Taboola.com(US:TBLA)2022-03-24 20:16PART I Key Information The company faces significant business, regulatory, technological, governance, and financial market risks Risks Related to Business and Industry Intense competition, reliance on key partners, and the need to retain clients pose significant business threats - The company's ability to sustain revenue growth depends on attracting and retaining digital properties and advertisers amid significant competition4850 - Failure to meet minimum guarantee payments to digital properties, which were approximately 15% or less of total TAC in 2021, could negatively impact gross profit49 - The business is highly dependent on key partners, with Microsoft accounting for approximately 17% of 2021 gross revenues757677 - The COVID-19 pandemic initially impacted ad rates, but a strong recovery occurred in the second half of 2020 and continued into 20217273 - The platform's success hinges on its AI's predictive accuracy and innovation to avoid losing digital properties and advertisers6769 - Failure to successfully integrate the Connexity acquisition could adversely affect financial results and revenue growth95 Risks Related to Laws and Regulations Evolving data privacy laws, the phase-out of third-party cookies, and new digital taxes present major regulatory hurdles - The company is subject to complex privacy laws like GDPR and CCPA, which impose significant compliance costs and carry heavy fines111114116 - The industry-wide shift away from third-party cookies could significantly impact user tracking and ad personalization, harming revenue6062123 - Increased scrutiny over native advertising disclosures by bodies like the FTC could reduce user click-through rates126127 - The company is exposed to potential new Digital Services Taxes (DSTs) in various jurisdictions, which could increase its tax burden130131134 - An ongoing DOJ criminal investigation into industry hiring activities presents uncertain and potentially costly legal risks129 Risks Related to Intellectual Property and Technology Reliance on trade secrets, cybersecurity threats, and use of open-source software create technological vulnerabilities - The company relies heavily on trade secrets over patents, which may be difficult to enforce against competitors149150 - Taboola is exposed to cybersecurity risks, having mitigated the "Log4Shell" vulnerability in December 2021158159 - Use of third-party open-source software carries risks of license non-compliance, potentially requiring platform re-engineering156157 - The company may be subject to costly intellectual property infringement claims from third parties152153 Risks Related to Being a Public Company and Governance As a newly public company and foreign private issuer, Taboola faces increased compliance costs and regulatory scrutiny - The management team has limited experience managing a publicly traded company, involving new reporting and control obligations166 - As a "foreign private issuer," Taboola is exempt from certain SEC rules, potentially offering fewer shareholder protections171172173 - The company must establish effective internal controls, with the first Sarbanes-Oxley Section 404 assessment due in 2023167168169 Risks Related to Our Ordinary Shares and Warrants The company's securities are subject to market price volatility, dilution risk, and specific warrant redemption conditions - The market price of Ordinary Shares may be highly volatile, and future sales of substantial shares could cause a decline178181 - The company has never paid dividends and does not anticipate paying any in the foreseeable future184185 - The company may redeem unexpired Warrants when the share price is at or above $11.50, which could be disadvantageous to holders188189 Risks Relating to Our Incorporation and Location in Israel Operations are subject to risks from regional instability, intense talent competition, and Israeli legal frameworks - The company's principal R&D facilities are in Israel, making it susceptible to regional political and military instability190192 - Intense competition for skilled technical personnel in Israel could hinder talent retention and increase wage expenses194195196 - Provisions of Israeli law and the company's articles may delay or prevent an acquisition or change in control200201 - The company's articles designate Israeli courts as the exclusive forum for most shareholder disputes, limiting legal options203 Information on the Company This section details Taboola's corporate history, business model, operational structure, and growth strategies History and Development of the Company Founded in 2007, Taboola