Cellebrite DI .(US:CLBT)2023-04-26 16:00PART I ITEM 3. KEY INFORMATION This section outlines significant business, industry, and securities risks, including technological obsolescence, government contract dependence, and geopolitical factors Risk Factors The company faces substantial risks including technological development, government sales dependence, intense competition, and personnel retention - The company's success is highly dependent on its ability to continuously develop solutions compatible with new products from OEMs and evolving security/encryption strategies223265 - Sales to law enforcement and government agencies accounted for approximately 90% of revenue in 2020, 2021, and 2022, making the company materially dependent on this sector266363 - The company faces intense competition from larger competitors with greater resources, industry consolidation, and potential new entrants67273 - The company's subscription-based revenue model means a decline in new or renewed agreements may not be immediately reflected in revenue but would negatively affect future periods216217 - The business is highly dependent on key personnel, particularly CEO Yossi Carmil, with loss or inability to retain staff potentially harming operations and growth162163218 - As a foreign private issuer incorporated in Israel, the company is subject to geopolitical risks in the region, and its governance may differ from U.S. standards400467442 ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Cellebrite's Digital Intelligence (DI) solutions, history, core products, and growth strategies History and Development Cellebrite DI Ltd. was incorporated in Israel in 1999, became publicly traded on Nasdaq in 2021, and details capital expenditures - The company was incorporated in Israel in 1999 and became a publicly traded company on Nasdaq on August 30, 2021, via a merger with a SPAC499 Capital Expenditures (2020-2022) | Fiscal Year | Capital Expenditures (in millions) | | :--- | :--- | | 2022 | $6.9 | | 2021 | $5.1 | | 2020 | $6.2 | Business Overview Cellebrite provides Digital Intelligence (DI) solutions for investigations, serving 7,000 customers with a comprehensive suite - Cellebrite provides a Digital Intelligence (DI) suite of solutions to approximately 7,000 customers, including government agencies and enterprise companies, for legally sanctioned investigations533564 - The company's core offerings are structured around the investigation lifecycle: Collect & Review (data extraction), Investigative Analytics (AI-based insights), and Investigative Management Solutions (workflow and collaboration)564 - Key competitive strengths include a large, entrenched install base with a 130% recurring revenue dollar-based net retention rate as of Dec 31, 2022, and deep vertical expertise with ~9% of employees having prior government agency experience54617577 - The company's growth strategy focuses on increasing penetration within its existing public sector customer base, developing innovative new solutions including SaaS offerings, and growing its private sector business57920581551 - The company faces competition from various point solutions and consolidated providers in both the public and private sectors, including Exterro, Magnet Forensics, MSAB, Nuix, and OpenText5727 Organizational Structure Cellebrite DI Ltd. is an Israeli company with wholly-owned or majority-owned subsidiaries located globally - Cellebrite DI Ltd. is the parent company with subsidiaries located globally, including in the U.S., Germany, Singapore, U.K., Japan, and Australia622592 Property, Plants and Equipment The company leases its main offices and a hardware factory in Israel, maintaining additional offices globally - Cellebrite's principal executive offices are leased in Petah-Tikva, Israel, and it operates a leased hardware factory in Kiryat Malachi, Israel, also maintaining offices globally623560 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section details the company's financial performance, including revenue growth, net income, liquidity, and key accounting estimates Operating Results Revenue increased 10% in 2022 driven by subscription growth, while operating income declined and net income rose significantly Key Financial Results (2021 vs. 2022) | Metric | 2022 ($ in millions) | 2021 ($ in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $270.7 | $246.2 | +10% | | Subscription Revenue | $216.0 | $183.3 | +18% | | Gross Profit | $219.9 | $203.7 | +8% | | Operating Income | $1.0 | $13.8 | -93% | | Net Income | $120.8 | $71.4 | +69% | | Adjusted EBITDA | $25.9 | $47.9 | -46% | - The 10% revenue growth in 2022 was primarily driven by an 18% increase in subscription revenue, reflecting the company's transition to a subscription-based model5435 - Operating expenses increased by 15% to $218.9 million in 2022, with a 23% rise in R&D and a 27% rise in Sales & Marketing, reflecting investments in product development675650676 - The significant increase in net income to $120.8 million was primarily due to $119.7 million in net financial income, mainly from the fair value remeasurement