UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of August 2022
Commission File Number 001- 40539
ironSource Ltd.
(Translation of Registrant’s name into English)
121 Menachem Begin Street
Tel Aviv 6701203, Israel
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7): ☐
EXPLANATORY NOTE
The following documents are attached hereto and incorporated by reference herein:
| ● | Exhibit 99.1. Condensed Consolidated Financial Statements as of June 30, 2022. |
| ● | Exhibit 99.2. Operating and Financial Review and Prospects in connection the Condensed Consolidated Financial Statements for the six months ended June 30, 2022. |
The Condensed Consolidated Financial Statements of ironSource Ltd. as of June 30, 2022 attached as Exhibit 99.1 and the Operating Results and Financial Review in connection with the Condensed Consolidated Financial Statements of ironSource Ltd. for the six months ended June 30, 2022 attached as Exhibit 99.2 to this Report on Form 6-K are hereby incorporated by reference into the Registrant’s Registration Statements on Form S-8 (File Nos. 333-258690 and 333-264007).
Exhibit No. |
| Description |
99.1 | Condensed Consolidated Financial Statements as of June 30, 2022. | |
99.2 | ||
101 | The following financial information from ironSource Ltd.’s Report on Form 6-K, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021; (ii) Condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2022 and 2021; (iii) Condensed consolidated statements of changes in shareholders’ equity for the six months ended June 30, 2022 and 2021; (iv) Condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021; and (v) notes to the Condensed consolidated financial statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IRONSOURCE, LTD. | ||
(Registrant) | ||
By: | /s/ Assaf Ben Ami | |
Assaf Ben Ami | ||
Chief Financial Officer | ||
Date: August 26, 2022 | ||
IRONSOURCE LTD.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
TABLE OF CONTENTS
| Page | |
Unaudited Condensed Consolidated Financial Statements: | ||
2-3 | ||
Condensed Consolidated Statements of Operations and Comprehensive Income | 4 | |
Condensed Consolidated Statements of Changes in Shareholders’ Equity | 5 | |
6-7 | ||
8-19 |
IRONSOURCE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except for number of shares and par value)
(Unaudited)
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 235,882 | $ | 778,261 | ||
Short-term deposits |
| 150,631 |
| — | ||
Accounts receivable, net of allowances of $828 and $437 as of June 30, 2022 and December 31, 2021, respectively |
| 286,809 |
| 232,049 | ||
Other current assets |
|
| 61,814 |
|
| 42,382 |
Total current assets |
| 735,136 |
| 1,052,692 | ||
Long-term restricted cash |
| 3,266 |
| 3,495 | ||
Deferred tax assets |
| 14,561 |
| 2,012 | ||
Operating lease right-of-use assets |
| 37,676 |
| 34,116 | ||
Property, equipment and software, net |
| 30,739 |
| 25,131 | ||
Investment in equity securities and other investments | 21,000 | 20,000 | ||||
Goodwill |
| 456,354 |
| 240,299 | ||
Intangible assets, net |
| 188,619 |
| 54,221 | ||
Other non-current assets |
| 73,273 |
| 18,857 | ||
Total assets | $ | 1,560,624 | $ | 1,450,823 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
IRONSOURCE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(U.S. dollars in thousands, except for number of shares and par value)
(Unaudited)
| June 30, | December 31, | ||||
| 2022 |
| 2021 | |||
Liabilities and shareholders' equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 265,682 | $ | 247,362 | ||
Operating lease liabilities | 9,905 |
| 7,525 | |||
Other current liabilities | 62,980 |
| 53,949 | |||
Total current liabilities | 338,567 |
| 308,836 | |||
Deferred tax liabilities | 6,898 |
| 6,514 | |||
Long-term operating lease liabilities | 28,541 |
| 30,076 | |||
Other non-current liabilities | 1,955 |
| 2,829 | |||
Total liabilities | 375,961 |
| 348,255 | |||
Commitments and contingencies (Note 8) |
|
|
|
| ||
Shareholders’ equity: |
| |||||
Class A and Class B ordinary shares, no par value; 11,500,000,000 (Class A 10,000,000,000 and Class B 1,500,000,000) shares authorized; 1,022,958,567 (Class A 679,594,924 and Class B 343,363,643) and 1,018,468,804 (Class A 652,938,412 and Class B 365,530,392) and at June 30, 2022 and December 31, 2021, respectively | — |
| — | |||
Treasury shares, at cost, 6,745,955 Class A ordinary shares held at June 30, 2022 and December 31, 2021 | (67,460) |
| (67,460) | |||
Additional paid-in capital | 1,101,163 |
| 1,042,589 | |||
Accumulated other comprehensive income (loss) | (2,482) |
| 495 | |||
Retained earnings | 153,442 |
| 126,944 | |||
Total shareholders’ equity | 1,184,663 |
| 1,102,568 | |||
Total liabilities and shareholders’ equity | $ | 1,560,624 | $ | 1,450,823 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
IRONSOURCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(U.S. dollars in thousands, except share and per share amounts)
(Unaudited)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Revenue | $ | 372,450 | $ | 254,749 | ||
Cost of revenue |
| 80,668 |
| 42,905 | ||
Gross profit |
| 291,782 |
| 211,844 | ||
Operating expenses: |
|
| ||||
Research and development |
| 69,864 |
| 43,571 | ||
Sales and marketing |
| 153,190 |
| 100,902 | ||
General and administrative |
| 44,311 |
| 36,233 | ||
Total operating expenses |
| 267,365 |
| 180,706 | ||
Income from operations |
| 24,417 |
| 31,138 | ||
Financial expenses (income), net |
| (878) |
| 2,006 | ||
Income before income taxes |
| 25,295 |
| 29,132 | ||
Provision for (benefit from) income taxes | (1,203) | 8,884 | ||||
Net income | $ | 26,498 | $ | 20,248 | ||
Basic net income per ordinary share | $ | 0.03 | $ | 0.02 | ||
Weighted-average ordinary shares outstanding – basic |
| 1,018,784,260 |
| 652,122,890 | ||
Diluted net income per ordinary share | $ | 0.02 | $ | 0.02 | ||
Weighted-average ordinary shares outstanding – diluted | 1,073,791,056 | 729,329,729 | ||||
Comprehensive income | ||||||
Net income | $ | 26,498 | $ | 20,248 | ||
Other comprehensive loss, net of tax: | ||||||
Unrealized losses on derivatives designated as cash flow hedge | (2,977) | — | ||||
Other comprehensive loss | (2,977) | — | ||||
Comprehensive income | $ | 23,521 | $ | 20,248 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
IRONSOURCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands, except share data)
(Unaudited)
Class A and Class B | Accumulated | |||||||||||||||||||
Ordinary Share | Additional | Other | ||||||||||||||||||
Number of | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||
| Shares |
| Amount |
| Capital |
| Shares |
| Earnings |
| Income (loss) |
| Total | |||||||
Balance at December 31, 2021 |
| 1,018,468,804 | $ | — |
| $ | 1,042,589 | $ | (67,460) | $ | 126,944 | $ | 495 | $ | 1,102,568 | |||||
Exercise of options |
| 4,368,250 |
| — |
|
| 3,680 | — |
| — | — |
| 3,680 | |||||||
Vested restricted share units |
| 121,513 |
| — |
|
| — | — |
| — | — |
| — | |||||||
Share options and restricted share units issued related to business combinations | — | — | 1,498 | — | — | — | 1,498 | |||||||||||||
Share-based compensation expense | — | — | 53,396 | — | — | — | 53,396 | |||||||||||||
Other comprehensive loss | — | — | — | — | — | (2,977) | (2,977) | |||||||||||||
Net income | — | — | — | — | 26,498 | — | 26,498 | |||||||||||||
Balance at June 30, 2022 | 1,022,958,567 | $ | — | $ | 1,101,163 | $ | (67,460) | $ | 153,442 | $ | (2,482) | $ | 1,184,663 | |||||||
Class A and Class B |
| |||||||||||||||||||||
2019 Ordinary Shares | Ordinary Share | Additional |
| |||||||||||||||||||
Number of | Number of | Paid-In | Treasury | Retained |
| |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Shares |
| Earnings |
| Total | |||||||
Balance at December 31, 2020 |
| 25,006,298 | $ | 72 |
| 640,266,044 |
| $ | — |
| $ | 152,251 |
| $ | — |
| $ | 67,123 |
| $ | 219,446 | |
Recapitalization transaction |
| (25,006,298) |
| (72) |
| 352,045,800 |
|
| — |
|
| 736,573 |
|
| (67,460) |
|
| — |
|
| 669,041 | |
Shares and share options issued related to business combinations |
| — |
| — |
| 9,503,398 |
|
| — |
|
| 57,715 |
|
| — |
|
| — |
|
| 57,715 | |
Exercise of options |
| — |
| — |
| 10,106,922 |
|
| — |
|
| 342 |
|
| — |
|
| — |
|
| 342 | |
Vested restricted share units |
| — |
| — |
| 695,078 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — | |
Share-based compensation expense |
| — |
| — |
| — |
|
| — |
|
| 38,225 |
|
| — |
|
| — |
|
| 38,225 | |
Net income |
| — |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 20,248 |
|
| 20,248 | |
Balance at June 30, 2021 |
| — | $ | — |
| 1,012,617,242 |
| $ | — |
| $ | 985,106 |
| $ | (67,460) |
| $ | 87,371 |
| $ | 1,005,017 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
IRONSOURCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities |
|
|
|
| ||
Net income | $ | 26,498 | $ | 20,248 | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
| ||||
Depreciation and amortization |
| 31,124 |
| 11,217 | ||
Share-based compensation expenses |
| 51,796 |
| 37,474 | ||
Non-cash lease expense |
| (3,132) |
| 842 | ||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
| 3,981 |
| (139) | ||
Gain on disposal of property and equipment | (1) | — | ||||
Interest accrued and other financial expenses |
| (631) |
| 628 | ||
Deferred income taxes, net |
| (16,160) |
| (728) | ||
Changes in operating assets and liabilities, net of effects of businesses acquired: |
|
| ||||
Accounts receivable |
| (2,736) |
| (38,866) | ||
Other current assets |
| (26,888) |
| (18,644) | ||
Other non-current assets |
| (55,241) |
| (8,037) | ||
Accounts payable |
| (21,029) |
| 20,368 | ||
Other current liabilities |
| (11,604) |
| (1,553) | ||
Other non-current liabilities |
| (678) |
| 637 | ||
Net cash provided by (used in) continuing operating activities |
| (24,701) |
| 23,447 | ||
Net cash provided by (used in) discontinued operating activities |
| — |
| (5,168) | ||
