsidiaries (together with Playtika, the “Company”) is one of the world’s leading developers of mobile games creating fun, innovative experiences that entertain and engage its users. It has built best-in-class live game operations services and a proprietary technology platform to support its portfolio of games which enable it to drive strong user engagement and monetization. The Company’s games are free-to-play, and the Company seeks to provide novel, curated in-game content and offers to its users, at optimal points in their game journeys to drive user engagement and monetization.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and include Playtika and all subsidiaries in which the Company has a controlling financial interest. Control generally equates to ownership percentage, whereby (i) affiliates that are more than 50% owned are consolidated; (ii) investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method where the Company has determined that it has significant influence over the entities; and (iii) investments in affiliates of 20% or less are generally accounted for using cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The significant accounting policies referenced in the annual consolidated financial statements of the Company as of December 31, 2021 have been applied consistently in these unaudited interim consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been recorded within the accompanying financial statements, consisting of normal, recurring adjustments, and all intercompany balances and transactions have been eliminated in the consolidation. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company's financial statements for the year ended December 31, 2021.
Investment in unconsolidated entities
The Company holds certain equity investments in various unconsolidated entities that, based upon the structure of the investment, are not within the scope of equity method investment accounting that would lead to the consolidation conclusions above. Instead, these investments fall within the scope of ASC 321, Investments - Equity Securities. As permitted within that guidance, the Company has elected to account for these investments at cost less impairment, adjusted for changes in fair value from observable transactions for identical or similar investments of the same issuer as of the respective transaction dates. No change to the carrying amounts were recorded in the three months ended March 31, 2022.
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of credit risk and significant customers
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term bank deposits, restricted cash, accounts receivable and derivative contracts. A large percentage of the Company’s cash is maintained with three financial institutions with high credit standings. The Company performs periodic evaluations of the relative credit standing of these financial institutions.
Apple, Facebook and Google are significant distribution, marketing, promotion and payment platforms for the Company's games. A significant portion of the Company’s revenues has been generated from players who accessed the Company's games through these platforms. Therefore, the Company's accounts receivable are derived mainly from sales through these three platforms. Accounts receivable are recorded at their transaction amounts and do not bear interest. The Company performs ongoing credit evaluations of its customers.
The following table summarizes the major accounts receivable of the Company as a percentage of the total accounts receivable as of the dates indicated:
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| March 31, 2022 | | December 31, 2021 |
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Apple | 42% | | 42% |
Google | 37% | | 34% |
Facebook | 7% | | 8% |
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less from the date of purchase and are stated at the lower of cost or market value. Cash equivalents include investments in money market funds that can be redeemed immediately at the current net asset value.
Restricted cash
Restricted cash primarily consists of deposits to secure obligations under the Company's operating lease agreements and to secure company-issued credit cards.
Short-term bank deposits
Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. Such short-term bank deposits are stated at cost which approximates fair market value.
Stock-based compensation expense
The Company has a stock-based compensation program which provides for equity awards including time-based stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”). Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period for options and RSUs and on an accelerated basis for PSUs. The Company records forfeitures as a reduction of stock-based compensation expense as those forfeitures occur.
The Company used the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with stock options. As it does not have a long history of market prices for its common stock because the stock was not publicly traded prior to January 2021, the Company used observable data for a group of peer companies that grant options with substantially similar terms to assist in developing its volatility assumptions. The expected volatility of the stock was determined using weighted average measures of the implied volatility and the historical volatility for the Company’s peer group of companies for a period equal to the expected life of the options. The weighted-average risk-free interest rates were based on the interest rate for U.S. Treasury bonds. The expected term assumptions were derived using the simplified method, which is based on an average between each vesting date and the expiration date of an option. This method was chosen
because there was no historical option exercise experience due to the Company being privately held. The Company does not anticipate paying cash dividends on its shares of common stock in the future. The stock options have a contractual term of 10 years. Except as otherwise provided in an option agreement between the Company and the employee, if an employee is terminated (voluntarily or involuntarily), any unvested awards as of the date of termination will be forfeited.
If factors change and the Company employs different assumptions, stock-based compensation cost on future awards may differ significantly from what the Company has recorded in the past. Higher volatility and longer expected terms result in an increase to stock-based compensation determined at the date of grant. Future stock-based compensation cost and unrecognized stock-based compensation will increase to the extent that the Company grants additional equity awards to employees or assumes unvested equity awards in connection with acquisitions. If there are any modifications or cancellations of the underlying unvested equity awards, the Company may be required to accelerate any remaining unearned stock-based compensation cost or incur incremental cost.
The Company uses the associated per-share value at the time of grant to determine the compensation cost to be recognized associated with RSUs and PSUs granted. The Company periodically reviews the estimates of performance against the defined criteria to assess the expected payout of each outstanding PSU grant and adjusts the stock compensation expense accordingly.
For RSUs, shares are issued on the vesting dates net of the applicable statutory income tax withholding to be paid by the Company on behalf of its employees. As a result, fewer shares are generally issued than the number of RSUs outstanding, and the income tax withholding is recorded as a reduction to additional paid-in capital.
The Company’s stock-based compensation expense is recorded in the financial statement line item relevant to each of the award recipients. See Note 8, Equity Transactions and Stock Incentive Plan, for additional discussion.
Employee related benefits
Appreciation and retention plan
In August 2019, the Company adopted the Playtika Holding Corp. Retention Plan (the “2021-2024 Retention Plan”) in order to retain key employees and reward them for contributing to the success of the Company. Under the 2021-2024 Retention Plan, eligible employees may be granted retention awards that let them receive their pro rata portion of a retention pool of $25 million per year for each of the plan years, and may also be granted appreciation units which allow the employee to receive their pro-rata portion of an appreciation pool calculated as a specified percentage of Adjusted EBITDA for each of the plan years.