of warrant liabilities and other shares36677 Liquidity and Capital Resources The company's liquidity as of December 31, 2022, included $206 million in cash and equivalents, with operating cash flow decreasing Cash Flow Summary (2021 vs. 2022) | Cash Flow Activity | 2022 ($ in thousands) | 2021 ($ in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,577 | $36,052 | | Net cash (used in) provided by investing activities | $(91,231) | $45,226 | | Net cash provided by (used in) financing activities | $13,970 | $(68,397) | - Cash from operating activities decreased to $20.6 million in 2022, primarily due to an increase in inventories and prepaid expenses, and a decrease in trade payables94 - The company had total commitments of $20.9 million as of December 31, 2022, related to office and car lease arrangements682657 Research and Development, Patents and Licenses The company's research and development spending consistently increased from 2020 to 2022, reflecting growing investment R&D Spending (2020-2022) | Year | R&D Spending ($ in millions) | | :--- | :--- | | 2022 | $80.6 | | 2021 | $65.5 | | 2020 | $54.4 | Critical Accounting Estimates This section outlines significant accounting judgments and estimates, including revenue recognition, share-based compensation, and fair value - Key accounting estimates involve revenue recognition (allocating transaction price based on standalone selling price), valuation of share-based compensation, fair value of assets from business combinations, and income taxes687561 - For share-based compensation, the company uses the Black-Scholes-Merton model for options, with key assumptions including expected volatility and expected term663104 - Warrants, restricted sponsor shares, and price adjustment shares are classified as liabilities and are re-measured at fair value at each balance sheet date, with changes recognized in earnings106169667 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation, board structure, and employee base, including executive officers and equity plans Directors and Senior Management This subsection lists the company's executive officers and directors as of April 27, 2023, with their professional biographies Key Management and Directors | Name | Position | | :--- | :--- | | Yossi Carmil | Chief Executive Officer, Director | | Dana Gerner | Chief Financial Officer | | Ronnen Armon | Chief Products & Technologies Officer | | Haim Shani | Chairman of the Board | | Ryusuke Utsumi | Director | | Adam H. Clammer | Director | Compensation Aggregate compensation for executive officers and directors was approximately $10.0 million in 2022, detailed with equity plans - Aggregate compensation for executive officers and directors for the year ended December 31, 2022, was approximately $10.0 million, including salaries, benefits, and share-based compensation177 2022 Compensation for Covered Executives (Salary & Social Benefits) | Executive | Position | Salary Expenses ($ thousands) | Social Benefits ($ thousands) | | :--- | :--- | :--- | :--- | | Yossi Carmil | CEO | $490 | $209 | | Dana Gerner | CFO | $321 | $110 | | Leeor Ben-Peretz | CSO | $248 | $110 | | Arthur Veinstein | President, International | $352 | $15 | | Marque Teegardin | President, Americas | $315 | $84 | - The company maintains several equity incentive plans (2008, 2019, 2021) to grant options and RSUs, with significant options outstanding under the 2008 and 2019 Plans as of Dec 31, 2022182741 - The 2021 Share Incentive Plan is the current active plan, with 22,789,113 ordinary shares available for future grant as of December 31, 2022748 Board Practices The company's board consists of nine directors with staggered terms, adhering to Nasdaq and Israeli corporate governance rules - The board of directors is comprised of nine members, divided into three classes with staggered three-year terms, and a majority of the directors are independent as defined by Nasdaq rules201205 - The company has an Audit Committee, Compensation Committee, and Nominating and Governance Committee, with charters consistent with Israeli law and Nasdaq rules791825864 - As an Israeli company, it is required to have at least two external directors, who must meet specific independence and qualification criteria under Israeli Companies Law208209 - The company has adopted a compensation policy compliant with Israeli law, governing terms for office holders and requiring approval by committees and shareholders802830 Employees As of December 31, 2022, Cellebrite had 1,005 full-time employees globally, with many having prior government agency experience Employee Headcount by Function (as of Dec 31, 2022) | Function | Number of Employees | | :--- | :--- | | Research and Development | 357 | | Sales and Marketing | 301 | | General and Administrative | 191 | | Operations and Services | 156 | | Total | 1,005 | - Approximately 9.2% of the company's employees have previously worked for police, military, or intelligence agencies, providing deep domain expertise877 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's ownership structure, with SUNCORPORATION as