What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-02 · 132 added, 157 removed, 291 unchanged (50% of the section changed)

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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.

Our players love our games because they are fun, creative, engaging, and kept fresh through a release of new features that are customized for different player segments.

Key Factors Affecting Our Business

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We also seek to make acquisitions in technology that enhance our marketing, artificial intelligence and research and development capabilities.

• Launch of new games and release of new content, offers, and features .

Our revenue growth has been driven by improving the content, offers, and features in our existing games and the release or acquisition of new games.

In order to enhance the content, offers, and features in our existing games and to develop or acquire new games, we must invest a significant amount of our technological and creative resources, ensuring that we support a consistent cadence of novel content creation that drives conversion and continued monetization.

• Offering of new games and release of new content, offers, and features .

Our revenue growth has been driven by improving the content, offers, and features in our existing games and the acquisition of new games.

In order to enhance the content, offers, and features in our existing games and to develop or acquire new games, we must invest a significant amount of our technological and creative resources, ensuring that we support an effective cadence of novel content creation that drives conversion and continued monetization.

These expenditures generally occur months in advance of the release of new content or the launch or acquisition of a new game.

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We intend to continue to seek new opportunities to enhance and refine these marketing efforts to acquire new users, including identifying potential technologies to enhance our marketing and advertising capabilities.

The global pandemic associated with COVID-19 has caused major disruption to all aspects of the global economy and daily life, particularly as quarantine and stay-at-home orders have been imposed by all levels of government.

We have followed guidance by the United States, Israeli and other applicable foreign and local governments to protect our employees and operations during the pandemic and have implemented a remote work environment for our business.

We cannot predict the potential impacts of the COVID-19 pandemic on our business or operations, but we continuously monitor performance and other industry reports to assess the risk of future negative impacts should the disruptions of the COVID-19 pandemic continue to evolve.

Despite the challenges we have faced in light of the COVID-19 pandemic, the stay-at-home orders that were in place across the United States sporadically throughout the pandemic have generally been favorable to our business as a result of increased time spent with digital entertainment, including casual gaming and games involving socially interactive experiences.

The COVID-19 pandemic has resulted in and may continue to result in consumers spending a greater portion of their time at home and sustained demand for entertainment options, which may continue to benefit our financial results.

However, the COVID-19 pandemic has caused an economic recession, high unemployment rates, and other disruptions, both in the United States and the rest of the world.

We cannot predict the potential impacts of the COVID-19 pandemic on our business or operations, and there is no guarantee that these favorable trends will continue, particularly if the COVID-19 pandemic increases and the adverse consequences thereof in severity or continues for a protracted period of time, which could disrupt our operations, or put greater financial pressure on the economy and users’ discretionary income or spending habits.

In addition, we could experience a decrease in user activity or spending after the COVID-19 pandemic subsides, which could adversely impact our cash flows, operating results, and financial condition.

See “Risk Factors—Risks Related to Our Business—The recent COVID-19 pandemic and similar health epidemics, contagious disease outbreaks and public perception thereof, could significantly disrupt our operations and adversely affect our business, results of operations, cash flows or financial condition” for more information.

Components of our Results of Operations

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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.

Our games are played on various third-party platforms for which the platform providers collect proceeds from our customers and pay us an amount after deducting platform fees.

For purchases made through both the third-party and Direct-to-Consumer platforms, 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.

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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.

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.

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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 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 general and administrative expenses will increase in absolute dollars to support our expected growth initiatives.

Interest expense and other, net

We generally did not incur interest expense prior to August 2019.

In August 2019, we borrowed $2,583 million under our Bridge Facility, and then subsequently refinanced the borrowings under that facility in December 2019 pursuant to our Credit Agreement, dated as of December 10, 2019.

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.

Our interest expense includes interest incurred under our December 2019 Credit Agreement and amortization of deferred financing costs, both of which are partially 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.

Interest income consists of interest earned on cash, cash equivalents and short-term bank deposits.

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.

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, Israel, Germany, and Austria, 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.

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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.

We calculate net income as revenue minus cost of revenues, research and development, sales and marketing and general and administrative expenses, interest and taxes.

Results of Operations

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Year ended December 31,

(in millions of dollars, except percentages, Average DPUs, and ARPDAU) 2021 2020 2019

(in millions, except percentages, Average DPUs, and ARPDAU) 2022 2021 2020

Revenues $ 2,615.5 $ 2,583.0 $ 2,371.5

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Operating income $ 471.4 $ 562.2 $ 387.2

Adjusted EBITDA $ 982.7 $ 941.6 $ 712.1

Net income $ 275.3 $ 308.5 $ 92.1

Credit Adjusted EBITDA $ 805.1 $ 848.7 $ 858.9

Non-financial performance metrics

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Revenues for the year ended December 31, 2022 increased by $32.5 million when compared to 2021.