The value of each unit of the 2021-2024 Retention Plan has been amortized into compensation expense using the straight-line method, which will result in the recognition of compensation costs in the same years as the underlying EBITDA used in the plan measurement is earned.
Derivative instruments
The Company uses interest rate swap contracts to reduce its exposure to fluctuating interest rates associated with the Company’s variable rate debt, and to effectively increase the portion of debt upon which the Company pays a fixed interest rate. The Company’s interest rate swap agreements are designated as cash flow hedges under ASC 815 involving the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional amount. These hedges are highly effective in offsetting changes in the Company’s future expected cash flows due to the fluctuation of the USD one-month LIBOR rate associated with its variable rate debt.
The Company monitors the effectiveness of its hedges on a quarterly basis, both qualitatively and quantitatively. The Company performed a regression analysis at inception of the hedging relationship and at period end in which it compared the change in the fair value of the swap transaction and the change in fair value of a hypothetical interest rate swap having terms that identically match the terms of the debt's interest rate payments based on 30 observations that are based on historical swap rates. Based on the regression results, the Company believes that, at inception and at period end, the hedging instrument is
expected to be highly effective at offsetting changes in the hedged transactions attributable to the risk being hedged. For each future reporting period, the Company will continue performing retrospective and prospective assessments of hedge effectiveness in a single regression analysis by updating the regression analysis that was prepared at inception of the hedging relationship.
The Company uses foreign currency derivative contracts to reduce its exposure to fluctuating exchange rates between the United States dollar (as the Company’s functional currency) and certain revenue or expense lines denominated in Israeli Shekels (“ILS”), Polish Zloty (“PLN”), Romanian Leu (“RON”) and Canadian Dollar (“CAD”). The Company’s derivative contracts are designated as cash flow hedges under ASC 815. The Company monitors the effectiveness of its hedges on a quarterly basis, both qualitatively and quantitatively, and expects these hedges to remain highly effective at offsetting fluctuations in exchange rates through their respective maturity dates.
The fair value of derivative financial instruments is recognized as an asset or liability at each balance sheet date, with changes in fair value recorded in other comprehensive income on the consolidated statements of comprehensive income until the future underlying transactions occur. The fair value approximates the amount the Company would pay if these contracts were settled at the respective valuation dates. The inputs used to measure the fair value of the Company’s interest rate swap agreements are categorized as Level 2 in the fair value hierarchy as established by ASC 820. The inputs used to measure the fair value of the Company’s foreign currency derivative contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.
Net income per share attributable to common stockholders
For all periods presented herein, basic net income per share is calculated by dividing net income by the weighted-average common shares outstanding. Diluted net income per share reflects the effect of all potentially dilutive common shares outstanding by dividing net income by the weighted-average of all common and potentially dilutive shares outstanding. Performance Stock Units are considered potentially dilutive as of the first day of the reporting period in which the underlying performance metric is achieved. In the event of a loss, diluted shares are not considered because of their anti-dilutive effect.
Accounting standards recently adopted by the Company
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of LIBOR or by another reference rate expected to be discontinued. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2021, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The Company continues to evaluate the potential impacts of ASU 2020-04 and may apply other elections as applicable as additional changes in the market occur.
NOTE 2. ACQUISITION
Acquisition of JustPlay.LOL Ltd
On March 23, 2022, the Company announced the acquisition of JustPlay.LOL Ltd. (“JustPlay”) consistent with the Company’s strategy to increase its breadth of entertainment genres and leverage the Company’s Boost platform to enhance game-operations. The acquisition was accounted for as a business combination.
Within the accompanying consolidated financial statements, management has recorded its initial estimate of the assets acquired and liabilities assumed in the acquisition, along with an estimate of the fair value for contingent consideration payable, based upon management’s financial models for this acquisition, and upon similar allocations from prior acquisitions. The Company has engaged a third-party valuation specialist to assist the Company with finalizing these estimates, with such finalization expected to be completed during the second quarter of 2022. As such, the Company expects that the initial purchase price allocation may change.
Given the timing of the acquisition immediately before the quarter end reporting date, and given the immateriality of the income statement of JustPlay for the period from March 22, 2022 through March 31, 2022, the profit and loss activity for this period has been excluded from the consolidated financial statements herein. These amounts will be recorded to the profit and loss statement during the second quarter of 2022.
The goodwill, which is non-deductible for tax purposes, is generally attributable to synergies between the Company's and JustPlay's respective studio operations and games.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in millions):
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Consideration | |
Total Consideration | $ | 59.9 | |
Less: Cash acquired | (0.6) | |
Total consideration, net of cash acquired | 59.3 | |
Less: Acquisition date fair value of contingent consideration | (30.0) | |
Consideration paid as of March 23, 2022 | $ | 29.3 | |
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Identifiable assets acquired and liabilities assumed | |
Accounts receivable | $ | 1.1 | |
Property and equipment | 0.1 | |
Intangible assets other than goodwill | $ | 15.1 | |
Goodwill | 43.3 | |
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Liabilities assumed | (0.3) | |
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Total identifiable assets acquired and liabilities assumed | $ | 59.3 | |
The developed game assets acquired and included in the above table are being amortized on a straight-line basis over their estimated useful life of six years, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized.
Pro forma results of operations for this acquisition subsequent to the March 23, 2022 acquisition date have not been presented because the incremental results from JustPlay are not material to the consolidated statements of comprehensive income presented herein.