Net cash provided by (used in) operating activities |
| (24,701) |
| 18,279 | ||
|
| |||||
Cash flows from investing activities |
|
| ||||
Purchase of property and equipment |
| (1,899) |
| (760) | ||
Capitalized software development costs | (8,118) | (5,602) | ||||
Purchase of intangible assets | — | (1,950) | ||||
Acquisitions, net of cash acquired | (356,589) | (89,340) | ||||
Purchase of equity securities and other investments | (1,000) | (20,000) | ||||
Investments in short-term deposits |
| (150,000) |
| — | ||
Maturities of short-term deposits |
| — |
| 17,590 | ||
Net cash used in continuing investing activities |
| (517,606) |
| (100,062) | ||
Net cash used in discontinued investing activities |
| — |
| — | ||
Net cash used in investing activities | (517,606) | (100,062) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
IRONSOURCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from financing activities | ||||||
Repayment of long-term loan |
| — |
| (85,000) | ||
Proceeds from Recapitalization transaction, net |
| — |
| 672,893 | ||
Exercise of options | 3,680 | 342 | ||||
Net cash provided by continuing financing activities |
| 3,680 |
| 588,235 | ||
Net cash provided by discontinued financing activities |
| — |
| — | ||
Net cash provided in financing activities |
| 3,680 |
| 588,235 | ||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
| (3,981) |
| 139 | ||
Net change in cash and cash equivalents and restricted cash |
| (538,627) |
| 506,452 | ||
Cash and cash equivalents and restricted cash at beginning of the period |
| 781,756 |
| 203,087 | ||
Cash and cash equivalents and restricted cash at end of the period | $ | 239,148 | $ | 709,678 | ||
Supplemental disclosure of cash flows information: | ||||||
Cash paid for taxes, net | $ | 13,397 | $ | 16,725 | ||
Cash paid for interest | $ | 401 | $ | 1,055 | ||
Supplemental disclosure of non-cash investing and financing activities: | ||||||
Fair value of ordinary shares issued as consideration for business combination | $ | — | $ | 57,197 | ||
Fair value of share options and restricted share units assumed in a business combination | $ | 1,498 | $ | 518 | ||
Fair value of contingent consideration assumed in a business combination | $ | — | $ | 844 | ||
Share-based compensation capitalized to software costs | $ | 1,600 | $ | 751 | ||
Unpaid offering costs | $ | — | $ | 9,080 | ||
Inception of lease transaction | $ | 3,793 | $ | — | ||
The below table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the total of the same amounts shown on the condensed consolidated statements of cash flows (U.S. dollars in thousands):
June 30, | June 30, | |||||
| 2022 |
| 2021 | |||
Cash and cash equivalents |
| $ | 235,882 |
| $ | 706,797 |
Long-term restricted cash |
| 3,266 |
| 2,881 | ||
Total cash and cash equivalents and restricted cash | $ | 239,148 | $ | 709,678 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
NOTE 1 — DESCRIPTION OF THE BUSINESS:
ironSource Ltd. (collectively referred to with its wholly owned subsidiaries as “ironSource”, “we”, “our”, “us” or the “Company”) is a leading business platform that enables mobile content creators to prosper within the App Economy.
Since our founding in 2010, we have focused on empowering our customers to grow, engage, monetize and analyze their users to create scaled and sustainable businesses. Today, we provide core business infrastructure to mobile game and app developers and enhance telecom operators’ relationship with their users.
We are headquartered in Tel-Aviv, Israel, and have offices in various cities in North America, Europe and Asia.
On June 28, 2021, we consummated a recapitalization transaction (the “Recapitalization”) with Thoma Bravo Advantage (“TBA”), a publicly traded special purpose acquisition company, resulting in TBA becoming a wholly owned subsidiary of the Company.
On June 29, 2021, ironSource became a publicly traded corporation at the New York Stock Exchange under the symbol “IS.”
Pending Merger
On July 13, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to merge with Unity Software Inc. (“Unity”), an industry leading platform for creating and operating interactive, real-time 3D (RT3D) content. The estimated purchase consideration is based on an exchange ratio of 0.1089 shares of Unity in exchange for shares of ironSource. The transaction, which is anticipated to close in the fourth quarter of this year, is subject to approval by ironSource and Unity shareholders, the receipt of required regulatory approvals, and other customary closing conditions. Once consummated, current Unity stockholders will own approximately 73.5% and current ironSource shareholders will own approximately 26.5% of the combined company.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES:
| a. | Basis of Presentation and Consolidation |
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, cash flows, and shareholders’ equity. All such adjustments are of a normal, recurring nature.
The results of operations for the six months ended June 30, 2022 shown in these unaudited condensed consolidated financial statements are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 20-F for the year ended December 31, 2021.
The condensed consolidated financial statements include the accounts of ironSource Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
There have been no material changes in our significant accounting policies as described in our consolidated financial statements for the year ended December 31, 2021.
| b. | Short-Term Deposits |
Short-term deposits are bank deposits with maturities over three months and of up to one year. As of June 30, 2022, short-term deposits were denominated in U.S. dollars, bore interest of 3.2% and are presented at their cost, including accrued interest. The recorded amounts of short-term deposits approximate their respective fair value because of the liquidity and short period of time to maturity of these instruments.
8
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued):
c. | New Accounting Pronouncements |
Recently issued accounting pronouncements, not yet adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments to introduce a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. Under the new standard, an entity is required to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. ASU No. 2016-13 is effective for us for the annual period beginning after December 15, 2022, including interim periods within that reporting period. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 is effective for us for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.
NOTE 3 — DISAGGREGATION OF REVENUE:
Revenue by Source
The following table presents our revenue disaggregated by source (U.S. dollars in thousands):
| Six Months Ended June 30, | |||||
| 2022 |
| 2021 | |||
Sonic | $ | 335,576 | $ | 222,519 | ||
Aura | 36,874 | 32,230 | ||||
Total revenue | $ | 372,450 | $ | 254,749 | ||
Revenue by Geographic Area
The following table presents our revenue disaggregated by geography, based on the invoice address of the customers (U.S. dollars in thousands):
| Six Months Ended June 30, | |||||
| 2022 |
| 2021 | |||
United States |
| $ | 129,812 |
| $ | 91,778 |
EMEA |
| 101,952 |
| 56,642 | ||
APAC |
| 81,732 |
| 41,612 | ||
Ireland |
| 37,532 |
| 49,969 | ||
Israel |
| 9,682 |
| 8,281 | ||
Other |
| 11,740 |
| 6,467 | ||
Total revenue | $ | 372,450 | $ | 254,749 | ||
For the six months ended June 30, 2022 and 2021, no individual country, other than those disclosed above, exceeded 10% of our total revenue. For the six months ended June 30, 2022, no individual customer exceeded 10% of our total revenue. For the six months ended June 30, 2021, we had one individual customer representing 12% of our total revenue.
9
NOTE 4 – BUSINESS COMBINATIONS:
Acquisition of Tapjoy
In January 2022, we acquired all outstanding shares of Tapjoy Inc. (“Tapjoy”), which provides mobile marketing and monetization services to game and app developers. We have included the financial results of Tapjoy in the consolidated financial statements from the date of acquisition. The costs associated with the acquisition were approximately $3,300 thousand and are recorded in general and administrative expenses.
The acquisition date fair value of the consideration transferred was $391,252 thousand, which consisted of the following (U.S. dollars in thousands):
Consideration: |
|
| |
Cash | $ | 389,754 | |
Fair value of share options and restricted share units assumed |
| 1,498 | |
Total consideration transferred | $ | 391,252 |
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (U.S. dollars in thousands):
The above allocation of the purchase price is still provisional and subject to change within the measurement period, including potential adjustments to deferred tax balances as tax returns are finalized and as additional information is received. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of the acquisition close.
The estimated useful life of the acquired technology is six years, the customer relationships is eight years and the trade name is five years. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The goodwill balance is not deductible for tax purposes.
We paid cash consideration of $392,034 thousand. Of the total consideration, $389,754 thousand was allocated to the purchase consideration and $2,280 thousand was allocated to future services, recorded under other assets, and will be expensed over the remaining service periods.
10
NOTE 4 – BUSINESS COMBINATIONS: (continued)
We assumed share options and restricted share units to Tapjoy’s employees with an estimated fair value of $3,245 thousand. Of the total consideration, $1,498 thousand was allocated to the purchase consideration and $1,747 thousand was allocated to future services and will be expensed over the remaining service periods. The fair value of the share options assumed by the Company was determined using the Black-Scholes option pricing model.