went public in 2021 and acquired e-commerce platform Connexity for approximately $800 million - On June 29, 2021, Taboola completed its business combination with ION Acquisition Corp. 1 Ltd, becoming a public company218 - On September 1, 2021, Taboola acquired Connexity for approximately $800 million, financed with cash, stock, and a $300 million term loan219223 - In 2021, Taboola drove strong growth through new and expanded partnerships with premium publishers including Microsoft, BBC, and Hearst UK224225 - The Connexity acquisition advanced the "Recommend Anything" strategy, contributing approximately 15% of revenues in Q4 2021228231 Business Overview Taboola operates an AI-powered recommendation engine for the Open Web, serving digital properties and advertisers - Taboola's mission is to power recommendations for the Open Web, helping people discover new content232233234 - For digital properties, Taboola aims to increase user engagement, grow audiences, and provide monetization through native advertising257 - For advertisers, Taboola offers massive reach to over 500 million daily active users in brand-safe environments258263 - Key growth opportunities include AI investment, client base expansion, new touchpoints, and strategic M&A like the Connexity acquisition293 - The company competes with "walled gardens" like Google and Facebook and other ad intermediaries like The Trade Desk and Outbrain303304 Organizational Structure Taboola.com Ltd. is the parent company with a simplified structure of wholly-owned subsidiaries - Taboola.com Ltd. is the parent company with significant wholly-owned subsidiaries including Taboola, Inc. (U.S.) and Connexity334 Property, Plants and Equipment Taboola leases all facilities and operates ten data centers globally through co-location agreements - The company leases all its facilities, with its corporate headquarters in New York City and core R&D in Tel Aviv336 - Taboola operates ten data centers worldwide through co-location agreements with third-party providers336 Operating and Financial Review and Prospects This section analyzes financial performance, highlighting revenue growth, the Connexity acquisition's impact, and liquidity Key Financial and Operating Metrics (2019-2021) | Metric (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $1,378,458 | $1,188,893 | $1,093,830 | | Gross profit | $441,071 | $319,497 | $231,969 | | ex-TAC Gross Profit (Non-GAAP) | $518,863 | $382,352 | $295,829 | | Net income (loss) | $(24,948) | $8,493 | $(28,025) | | Adjusted EBITDA (Non-GAAP) | $179,464 | $106,193 | $34,082 | | Free Cash Flow (Non-GAAP) | $24,451 | $121,313 | $(26,272) | - The acquisition of Connexity on September 1, 2021, for approximately $800 million was a key event, financed through cash, stock, and a $300 million term loan348351 - Key performance factors include growing the base of digital property partners (~16,000) and advertiser clients (~15,000) in Q4 2021352356357 Operating Results Revenues grew 15.9% to $1.38 billion in 2021, but the company posted a net loss due to public listing and acquisition costs Consolidated Statements of Income (Loss) Summary | (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $1,378,458 | $1,188,893 | $1,093,830 | | Gross profit | $441,071 | $319,497 | $231,969 | | Operating income (loss) | $(13,265) | $26,193 | $(19,636) | | Net income (loss) | $(24,948) | $8,493 | $(28,025) | - Revenues increased by $189.6 million (15.9%) in 2021 compared to 2020, driven by new partners and the Connexity acquisition419 - Gross Profit increased by $121.6 million (38.1%) in 2021, while ex-TAC Gross Profit (a non-GAAP measure) increased by $136.5 million (35.7%)420421 - Operating expenses increased by $161.0 million (54.9%) in 2021, largely due to $128.0 million in share-based compensation and acquisition-related costs427428 - The company reported a net loss of $24.9 million in 2021, compared to a net income of $8.5 million in 2020418430 Liquidity and Capital Resources The company maintains sufficient liquidity through operations, equity, and debt, ending 2021 with $319.3 million in cash - As of December 31, 2021, the company had $319.3 million in cash and cash equivalents447 Cash Flow Summary (2019-2021) | (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $63,521 | $139,087 | $18,056 | | Net cash provided by (used in) investing activities | $(620,460) | $10,883 | $(47,466) | | Net cash provided by financing activities | $631,127 | $2,603 | $991 | - Net cash from operating activities decreased to $63.5 million in 2021 from $139.1 million in 2020, primarily due to changes in working capital450452 - Net