NOTE 3. GOODWILL
Changes in goodwill for the three months ended March 31, 2022 were as follows (in millions):
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| Three months ended March 31, 2022 | | |
Balance at beginning of period | $ | 788.1 | | | |
Goodwill acquired during the period | 43.3 | | | |
Foreign currency translation adjustments | (2.1) | | | |
Balance at end of period | $ | 829.3 | | | |
NOTE 4. INTANGIBLE ASSETS OTHER THAN GOODWILL, NET
The carrying amounts and accumulated amortization of the acquired intangible assets other than goodwill, net, including the impact of foreign currency exchange translation, at March 31, 2022 and December 31, 2021, were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| March 31, 2022 | | |
| Weighted average remaining useful life (in years) | | Balance | | December 31, 2021 |
Historical cost basis | | | | | |
Developed games and acquired technology | 4.9 | | $ | 606.1 | | | $ | 591.0 | |
Trademarks and user base | 0.4 | | 31.2 | | | 31.2 | |
Internal use software | 2.8 | | 111.2 | | | 97.0 | |
| | | 748.5 | | | 719.2 | |
Accumulated amortization | | | | | |
Developed games and acquired technology | | | (265.8) | | | (247.9) | |
Trademarks and user base | | | (26.0) | | | (23.0) | |
Internal use software | | | (37.4) | | | (31.0) | |
| | | (329.2) | | | (301.9) | |
Intangible assets other than goodwill, net | | | $ | 419.3 | | | $ | 417.3 | |
During the three months ended March 31, 2022 and 2021, the Company recorded amortization expense in the amounts of $28.7 million and $23.3 million, respectively.
As of March 31, 2022, the total expected future amortization related to intangible assets was as follows (in millions):
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Remaining 2022 | $ | 81.1 | |
2023 | 95.8 | |
2024 | 82.2 | |
2025 | 70.1 | |
2025 and thereafter | 90.1 | |
Total | $ | 419.3 | |
NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at March 31, 2022 and December 31, 2021 were as follows (in millions):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Tax accruals | $ | 162.9 | | | $ | 162.5 | |
Accrued expenses | 140.8 | | | 132.7 | |
Employees and related expenses | 116.1 | | | 167.8 | |
Deferred revenues | 31.0 | | | 31.6 | |
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Contingent consideration | 6.6 | | | — | |
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Total accrued expenses and other current liabilities | $ | 457.4 | | | $ | 494.6 |
NOTE 6. LEASES
The Company's leases include office real estate and data center leases for its facilities worldwide, which are all classified as operating leases, and which expire on various dates, the latest of which is April 2031. Certain lease agreements include rental payments that are adjusted periodically for the consumer price index (“CPI”). For these specific leases the ROU asset and lease liability were calculated using the initial CPI and will not be subsequently adjusted. Certain leases include renewal options that are reasonably certain to be exercised.
Supplemental balance sheet information related to leases is as follows (in millions):
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| March 31, 2022 |
Operating lease right-of-use assets, gross | $ | 148.4 | |
Accumulated amortization | (49.6) | |
Operating lease right-of-use assets, net | $ | 98.8 | |
The following is a summary of weighted average remaining lease terms and discount rates for all of the Company's operating leases:
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| March 31, 2022 |
Weighted average remaining lease term (years) | 5.9 |
Weighted average discount rates | 3.2 | % |
Total operating lease expense was $6.0 million and $4.6 million during the three months ended March 31, 2022 and 2021, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities was $6.0 million and $5.1 million during the three months ended March 31, 2022 and 2021, respectively.
Maturities of lease liabilities are as follows as of March 31, 2022 (in millions):
| | | | | |
Remaining 2022 | $ | 16.2 | |
2023 | 24.8 | |
2024 | 22.0 | |
2025 | 17.0 | |
2026 and thereafter | 37.6 | |
Total undiscounted cash flows | 117.6 | |
Less: imputed interest | (9.7) | |
Present value of lease liabilities | $ | 107.9 | |
The table above excludes approximately $7 million in lease obligations associated with leases that are currently under negotiation or that start after April 1, 2022.
NOTE 7. DEBT
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| March 31, 2022 | | December 31, 2021 |
(in millions, except interest rates) | Maturity | | Interest rate | | Book value | | Face value | | Book value |
| | | | | |
Term Loan | 2028 | | 2.959% | | $ | 1,841.0 | | | $ | 1,881.0 | | | $ | 1,843.8 | |
Senior Notes | 2029 | | 4.250% | | 591.5 | | | 600.0 | | | 591.3 | |
Revolving Credit Facility | 2026 | | n/a | | — | | | — | | | — | |
Total debt | | | | | 2,432.5 | | | 2,481.0 | | | 2,435.1 | |
Less: Current portion of long-term debt | | | | | (12.2) | | | (19.0) | | | (12.2) | |
Long-term debt | | | | | $ | 2,420.3 | | | $ | 2,462.0 | | | $ | 2,422.9 | |
Book value of debt in the table above is reported net of deferred financing costs and original issue discount of $48.5 million at March 31, 2022 and deferred financing costs of $50.7 million at December 31, 2021, respectively.
Credit Agreement
On December 10, 2019, the Company entered into $2,750 million of senior secured credit facilities (the "Credit Facilities"), consisting of a $250 million revolving credit facility (the "Revolving Credit Facility"), and a $2,500 million first lien term loan (the "Old Term Loan"). The Credit Facilities were provided pursuant to a Credit Agreement, dated as of December 10, 2019 (the "Credit Agreement"), by and among Playtika, the lenders party thereto, and Credit Suisse, AG, Cayman Islands Branch, as administrative agent (in such capacity, the "Administrative Agent") and collateral agent (in such capacity, the "Collateral Agent"). On June 15, 2020, the Company increased the capacity of the Revolving Credit Facility to $350 million. On January 15, 2021, the Company increased the borrowing capacity of the Revolving Credit Facility from $350 million to $550 million.