The Company’s condensed consolidated statement of operations for the six months ended June 30, 2022, includes revenue of $49.3 million from Tapjoy. However, due to the significant integration of Tapjoy with Sonic, it was impractical to determine the impact of the acquired business on earnings.
The following unaudited pro forma financial information presents the consolidated results of Tapjoy for the six months ended June 30, 2022 and 2021, giving effect to the acquisition as if it had occurred on January 1, 2021, and combines the historical financial results of Tapjoy. The unaudited pro forma financial information was as follows (U.S. dollars in thousands):
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Unaudited pro forma financial information |
|
|
|
| ||
Pro forma revenue | $ | 372,450 | $ | 300,100 | ||
Pro forma net income | $ | 29,524 | $ | 6,213 | ||
The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition. The pro forma financial information includes adjustments to amortization for intangible assets acquired, share-based compensation expense for unvested share options and restricted share units, acquisition costs and income taxes. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, future revenues, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition.
NOTE 5 — GOODWILL & INTANGIBLE ASSETS, NET:
Goodwill
The following table presents the changes in the carrying amount of goodwill for the six months ended June 30, 2022 (U.S. dollars in thousands):
Balance as of December 31, 2021 |
| $ | 240,299 |
Goodwill from acquisition of Tapjoy |
| 216,055 | |
Balance as of June 30, 2022 | $ | 456,354 |
11
NOTE 5 — GOODWILL & INTANGIBLE ASSETS, NET: (continued)
Intangible Assets
The following tables present details of our intangible assets (U.S. dollars in thousands):
| June 30, | ||||||||||
2022 | |||||||||||
| Weighted- | ||||||||||
| Average |
| Carrying | ||||||||
| Remaining |
| Amount, | ||||||||
| Useful Lives |
| Net of |
| Accumulated | Net Book | |||||
| in Years |
| Impairment |
| Amortization |
| Value | ||||
Technology |
| 5.17 |
| $ | 173,925 |
| $ | (27,492) | $ | 146,433 | |
Customer relationships |
| 7.04 |
| 44,382 |
| (8,936) |
| 35,446 | |||
Trade Name | 4.51 | 5,700 | (570) | 5,130 | |||||||
Domain | 6.61 | 1,950 | (340) | 1,610 | |||||||
Total intangible assets | $ | 225,957 | $ | (37,338) | $ | 188,619 | |||||
December 31, | |||||||||||
2021 | |||||||||||
| Weighted- |
|
|
|
|
|
| ||||
Average | Carrying | ||||||||||
Remaining | Amount, | ||||||||||
Useful Lives | Net of | Accumulated | Net Book | ||||||||
in Years |
| Impairment |
| Amortization |
| Value | |||||
Technology |
| 4.68 |
| $ | 60,400 |
| $ | (12,908) |
| $ | 47,492 |
Customer relationships |
| 3.97 |
| 11,082 |
| (6,085) |
| 4,997 | |||
Domain | 7.1 | 1,950 | (218) | 1,732 | |||||||
Total intangible assets |
|
| $ | 73,432 | $ | (19,211) | $ | 54,221 | |||
Amortization expenses of intangible assets were $18,127 thousand and $2,825 thousand for the six months ended June 30, 2022 and 2021, respectively.
The following table presents the estimated future amortization of intangible assets as of June 30, 2022 (U.S. dollars in thousands):
Year ending December 31 |
| ||
Remainder of 2022 | $ | 18,210 | |
2023 |
| 36,434 | |
2024 | 34,914 | ||
2025 | 33,041 | ||
2026 | 32,735 | ||
Thereafter |
| 33,285 | |
$ | 188,619 |
12
NOTE 6 – REVOLVING CREDIT FACILITY:
On June 29, 2021, we entered into a credit agreement (the “RCF”) with several lenders (the “Lenders”), Silicon Valley Bank, as L/C issuer and the Agent. Under the RCF, the Lenders would extend to the Company a five-year revolving credit facility in an initial aggregate principal amount of up to $350 million, with the right, subject to certain conditions, to incur additional revolving commitments and/or incremental term loans in an amount not to exceed the sum of (i) $150 million plus (ii) additional amounts so long as the consolidated secured leverage ratio, on a pro forma basis after giving effect to such increase or incurrence, is no greater than or equal to 2.25:1.00. Revolving loans under the RCF bear interest through maturity at a variable rate based upon, at the Company’s option, either the Eurodollar rate (also known as LIBOR rate) or the base rate (which is the highest of (x) the federal funds rate plus 0.50%, (y) the prime rate published in the Wall Street Journal or any successor publication thereto, and (z) 1.00% in excess of the one-month Eurodollar rate), plus, in each case, an applicable margin.
Based on the applicable consolidated net leverage ratio, the applicable margin for Eurodollar rate revolving loans ranges from 1.25% to 1.75% per annum and the applicable margin for base rate loans ranges from 0.25% to 0.75% per annum. Revolving loans may be prepaid, and revolving loan commitments may be permanently reduced by the Company in whole or in part, without penalty or premium. Our RCF allows for the LIBOR rate to be phased out and replaced with the Secured Overnight Financing Rate and therefore we do not anticipate a material impact by the expected upcoming LIBOR transition. The LIBOR in relation to the RCF, will be in use until the end of June 2023.
In addition to paying interest on outstanding principal under the RCF, the Company will be required to pay an unused line fee on a quarterly basis with respect to the unutilized commitments under the RCF from 0.20% to 0.30% per annum, depending on consolidated net leverage ratio. The Company will also be required to pay customary letter of credit fees and agent and lender fees customary for credit facilities of this size and type.
The Company’s obligations under the RCF will be secured by, substantially all of the assets of the Company and its material subsidiaries, and the equity interests therein. The obligations under the RCF and the guarantees are secured by a lien on substantially all of the Company’s tangible and intangible personal property and the subsidiaries that are guarantors, and by a pledge of substantially all of the equity interests of the Company’s subsidiaries, subject to limited exceptions.
The RCF contains a number of covenants and restrictions that, among other things, require the Company to maintain (i) a maximum ratio of consolidated funded indebtedness (net of unrestricted cash and Cash Equivalents, in an amount not to exceed 50% of consolidated EBITDA) to consolidated EBITDA (both as defined in the RCF) of 4.00:1.00, subject to a step down to 3.75:1.00 after four full fiscal quarters, which ratio will, in either case, be increased by 0.50:1.00 following a Qualified Acquisition (as defined in the RCF) and (ii) a ratio of consolidated EBITDA to consolidated interest charges (as defined in the RCF) of less than 3.00:1.00. Further, the RCF contains a number of covenants and restrictions including restrictions on the Company and its subsidiaries’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate.
The RCF also includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain material ERISA events.
The occurrence of an event of default including the change of control upon the consummation of the Merger Agreement with Unity could result in the acceleration of the obligations under the RCF.
As of June 30, 2022, we were in compliance with all of the covenants.
There were no outstanding borrowings under the RCF as of June 30, 2022.
13
NOTE 7 – DERIVATIVES AND HEDGING:
We entered into forward contracts to hedge certain forecasted payroll payments denominated in NIS, against exchange rate fluctuations of the U.S. dollar for a period of up to twelve months. We record the cash flows associated with these derivatives under operating activities. Forward contracts are designated as cash flow hedges, as defined by ASC Topic 815, and are all highly effective.
As of June 30, 2022, and December 31, 2021, we had outstanding contracts designated as hedging instruments in the aggregate notional amount of approximately $41 million and $31 million, respectively. As of June 30, 2022, the fair value of our outstanding contracts amounted to a liability of $2,821 thousand, recorded under other current liabilities. As of December 31, 2021, the fair value of our outstanding contracts amounted to an asset of $562 thousand, recorded under other current assets. The foreign exchange forward contracts will expire throughout 2022. For the six months ended June 30, 2022, an amount of $1,004 thousand was reclassified from other comprehensive income into net income.
As of June 30, 2022, we expect to reclassify all of our unrealized gains and losses from accumulated other comprehensive income to earnings during the next twelve months.
NOTE 8 — COMMITMENTS AND CONTINGENT LIABILITIES:
Legal Proceedings
From time to time, we are subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although the outcome of the various legal proceedings and claims cannot be predicted with certainty, we believe that any of these proceedings or other claims are neither probable to result in a liability nor can result in a material adverse effect on our business, financial condition, results of operations or cash flows. We are not currently a party to any material legal proceedings, including any such proceedings that are pending or threatened, of which we are aware.
NOTE 9 — SHARE-BASED COMPENSATION:
| a. | Share-based compensation expense for the six months ended June 30, 2022 and 2021 was as follows (U.S. dollars in thousands): |
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Cost of revenue |
| $ | 1,398 |
| $ | 593 |
Research and development |
| 19,023 |
| 11,142 | ||
Sales and marketing |
| 17,750 |
| 8,511 | ||
General and administrative |
| 13,625 |
| 17,228 | ||
Total share-based compensation expenses | $ | 51,796 | $ | 37,474 | ||
14
NOTE 9 — SHARE-BASED COMPENSATION: (continued)
As of June 30, 2022, there is an unrecognized share-based compensation expense of $136,548 thousand to be recognized over the average remaining vesting period of 3.31 years.
b. | A summary of our share options for Class A and Class B ordinary shares activity is as follows: |
Weighted- | ||||||||||
Weighted- | Average | Aggregate | ||||||||
Average | Remaining | Intrinsic | ||||||||
Exercise | Contractual | Value (U.S. | ||||||||
Number of | Price (U.S. | Term | dollars in | |||||||
| Options |
| dollars) |
| In Years |
| thousands) | |||
Balance as of December 31, 2021 |
| 103,239,069 |
| $ | 1.71 |
| 5.95 | $ | 622,635 | |
Granted |
| 1,941,995 |
| 5.48 |
| — |
| — | ||
Exercised |
| (4,368,250) |
| 0.81 |
| — |
| — | ||
Forfeited |
| (1,081,144) |
| 2.51 |
| — |
| — | ||
Balance as of June 30, 2022 |
| 99,731,670 | $ | 1.81 |
| 5.62 | $ | 92,154 | ||
Exercisable, June 30, 2022 |
| 60,464,486 | $ | 1.33 |
| 4.56 | $ | 74,765 | ||
For the six months ended June 30, 2022, the aggregate intrinsic values of share options exercised were $17,038 thousand.