cash used in investing activities was $620.5 million in 2021, mainly due to $583.5 million cash paid for the Connexity acquisition460 - Net cash from financing activities was $631.1 million in 2021, primarily from $339.3 million in proceeds from the ION merger and a $288.0 million loan464 Contractual Obligations as of Dec 31, 2021 | (in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Debt Obligations | $3,000 | $3,000 | $3,000 | $3,000 | $3,000 | $284,250 | | Operating Leases | $18,542 | $14,865 | $14,115 | $12,304 | $12,610 | $18,843 | | Purchase Obligations | $7,663 | $4,147 | $2,161 | - | - | - | Research and Development, Patents and Licenses, Etc. R&D is a crucial investment focused on AI and Deep Learning, historically protected by trade secrets - R&D investments are focused on product innovation, especially in AI (Deep Learning), and maintaining the core business infrastructure472 - Historically reliant on trade secrets, the company now holds approximately twenty issued patents as of December 31, 2021473 Trend Information The business is subject to seasonal advertising trends, with spending highest in Q4 and lowest in Q1 - The business is subject to seasonality, with advertising spend typically highest in the fourth quarter and lowest in the first quarter474 Critical Accounting Estimates Financials rely on significant management judgment in areas like revenue recognition, warrants, and business combinations - Revenue Recognition: Significant judgment is required to determine if Taboola acts as a principal (gross basis) or an agent (net basis)480 - Warrants Liability: Warrants are recorded as derivative liabilities at fair value, with private warrants valued using a Black-Scholes model484485 - Share-Based Compensation: The fair value of option awards is estimated using the Black-Scholes model, requiring subjective inputs486487 - Business Combinations: Accounting for acquisitions like Connexity requires significant estimates in valuing acquired intangible assets498 Directors, Senior Management and Employees This section details Taboola's leadership, compensation, board structure, and employee base Directors and Senior Management The leadership team is led by founder and CEO Adam Singolda, with an experienced board of directors - The executive team is led by Adam Singolda (Founder, CEO), Eldad Maniv (President & COO), Lior Golan (CTO), and Stephen Walker (CFO)501 - The Board of Directors is chaired by Zvi Limon and comprises eight other members with extensive experience in technology and media501 Compensation Aggregate 2021 executive and director compensation was $98.7 million, driven by share-based awards from the public listing - Aggregate compensation for executive officers and directors in 2021 was approximately $98.7 million, primarily from share-based compensation525 2021 Compensation for Top 5 Executives (in thousands) | Executive | Position | Salary & Benefits | Cash Bonus | Equity-Based Comp. Expense | | :--- | :--- | :--- | :--- | :--- | | Adam Singolda | CEO & Director | $908.2 | $825.0 | $35,111.7 | | Eldad Maniv | President & COO | $385.0 | $1,025.0 | $34,411.8 | | Lior Golan | CTO | $233.1 | $1,025.0 | $17,263.7 | | Stephen Walker | CFO | $529.8 | $614.0 | $3,867.0 | | Kristy Sundjaja | SVP, People Ops | $386.5 | $233.8 | $1,095.0 | - Non-employee directors receive an annual cash retainer and committee fees, plus an initial RSU grant valued at $360,000527528 - The company has multiple equity incentive plans, with 27,584,474 shares available for issuance under the 2021 Plan as of year-end551 Board Practices The board is staggered, relies on foreign private issuer exemptions, and has independent audit and compensation committees - The Board of Directors is divided into three classes with staggered three-year terms609613 - As a foreign private issuer, Taboola has opted out of the Israeli requirement for external directors, complying with Nasdaq rules instead605616 - The board has three primary committees: Audit, Compensation, and Nominating and Governance, with independent members620626641 - The company has adopted a comprehensive compensation policy as required by Israeli law, effective for five years from the public listing628629633 Employees As of December 31, 2021, Taboola had approximately 1,800 employees, including about 500 in R&D - As of December 31, 2021, the company had approximately 1,800 employees, including those from the Connexity acquisition664 - Approximately 500 employees work in research and development664 - Most employees are not covered by a collective bargaining agreement, except for about 60 in France, Spain, and Brazil665 