On March 11, 2021, the Company amended the Credit Agreement pursuant to an Incremental Assumption Agreement No. 3 and Second Amendment to Credit Agreement (the “Second Amendment”). The Second Amendment, among other things, effected a refinancing of the Old Term Loan with a new $1.9 billion senior secured first lien term loan borrowed under the Credit Agreement (the “New Term Loan”), increased the Revolving Credit Facility to $600 million and extended the maturity of the Revolving Credit Facility to March 11, 2026. The New Term Loan matures on March 11, 2028 and requires scheduled quarterly principal payments in amounts equal to 0.25% of the original aggregate principal amount of the New Term Loan, with the balance due at maturity.
The Revolving Credit Facility includes a maximum first-priority net senior secured leverage ratio financial maintenance covenant of 6.25 to 1.0. At March 31, 2022, the Company’s first-priority net senior secured leverage ratio was 0.94 to 1.0.
The Company was in compliance with its financial and other covenants under the Credit Agreement as of March 31, 2022.
Interest and Fees
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Company’s option, either (a) LIBOR determined by reference to the cost of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a floor of 0% or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate as determined by the administrative agent and (iii) the one-month adjusted LIBOR rate plus 1.00%, in each case plus an applicable margin. Such applicable margin is (x) with respect to the New Term Loan, 2.75% per annum in the case of any LIBOR loan or 1.75% per annum in the case of any base rate loan, subject to one 0.25% step-down based on the Company’s credit ratings and (y) in the case of the Revolving Credit Facility, a range from 2.25% to 3.00% per annum in the case of any LIBOR loan and a range from 1.25% to 2.00% per annum in the case of any base rate loan, based on the Company’s net senior secured leverage ratio.
In addition, on a quarterly basis, the Company is required to pay each lender under the Revolving Credit Facility a commitment fee in respect of any unused commitments under the Revolving Credit Facility in the amount of 0.50% of the principal amount of the daily unused commitments of such lender, subject to step-downs to 0.375% and 0.25% based upon the Company’s senior secured leverage ratio. The Company is also required to pay customary agency fees as well as letter of credit participation fees on outstanding letters of credit.
The Credit Agreement permits voluntary prepayments and requires mandatory prepayments in certain events including, among others, 50% (subject to step-downs to 25% and 0% based upon the Company’s net total secured leverage ratio) of the Company's excess cash flow to the extent such amount exceeds $10 million, certain net cash proceeds from non-ordinary asset sale transactions (subject to reinvestment rights), and 100% of net proceeds of any issuance of debt (except for debt permitted to be incurred by the Credit Agreement). If the Company’s total secured leverage ratio remains below 2.0 to 1.0, consistent with the ratio for the year ended December 31, 2021, the Company’s required excess cash flow percentage for 2022 will step down to 0%.
The significant terms and conditions of the Credit Agreement have not changed from what was disclosed in Note 9, Debt in our Annual Report on Form 10-K filed with the SEC on March 2, 2022.
Offering of 4.250% Senior Notes due 2029
Indenture
On March 11, 2021, the Company issued $600.0 million aggregate principal amount of its 4.250% senior notes due 2029 (the “Notes”) under an indenture, dated March 11, 2021 (the “Indenture”), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee (the “Trustee”).
Maturity and Interest
The Notes mature on March 15, 2029. Interest on the Notes will accrue at a rate of 4.250% per annum. Interest on the Notes is payable semi-annually in cash in arrears on March 15 and September 15 of each year.
The significant terms and conditions of the Notes have not changed from what was disclosed in Note 9, Debt in our Annual Report on Form 10-K filed with the SEC on March 2, 2022.
NOTE 8. EQUITY TRANSACTIONS AND STOCK INCENTIVE PLAN
Overview of Stock Incentive Plan
On May 26, 2020, the Board of Directors of the Company approved the Playtika Holding Corp. 2020 Incentive Award Plan (the “Plan”).
The maximum number of shares of the Company’s common stock for which grants may be made under the Plan was 56,232,228 shares as of March 31, 2022. As of March 31, 2022, a total of 4,294,832 shares of the Company’s common stock remained available for grants of awards under the Plan.
Stock Options
The following table summarizes the Company’s stock option activity during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted | | Weighted | | |
| Stock | | Average | | Average | | Intrinsic |
| Options | | Remaining | | Exercise | | Value |
| Outstanding | | Term (in years) | | Price | | (in millions) |
Outstanding at January 1, 2022 | 15,849,693 | | | 8.8 | | $ | 22.70 | | | |
Granted | 2,423,042 | | | | | $ | 15.65 | | | |
Exercised | — | | | | | | | |
Cancelled | (869,102) | | | | | $ | 22.57 | | | |
Expired | — | | | | | | | |
Outstanding at March 31, 2022 | 17,403,633 | | | 8.50 | | $ | 19.27 | | | $ | — | |
Exercisable at March 31, 2022 | 4,112,918 | | | 7.58 | | $ | 22.24 | | | $ | — | |
The Company used the Black-Scholes option pricing model for determining the estimated fair value of stock-based compensation related to stock options. The table below summarizes the assumptions used for the options granted in each respective period, as well as for options repriced during the three months ended March 31, 2022:
| | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
Risk-free interest rate | 0.67% - 1.82% | | 0.67% |
Expected dividend yield | — | | — |
Expected term in years | 6.1 | | 6.1 |
Expected volatility | 38.19% - 38.60% | | 38.56% |
On February 7, 2022, the Compensation Committee of the Board of Directors of the Company approved an amendment to 5,303,242 options granted in 2021 that are scheduled to vest after the first anniversary of the grant date (the “Adjusted Portion”). The Adjusted Portion was amended to reduce the per share exercise prices of such Adjusted Portion to $18.71. The company accounted for the repricing as a modification and will record incremental compensation expense of approximately $8.8 million over the remaining vesting period. There were no awards to any named executive officers or other Section 16 executives included in this repricing.