The calculated fair value of option grants was estimated using the Black-Scholes option-pricing model with the following assumptions:
The risk-free interest rate is based on U.S. Treasury rates in effect at the time of grant with maturities equal to the grant’s expected term. The expected term is calculated using the simplified method, as we conclude that our historical share option exercise experience does not provide a reasonable basis to estimate the expected option term. The expected volatility is based on the historical volatility of the ordinary shares of comparable companies that are publicly traded. The fair value of an ordinary share is estimated based on observable transactions in the secondary market for share options granted prior to the Recapitalization and based on the grant-date closing price of our ordinary share for share options granted after the Recapitalization. Dividend yield is zero since we have a mandatory adjustment to the options exercise price in our option plan following any cash dividends.
c. | A summary of our RSUs for Class A and Class B ordinary share activity is as follows: |
15
NOTE 10 — TAXES ON INCOME:
The Company’s quarterly tax provision, and estimates of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income, the mix of jurisdictions to which such income relates and tax law developments, as well as non-deductible expenses, such as share-based compensation.
For the six months ended June 30, 2022 and 2021, the Company’s effective tax rate differs from the Israeli statutory rate of 23% due to non-deductible expenses mainly related to share-based compensation and tax benefits arising from reduced tax rates under benefit programs, and for the six months ended June 30, 2022, is primarily due to discrete tax adjustments and tax benefits related to share-based compensation.
The Company and its Israeli subsidiaries are subject to Preferred Technological Enterprise status and, accordingly, eligible for a reduced tax rate of 12%.
NOTE 11 – RELATED PARTIES:
Related party balances and transactions
The Company’s chairman of the audit committee and member of the board, Mr. David Kostman, is the Co-Chief Executive Officer of Outbrain Inc. (“Outbrain”). Accordingly, Outbrain is considered a related party. During the six months ended June 30, 2022, revenue recorded by the Company from its operational activity with Outbrain amounted to $1,535 thousand. As of June 30, 2022, the Company had trade receivables balances due from Outbrain in amounts of $1,023 thousand. In 2021, there were no material related party balances and transactions with Outbrain.
Type A
On December 31, 2020, we entered into an agreement with TypeA to provide certain administrative services over a four-month period ended on April 30, 2021. On the same date, we also entered into a sub-lease agreement with TypeA for a term of twelve months ended on December 31, 2021. TypeA extended the sub-lease agreement by an additional one month and a half. For the six months ended June 30, 2022 and 2021, we recorded an amount of $212 thousand and $1,308 thousand, respectively, as a deduction in the general and administrative expense.
Options Granted to Executive Officers and Directors
On February 16, 2022, we granted 153,846 options and 307,692 RSUs to one executive officer, which will become exercisable over a four-year period. The options have an exercise price of $6.5.
On January 17, 2021, we granted 24,908,370 options and 77,900 RSUs to our executive officers and directors, which will become exercisable over a three-year or a four-year period. The options have an exercise price of $3.14.
On June 28, 2021, we granted 50,000 RSUs to our executive officers and directors, which will become exercisable over a three-year period.
16
NOTE 12 — OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following (U.S. dollars in thousands):
| June 30, | December 31 | ||||
| 2022 |
| 2021 | |||
Accrued compensation | $ | 36,399 | $ | 42,971 | ||
Other current liabilities | 26,581 | 10,978 | ||||
Total other current liabilities | $ | 62,980 | $ | 53,949 | ||
NOTE 13 – NET INCOME PER ORDINARY SHARE:
Basic net income per ordinary share is computed by dividing net income by the weighted-average number of ordinary shares outstanding during the period, including unexercised vested options with a zero exercise price, net of treasury shares.
Diluted net income per ordinary share is computed by dividing net income by the weighted-average number of ordinary shares outstanding during the period, while giving effect to all potentially dilutive ordinary shares to the extent they are dilutive.
Basic and diluted net income per ordinary share takes into account deduction of amounts attributable to participating securities, in conformity with the "two-class" method.
Moreover, the 2019 ordinary shares’ conversion into ordinary shares was contingent upon certain deemed liquidation events, for which we assessed their occurrence at the end of each reporting period. If the contingency was met, their potential dilution was computed using the “if-converted” method.
The 2019 ordinary shares’ contingency was met on June 28, 2021, as part of the Recapitalization, following which the 2019 ordinary shares were converted into the Company's ordinary shares. The 2019 ordinary shares were excluded from the computation of net income per ordinary share, for the six months ended June 30, 2021, due to their anti-dilutive effect.
Following the Recapitalization, the Company has two classes of issued and outstanding ordinary shares: Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and holders of Class B ordinary shares have substantially identical rights, except for different voting rights, with holders of Class A ordinary shares entitled to one vote per share while holders of Class B ordinary shares are entitled to five votes per share. As such, basic and diluted income per ordinary share of Class A ordinary shares and Class B ordinary shares are identical. Class B ordinary shares will be automatically converted automatically on a one-for-one basis into a Class A ordinary share upon sale or transfer (other than excluded transfers to certain parties that are related to or affiliated with the shareholder).
17
NOTE 13 – NET INCOME PER ORDINARY SHARE (continued):
The following table sets forth the computation of basic and diluted net income per ordinary share, attributable to our ordinary shares (U.S. dollars in thousands, except share and per share data):
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Basic net income per ordinary share | ||||||
Numerator: | ||||||
Net income | $ | 26,498 | $ | 20,248 | ||
Amount allocated to participating 2019 shareholders | — | (5,562) | ||||
Amount allocated to contingently returnable shares issued in connection with acquisitions |
| (40) |
| — | ||
Net income, attributable to ordinary shares |
| 26,458 |
| 14,686 | ||
Denominator: |
|
| ||||
Weighted-average number of ordinary shares outstanding |
| 1,018,784,260 |
| 652,122,890 | ||
Basic net income, attributable to ordinary shares | $ | 0.03 | $ | 0.02 | ||
Diluted net income per ordinary share | ||||||
Effect of dilutive securities on weighted-average number of ordinary shares: | ||||||
Options | 54,830,450 | 76,218,322 | ||||
RSUs | 176,345 | 988,517 | ||||
Weighted-average number of ordinary shares outstanding, after giving effect to dilutive securities |
| 1,073,791,056 |
| 729,329,729 | ||
Diluted net income, attributable to ordinary shares | $ | 0.02 | $ | 0.02 | ||
18
NOTE 13 – NET INCOME PER ORDINARY SHARE (continued):
The following weighted-average amounts of securities were excluded from the computation of diluted net income per ordinary share:
Six Months Ended June 30, | ||||
2022 | 2021 | |||
Options |
| 21,033,355 |
| 65,432 |
RSUs | 15,982,328 | 25,000 | ||
Contingently returnable shares |
| 1,540,350 |
| — |
2019 ordinary shares (*) |
| — |
| 246,871,957 |
(*) | The weighted-average number of ordinary shares that were excluded from the computation of diluted net income per ordinary share is based on the number of ordinary shares for which the 2019 ordinary shares were converted into following the Recapitalization. The 2019 ordinary shares' contingent conversion was triggered on June 28, 2021, as part of the Recapitalization. |
19
Exhibit 99.2
Operating and Financial Review and Prospects
You should read the following discussion together with the unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2022 and 2021 and related notes appearing elsewhere in this Form 6-K, our audited consolidated financial statements and other financial information as of and for the year ended December 31, 2021 appearing in our Annual Report on Form 20-F for the year ended December 31, 2021 (the “Annual Report”) and Item 5—”Operating and Financial Review and Prospects” of the Annual Report. Except where the context otherwise requires or where otherwise indicated in this discussion, the terms “ironSource Ltd.,” the “Company,” “we,” “us,” “our,” “our company” and “our business” refer to ironSource Ltd. and its subsidiaries.
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, planned investments in our expansion into additional geographies, research and development, sales and marketing and general and administrative functions, as well as other non-historical statements in this discussion are forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “seek,” “believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,” “possible” or similar words.
Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends which affect or may affect our business, operations and industry. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties. These forward-looking statements are subject to a number of known and unknown risks, uncertainties, other factors and assumptions, including the risks described in Item 3.D. “Key Information-Risk Factors” in our Annual Report. The forward-looking statements made in this discussion relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this discussion to reflect events or circumstances after the date of this discussion or to reflect new information or the occurrence of unanticipated events, except as required by law.
Overview
ironSource is a leading business platform that enables mobile content creators to prosper within the App Economy. Before founding ironSource, our founders built consumer web apps. While the apps they built resonated with users, they struggled to efficiently scale their user bases and grow revenue. In building tools to help solve those challenges, our founders identified a much larger opportunity and founded ironSource in 2010 with a clear mission: to help developers turn their apps into scalable, successful businesses.