The increase in revenues was due to incremental revenues of $32.4 million generated from the Company’s August 2021 acquisition of 80% of the issued and registered shares and options of Reworks, combined with improved monetization and increased revenues from new content and product features across our broader portfolio of games when compared to 2020.

The combination of unusually high DAUs in early 2020 related to the initial onset of COVID 19, combined with the continued focus of the

Company’s marketing efforts on player conversion rather than increasing player traffic lead to a decrease in DAUs for 2021 when compared with 2020.

The same focus on player conversion, combined with improvements to monetization, new content and new product features drove an increase in DPUs in 2021 compared with 2020.

This year-over-year comparison includes incremental revenues of $34.3 million generated from the Company’s August 2021 acquisition Reworks.

Absent this acquisition, revenues in 2022 declined when compared with 2021 as improved monetization and increased revenues from new content and product features across our broader portfolio of games were unable to offset the incremental revenues recognized in 2021 due to the Covid pandemic.

The combination of unusually high DAUs in early

2021, combined with the continued focus of the Company’s marketing efforts on player conversion rather than increasing player traffic lead to a decrease in DAUs for 2022 when compared with 2021.

The same focus on player conversion, combined with improvements to monetization, new content and new product features drove an increase in DPUs in 2022 compared to 2021.

The increase in revenues generated from Direct-to-Consumer platforms as a percentage of total revenues resulted from marketing activities for the games offered through these platforms.

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The increase in cost of revenue includes approximately $10.0 million in incremental platform fees associated with the August 2021 acquisition of Reworks.

The remaining increase was primarily due to increased amortization expense for capitalized software and for intangible assets associated with recent acquisitions.

Absent this acquisition, cost of revenues for 2022 would have declined when compared to 2021, primarily as a result of the increase in revenues generated through our Direct-to-Consumer platforms, partially offset by increased depreciation and amortization expenses.

Research and development expenses

Research and development expenses for the year ended December 31, 2022 increased by $85.6 million when compared with the year ended December 31, 2021.

Research and development expenses were adversely impacted by increased headcount and associated payroll costs in our existing research and development operations and, to a lesser extent, by the expansion of our research and development operations into new offices in Poland.

Research and development expenses were adversely impacted by increased headcount and associated payroll costs in our existing research and development operations, including costs incurred in connection with severance payments incurred during the fourth quarter 2022 in connection with our workforce reduction.

In addition, stock-based compensation costs, net of amounts capitalized, included in research and development expenses increased by $15.7 million for the year ended December 31, 2022 when compared with the year ended December 31, 2021.

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Sales and marketing expenses for the year ended December 31, 2022 increased by $22.0 million when compared with the year ended December 31, 2021.

The increase in sales and marketing expenses was primarily due to approximately $21.7 million in incremental expenses incurred by us related to the acquisition of Reworks, and to increased marketing expenses related to media buy expenses, increased stock-based compensation costs, and increased headcount and higher associated payroll costs.

The increase in sales and marketing expenses was primarily related to increased amortization expense, increased media buy expenses, increased stock-based compensation costs, and increased headcount and higher associated payroll costs.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2021 decreased by $177.8 million when compared with the year ended December 31, 2020.

General and administrative expenses for the year ended December 31, 2022 increased by $9.0 million when compared with the year ended December 31, 2021.

General and administrative expenses includes stock-based compensation expenses of $69.5 million for the year ended December 31, 2022, compared with $64.4 million for the year ended December 31, 2021.

Included in general and administrative expenses for the year ended December 31, 2021, with no comparable amount for the year ended December 31, 2022, are bonus expenses of approximately $35.4 million paid as a result of the successful initial public offering of the Company’s stock in January 2021.

Included in general and administrative expenses for the year ended December 31, 2020, with no comparable amount for the year ended December 31, 2021, are expenses of approximately $37.6 million related to a litigation settlement.

Adjusting for these items, general and administrative expenses increased by approximately $35.2 million, primarily due to increased compensation costs associated with the long-term incentive plan, which was partially offset by reduced expense attributable to adjusting contingent consideration to fair value.

Adjusting for these items, general and administrative expenses increased by approximately $39.3 million, primarily due to increased compensation costs associated with the long-term incentive plan and costs associated with exploring strategic alternatives, which were partially offset by reduced expense attributable to adjusting contingent consideration to fair value.