the largest shareholder, and related transactions Major Shareholders (as of early 2023) | Shareholder | Beneficial Ownership % | | :--- | :--- | | SUNCORPORATION | 49.10% | | IGP Saferworld, Limited Partnership | 16.76% | | True Wind Capital Management | 6.88% | - SUNCORPORATION, a Japanese public company, is the principal shareholder with significant influence over corporate matters427454 - The company has a distribution agreement with its major shareholder, SUNCORPORATION, for the promotion and sale of its mobile solutions in Japan887857 ITEM 8. FINANCIAL INFORMATION This section covers legal proceedings and the company's dividend policy, noting no material legal issues and no future dividends - The company is not currently a party to any legal proceedings that would have a material adverse effect on its business or financial condition591915 - Cellebrite does not anticipate paying cash dividends in the foreseeable future and plans to retain earnings for operations and expansion, with distributions also limited by Israeli law861915 ITEM 10. ADDITIONAL INFORMATION This section provides supplementary details, primarily focusing on material U.S. and Israeli tax considerations Taxation The company's tax considerations involve complex U.S. and Israeli regulations, including foreign corporation status and tax benefits - For U.S. tax purposes, the company is not expected to be treated as a U.S. corporation under Section 7874 following its 2021 merger, though this is subject to complex rules and potential IRS challenge474944 - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2022 taxable year but notes this is an annual factual determination and cannot be guaranteed for future years963907 - In Israel, the company is eligible for tax benefits as a 'Preferred Technological Enterprise' under the Law for the Encouragement of Capital Investments, resulting in a reduced corporate tax rate of 12% on its 'Preferred Technology Income'8181257 - Dividends paid to non-Israeli residents are generally subject to a 25% withholding tax (or 30% for a 'substantial shareholder'), which may be reduced by an applicable tax treaty767 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks, primarily from foreign currency exchange rate fluctuations and interest rate changes - The company's primary market risk is foreign currency exchange risk, as a significant portion of its operating costs are denominated in ILS while revenues are primarily in USD99 - Cellebrite has established a hedging program using foreign currency forward contracts and options to reduce the impact of foreign exchange volatility on future cash flows13199 - The company is exposed to interest rate risk on its cash, cash equivalents, and short-term investments, with a hypothetical 10% change impacting financial income by $0.4 million for 2022100685 PART II ITEM 15. CONTROLS AND PROCEDURES This section addresses the company's internal controls, with management concluding effectiveness of disclosure and financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022814 - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 20229981026 - As an emerging growth company, this annual report does not include an attestation report from the independent registered public accounting firm regarding internal control over financial reporting1027 ITEM 16. CORPORATE GOVERNANCE AND OTHER DISCLOSURES This section covers corporate governance, including the audit committee financial expert, auditor change, and foreign private issuer practices - The Board of Directors has identified Dafna Gruber as an 'audit committee financial expert' as defined by U.S. federal securities laws1001 - The company changed its independent registered public accounting firm, appointing Kost Forer Gabbay & Kasierer (a member of Ernst & Young) on April 14, 2022, following KPMG's decision not to stand for re-appointment1049 - As a foreign private issuer, Cellebrite relies on home country (Israel) practices for shareholder meeting quorum requirements and report distribution, which differ from Nasdaq's requirements1037 PART III ITEM 18. FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP Consolidated Balance Sheet Highlights (as of Dec 31) | Account ($ in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents, and short-term deposits | $138,980 | $181,565 | | Total Current Assets | $295,931 | $273,212 | | Goodwill & Intangible Assets, net | $38,083 | $38,057 | | Total Assets | $403,293 | $339,783 | | Liabilities & Equity | | | | Deferred Revenues (Current & Long-term) | $194,882 | $159,409 | | Warrant, Sponsor & Price Adj. Shares Liability | $63,731 | $180,594 | | Total Liabilities | $329,428 | $413,130 | | Total Shareholders' Equity (Deficiency) | $73,865 | $(73,347) | Consolidated Statement of Income Highlights (Year Ended Dec 31) | Account ($ in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | $270,651 | $246,246 | $194,913 | | Gross Profit | $219,905 | $203,689 | $157,034 | | Operating Income | $1,044 | $13,822 | $9,218 | | Financial Income, net | $119,716 | $68,483 | $2,179 | | Net Income | $120,805 | $71,396 | $5,781 |