In the years since our founding, mobile app creation has become easier, but app commercialization has become increasingly difficult. The ironSource platform is designed to enable any app or game developer to turn their app into a scalable, successful business by helping them to monetize and analyze their app and grow and engage their users through multiple channels, including unique on-device distribution through partnerships with leading telecom operators and original equipment manufacturers (“OEMs”) such as Boost, Orange, Vodafone and Samsung. Our solutions are designed to allow our customers to focus on what they do best—creating great apps and user experiences—while we strive to provide the infrastructure for their business expansion in one of the largest and fastest growing markets today: the App Economy.
Our platform consists of two solution suites: Sonic and Aura. Our Sonic solution suite supports developers as they launch, monetize and scale their apps and games, by providing solutions for app discovery, user growth, content monetization, analytics and publishing. Our Aura solution suite allows telecom operators to enrich the device experience by creating new engagement touchpoints that deliver relevant content for their users across the entire lifecycle of the device, from first setup to in-life engagement, which in turn creates a powerful on-device distribution channel for developers to promote their apps as a native part of the device experience.
Recent Developments
In January 2022, we acquired all outstanding shares of Tapjoy Inc. (“Tapjoy”), which provides mobile marketing and monetization services to publishers. We have included the financial results of Tapjoy in the consolidated financial statements from the date of acquisition.
On July 13, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to merge with Unity Software Inc. (“Unity”), an industry-leading platform for creating and operating interactive, real-time 3D (RT3D) content. The estimated purchase consideration is based on an exchange ratio of 0.1089 shares of Unity in exchange for shares of ironSource. The transaction, which is anticipated to close in the fourth quarter of this year, is subject to approval by ironSource and Unity shareholders,
the receipt of required regulatory approvals, and other customary closing conditions. Once consummated, current Unity stockholders will own approximately 73.5% and current ironSource shareholders will own approximately 26.5% of the combined company.
Our Business Model
A substantial majority of our revenue is currently generated under a revenue-share model with our customers, whereby we take a percentage of revenue earned by them for serving in-app advertising placements in their apps and games, or through on-device placements. The remainder consists of usage-based fees, in-app advertising revenue, and to a small extent, in-app purchase revenue. As such, our ability to increase our revenue is highly aligned with our customers’ success. As they grow, so do we. Furthermore, as our customers see greater benefit from our solutions, they increase their usage and adopt additional solutions that accelerate their growth. In many cases, our customers adopt our solutions at an early stage of their business development and scale their usage in conjunction with their growth. For example, a customer may start using our monetization solution before going on to use our marketing solution to scale their user base.
Sonic
Our Sonic solution suite is designed to enable developers to grow their apps into scaled businesses by powering their ability to publish apps, monetize content, cost-effectively acquire users, and analyze app, revenue and growth performance for increased optimization. Our Sonic business model is outlined below:
| ● | Developers use our marketing solutions to acquire new users mainly on a pay-for-performance basis and, to a lesser extent, on a pay-for-impression basis. |
| ● | Developers use our monetization solutions to generate revenue by selling advertising inventory from their mobile applications to advertisers, of which we retain a share. |
| ● | We also generate revenue through usage-based fees charged for use of our products, such as in-app bidding, cross-promotion, cross-channel marketing software and creative management. |
| ● | Our analytics solution is typically included within commercial arrangements for our Sonic solution suite. |
| ● | Our Supersonic publishing solutions generate revenue primarily through in-app advertising and a small portion through in-app purchases in our published games. |
Aura
Our Aura solution suite is designed to allow telecom operators to enrich the device experience by creating new engagement touchpoints that deliver relevant content for their users. These touchpoints occur across the entire device lifecycle, from the time a user first sets up a new device, until they trade in for a new device. This engagement creates a unique on-device distribution channel for our app developers to promote their apps as a native part of the device experience, and for telecom operators to cross-sell and expand adoption of their own apps and services.
Aura revenue is primarily generated under a revenue-share model with our customers, whereby we take a percentage of revenue earned through on-device app and service recommendations. The contractual arrangements with customers may vary depending on whether the promoted app or service is owned by the customer or a third-party. These contracts are billed on a monthly basis. Recommendations in the Aura environment are based on user-provided data, contextual datasets and user preferences. This ensures that the promotions are relevant to users and improves conversions and overall revenue generated for the telecom operator customers.
For both Sonic and Aura customers, we generally invoice advertisers at the end of each month. Accounts receivable are recorded at the gross amount collectible from customers before revenue share, and accounts payable are recorded at the net amount payable to customers. Revenue generated by a specific customer’s use of our Sonic solutions may vary within a period and from period to period depending on, among other things, the launch timing and popularity of a customer’s apps and their usage of our various solutions.
Key Metrics and Non-GAAP Financial Metrics
We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors.
Key Metrics
Customers Contributing More Than $100,000 of Revenue
Our larger customer relationships drive scale, improved unit economics and operating leverage in our business model, which improves our solutions and thereby increases our value proposition to all of our customers. To measure our ability to scale with our customers and attract large enterprises to our platform, we count the number of customers that contributed more than $100,000 in revenue in the trailing twelve months. As of June 30, 2021 and June 30, 2022, we had 309 and 446 of these customers, respectively, and we focus on them as they represent the majority of our revenue, the largest component of our dataset, and our strongest retention cohort. These customers have grown from representing 94% of our revenue in the trailing twelve months as of June 30, 2021 to 95% in the trailing twelve months as of June 30, 2022 due to their increasing usage of our solutions, our ability to cross-sell a greater proportion of our solutions to them, as well as general growth in the number of new customers that contributed more than $100,000 of revenue. Our sizable base of customers in this group helps diversify our revenue base and offers greater revenue visibility given the sticky nature of our relationships with these customers, as evidenced by their 99% gross retention rate as of both June 30, 2021 and 2022. Our gross customer retention rate is calculated by comparing two twelve-month periods to see how many customers in the previous period remain active customers in the current period. Our customer count is subject to adjustments for acquisitions, consolidations, spin-offs and other market activity.
Dollar-Based Net Expansion Rate
We believe the growth in the use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We monitor our performance in this area using an indicator we refer to as Dollar-Based Net Expansion Rate.
We calculate our Dollar-Based Net Expansion Rate for a period by dividing current period revenue from a set of customers by prior period revenue of the same set of customers. Prior period revenue is the trailing twelve month revenue measured as of such prior period end. Current period revenue is the trailing twelve month revenue from the same customers as of the current period end. Our calculation of our Dollar-Based Net Expansion Rate includes the effect of any customer renewals, expansion, contraction and churn, but excludes revenue from new customers.
Our Dollar-Based Net Expansion Rate for the twelve months ended June 30, 2021 and 2022, was 181% and 142%, respectively.
Our Dollar-Based Net Expansion Rate may fluctuate for several reasons, including launch of new solutions on our platform, new app marketing campaigns or new monetized apps from customers; performance of our customers’ applications; and general industry trends, such as the COVID-19 pandemic’s impact on the gaming industry.
Non-GAAP Financial Metrics
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income as adjusted for provision for (benefit from) income taxes, financial expenses (income), net and depreciation and amortization, further adjusted, as applicable, for assets impairment, share-based compensation expense, fair value adjustment related to contingent consideration, acquisition-related costs and offering costs. We define Adjusted EBITDA Margin as Adjusted EBITDA calculated as a percentage of revenue. Adjusted EBITDA and Adjusted EBITDA Margin are included in this Current Report on Form 6-K because they are key metrics used by management and our board of directors to assess our financial performance. Adjusted EBITDA and Adjusted EBITDA Margin are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate directly to the performance of the underlying business.
Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income as a measure of financial performance, as alternatives to cash flows from operations as a measure of liquidity, or as alternatives to any other performance measure derived in accordance with GAAP. Neither Adjusted EBITDA nor Adjusted EBITDA Margin should be construed as an inference that our future results will be unaffected by unusual or other items. Additionally, Adjusted EBITDA and Adjusted EBITDA Margin are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect our tax payments and certain other cash costs that may recur in the future, including, among other things, cash requirements for costs to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA and Adjusted EBITDA
Margin as supplemental measures. Our measures of Adjusted EBITDA and Adjusted EBITDA Margin are not necessarily comparable to similarly titled captions of other companies due to different methods of calculation.
(1) | Calculated as net income divided by revenue. |
Our net income and Adjusted EBITDA increased during the six months ended June 30, 2022 from the comparable period in 2021 primarily as a result of revenue growth across all of our solutions. Our Adjusted EBITDA Margin decreased from 34% in the six months ended June 30, 2021 to 31% in the six months ended June 30, 2022.
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to the most directly comparable GAAP financial performance measures, which are net income and net income margin, respectively:
(a)Represents $18,133 and $2,825 in intangible assets amortization, $5,420 and $4,915 in capitalized software amortization and $1,049 and $734 in fixed assets depreciation for six months ended June 30, 2022 and 2021, respectively. In addition, we adjusted for $6,522 and $2,743 for the six months ended June 30, 2022 and 2021, respectively, of amortization of certain incentive payments to customers, which we amortize contra revenue over the term we expect to provide services to these customers.
(b) | Represents non-cash share-based compensation expenses. |
(c)Represents costs in connection with several transactions. These costs include compensation subject to continuing employment and other acquisition-related costs.
(d) | Represents net income divided by revenue. |
Key Factors Affecting Our Performance
Retention and expansion of existing customers
Our revenue growth depends on our ability to retain our existing customers and to expand their use of our solutions.
We continuously seek to develop and reinforce strong, long-standing relationships with our customers by delivering increased value to them and driving greater use of our solutions. Our Dollar-Based Net Expansion Rate was 181% and 142% as of June 30, 2021 and 2022, respectively. Our solutions can be used individually or in combination, but many of our customers adopt more than one solution over a period of time. We have seen significant success in cross-selling incremental capabilities to existing
customers during our operating history. Over the trailing twelve-month period ended June 30, 2022, 59% of our Sonic customers who contributed over $100,000 of annual revenue used both our marketing and monetization solutions.