RSUs
The following table summarizes the Company’s RSU activity during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | Total Fair |
| | | | | Average | | Value of |
| | | | | Grant Date | | Shares Vested |
| | | Shares | | Fair Value | | (in millions) |
Outstanding at January 1, 2022 | | | 11,375,084 | | | $ | 25.29 | | | |
Granted | | | 5,774,908 | | | $ | 15.65 | | | |
Vested | | | (1,170,026) | | | $ | 30.88 | | | $ | 22.0 | |
Cancelled | | | (427,074) | | | $ | 29.35 | | | |
Outstanding at March 31, 2022 | | | 15,552,892 | | | $ | 21.18 | | | |
PSUs
On February 7, 2022, the Compensation Committee of the Board of Directors of the Company approved the grant of PSUs to certain employees pursuant to the Plan. For each annual performance period consisting of calendar years 2022 through 2025, up to 25% of the PSUs will be eligible to vest based on the Company’s annual revenue growth rate during the applicable performance period relative to threshold, target and maximum achievement levels.
If the Company’s annual revenue growth rate for a performance period is between two achievement levels, the achievement percentage will be determined by linear interpolation between the applicable achievement levels. Notwithstanding the foregoing, in no event shall less than 25 PSUs vest during each performance period for Israeli participants.
The following table summarizes the Company’s PSU activity during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | Total Fair |
| | | | | Average | | Value of |
| | | | | Grant Date | | Shares Vested |
| | | Shares(1) | | Fair Value | | (in millions) |
Outstanding at January 1, 2022 | | | — | | | $ | — | | | |
Granted | | | 3,478,378 | | | $ | 15.65 | | | |
Vested | | | — | | | $ | — | | | $ | — | |
Cancelled | | | — | | | $ | — | | | |
Outstanding at March 31, 2022 | | | 3,478,378 | | | $ | 15.65 | | | |
________
(1) The number of shares for the PSUs listed as granted represent the total number of PSUs granted to each recipient eligible to vest if the Company meets its highest specified performance goals for the applicable period.
Stock-Based Compensation
The following table summarizes stock-based compensation costs, net of amounts capitalized, as reported on the Company’s consolidated statement of comprehensive income (in millions):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Research and development expenses | | | | | $ | 13.8 | | | $ | 6.5 | |
Sales and marketing expenses | | | | | 2.9 | | | 2.8 | |
General and administrative expenses | | | | | 23.1 | | | 15.0 | |
Total stock-based compensation costs, net of amounts capitalized | | | | | $ | 39.8 | | | $ | 24.3 | |
During the three months ended March 31, 2022, the Company capitalized $0.7 million of stock-based compensation cost. There was no stock-based compensation cost capitalized during the three months ended March 31, 2021.
As of March 31, 2022, the Company’s unrecognized stock-based compensation expenses related to stock options, RSUs and PSUs was approximately $108.9 million, $297.8 million and $50.0 million, respectively. The expense related to stock options, RSUs and PSUs are expected to be recognized over a weighted average period of 2.8 years, 3.0 years and 2.3 years, respectively.
NOTE 9. DERIVATIVE INSTRUMENTS
Interest Rate Swap Agreements
In March 2021, the Company entered into two interest rate swap agreements, each with a notional value of $250 million. Each of these swap agreements is with a different financial institution as the counterparty to reduce the Company’s
counterparty risk. Each swap requires the Company to pay a fixed interest rate of 0.9275% in exchange for receiving one-month LIBOR. The interest rate swap agreements settle monthly commencing in April 2021 through their termination dates on April 30, 2026. The estimated fair value of the Company’s interest rate swap agreements is derived from a discounted cash flow analysis. The aggregate fair value of the Company’s interest rate swap agreements was an asset of $29.2 million as of March 31, 2022 and was recorded between prepaid expenses and other current assets and other non-current assets in the accompanying consolidated balance sheets based upon the timing of the underlying expected cash flows.
Foreign currency hedge agreements
The Company has also entered into multiple derivative contracts for the future purchase of ILS, RON, PLN and CAD. At March 31, 2022, the Company had entered into derivative contracts to purchase certain foreign currencies, including ILS, RON, PLN and CAD at future dates. The approximate amount of hedges was equal to $191.3 million, and all contracts are expected to mature during the upcoming 12 months. The aggregate fair value of the Company’s derivative contracts was an asset of $1.3 million as of March 31, 2022 and was recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
NOTE 10. FAIR VALUE MEASUREMENTS
The Company accounts for fair value in accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"). Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a three-tier hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The first two levels in the hierarchy are considered observable inputs and the last is considered unobservable. The carrying value of accounts receivable and payables and the Company's cash and cash equivalents, short-term bank deposits and restricted cash, approximates fair value due to the short time to expected payment or receipt of cash.
The following table summarizes the fair value measurement of the Company’s long-term debt at March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Face Value | | Fair Value | | Fair Value Hierarchy |
Term Loan | $ | 1,881.0 | | | $ | 1,843.4 | | | Level 2 |
Senior Notes | 600.0 | | | 551.3 | | | Level 2 |
Total debt | $ | 2,481.0 | | | $ | 2,394.7 | | | |
The estimated fair value of the Company’s term loan is based upon the prices at which the Company’s debt traded in the days immediately preceding the balance sheet date. As the trading volume of the Company’s debt is low relative to the overall debt balance, the Company does not believe that the associated transactions represent an active market, and therefore this indication of value represents a level 2 fair value input.