Comparison of the year ended December 31, 2021 versus the year ended December 31, 2020

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Revenues for the year ended December 31, 2021 increased by $211.5 million when compared to 2020.

The increase in revenues was primarily due to the acquisitions of Seriously in July 2019, contributing an aggregate $93.5 of incremental revenues compared to the year ended December 31, 2019, combined with improved monetization and increased revenues from new content and product features across our broader portfolio of games when compared to 2019.

The combination of the acquisitions and improvements to monetization, new content and product features drove an increase in both DAUs and DPUs.

The combination of unusually high DAUs in early 2020 related to the initial onset of COVID 19, combined with the continued focus of the Company’s marketing efforts on player conversion rather than increasing player traffic lead to a decrease in DAUs for 2021 when compared with 2020.

The same focus on player conversion, combined with improvements to monetization, new content and new product features drove an increase in DPUs in 2021 compared with 2020.

The increase in revenues generated from Direct-to-Consumer platforms as a percentage of total revenues resulted from marketing activities for the games offered through these platforms.

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Cost of revenue for the year ended December 31, 2021 increased by $16.8 million when compared with the year ended December 31, 2020.

The increase in cost of revenue was primarily due to $24.0 million in incremental platform fees incurred by us related to the acquisition of Seriously, combined with increased platform fees that generally correspond with an increase in revenues.

The increase in revenues generated from Direct-to-Consumer platforms as a percentage of total revenues resulted in a favorable impact on total platform fees, although this favorable impact was more than offset by increased amortization expense for intangible assets resulted from recent acquisitions.

The increase in cost of revenue includes approximately $9.7 million in incremental platform fees associated with the August 2021 acquisition of Reworks.

The remaining increase was primarily due to increased amortization expense for capitalized software and for intangible assets associated with recent acquisitions.

Research and development expenses

Research and development expenses for the year ended December 31, 2021 increased by $117.8 million when compared with the year ended December 31, 2020.

The increase in research and development expenses was primarily due to $11.7 million in incremental expenses incurred by us related to the acquisition of Seriously, as well as increased headcount resulting from newly formed research and development operations in Romania and Switzerland and expansions of our existing research and development operations in the Ukraine, Belarus and Israel.

In addition, stock-based compensation costs, net of amounts capitalized, included in research and development expenses increased by $27.2 million for the year ended December 31, 2021 when compared with the year ended December 31, 2020.

Sales and marketing expenses

Sales and marketing expenses for the year ended December 31, 2021 increased by $79.7 million when compared with the year ended December 31, 2020.

The increase in sales and marketing expenses was primarily due to approximately $30.8 million in incremental expenses incurred by us related to the acquisition of Seriously, as well as increased marketing expenses related to media buy expenses.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2020 increased by $301.5 million when compared with the year ended December 31, 2019.

The increase in general and administrative expenses was primarily due to $276.0 million in stock-based compensation, a $37.6 million expense related to a litigation settlement, and $5.0 million in incremental expenses incurred by us related to the acquisition of Seriously, all of which have no comparable amounts in the prior period.

This increase was partially offset by a $4.0 million lower expense associated with adjusting contingent consideration to fair value and lower recruiting expense in 2020 when compared to 2019.

General and administrative expenses for the year ended December 31, 2021 decreased by $177.8 million when compared with the year ended December 31, 2020.

General and administrative expenses includes stock-based compensation expenses of $64.4 million for the year ended December 31, 2021, compared with $275.1 million for the year ended December 31, 2020.

Included in general and administrative expenses for the year ended December 31, 2021, with no comparable amount for the year ended December 31, 2020, are bonus expenses of approximately $35.4 million paid as a result of the successful initial public offering of the Company’s stock in January 2021.

Other Factors Affecting Net Income

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Interest income (14.1) (0.8) (0.1)

Foreign currency translation expense (income), net 5.7 ( 5.7 ) 0.3

Foreign currency exchange, net 7.0 5.7 (5.7)

Other 0.2 (0.3) 0.3

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Interest expense

Interest expense in both 2021 and 2020 is primarily related to amounts borrowed under the December 2019 Credit Facilities.

Interest expense in 2019 is primarily related to funds borrowed in August 2019 under the Bridge Facility, and amounts borrowed under the December 2019 Credit Facilities.

Prior to the August 2019 Bridge Facility transaction, interest expense was not material to the Company.

Interest expense in 2022, 2021 and 2020 is primarily related to amounts borrowed under the December 2019 Credit Facilities.

The decrease in interest expense in 2022 when compared with 2021 is driven primarily by lower average interest rates.

The increase in interest income in 2022 when compared with 2021 is driven primarily by more active investment of excess cash in income-bearing investments.