Major Shareholders and Related Party Transactions This section details the ownership structure and transactions with related parties, including major VC firms and management Major Shareholders (as of March 15, 2022) | Shareholder | Percentage of Outstanding Shares | | :--- | :--- | | Evergreen | 10.2% | | STG III, L.P | 7.4% | | Marker | 6.3% | | FMR LLC | 6.0% | | Pitango | 5.2% | | Adam Singolda (CEO) | 5.6% | | All Executive Officers and Directors as a Group | 41.1% | - The company entered into an Investors' Rights Agreement with certain shareholders, granting them registration rights for resale680 - The company has entered into indemnification agreements with its directors and executive officers682 Financial Information This section confirms financial statements are provided and notes no material legal proceedings or dividend plans - The company is not presently party to any legal proceedings expected to have a material adverse effect on its business686 - Taboola has never declared or paid dividends and does not anticipate paying any in the foreseeable future687 Additional Information This section details share capital, articles of association, and key Israeli and U.S. tax considerations Memorandum and Articles of Association The company has 700 million authorized shares and holds annual general meetings as required by its articles - Authorized share capital is 700,000,000 Ordinary Shares, with 234,031,749 issued and outstanding as of December 31, 2021699 - An annual general shareholder meeting is required every calendar year, with special meetings callable by the board or shareholders704 Taxation Taboola benefits from a reduced Israeli tax rate and believes it was not a PFIC for U.S. holders in 2021 - The company is eligible for a reduced Israeli corporate tax rate of 12% on its "Preferred Technology Income"714728731 - In Q4 2021, the company released previously tax-exempted earnings, resulting in a one-time GAAP tax expense of $4.4 million4151032 - The company believes it was not a Passive Foreign Investment Company (PFIC) for its 2021 taxable year, but future status is uncertain757760770 Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to foreign currency, interest rate, and credit risks Foreign Currency Exchange Rate Sensitivity (Impact on Operating Income) | Currency Pair (in thousands) | +10% Change Impact | -10% Change Impact | | :--- | :--- | :--- | | 2021 | | | | NIS/USD | $(7,542) | $7,542 | | EUR/USD | $(5,886) | $5,886 | | GBP/USD | $4,685 | $(4,685) | | JPY/USD | $(1,966) | $1,966 | - The company is exposed to interest rate risk from its variable-rate debt; a 1% rate increase would raise annual interest expense by ~$3 million805 - Credit risk from accounts receivable is managed through credit limits and insurance, with no material losses in the last three years806 PART II Controls and Procedures Management concluded disclosure controls were effective, with no management report on internal controls required yet - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021813 - As a newly public company, this annual report does not include a management report or auditor attestation on internal control over financial reporting814 Other Information This section covers governance topics, including the audit committee financial expert, code of conduct, and auditor fees - The board of directors has determined that Mr. Richard Scanlon is an audit committee financial expert816 - The company has adopted a Code of Conduct that applies to all employees, officers, and directors818819 Principal Accountant Fees (in thousands) | Fee Category | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $3,598 | $2,632 | | Audit-Related Fees | $221 | $162 | | Tax Fees | $1,718 | $1,137 | | All Other Fees | $227 | $153 | | Total | $5,764 | $4,084 | - As a foreign private issuer, Taboola relies on an exemption from Nasdaq's quorum requirement, setting its quorum at 25% of voting power833 PART III Financial Statements This section contains the audited consolidated financial statements for fiscal years 2019-2021 - The financial statements were audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global839851 - Critical Audit Matters identified were: 1) Revenue Recognition (principal vs. agent), and 2) Valuation of intangible assets in the Connexity acquisition855857861 Consolidated Balance Sheet Summary (As of Dec 31) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $628,948 | $426,134 | | Total Assets | $1,597,314 | $580,168 | | Total Current Liabilities | $400,561 | $300,233 | | Total Liabilities | $829,743 | $363,322 | | Total Shareholders' Equity | $767,571 | $46,640 |