The following table sets forth the assets and liabilities measured at fair value on a recurring basis in the Company’s consolidated balance sheets at March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value at |
| | | | | Pricing Category | | March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | | | | | | | | | |
Money market funds | | | | | Level 1 | | $ | 184.5 | | | $ | 310.2 | |
| | | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | | |
Derivative instruments - foreign currency derivative contracts | | | | | Level 2 | | $ | 1.3 | | | $ | 1.3 | |
Derivative instruments - interest rate swaps | | | | | Level 2 | | 4.2 | | | — | |
| | | | | | | | | |
Other non-current assets: | | | | | | | | | |
Derivative instruments - interest rate swaps | | | | | Level 2 | | $ | 25.0 | | | $ | 7.9 | |
| | | | | | | | | |
| | | | | | | | | |
Accrued expenses and other current liabilities: | | | | | | | | | |
Derivative instruments - interest rate swaps | | | | | Level 2 | | $ | — | | | $ | 2.4 | |
Contingent consideration - current | | | | | Level 3 | | 6.6 | | | — | |
| | | | | | | | | |
Contingent consideration | | | | | Level 3 | | $ | 30.0 | | | $ | 28.7 | |
| | | | | | | | | |
The Company estimates the fair value of interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of the Company’s interest rate swap contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.
The fair value of the Company’s foreign currency contracts approximates the amount the Company would pay or receive if these contracts were settled at the respective valuation dates. The inputs used to measure the fair value of the Company’s foreign currency contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.
The change in fair value of contingent consideration payable was valued using significant unobservable inputs (Level 3), was
included in the general and administrative expenses in the Company’s consolidated statements of comprehensive income and
consisted of the following (in millions):
| | | | | |
Balance as of January 1, 2022 | $ | 28.7 | |
Recorded in connection with acquisition transaction | 30.0 | |
Fair value adjustment | (22.1) | |
Balance as of March 31, 2022 | $ | 36.6 | |
The Company estimated the fair value of its contingent consideration liabilities using probability-weighted discounted cash flow analyses. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820. The extent to which the actual results differ from assumptions made within the probability-weighted analyses will result in adjustments to this liability in future periods.
The Company has not elected the fair value measurement option available under U.S. GAAP for any of its assets or liabilities that meet the option for these criteria.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In December 2016, a copywriter lawsuit was filed against Wooga GmbH (a subsidiary of the Company) in the regional court of Berlin, Germany. The Plaintiff is suing for additional remuneration to his contributions for a storyline provided for one of
Wooga's games and alleged reuse of parts of that storyline in one of Wooga’s other games. As of March 31, 2022, the Company has recorded in its financial statements a reserve based upon its best estimate outcome. It is possible that any final amounts payable in connection with this lawsuit could exceed the Company’s currently reserved best estimate.
In November 2013, the Company’s subsidiary, Playtika, Ltd., sent an initial demand letter to Enigmatus s.r.o., a game developer in the Czech Republic, which owns various U.S. trademark registrations that resemble the Company’s Sloto-formative trademark names, demanding that it cease use of the trademark Slotopoly. In response, Enigmatus s.r.o. asserted that it was the owner of the Sloto-formative trademarks and denied that its game title infringed the Company’s trademarks. Enigmatus s.r.o. applied to register one of the Company’s trademarks in the United Kingdom and European Union, and the Company successfully opposed its applications. In December 2016, Enigmatus s.r.o., filed a trademark infringement lawsuit, Enigmatus, s.r.o. v. Playtika LTD and Caesars Interactive Entertainment, Inc., against Playtika, Ltd. and Caesars Interactive Entertainment LLC in the Federal Court of Canada asserting that the Company’s use of the Slotomania trademarks violates its proprietary and trademark rights. The plaintiff sought injunctive relief and monetary damages. Pleadings have been exchanged and the lawsuit is in the discovery stage. No trial date has been scheduled. The Company has defended this case vigorously and will continue to do so. As the case is in preliminary stages, the Company cannot estimate what impact, if any, the litigation may have on its results of operations, financial condition or cash flows.
On October 26, 2020, a patent infringement claim was filed against Playtika Holding Corp., Playtika Ltd. and Caesars Interactive Entertainment LLC in U.S. District Court, District of Nevada. The Plaintiff alleged that the defendants are infringing certain patents in the field of communication and the transferring of images between the gaming server and the end device on certain of its social casino games. The Plaintiff is seeking monetary damages. On April 7, 2021, following the Company’s preliminary motions for dismissal and stay, the Company’s motion for stay was approved by the court pending ruling on motions to dismiss. On July 7, 2021, the Court issued an order finding each of the Plaintiff’s asserted patents invalid as failing to comply with certain legal requirements and dismissing the lawsuit as to all parties. On July 19, 2021, the Plaintiff filed an appeal, and a hearing on the appeal was held on May 6, 2022 before the United States Court of Appeals for the Federal Circuit. Playtika Holding Corp. and Playtika Ltd. intend to continue defending the case vigorously.
On November 23, 2021, the Company and its directors and certain of its officers were named in a putative class action lawsuit filed in the United States District Court for the Eastern District of New York (Bar-Asher v. Playtika Holding Corp. et al.). The complaint was brought on behalf of an alleged class of purchasers of the Company’s securities between January 15, 2021 and November 2, 2021, and alleged violations of federal securities laws arising out of alleged misstatements or omissions by the defendants during the alleged class period. On March 10, 2022, the court appointed LBMotion Ltd as lead plaintiff, and the plaintiff filed an amended complaint on May 6, 2022. The amended complaint alleges violations of Section 11 and 15 of the Securities Act of 1933 and seeks, among other things, damages and attorneys’ fees and costs on behalf of the putative class. The amended complaint also added the companies that served as underwriters for the Company’s IPO as defendants in the lawsuit. As the case is in preliminary stages, the Company cannot estimate what impact, if any, the litigation may have on its results of operations, financial condition or cash flows.