On March 11, 2021, the Company amended the Credit Agreement which, 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.

Also on March 11, 2021, the Company issued $600.0 million aggregate principal amount of its 4.250% senior notes due 2029 under an indenture, dated March 11, 2021.

The combination of these two March 2021 transactions significantly reduced or average interest rates on our outstanding indebtedness, driving the decrease in interest expense in 2021 when compared with 2020.

The combination of these two March 2021 transactions significantly reduced our average interest rates on our outstanding indebtedness, driving the decrease in interest expense in 2021 when compared with 2020.

Interest income

Interest income in 2022, 2021 and 2020 is primarily related to interest earned on cash, cash equivalents and short term bank deposits, of which there were greater amounts in 2022.

Taxes on income

The provision for income tax was $85.5 million for the year ended December 31, 2022 and the effective income tax rate was 23.7%.

The tax rate is affected by recurring items such as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions and unrecognized tax benefits.

The difference between the effective income tax rate and the U.S.

statutory tax rate is due to recurring items such as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions, unrecognized tax benefits, and GILTI inclusion.

It is also affected by items that are not consistent from year to year.

Of these items, the primary differences related to the reversal of a valuation allowance relating to foreign net operating losses and return-to-provision adjustments.

The provision for income tax was $99.9 million for the year ended December 31, 2021 and the effective income tax rate was 24.5%.

The difference between the effective income tax rate and the U.S.

statutory tax rate was due to recurring items such as

tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions, unrecognized tax benefits, and GILTI inclusion.

It is also affected by items that are not consistent from year to year.

Of these items, the primary difference related to the reversal of deferred tax liabilities due to the change in reinvestment assertion related to undistributed earnings of certain of our non-U.S.

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The difference between the effective income tax rate and the U.S.

statutory tax rate was primarily due to recurring items such as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions.

statutory tax rate was due to recurring items such as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions.

In addition, the effective tax rate for the year ended December 31, 2020 was affected by significant non-deductible stock-based compensation expense for certain restricted stock units granted during the year ended December 31, 2020.

The provision for income tax was $ 147.4 million for the year ended December 31, 2019, and the effective income tax rate was 33.8 %.

The difference between the effective income tax rate and the U.S.

statutory tax rate was primarily due to recurring items such as tax rates in foreign jurisdictions and the relative amounts of income earned in those jurisdictions.

In addition, the effective tax rate for the year ended December 31,2019 was affected by the tax effects of recording a deferred tax liability due to the change in reinvestment assertion related to undistributed earnings of certain of our non-U.S.

subsidiaries during the year.

Prior to the second quarter of 2019, the Company considered the earnings in all its non-U.S.

subsidiaries to be indefinitely reinvested and accordingly, recorded no deferred income taxes associated with such earnings.

During the second quarter of 2019, the Company reevaluated its historic assertion and no longer considered the earnings of certain of its non-U.S.

subsidiaries to be indefinitely reinvested since the cash generated from some of the foreign subsidiaries will be used to service debt in the United States.

As a result of the change in assertion, the impact of a repatriation of the undistributed earnings resulted in recording a deferred tax liability consisting of potential withholding and distribution taxes of $41.7 million as of December 31, 2019.

For the year ended December 31, 2020, the Company accrued an additional $ 4.5 million of deferred tax liability.

Such deferred taxes were recognized as tax expense.

As a result of the changes to the Credit Agreement, primarily a reduction in the interest rate, in addition to other considerations, the Company has reevaluated its assertion and now considers the earnings of all its non-U.S.

subsidiaries to be indefinitely reinvested.

For the year ended December 31, 2021, the Company reversed the previously accrued deferred tax liability and recognized $46.2 million of tax benefit.

Reconciliation of Adjusted EBITDA to net income

Adjusted EBITDA is a non-GAAP financial measure and should not be construed as an alternative to net income as an indicator of operating performance, nor as an alternative to cash flow provided by operating activities as a measure of liquidity, or any other performance measure in each case as determined in accordance with GAAP.

Below is a reconciliation of Adjusted EBITDA to net income, the closest GAAP financial measure.

We define Adjusted EBITDA as net income before (i) interest expense, (ii) interest income, (iii) provision for income taxes, (iv) depreciation and amortization expense, (v) stock-based compensation, (vi) legal settlements, (vii) contingent consideration, (viii) acquisition and related expenses, (ix) expenses under our long-term compensation plan, (x) M&A related retention payments, and (xi) certain other items.

We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by revenues.

We supplementally present Adjusted EBITDA and Adjusted EBITDA Margin because these are key operating measures used by our management to assess our financial performance.