As customers increase the usage and adoption of our solutions, we become more deeply integrated with their business, thereby increasing our customer retention. We achieved a high gross retention rate of 99% as of both June 30, 2021 and 2022 for customers who generated over $100,000 revenue over the trailing twelve months. We rely on our growth team to deliver customer satisfaction and help increase the value our solutions create for our customers, helping them further scale their businesses. Our increasingly large base of customers represents a significant opportunity for further growth and adoption of our platform. While we have seen a rapid increase in the number of customers that have contributed more than $100,000 revenue in the trailing twelve months, we believe that there is a substantial opportunity to continue growing this category of customers further. We plan to continue investing in growing our deep partnerships with our customers, with a focus on increasing the usage of all of our solutions, and providing new solutions to increase our share of wallet.
In any given period, our customers’ use of our platform may fluctuate, which could cause fluctuations in our revenue and results of operations. Our ability to increase the use of our platform by, and to sell additional solutions to, our existing customers, particularly our large enterprise customers, will depend on a number of factors, including our customers’ satisfaction with our platform, the offerings of our competition, the strength of our network, pricing, overall changes in our customers’ spending levels, the effectiveness of our efforts to help our customers realize the benefits of our platform and the extent to which the App Economy continues to grow.
Attracting new customers across gaming and app developers
The majority of our growth comes from existing customers who are using more of our products, but our ability to attract new customers to adopt our Sonic solutions is also critical to our future growth. Our solutions provide app developers with easy access to the technology that underlies core business operations, enabling us to attract a wide range of new customers with varying business needs, in both gaming and app categories beyond gaming.
For Sonic, we see an opportunity to increase our engagement with smaller, independent game developers who are large in number but small in revenue contribution, and who, we believe, could become large revenue contributors over time. Developers benefit significantly by using Sonic solutions earlier in the app development life-cycle to quickly monetize their content and cost-effectively accelerate the growth cycle of reinvestment to reach more users and expand their footprint across the mobile ecosystem. We seek to attract these developers with best-in-class products and by leveraging our industry expertise and reputation in scaling the apps of larger enterprises. For example, through our publishing solution, Supersonic, we offer marketability tools that enable early-stage developers to evaluate the product-market fit of their content and market value prior to publishing. We launched Supersonic in February 2020 and the 63 games published using our Supersonic solution have been downloaded 2.47 billion times as of June 30, 2022. We plan to develop additional publishing features and capabilities to increase the integration and retention of early-stage developers on our platform, enabling them to grow their business within our ecosystem, and to eventually benefit from all our solutions.
In addition, we see a significant opportunity to grow our penetration among customers in industries beyond gaming, especially through the use of our cross-channel marketing software. These customers represented 22% of our 446 customers with more than $100,000 in trailing twelve-month revenue as of June 30, 2022, and we expect this to be a significant growth driver over time.
We plan to further grow our customer base by continuing to make significant investments in sales and marketing and brand awareness. Our ability to attract new customers will depend on a number of factors, including our success in recruiting and scaling our sales and marketing organization as well as the competitive dynamics and continued success of our gaming and non-gaming target markets.
Adoption of our solutions by telecom operators and OEMs
Our ability to grow our revenue is, in part, dependent on our ability to continue to attract major global telecom operators and OEMs to adopt our Aura solution suite. Telecom operators globally are facing an increasing commoditization of data and telephony services, and are looking for ways to better differentiate themselves with subscribers. Creating a more engaging device experience will also allow telecom operators and OEMs to drive incremental revenue with their users beyond the point of device sale and subscription plans.
We believe that our Aura solution suite is attractive for telecom operators and OEMs globally, as the solution suite can be customized to natively support a wide variety of engagement and monetization use-cases. We plan to leverage our track-record of customer success with Aura as a compelling proof point to attract other major telecom operators and OEMs worldwide who do not currently use our Aura solutions. We also intend to introduce new touchpoints, solutions and products to our Aura customers to enable
richer and more engaging user experiences by investing in our Aura technology, which will enable our customers to engage with more users and better monetize the devices in their network.
We have experienced significant success in providing solutions for the mobile ecosystem. However, we see a significant opportunity to leverage our user growth, engagement and monetization expertise in building and offering solutions to customers for other connected devices, such as extending our device experience management solution to smart TVs, allowing us to increase integrated engagement touchpoints with various device users. We intend to leverage our Aura brand and technology leadership with telecom operators and OEMs to facilitate expansion into these additional connected devices by designing relevant solutions and leveraging existing enterprise relationships to gain market share. We are investing in product development and other capabilities to achieve this expansion, which may reduce our profitability as we seek further scale.
Continued innovation of our solutions and technology
Our ability to increase the size and engagement of our customer base and increase our revenue depends, in part, on our ability to maintain and enhance our platform’s innovation, features and functionality, and to successfully develop or acquire new capabilities. We constantly improve our solutions to deliver better results to our customers, as well as develop new features and use cases for our solutions. We plan to continue to make significant investments in research and development to ensure that we offer best-in-class solutions, and that we are first to market with new solutions that cement our industry leadership. This also includes exploring different areas or domains, such as expanding our Sonic platform to customers in apps beyond gaming, and Aura to non-mobile devices such as smart TVs. These investments in our future growth may reduce our profitability in the near-term.
In addition to our ongoing investment in research and development, we regularly evaluate acquisitions of companies, products, teams and technologies that complement and expand our current solutions, support our industry leadership by gaining access to new customers or markets, or add to our technology expertise. As our historical track record of acquisitions demonstrates, we have managed to execute business integrations to drive and enhance our technological capabilities, business performance and unique culture. We believe both organic development and acquisitions are core competencies for us, and we intend to use both to drive increased value for our customers and improvements to our results of operations.
Ability to attract and retain talent
Our employees drive our innovation, and are therefore the foundational asset for our company. Our business depends on our ability to attract and retain talent to drive innovation and enhance our product development, marketing efforts and management. As of June 30, 2022, we had 1,289 full-time employees, an increase of 65% compared to June 30, 2021 and 117 contractors. Our brand, scale, track record of success and culture of innovation have established us as an employer of choice. In 2020 and 2021, we were recognized by Dun & Bradstreet Israel as among the top three best tech companies to work for in Israel, alongside Google and Microsoft. We expect to continue to hire talented employees and to provide competitive compensation to our employees, and to grow our headcount in the foreseeable future to drive our growth and market leadership. We will also continue to evaluate strategic acquisitions to enhance our talent-base, particularly in new growth areas for our business.
Current Economic Conditions
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including but not limited to, the COVID-19 pandemic and the ongoing military conflict in Ukraine. Inflation, rising interest rates and reduced consumer confidence may cause our clients to be cautious in their spending. The full impact of these macroeconomic events and the extent to which these macro factors may impact our business, financial condition, and results of operations in the future remains uncertain. See Item 3.D. “Key Information—Risk Factors” in our Annual Report for further discussion of the risks to our business.
Components of Results of Operations
Revenue Our primary sources of revenue are derived from our Sonic and Aura solution suites. Our Sonic solution suite enables mobile game and app developers (which we collectively refer to here as “developers”) to grow their apps into scaled businesses by providing solutions to monetize content, acquire users and publish apps. A developer uses our monetization solution to generate revenue by selling his or her in-app placements inventory to advertisers within the developer’s games and apps. Developers may also use our publishing solution, focused on smaller, third-party game developers, to publish their mobile games. We generate revenue through in-app advertising, and through in-app purchases generated from third-party developed games we publish. Third-party developers that contract with us enjoy a revenue-share model where they receive a share of the monetization that we create.
Our Aura solution suite enables our telecom operator and OEM customers to engage with their users beyond the purchase of devices and service plans, by providing them device experiences such as personalized device setup, service promotions and app promotions. We generate revenue when a user (device owner) accepts a service or installs a promoted app. We retain a share of the revenue that is generated based on our revenue-share arrangement with the customer.
Cost of revenue. Cost of revenue consists primarily of expenses associated with the delivery of our platform, including server expenses, personnel-related expenses, including salaries, benefits and share-based compensation for employees on our operations teams and allocated overhead costs. Cost of revenue also includes amounts paid to developers who use our publishing solutions, as well as amortization of acquired technology and capitalized software costs.
Research and development. Research and development expenses primarily comprise costs associated with the maintenance and ongoing development of our platform and technology including personnel, allocated costs, allocated overhead and other development-related expenses. Research and development costs are expensed as incurred. We expect these costs to increase as we continue to hire new employees in order to support our anticipated growth. We believe continued investments in research and development are important to attain our strategic objectives and expect research and development costs to increase in absolute dollars.
Sales and marketing. Sales and marketing expenses primarily comprise costs of our marketing personnel including allocated overhead costs, branding costs, amortization of customer relationships, user acquisition costs and other advertising costs. Sales and marketing expenses are expensed as incurred. We intend to continue to invest in our sales and marketing capabilities in the future to continue to increase our brand awareness and expect these costs to increase on an absolute dollar basis as we grow our business. Sales and marketing expenses in absolute dollars and as a percentage of total revenue may fluctuate from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions, as these investments may vary in scope and scale over future periods.
General and administrative. General and administrative expenses primarily comprise costs of personnel-related costs for our executive, finance, legal and other administrative personnel, professional fees for external legal, accounting and other professional services, offering costs and allocated overhead costs. General and administrative expenses are expensed as incurred. We expect that our general and administrative expenses will increase in absolute dollars for the foreseeable future as we grow our business, as well as to cover the additional cost and expenses associated with maintaining a publicly-listed company.