NOTE 12. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following table provides information about disaggregated revenue by geographic location of the Company’s players and type of platform (in millions):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Geographic location | | | | | | | |
USA | | | | | $ | 474.4 | | | $ | 454.7 | |
EMEA | | | | | 104.2 | | | 91.7 | |
APAC | | | | | 52.3 | | | 49.9 | |
Other | | | | | 46.0 | | | 42.6 | |
Total | | | | | $ | 676.9 | | | $ | 638.9 | |
| | | | | | | |
Platform type | | | | | | | |
Mobile | | | | | $ | 546.0 | | | $ | 513.2 | |
Web | | | | | 130.9 | | | 125.7 | |
Total | | | | | $ | 676.9 | | | $ | 638.9 | |
Revenues through third-party platforms and through the Company’s own direct-to-consumer platforms were as follows (in millions):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Revenues | | | | | | | |
Third-party platforms | | | | | $ | 524.5 | | | $ | 523.0 | |
Direct-to-consumer platforms | | | | | 152.4 | | | 115.9 | |
Total | | | | | $ | 676.9 | | | $ | 638.9 | |
Contract balances
Payments from players for virtual items are collected by platform providers or payment processors and remitted to the Company (net of the platform or clearing fees) generally within 45 days after the player transaction. The Company’s right to receive the payments collected by the platform providers or payment processors is recorded as an accounts receivable as the right to receive payment is unconditional. Deferred revenues, which represent a contract liability, represent mostly unrecognized fees billed for virtual items which have not yet been consumed at the balance sheet date. Platform fees paid to platform providers or payment processors and associated with deferred revenues represent a contract asset.
Balances of the Company’s contract assets and liabilities are as follows (in millions):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accounts receivable | $ | 139.7 | | | $ | 143.7 | |
Contract assets (1) | 9.3 | | | 9.4 | |
Contract liabilities (2) | 31.0 | | | 31.6 | |
_______
(1) Contract assets are included within prepaid expenses and other current assets in the Company’s consolidated balance sheets.
(2) Contract liabilities are included within accrued expenses and other current liabilities as “deferred revenues” in the Company’s consolidated balance sheets.
During the three months ended March 31, 2022, the Company recognized $24.0 million of its contract liabilities that were outstanding as of December 31, 2021.
Unsatisfied performance obligations
Substantially all of the Company’s unsatisfied performance obligations relate to contracts with an original expected length of one year or less.
NOTE 13. APPRECIATION AND RETENTION PLAN
In August 2019, the Board approved the 2021-2024 Retention Plan. Under the 2021-2024 Retention Plan, eligible employees may be granted retention awards that let them receive their pro rata portion of a retention pool of $25 million per year for each of the plan years, and may also be granted appreciation units which allow the employee to receive their pro-rata portion of an appreciation pool calculated as a specified percentage of Adjusted EBITDA in each of the plan years.
The Company recognized compensation expenses in respect of retention bonus and appreciation unit awards under its appreciation and retention plans of $24.9 million and $29.8 million during the three months ended March 31, 2022 and 2021, respectively.
The Company has also granted retention awards to key individuals associated with acquired companies as an incentive to retain those individuals on a long-term basis. The Company recognized compensation expenses associated with these development-related retention payments of $0.6 million and $3.1 million during the three months ended March 31, 2022 and 2021, respectively.
NOTE 14. INTEREST EXPENSE AND OTHER, NET
Interest expense and other, net are as follows (in millions):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Interest expense | | | | | $ | 23.7 | | | $ | 78.0 | |
Interest income | | | | | (0.8) | | | (0.2) | |
Foreign currency translation differences, net | | | | | 4.6 | | | (0.8) | |
Other | | | | | — | | | (1.3) | |
Total interest expense and other, net | | | | | $ | 27.5 | | | $ | 75.7 | |
NOTE 15. INCOME TAXES
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
(in millions, except tax rate) | | | | | 2022 | | 2021 |
Income before income taxes | | | | | $ | 92.9 | | | $ | 54.6 | |
Provision for income taxes | | | | | $ | 9.7 | | | $ | 18.9 | |
Effective tax rate | | | | | 10.4 | % | | 34.6 | % |
The effective income tax rate for the three months ended March 31, 2022 was 10.4% compared to 34.6% for the three months ended March 31, 2021. The effective tax rates were determined using a worldwide estimated annual effective tax rate and took discrete items into consideration. The primary difference between the effective tax rate and the 21% federal statutory rate for the three months ended March 31, 2022 was due to a discrete tax benefit for the release of a valuation allowance on certain foreign deferred tax assets resulting from the commencement of changes to our organizational structure. The primary differences between the effective tax rate and the 21% federal statutory rate for the three months ended March 31, 2021 were
due to tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions, the impact of repatriation of the undistributed earnings of certain foreign subsidiaries and the inclusion of Global Intangible Low-Taxed Income.
NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables show a summary of changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended March 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Interest Rate Swaps | | Foreign Currency Derivative Contracts | | Total |
Balance as of January 1, 2022 | $ | (1.9) | | | $ | 4.2 | | | $ | 0.9 | | | $ | 3.2 | |
Other comprehensive income (loss) before reclassifications | (3.3) | | | 17.7 | | | 0.3 | | | 14.7 | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | 0.8 | | | (0.1) | | | 0.7 | |
Balance as of March 31, 2022 | $ | (5.2) | | | $ | 22.7 | | | $ | 1.1 | | | $ | 18.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Interest Rate Swaps | | Foreign Currency Derivative Contracts | | Total |
Balance as of January 1, 2021 | $ | 16.7 | | | $ | — | | | $ | — | | | $ | 16.7 | |
Other comprehensive income (loss) before reclassifications | (9.9) | | | 0.7 | | | (1.1) | | | (10.3) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | — | | | 0.3 | | | 0.3 | |
Balance as of March 31, 2021 | $ | 6.8 | | | $ | 0.7 | | | $ | (0.8) | | | $ | 6.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
NOTE 17. NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders (in millions, except per share data):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income | | | | | $ | 83.2 | | | $ | 35.7 | |
Denominator: | | | | | | | |
Weighted-average shares used in computing net income per share attributable to common stockholders, basic | | | | | 412.0 | | | 406.5 | |
Weighted-average shares used in computing net income per share attributable to common stockholders, diluted | | | | | 412.5 | | | 409.5 | |
Net income per share, basic | | | | | $ | 0.20 | | | $ | 0.09 | |
Net income per share, diluted | | | | | $ | 0.20 | | | $ | 0.09 | |
The following outstanding employee equity awards were excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive for the periods presented:
| | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
Stock options | 17,258,351 | | | 7,942,431 | |
RSUs | 9,798,613 | | | 4,937,521 | |
Total | 27,056,964 | | | 12,879,952 | |
In addition, 3,478,378 PSUs were excluded from the calculation of diluted net income per share for the three months ended March 31, 2022 because the minimum performance measures have not yet been met.