Adjusted EBITDA adjusts for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance.

Management believes Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors and analysts in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments.

Management uses Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against other peer companies using similar measures.

We evaluate Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with our results according to GAAP because we believe they provide investors and analysts a more complete understanding of factors and trends affecting our business than GAAP measures alone.

Adjusted EBITDA and Adjusted EBITDA Margin as calculated herein may not be comparable to similarly titled measures reported by other companies within the industry and are not determined in accordance with GAAP.

Our presentation of Adjusted EBITDA and Adjusted EBITDA Margin should not be construed as an inference that our future results will be unaffected by unusual or unexpected items.

Upon aggregating all of the components of our results of operations above, net income for the year ended December 31, 2022 decreased by $33.2 million when compared with 2021.

Net income for the year ended December 31, 2021 increased $216.4 million when compared to 2020.

Reconciliation of Credit Adjusted EBITDA to net income

Credit Adjusted EBITDA is a non-GAAP financial measure and should not be construed as an alternative to net income as an indicator of operating performance, nor as an alternative to cash flow provided by operating activities as a measure of liquidity, or any other performance measure in each case as determined in accordance with GAAP.

Below is a reconciliation of Credit Adjusted EBITDA to net income, the closest GAAP financial measure.

Our Credit Agreement defines Adjusted EBITDA (which we call “Credit Adjusted EBITDA”) as net income before (i) interest expense, (ii) interest income, (iii) provision for income taxes, (iv) depreciation and amortization expense, (v) stock-based compensation, (vi) legal settlements, (vii) contingent consideration, (viii) acquisition and related expenses, and (ix) certain other items.

We calculate Credit Adjusted EBITDA Margin as Credit Adjusted EBITDA divided by revenues.

Credit Adjusted EBITDA and Credit Adjusted EBITDA Margin as calculated herein may not be comparable to similarly titled measures reported by other companies within the industry and are not determined in accordance with GAAP.

Our presentation of Credit Adjusted EBITDA and Credit Adjusted EBITDA Margin should not be construed as an inference that our future results will be unaffected by unusual or unexpected items.

Year ended December 31,

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123.5 100.4 276.0

Contingent consideration (14.3) (6.6) 17.4

Acquisition and related expenses (2)

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Legal settlement (3)

Long-term cash compensation (4)

112.7 67.6 72.7

M&A related retention payments (5)

21.3 15.1 18.4

Other items (4)

3.9 7.5 (6.5)

Adjusted EBITDA $ 982.7 $ 941.6 $ 712.1

Credit Adjusted EBITDA $ 805.1 $ 848.7 $ 858.9

Net income margin 10.5 % 11.9 % 3.9 %

Adjusted EBITDA margin 38.0 % 39.7 % 37.7 %

(1) Reflects, for the years ended December 31, 2021 and 2020, stock-based compensation expense related to the issuance of equity awards to certain of our employees.

(2) Amounts for the year ended December 31, 2021 primarily relate to bonus expenses paid as a result of the successful initial public offering of the Company’s stock in January 2021 and the adjustment to contingent consideration payable recorded after the acquisition date.

Amounts for the years ended December 31, 2020 and 2020 include (i) contingent consideration payments with respect to our acquisitions of Seriously and Supertreat in 2019, and (ii) third-party fees for actual or planned acquisitions, including related legal, consulting and other expenditures.

Credit Adjusted EBITDA margin 30.8 % 32.9 % 36.2 %

(1) Reflects, for all years, stock-based compensation expense related to the issuance of equity awards to certain of our employees.

(2) Amounts for the year ended December 31, 2022 primarily relate to expenses incurred by the Company in connection with the evaluation of strategic alternatives for the Company.

Amounts for the year ended December 31, 2021 primarily relate to bonus expenses paid as a result of the successful initial public offering of the Company’s stock in January 2021.

Amounts for the year ended December 31, 2020 include third-party fees for actual or planned acquisitions, including related legal, consulting and other expenditures.

(3) Reflects a legal settlement expense of $37.6 million for the year ended December 31, 2020.

(4) Includes expenses recognized for grants of annual cash awards to employees pursuant to our Retention Plans, which awards are incremental to salary and bonus payments, and which plans expire in 2024.

For more information, see Note 15, Appreciation and Retention Plans, of our audited financial statements included in this document.

(5) Includes retention awards to key individuals associated with acquired companies as an incentive to retain those individuals on a long-term basis for the years ended December 31, 2021 and 2020.

For more information, see Note 15, Appreciation and Retention Plans , of our audited financial statements included in this document.

For the year December 31, 2019, includes income from an early termination of a license agreement.