Financial expenses (income), net. Financial expenses (income), net include interest earned on cash equivalents and deposits, gains and losses arising from foreign exchange fluctuations and other financial expenses in connection with bank charges, our long-term loan and our Credit Agreement (as defined below).
Provision for (benefit from) income taxes. We account for income taxes in accordance with ASC 740, “Income Taxes.” We are eligible for certain tax benefits in Israel under the Law for the Encouragement of Capital Investments, 1959, or the Investment Law at a reduced tax rate of 12%. Accordingly, as we generate taxable income in Israel, our effective tax rate is lower than the standard corporate tax rate for Israeli companies, which is 23%. Our taxable income generated outside of Israel or derived from other sources in Israel which is not eligible for tax benefits will be subject to the regular corporate tax rate. For more information about the tax benefits available to us as a Beneficiary Enterprise, see Item 10.E. “Taxation—Israeli Tax Considerations” in our Annual Report.
A. | Operating Results |
The following tables summarize key components of our results of operations data and such data as a percentage of total revenue for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021
| | Six Months Ended June 30, | | ||||||||
| | 2022 | | 2021 | | ||||||
| | (in | | (as % of | | (in | | (as % of | | ||
| | thousands) | | revenue) | | thousands) | | revenue) | | ||
Revenue |
| $ | 372,450 |
| 100 | % | $ | 254,749 |
| 100 | % |
Cost of revenue | | | 80,668 | | 21.7 | | | 42,905 | | 16.9 | |
Gross profit | | | 291,782 | | 78.3 | | | 211,844 | | 83.1 | |
Operating expenses: | | | | | | | | | | | |
Research and development | | | 69,864 | | 18.8 | | | 43,571 | | 17.1 | |
Sales and marketing | | | 153,190 | | 41.1 | | | 100,902 | | 39.6 | |
General and administrative | | | 44,311 | | 11.9 | | | 36,233 | | 14.2 | |
Total operating expenses | | | 267,365 | | 71.8 | | | 180,706 | | 70.9 | |
Income from operations | | | 24,417 | | 6.5 | | | 31,138 | | 12.2 | |
Financial expenses (income), net | | | (878) | | (0.2) | | | 2,006 | | 0.8 | |
Income before income taxes | | | 25,295 | | 6.7 | | | 29,132 | | 11.4 | |
Provision for (benefit from) income taxes | | | (1,203) | | (0.3) | | | 8,884 | | 3.5 | |
Net income | | $ | 26,498 | | 7.0 | % | $ | 20,248 | | 7.9 | % |
Revenue
Revenue increased by $117.7 million, or 46%, to $372.4 million for the six months ended June 30, 2022 from $254.7 million for the six months ended June 30, 2021. Revenue from our Sonic solution increased by $113.1 million, or 51%, from $222.5 million for the six months ended June 30, 2021 to $335.6 million for the six months ended June 30, 2022, which included revenue of $49.3 million from Tapjoy, and revenue from our Aura solution increased by $4.6 million, or 14%, from $32.2 million for the six months ended June 30, 2021 to $36.8 million for the six months ended June 30, 2022. The increase was mainly due to increased revenue from existing customers, which accounted for $91.7 million, or 78%, of the total increase in revenue, and revenue from new customers, which accounted for $26 million, or 22%, of the total increase in revenue. The growth of our total revenue was driven by enhancements made to our platform, the increased use of our solutions by our new and existing customers and the closing of the Tapjoy acquisition.
Cost of revenue
Cost of revenue increased by $37.8 million, or 88%, to $80.7 million for the six months ended June 30, 2022 from $42.9 million for the six months ended June 30, 2021. The increase was mainly due to an increase of $18.8 million in hosting and services fees, an increase of $4 million in employee-related costs, mostly driven by an increase in headcount and an increase of $0.8 million in share-based compensation, and an increase of $13.1 million in amortization expenses of purchased intangibles from business combinations.
Research and development
Research and development costs increased by $26.3 million, or 60%, to $69.9 million for the six months ended June 30, 2022 from $43.6 million for the six months ended June 30, 2021. The increase was mainly due to an increase of $20.8 million in employee-related costs, mostly driven by an increase in headcount and an increase in share-based compensation expense of $7.9 million.
Sales and marketing
Sales and marketing costs increased by $52.3 million, or 52%, to $153.2 million for the six months ended June 30, 2022 from $100.9 million for the six months ended June 30, 2021. The increase was mainly due to an increase of $19.4 million in user acquisition costs of our Sonic publishing solution, an increase of $25 million in employee-related costs, mostly driven by an increase in headcount and an increase of $9.2 million in share-based compensation, and an increase of $2.8 million in amortization expenses of purchased intangibles from business combinations.
General and administrative
General and administrative costs increased by $8.1 million, or 22%, to $44.3 million for the six months ended June 30, 2022 from $36.2 million for the six months ended June 30, 2021. The increase was primarily as a result of an increase of $3.9 million in employee-related costs, mostly driven by an increase in headcount that was partially offset by a decrease in share-based compensation of $3.6 million, an increase of $5.3 million in professional services and insurance expenses due to increased costs as part of being public company and an increase of $2.5 million in acquisition-related costs partially offset by a $4.2 million decrease in transaction costs, related to our public offering.
Financial expenses (income), net
Financial income, net was $0.9 million for the six months ended June 30, 2022 compared to financial expenses, net of $2 million for the six months ended June 30, 2021. The change was mainly due to a decrease in losses on foreign exchange fluctuations of $1.3 million and a decrease in interest and financial expenses related to our long term loan and Credit Agreement of $1.4 million.
Provision for (benefit from) income taxes
Benefit from income taxes was $1.2 million for the six months ended June 30, 2022 compared to a provision for income taxes of $8.9 million for the six months ended June 30, 2021. The change was mainly due to discrete tax adjustments and tax benefits related to stock-based compensation.
B. | Liquidity and Capital Resources |
Overview
Since our inception, we have financed our operations primarily through cash generated from operations. In 2021, we received $664 million in proceeds, net of underwriting fees and offering costs, from the recapitalization transaction we completed on June 28,
2021. We have also funded our recent acquisitions with cash on hand. Our cash, cash equivalents and restricted cash were $239.1 million as of June 30, 2022 compared to $781.8 million as of December 31, 2021. In addition, we had $150.6 million in short-term deposits as of June 30, 2022.
Our primary requirements for liquidity and capital resources are to finance working capital, capital expenditures and general corporate purposes. We believe that our cash and cash-equivalents on hand and cash we expect to generate from future operations will be sufficient to meet our business needs for at least the next twelve months. Our future cash and capital requirements will depend on many factors, including our growth rate; the timing and extent of our spending to support our research and development efforts; capital expenditures to purchase hardware and software; the expansion of sales and marketing activities; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary products, teams and technologies, including intellectual property rights, which could increase our cash requirements.
As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing is required from outside sources, we may not be able to raise it on terms favorable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
Our capital expenditures consist primarily of internal-use software costs, computers and peripheral equipment and leasehold improvements. In the six months ended June 30, 2022, we completed the acquisition of Tapjoy, which reduced our cash balance as of June 30, 2022 by $356.6 million.
We assess our liquidity, in part, through an analysis of our working capital, together with other sources of liquidity. We had working capital of $396.6 million as of June 30, 2022, compared to $743.9 million as of December 31, 2021. The decrease from December 31, 2021 to June 30, 2022 was mainly due to cash used for the acquisition of Tapjoy and cash used by our operating activities.
Our material cash requirements as of June 30, 2022, include our $31.9 million non-cancelable contractual commitments, primarily related to servers and hosting services which are due within three years, of which $18.7 million is due within the next twelve months, and our $40.3 million of operating lease obligations, of which $10.4 million is due within the next twelve months. The weighted-average remaining lease term was 2.16 years as of June 30, 2022.
The following table presents the summary consolidated cash flow information for the periods presented:
Net Cash Provided by (Used in) Continuing Operating Activities
During the six months ended June 30, 2022, net cash used in continuing operating activities was $24.7 million, consisting of net income of $26.5 million, adjusted by non-cash charges of $67 million and net cash outflows from the change in net operating assets and liabilities of $118.2 million. The non-cash charges were primarily depreciation and amortization of $31.1 million and share-based compensation expenses of $51.8 million which were partially offset by a change in deferred income taxes, net of $16.2 million. The net cash outflows from the change in net operating assets and liabilities were primarily an increase in accounts receivable of $2.7 million, an increase in other current assets of $26.9 million, an increase in other non-current assets of $55.2 million, a decrease in accounts payables of $21 million and a decrease in other current liabilities of $11.6 million.
During the six months ended June 30, 2021, net cash provided by continuing operating activities was $23.4 million, consisting of net income of $20.2 million, adjusted by non-cash charges of $49.3 million and net cash outflows from the change in net operating assets and liabilities of $46.1 million. The non-cash charges were primarily depreciation and amortization of $11.2 million and share-based compensation expenses of $37.5 million. The net cash outflows from the change in net operating assets and liabilities were primarily an increase in accounts receivable of $38.9 million, an increase in other current assets of $18.6 million and an increase in other non-current assets of $8 million which were partially offset by an increase in accounts payables of $20.4 million.
Net Cash Used in Investing Activities
During the six months ended June 30, 2022, net cash used in investing activities was $517.6 million, primarily consisting of cash used in acquisitions of $356.6 million, investments in short-term deposits of $150 million and purchase of property and equipment and capitalized software development costs of $10 million.
During the six months ended June 30, 2021, net cash used in investing activities was $100.1 million, primarily consisting of cash used in acquisitions of $89.3 million and the purchase of an equity investment of $20 million, partially offset by maturities of short-term deposits of $17.6 million.