NOTE 18. SUBSEQUENT EVENTS
The Company performed a review for subsequent events through the date of these financial statements and noted no material items for disclosure.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are one of the world’s leading developers of mobile games creating fun, innovative experiences that entertain and engage our users. We have built best-in-class live game operations services and a proprietary technology platform to support our portfolio of games which enable us to drive strong user engagement and monetization. Our games are free-to-play, and we are experts in providing novel, curated in-game content and offers to our users, at optimal points in their game journeys. Our players love our games because they are fun, creative, engaging, and kept fresh through a steady release of new features that are customized for different player segments.
Components of our Results of Operations
Revenues
We primarily derive revenue from the sale of virtual items associated with online games.
We distribute our games to the end customer through various web and mobile platforms, such as Apple, Facebook, Google and other web and mobile platforms plus our own direct-to-consumer platforms. Through these platforms, users can download our free-to-play games and can purchase virtual items to enhance their game-playing experience. Players can purchase virtual items through various widely accepted payment methods offered in the games. Payments from players for virtual items are non-refundable and relate to non-cancellable contracts that specify our obligations and cannot be redeemed for cash nor exchanged for anything other than virtual items within our games.
Our games are played primarily on various third-party platforms for which the platform providers collect proceeds from our customers and pay us an amount after deducting platform fees. We are primarily responsible for fulfilling the virtual items, have the control over the content and functionality of games and have the discretion to establish the virtual items’ prices. Therefore, we are the principal and, accordingly revenues are recorded on a gross basis. Payment processing fees paid to platform providers are recorded within cost of revenue.
Cost of revenue
Cost of revenue includes payment processing fees, customer support, hosting fees and depreciation and amortization expenses associated with assets directly involved in the generation of revenues, including servers and internal use software. Platform providers (such as Apple, Facebook and Google) charge a transactional payment processing fee to accept payments from our players for the purchase of in-app virtual goods. Payment processing fees and other related expenses for in-app purchases made through our direct-to-consumer platforms are typically 3-4%, compared to a 30% platform fee for third party platforms. We generally expect cost of revenue to fluctuate proportionately with revenues.
Research and development
Research and development consists of salaries, bonuses, benefits, other compensation, including stock-based compensation and allocated overhead, related to engineering, research, and development. In addition, research and development expenses include depreciation and amortization expenses associated with assets associated with our research and development efforts. We expect research and development 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. We also expect that research and development expenses specifically associated with new game development will fluctuate over time.
Sales and marketing
Sales and marketing consists of costs related to advertising and user acquisition, including costs related to salaries, bonuses, benefits, and other compensation, including stock-based compensation and allocated overhead. In addition, sales and marketing expenses include depreciation and amortization expenses associated with assets related to our sales and marketing
efforts. 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 revenues depending on the timing and efficiency of our marketing efforts.
General and administrative
General and administrative expenses consist of salaries, bonuses, benefits, and other compensation, including stock-based compensation, for all our corporate support functional areas, including our senior leadership. In addition, general and administrative expenses include outsourced professional services such as consulting, legal and accounting services, taxes and dues, insurance premiums, and costs associated with maintaining our property and infrastructure. General and administrative expenses also include depreciation and amortization expenses associated with assets not directly attributable to any of the expense categories above. We also record adjustments to contingent consideration payable recorded after the acquisition date, and legal settlement expenses, as components of general and administrative expense. We expect non-discrete general and administrative expenses will increase in absolute dollars to support our expected growth initiatives.
Interest expense and other, net
Interest expense is primarily related to borrowings under our Credit Agreement dated as of December 10, 2019 (as amended, the “Credit Agreement”). Our interest expense includes amortization of deferred financing costs and is offset by interest income earned on the investment of excess cash and cash equivalents. We expect to continue to incur interest expense under our Credit Agreement, although such interest expense will fluctuate based upon the underlying variable interest rates. In March 2021, we entered into two interest rate swap agreements, each with a notional value of $250 million, reducing our overall exposure to variable interest rates.
Provision for income taxes
The provision for income taxes consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, the United Kingdom and Israel, as well as deferred income taxes 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 effective tax rate can fluctuate based on various factors, including our financial results and the geographic mix to which they relate, the applicability of special tax regimes, changes in our business or operations, examination-related developments and uncertain tax positions, and changes in tax law.
Consolidated Operating Results of Playtika Holding Corp
We measure the performance of our business by using several key financial metrics, including revenue and operating income, and operating metrics, including Daily Active Users, Average Revenue per Daily Active User, Paying Users, and Average Revenue per Paying User. These operating metrics help our management to understand and measure the engagement levels of our players, the size of our audience and our reach. See “Basis of Presentation” and “Summary Consolidated Financial and Other Data” for additional information of these measures.