(6) Includes business optimization expenses during the years ended December 31, 2021 and 2020 and income from an early termination of a license agreement during the year ended December 31, 2019.

(4) Amount for the year ended December 31, 2022 consists of $13.2 million incurred by the Company for severance, $4.1 million incurred by the Company for relocation and support provided to employees due to the war in Ukraine and $16.4 million incurred related to the announced restructuring activities.

Amounts for the years ended December 31, 2021 and 2020 include business optimization expenses.

Liquidity and Capital Resources

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Our primary sources of liquidity are the cash flows generated from our operations, currently available unrestricted cash and cash equivalents, short-term bank deposits, and borrowings under our Credit Facility and Revolver.

Our cash and cash equivalents and short-term bank deposits totaled $1,117.1 million and $520.1 million at December 31, 2021 and

December 31, 2020, respectively.

As of December 31, 2021 and 2020, we had $600 million and $350 million in additional borrowing capacity pursuant to our Revolving Credit Facility, respectively.

Our cash and cash equivalents and short-term bank deposits totaled $768.7 million and $1,117.1 million at December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022 and 2021, we had $600 million in additional borrowing capacity pursuant to our Revolving Credit Facility.

Payments of short-term debt obligations and other commitments are expected to be made from cash on the balance sheet and operating cash flows.

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Operating activities

Net cash flows provided by operating activities for the year ended December 31, 2021 increased $34.0 million when compared with the year ended December 31, 2020.

Net cash flows provided by operating activities for the year ended December 31, 2022 decreased $58.0 million when compared with the year ended December 31, 2021.

Net cash flows provided by operating activities for the year ended December 31, 2021 increased $34.0 million when compared with the year ended December 31, 2020.

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Investing activities

Net cash flows used in investing activities for the year ended December 31, 2021 increased $511.3 million when compared to the year ended December 31, 2020 mainly due to $394.1 million of consideration paid (net of cash acquired) for the 2021 acquisition of Reworks.

Net cash flows used in investing activities for the year ended December 31, 2020 decreased $418.4 million when compared to the year ended December 31, 2019, due to $422.7 million of consideration paid for the acquisition of Supertreat and Seriously in 2019.

Net cash flows used in investing activities for the year ended December 31, 2022 decreased $534.8 million when compared to the year ended December 31, 2021 mainly due to $394.1 million of consideration paid (net of cash acquired) for the 2021 acquisition of Reworks.

Net cash flows used in investing activities for the year ended December 31, 2021 increased $511.3 million when compared to the year ended December 31, 2020, due to $394.1 million of consideration paid (net of cash acquired) for the 2021 acquisition of Reworks.

Financing activities

Net cash flows used in financing activities for the year ended December 31, 2021 increased $741.0 million when compared to the year ended December 31, 2020.

Financing activity cash flows for the year ended December 31, 2021 primarily relate to the Company’s initial public offering of its equity in January 2021, and the refinancing of its Old Term Loan (as defined below) in March 2021.

Net cash flows used in financing activities for the year ended December 31, 2022 was $652.0 million when compared to net cash flows provided by financing activities of $559.7 million for the year ended December 31, 2021.

Financing activity cash flows for the year ended December 31, 2022 primarily related to the Company’s Tender Offer in October 2022.

Financing activity cash flows for the year ended December 31, 2021 primarily related to the Company’s initial public offering of its equity in January 2021, and the refinancing of its Old Term Loan (as defined below) in March 2021.

Net cash flows provided by financing activities for the year ended December 31, 2021 increased $741.0 million when compared to the year ended December 31, 2020.

Financing activity cash flows for the year ended December 31, 2020 primarily relate to repayments on the Company’s bank borrowings.

Financing activities for the year ended December 31, 2019, included a dividend distribution to our stockholder, proceeds from our Bridge Facility and our Term Loan, and repayment of our Bridge Facility.

Capital resources

On December 10, 2019, we 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 the Credit Agreement, dated as of December 10, 2019, 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").

such capacity, the "Administrative Agent") and collateral agent (in such capacity, the "Collateral Agent").

Proceeds borrowed under the Credit Facilities on the closing date were used to pay off the outstanding balance on our prior debt facility.

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Business combinations

We apply the provisions of ASC 805, Business Combination and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

We apply the provisions of ASC 805, Business Combination and allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

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Thus, to the extent the revenues volumes deteriorate in the near future, discount rates increase significantly, or we do not meet our projected performance, we could have impairments to record in the next twelve months, and such impairments could be material.

Impairment of long-lived assets

Our long-lived assets to be held or used, including right-of-use (“ROU”) assets, and identifiable intangible assets that are subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets.