Net Cash Provided by Financing Activities
During the six months ended June 30, 2022, net cash provided by financing activities was $3.7 million, consisting of proceeds from the exercise of options of $3.7 million.
During the six months ended June 30, 2021, net cash provided by financing activities was $588.2 million, primarily consisting of proceeds from the recapitalization transaction, net of underwriting fees and offering costs, of $672.9 million, partially offset by repayment of a long-term loan of $85 million.
SVB Credit Agreement
On March 29, 2018, we entered into a credit agreement (the “SVB Credit Agreement”) with a syndicate of banks, Silicon Valley Bank and certain other lenders. The SVB Credit Agreement provided for a $100 million term loan (the “Term Loan”) maturing on March 28, 2023. In addition, the SVB Credit Agreement provides a revolving credit line of $50 million (the “Revolver”). On June 28, 2021, we exercised our option to repay (without penalties) in full the outstanding balance of $82.5 million of the Term Loan. As part of the repayment, the Revolver was canceled. On June 28, 2021, in connection with the closing of the recapitalization transaction, we repaid all outstanding amounts under the SVB Credit Agreement. Since then, there have been no outstanding borrowings under the Revolver.
SVB Revolving Credit Facility
On June 29, 2021, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time party thereto (the “Lenders”) and Silicon Valley Bank, as administrative agent (the “Agent”) and L/C issuer, pursuant to which the Lenders extended to us a five-year senior secured revolving credit facility in an initial aggregate principal amount of up to $350.0 million, with the right, subject to certain conditions, to incur additional revolving commitments and/or incremental term loans in an amount not to exceed the sum of (i) $150.0 million plus (ii) additional amounts so long as the consolidated secured leverage ratio, on a pro forma basis after giving effect to such increase or incurrence, is no greater than or equal to 2.25:1.00.
Revolving loans under the Credit Agreement bear interest through maturity at a variable rate based upon, at our option, either the Eurodollar rate or the base rate (which is the highest of (x) the federal funds rate plus 0.50%, (y) the prime rate published in The Wall Street Journal or any successor publication thereto, and (z) 1.00% in excess of the one-month Eurodollar rate), plus, in each case, an applicable margin. The applicable margin for Eurodollar rate revolving loans ranges, based on the applicable consolidated net leverage ratio, from 1.25% to 1.75% per annum and the applicable margin for base rate loans ranges, based on the applicable consolidated net leverage ratio, from 0.25% to 0.75% per annum. Revolving loans may be prepaid, and revolving loan commitments may be permanently reduced by us, in each case, at any time, in whole or in part, without penalty or premium.
In addition to paying interest on outstanding principal under the Credit Agreement, we are required to pay an unused line fee on a quarterly basis with respect to the unutilized commitments under the Credit Agreement from 0.20% to 0.30% per annum, depending on the consolidated net leverage ratio. The Company is also required to pay customary letter of credit fees, as necessary, and agent and lender fees customary for credit facilities of this size and type.
Our obligations under the Credit Agreement are guaranteed by the majority of our subsidiaries, subject to certain exceptions (the “Guarantors”). The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all of the Company’s (including all of the Guarantors’) tangible and intangible personal property, and by a pledge of substantially all of the shares of stock, partnership interests and limited liability company interests of the Company’s subsidiaries, subject to limited exceptions.
The Credit Agreement contains a number of covenants and restrictions that, among other things, require us to maintain (i) a maximum ratio of consolidated funded indebtedness (as defined in the Credit Agreement and net of unrestricted cash and cash equivalents, in an amount not to exceed 50% of consolidated EBITDA (as defined in the Credit Agreement)) to consolidated EBITDA of 4.00:1.00, subject to a step down to 3.75:1.00 after four full fiscal quarters, which ratio will, in either case, be increased by
0.50:1.00 following a Qualified Acquisition (as defined in the Credit Agreement) and (ii) a ratio of consolidated EBITDA to consolidated interest charges (as defined in the credit agreement) of less than 3.00:1.00. The Credit Agreement also contains customary representations, warranties, and covenants, including covenants that restrict the Company’s and its subsidiaries’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase the Company’s stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of the Company’s business, enter into sale-leaseback transactions, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the revolving loans becoming immediately due and payable.
The Credit Agreement includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain material ERISA events. The occurrence of an event of default including the change of control upon the consummation of the Merger Agreement with Unity could result in the acceleration of the obligations under the Credit Agreement.
As of June 30, 2022, we were in compliance with all of the covenants. There were no outstanding borrowings under the revolving credit facility as of June 30, 2022.
C. | Research and Development, Patents and Licenses, Etc. |
For a discussion of our research and development policies, see “Research and Development” in Item 4.B. of our Annual Report and “Key Information—Risk Factors—Risks Related To Our Incorporation and Location In Israel” in Item 3.D. of our Annual Report.
D. | Trend Information |
Other than as described in Item 3.D. “Key Information—Risk Factors” and in Item 5. “Operating and Financial Review and Prospects —Key Factors Affecting Our Performance” of our Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our total revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E. | Critical Accounting Estimates |
We have provided a summary of our significant accounting policies, estimates and judgments in Note 3 to our consolidated financial statements, which are included in our Annual Report. The following critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations and cash flows to those of other companies.
Application of Critical Accounting Policies and Estimates
Our significant accounting policies and their effect on our financial condition and results of operations are more fully described in our audited consolidated financial statements included in our Annual Report. We have prepared our financial statements in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates are prepared using our best judgment, after considering past and current events and economic conditions. While management believes the factors evaluated provide a meaningful basis for establishing and applying sound accounting policies, management cannot guarantee that the estimates will always be consistent with actual results. In addition, certain information relied upon by us in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third-parties. Actual results may differ from these estimates. See in Item 3.D. “Key Information—Risk Factors” in our Annual Report for a discussion of the possible risks that may affect these estimates.
We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate and (2) changes in the estimate could have a material impact on our financial condition or results of operations.
Revenue recognition
We recognize revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) when, or as, control of the promised goods or services is transferred to the customer, and in an amount that reflects the consideration we are expected to receive in exchange for those services or goods. We follow five steps to record revenue under Topic 606: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy its performance obligations.
Our platform consists of revenue from two solution suites: Sonic and Aura. Sonic for game and app developers, and Aura for telecom operators and OEMs.
For both Sonic and Aura, we evaluate whether we act as the principal (i.e., report revenue on a gross basis) or the agent (i.e., report revenue on a net basis). The evaluation to present revenue on a gross versus net basis requires significant judgment. We have concluded that for Sonic monetization solutions and for Aura solutions, we are the agent in facilitating the fulfillment of our customers’ access to the different advertisers.
This conclusion is primarily based on the fact that we do not have control over the bid price from the advertisement nor the promotion. Additionally, we do not control the in-app placements inventory nor the on-device placements inventory prior to the placement of an advertisement or the promotion, therefore bearing no inventory risk. Further, we do not promise our customers any results. Based on these factors, we determined that we are acting as an agent, and, therefore, report revenue based on the net amount retained from the transaction, which is our revenue share.
As to our Sonic publishing solution, we have concluded that we are the principal for these sales and report revenue on a gross basis due to the fact that we are the publisher and have control of the in-app placement inventory (and as a result bear the risk of inventory), and we have the latitude in determining the price.
Valuation of share-based compensation
We measure all share-based awards, including share options and RSUs, based on their estimated fair value on the grant date for awards to our employees and directors.
We use the Black-Scholes pricing model to determine the fair values of share options. The option pricing model requires the input of highly subjective assumptions, including estimated fair value of ordinary share price prior to being a publicly traded company, the expected share price volatility and expected term. Any changes in these highly subjective assumptions would significantly impact the share-based compensation expense. We measure the fair value of RSUs based on the grant-date share price of the underlying ordinary share.
Ordinary Share Valuations
Given the absence of a public trading market for our ordinary shares prior to our listing, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide: Valuation of Privately-Held Company Equity Securities Issued as Compensation, we were required to estimate the fair value of our ordinary shares at the time of each grant of an equity-based award. In doing so we exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our ordinary shares, including:
| ● | the prices at which we or other holders sold our ordinary shares to outside investors in arms-length transactions; |
| ● | third-party valuations of our ordinary shares performed near the date of grant; |
| ● | the fact that the option and RSU grants have involved rights in illiquid securities in a private company; |
| ● | the likelihood of achieving a liquidity event, such as a sale of our company given prevailing market conditions; and |
| ● | the history and nature of our business, industry trends and competitive environment. |
Goodwill
Goodwill reflects the excess of the fair value of the consideration paid or transferred at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is not amortized but rather is tested for impairment annually at the reporting unit level at the end of each year, or more frequently if impairment indicators are present. Additionally, we are permitted to first assess
qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if we determine, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.
We did not record any impairment of goodwill for any of the periods presented. Our forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.
Income Taxes
We account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740 prescribes the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
We account for our uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring 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.
We classify interest and penalties recognized related to its uncertain tax positions within income taxes on the consolidated statements of operations.
Recent Accounting Pronouncements
See Note 2(c), “New Accounting Pronouncements,” of the Notes to unaudited condensed consolidated financial statements included in this Current Report on Form 6-K.
JOBS Act
We are currently an “emerging growth company” pursuant to the provisions of the JOBS Act, but will cease to be an emerging growth company on December 31, 2022, at which point we will qualify as a “large accelerated filer”. Until such time as we cease to be an emerging growth company, we rely on certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As an emerging growth company, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, which would otherwise be required beginning with our second annual report on Form 20-F, and (ii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to use this extended transition period, which allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.