Impairment indicators include any significant changes in the manner of the Company’s use of the assets and significant negative industry or economic trends.

We recognize impairment based on the difference between the fair value of the asset and its carrying value.

Fair value is generally measured based on either quoted market prices, if available, or a discounted cash flow analysis.

Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of the carrying amount over fair value.

There is inherent uncertainty in our forecasts and projections used in any impairment analysis, and different assumptions and estimates could have lead to different impairment test results, and those results could have been materially different.

The preparation of cash flow projections for use in any impairment indicators test or fair value analysis requires management to make critical estimates, judgments and assumptions with regards to estimated future cash flows, as they are, by their nature, subjective and actual results may differ materially from such estimates.

Cash flow estimates are unpredictable and inherently uncertain, since they are based on the current regulatory, political and economic climates, recent operating information and projections.

Such estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, competition, events affecting various forms of travel and access to our properties, and other factors.

If our estimates of future cash flows are not met or if there are changes in significant assumptions and judgments used in the estimation process, we may have to record impairment charges in the future.

Revenue recognition

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over time) which is usually up to one month.

We have determined through a review of game play behavior that players generally do not purchase additional virtual currency until their existing virtual currency balances have been substantially consumed.

We have determined through a review of game play

behavior that players generally do not purchase additional virtual currency until their existing virtual currency balances have been substantially consumed.

This review, performed on a game-by-game basis, includes an analysis of game players’ historical play behavior, purchase behavior, and the amount of virtual currency outstanding.

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Therefore, we recognize revenues related to these arrangements on a net basis.

Stock-based compensation

Common stock valuation

Prior to our initial public offering of equity in January 2021, we, with the assistance of third-party valuation experts, used a combination of the income approach (the discounted cash flow method) and the market approach (a combination of the guideline public company method and the guideline transaction method) to estimate our equity value in connection with our stock-based compensation program discussed below.

The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenue and costs.

The guideline public company method estimates the value of a company by applying market multiples of publicly traded companies in the same or similar lines of business to the results and projected results of the company being valued.

The guideline transaction method estimates the value of a company by applying valuation multiples paid in actual transactions for comparable public and private companies.

The valuation of the our equity considers a number of objective and subjective factors that we believe market participants would consider, including (a) the our business, financial condition, and results of operations, including related industry trends affecting our operations;

(b) our forecasted operating performance and projected future cash flows;

(d) the rights and privileges of our common stock;

(e) market multiples of our most comparable public peers;

and (f) market conditions affecting our industry.

As of the valuation date, financial forecasts were prepared and used in the computation of the estimated fair value of our equity using both the market and income approaches.

The financial forecasts were based on assumed revenue growth rates and operating margin levels that considered past experience and future expectations.

The assumed risks associated with achieving these forecasts were assessed in selecting the appropriate cost of capital rates.

The values derived under the market and income approaches were used to determine an initial estimated fair market value of our equity.

The initial estimated value was then subjected to a discount for the lack of marketability based on the impediments to liquidity as a result of our previous status as a private company, including the lack of publicly available information and the lack of a trading market.

Subsequent to our initial public offering of equity in January 2021, we use the public trading price of our common stock on the Nasdaq stock exchange as the basis for determining the fair market value for our common stock for purposes of our stock-based compensation expense.

There is inherent uncertainty in our forecasts and projections, and if different assumptions and estimates had been made than those described previously, the amount of the equity valuation and stock-based compensation expense could have been materially different.

Options granted on June 26, 2020 had an exercise price equal to the estimated fair value of our common stock as determined by our valuation as of June 26, 2020.

The valuation used a non-marketability discount of 10%.

Stock-based compensation expense

We have a stock-based compensation program, which provides for equity awards including stock options and time-based RSUs.

Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period for the award.

We record forfeitures as a reduction of stock-based compensation expense as those forfeitures occur.

We used the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options.

As we do not have a sufficient history of market prices for our common stock because the stock was not publicly traded prior to January 2021, we used observable data for a group of peer companies that grant options with substantially similar terms to assist in developing our pre-IPO volatility assumption.

The expected volatility of the stock was determined using weighted average measures of the implied volatility and the historical volatility for our peer group of companies for a period equal to the expected life of the option.

The expected term assumption was derived using the simplified method, which is based on an average between the vesting date and the expiration date of an option.

This method was chosen because there was no historical option exercise experience due to us being privately held.

The weighted-average risk-free interest rate was based on the interest rate for U.S.

We have 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.

We used the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with stock options.

As we do not have a long history of market prices for our common stock because the stock was not publicly traded prior to January 2021, we used observable data for a group of peer companies that grant options with substantially similar terms to assist in developing our volatility assumptions.

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 us being privately held.

We do not anticipate paying cash dividends on our shares of common stock in the future.

The stock options have a contractual term of 10 years.

Except as provided in an option agreement between us and the employee, if an employee is terminated (voluntarily or involuntarily), any unvested awards as of the date of termination will be forfeited.

Except as otherwise provided in an agreement between us 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 we employ different assumptions, stock-based compensation cost on future awards may differ significantly from what we have recorded in the past.

Lower volatility and shorter expected terms or higher volatility and longer expected terms result in a decrease or increase, respectively, to stock-based compensation determined at the date of grant.

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 we grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.

If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned stock-based compensation cost or incur incremental cost.

If there are any modifications or cancellations of the underlying unvested equity awards, we may be required to accelerate any remaining unearned stock-based compensation cost or incur incremental cost.

We use the associated per-share value at the time of grant to determine the compensation cost to be recognized associated with RSUs and PSUs granted.

We periodically review the estimates of performance against the defined criteria to assess the expected payout of each outstanding PSU grant and adjust 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 us on behalf of our 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.

Our stock-based compensation expense is recorded in the financial statement line items relevant to each of the award recipients.

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We use interest rate swap contracts to reduce our exposure to fluctuating interest rates associated with our variable rate debt, and to effectively increase the portion of debt upon which we pay a fixed interest rate.

Our interest rate swap agreements are designated as cash flow hedges under ASC 815.

These hedges are highly effective in offsetting changes in our future expected cash flows due to the fluctuation on the one-month LIBOR rate associated with our variable rate debt.

Interest rate swap is designated as a cash flow hedge involving the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional amount.

Our interest rate swap agreements are designated as cash flow hedges under ASC 815, Derivatives and Hedging (“ASC 815”), involving the receipt of variable amounts from a counterparty in exchange for us 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 our future expected cash flows due to the fluctuation of our variable rate debt.

We monitor the effectiveness of our hedges on a quarterly basis, both qualitatively and quantitatively.

We performed a regression analysis at inception of the hedging relationship and at period end in which we 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.

We 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 at least 30 observations that are based on historical swap rates.

Based on the regression results, we believe 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, we 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.

We use foreign currency derivative contracts to reduce our exposure to fluctuating exchange rates between the United States dollar (as our functional currency) and certain revenue or expense lines denominated in Israeli Shekels (“ILS”), Polish Zloty (“PLN”) and Romanian Leu (“RON”).

We use foreign currency derivative contracts to reduce our exposure to fluctuating exchange rates between the United States dollar (as our functional currency) and certain expense lines denominated in Israeli Shekels (“ILS”), Polish Zloty (“PLN”) and Romanian Leu (“RON”).

Our derivative contracts are designated as cash flow hedges under ASC 815.

We expect these hedges to remain highly effective at offsetting fluctuations in exchange rates through their respective maturity dates.

We monitor the effectiveness of our 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.

See Note 14, Derivative Instruments, for additional discussion.

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 we would pay if these contracts were settled at the respective valuation dates.

The inputs used to measure the fair value of our 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 our derivative contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.

We record income taxes under the asset and liability method of accounting for income taxes pursuant to ASC 740, Income Taxes .

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred income taxes are determined using enacted tax rates that are expected to be effect in the year in which the deferred tax asset or liability is to be realized or settled.

The fair value approximates the amount we would pay or receive if these contracts were settled at the respective valuation dates.

The inputs used to measure the fair value of our interest rate swap agreements are categorized as Level 2 in the fair value hierarchy as established by ASC 820, Fair Value Measurement (“ASC 820”).

The inputs used to measure the fair value of our foreign currency derivative contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.

Valuation allowances

We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized.

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This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused and tax planning alternatives.

We implement a two-step approach to recognize and measure uncertain tax positions.

The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

The Tax Cuts and Jobs Act (“TCJA”) subjects a U.S.

shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries.

We can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes.

We elected to account for the income tax effects of GILTI as a “period cost,” or an income tax expense in the year the tax is incurred.

Uncertain tax positions

The Company is subject to income taxes in the U.S.

and numerous foreign jurisdictions.

The evaluation of the Company’s uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex domestic and international tax laws, and matters related to the allocation of international taxation rights between countries.

Although management believes the Company’s reserves are reasonable, no assurance can be given that the final outcome of these uncertainties will not be different from that which is reflected in the Company’s reserves.

Reserves are adjusted considering changing facts and circumstances, such as the closing of a tax examination.

Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.

Recently issued accounting pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis