Taboola.com Ltd. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________

For the Quarterly Period Ended March 31, 2023

For the transition period from ___________ to ___________

Commission File Number: 001-40566

_________________________

TABOOLA.COM LTD.

(Exact name of registrant as specified in its charter)

_________________________

_________________________

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 ☐ Yes ☒ No

As of April 30, 2023 the Registrant had outstanding 297,952,725 Ordinary Shares and 45,198,702 Non-Voting Ordinary Shares.

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	Page
Consolidated Interim Balance Sheets	5
Consolidated Interim Statements of Income (Loss)	6
Consolidated Interim Statements of Comprehensive Income (Loss)	7
Consolidated Interim Statements of Shareholders’ Equity	8
Consolidated Interim Statements of Cash Flows	9-10
Notes to Consolidated Interim Financial Statements	11-26

NOTE 1:-

GENERAL

a.

Taboola.com Ltd. (together with its subsidiaries, the “Company” or “Taboola”) was incorporated under the laws of the state of Israel and commenced its operations on September 3, 2006.

b.

In November 2022, the Company announced it entered into a 30-year exclusive commercial agreement (the “Commercial agreement”) with Yahoo Inc. and affiliated entities (“Yahoo”), under which Taboola will power native advertising across all of Yahoo’s digital properties, expanding the Company’s native advertising offering. In connection with this transaction, and following approval by the Company’s shareholders on December 30, 2022, the articles of association of the Company were amended and restated (the “Articles”) in their entirety to include a Non-voting Ordinary share class with an authorized share capital of 46,000,000. On January 17, 2023 (the “Transaction closing date”), the Company closed the transaction related agreements, including the issuance of 39,525,691 Ordinary Shares and 45,198,702 Non-voting Ordinary Shares to Yahoo. Based on the closing share price, on January 17, 2023, of $3.4 per share, the aggregate fair value of the issued shares amounted to $288,063.

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

NOTE 4:-

FAIR VALUE MEASUREMENTS

●

The risk-free interest rate assumption was interpolated based on constant maturity U.S. Treasury rates over a term commensurate with the expected term of the Private Warrants.

●

The expected term was based on the maturity of the Private Warrants of five years following June 29, 2021, the Business Combination date (as defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 13, 2023), and for certain Private Warrants the maturity date was determined to be five years from October 1, 2020, ION initial public offering effective date.

●

The expected share volatility assumption was based on the implied volatility from a set of comparable publicly-traded companies as determined based on size and proximity.

NOTE 5:-

SHORT-TERM INVESTMENTS

NOTE 6:-

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 7:-

GOODWILL AND INTANGIBLE ASSETS, NET

NOTE 8:-

FINANCING ARRANGEMENTS

NOTE 9:-

SHAREHOLDERS’ EQUITY AND SHARE INCENTIVE PLANS

b.

The following is a summary of share option activity and related information for the three months ended March 31, 2023 (including employees, directors, officers and consultants of the Company):

c.

The following is a summary of the RSU activity and related information for the three months ended March 31, 2023:

NOTE 10:-

INCOME TAXES

NOTE 11:-

COMMITMENTS AND CONTINGENCIES

a.

In April 2021, the Company became aware that the Antitrust Division of the U.S. Department of Justice is conducting a criminal investigation of hiring activities in the Company’s industry, including the Company. The Company is cooperating with the Antitrust Division. While there can be no assurances as to the ultimate outcome, the Company does not believe that its conduct violated applicable law.

b.

In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. The Company investigates these claims as they arise and record a provision, as necessary. Provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Although claims are inherently unpredictable, the Company is currently not aware of any matters that, it believes would individually or taken together, have a material adverse effect on its business, financial position, results of operations, or cash flows.

NOTE 12:-

RELATED PARTY BALANCES AND TRANSACTIONS

NOTE 13:-

GEOGRAPHIC INFORMATION

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands, except per share data)		Three months ended March 31,
		2023				2022
		Unaudited
Revenues		$	327,686			$	354,726
Gross profit		$	89,592			$	112,030
Net income (loss)		$	(31,313	)		$	3,888
EPS diluted (1)		$	(0.09	)		$	0.01
Ratio of net income (loss) to gross profit			(35.0	%)			3.5	%
Cash flow provided by operating activities		$	17,524			$	8,123
Cash, cash equivalents, short-term deposits and investments		$	274,431			$	317,953
Non-GAAP Financial Data (2)
ex-TAC Gross Profit		$	115,740			$	138,228
Adjusted EBITDA		$	10,122			$	34,856
Non-GAAP Net Income (Loss) (3)		$	(4,101	)		$	22,095
Ratio of Adjusted EBITDA to ex-TAC Gross Profit			8.7	%			25.2	%
Free Cash Flow		$	11,174			$	1,221

(1)	The weighted-average shares used in the computation of the diluted EPS for the three months ended March 31, 2023 and 2022 are 333,424,276 and 260,036,934, respectively.

(2)	Refer to “Non-GAAP Financial Measures” below for an explanation and reconciliation to GAAP metrics.

(3)	Three months ended March 31, 2022 have been adjusted to exclude the impact of foreign currency exchange rates to be consistent with current period presentation.

●

Traffic acquisition cost is a significant component of our cost of revenues but is not the only component; and

●

ex-TAC Gross Profit is not comparable to our gross profit and by definition ex-TAC Gross Profit presented for any period will be higher than our gross profit for that period. The following table provides a reconciliation of revenues and gross profit to ex-TAC Gross Profit:

		Three months ended March 31,
		2023				2022
		(dollars in thousands)
Revenues		$	327,686			$	354,726
Traffic acquisition cost			211,946				216,498
Other cost of revenues			26,148				26,198
Gross profit		$	89,592			$	112,030
Add back: Other cost of revenues			26,148				26,198
ex-TAC Gross Profit		$	115,740			$	138,228

●

although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

●

Adjusted EBITDA excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;

●

Adjusted EBITDA does not reflect, to the extent applicable for a period presented: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or if applicable principal payments on debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and

●

The expenses and other items that we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results.

		Three months ended March 31,
		2023				2022
		(dollars in thousands)
Net income (loss)		$	(31,313	)		$	3,888
Adjusted to exclude the following:		​				​
Finance (income) expenses, net			3,154				(11,195	)
Income tax benefit			(639	)			(392	)
Depreciation and amortization			22,601				22,676
Share-based compensation expenses			13,527				17,039
Holdback compensation expenses (1)			2,555				2,790
M&A and other costs (2)			237				50
Adjusted EBITDA		$	10,122			$	34,856

(1)	Represents share-based compensation due to holdback of Taboola Ordinary Shares issuable under compensatory arrangements relating to Connexity acquisition.

(2)	Includes commercial agreement asset acquisition costs.

		Three months ended March 31,
		2023				2022
		(dollars in thousands)
Gross profit		$	89,592			$	112,030
Net income (loss)		$	(31,313	)		$	3,888
Ratio of net income (loss) to gross profit			(35.0	%)			3.5	%
ex-TAC Gross Profit		$	115,740			$	138,228
Adjusted EBITDA		$	10,122			$	34,856
Ratio of Adjusted EBITDA margin to ex-TAC Gross Profit			8.7	%			25.2	%

●

Non-GAAP Net Income (Loss) excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;

●

Non-GAAP Net Income (Loss) will generally be more favorable than our net income (loss) for the same period due to the nature of the items being excluded from its calculation; and

●

Non-GAAP Net Income (Loss) is a performance measure and should not be used as a measure of liquidity.

		Three months ended March 31,
		2023				2022
		(dollars in thousands)
Net income (loss)		$	(31,313	)		$	3,888
Amortization of acquired intangibles			15,969				15,780
Share-based compensation expenses			13,527				17,039
Holdback compensation expenses (1)			2,555				2,790
M&A and other costs (2)			237				50
Revaluation of Warrants			(1,676	)			(14,042	)
Foreign currency exchange rate losses (3)			429				216
Income tax effects			(3,829	)			(3,626	)
Non-GAAP Net Income (Loss)		$	(4,101	)		$	22,095

(1)	Represents share-based compensation due to holdback of Taboola Ordinary Shares issuable under compensatory arrangements relating to Connexity acquisition.

(3)	Represents non-operating foreign currency exchange rate gains or losses related to the remeasurement of monetary assets and liabilities to the Company’s functional currency using exchange rates in effect at the end of the reporting period.

●

It should not be inferred that the entire Free Cash Flow amount is available for discretionary expenditures. For example, cash is still required to satisfy other working capital needs, including short-term investment policy, restricted cash, repayment of loan and intangible assets;

●

Free Cash Flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities; and

●

This metric does not reflect our future contractual commitments.

		Three months ended March 31,
		2023				2022
		(dollars in thousands)
Net cash provided by operating activities		$	17,524			$	8,123
Purchases of property and equipment, including capitalized internal-use software			(6,350	)			(6,902	)
Free Cash Flow		$	11,174			$	1,221

		Three months ended March 31,
		2023				2022
Revenues		$	327,686			$	354,726
Cost of revenues:
Traffic acquisition cost			211,946				216,498
Other cost of revenues			26,148				26,198
Total cost of revenues			238,094				242,696
Gross profit			89,592				112,030
Operating expenses:
Research and development			31,985				30,412
Sales and marketing			60,569				61,368
General and administrative			25,836				27,949
Total operating expenses			118,390				119,729
Operating loss			(28,798	)			(7,699	)
Finance income (expenses), net			(3,154	)			11,195
Income (loss) before income taxes			(31,952	)			3,496
Income tax benefit			639				392
Net income (loss)		$	(31,313	)		$	3,888

		Three months ended March 31,
		2023				2022
		Unaudited
Cash Flow Data:
Net cash provided by operating activities			17,524				8,123
Net cash provided by (used in) investing activities			35,310				(49,648	)
Net cash provided by (used in) financing activities			(206	)			804
Exchange rate differences on balances of cash and cash equivalents			328				(671	)
Increase (decrease) in cash and cash equivalents			52,956				(41,392	)

		Contractual Obligations by Period
		2023				2024				2025				2026				2027				Thereafter
		(dollars in thousands)
Debt Obligations		$	32,250			$	3,000			$	3,000			$	3,000			$	3,000			$	189,985
Operating Leases (1)			13,160				18,108				16,075				13,311				9,614				13,692
Non-cancellable purchase obligations (2)			19,123				4,763				247				3				—				—
Total Contractual Obligations		$	64,533			$	25,871			$	19,322			$	16,314			$	12,614			$	203,677

(1)

Represents future minimum lease commitments under non-cancellable operating lease agreements.

(2)

Primarily represents non-cancelable amounts for contractual commitments in respect of software and information technology.

​		Operating loss impact Three months ended March 31,
​		2023								2022
​		(dollars in thousands)
​			+10	%			-10	%			+10	%			-10	%
NIS/USD		$	(841	)		$	841			$	(1,765	)		$	1,765
EUR/USD		$	204			$	(204	)		$	1,358			$	(1,358	)
GBP/USD		$	(481	)		$	481			$	(1,289	)		$	1,289
JPY/USD		$	354			$	(354	)		$	570			$	(570	)

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

	Exhibit No.		Exhibit Description
	3.1*		12th Amended and Restated Articles of Association of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 17, 2023)
	10.1*		Omnibus Agreement, dated as of November 28, 2022, by and among the Registrant, College Top Holdings, Inc. and Yahoo AdTech JV, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 17, 2023)
	10.2*		Investor Rights Agreement, dated as of January 17, 2023, by and between the Registrant and College Top Holdings, Inc. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 17, 2023)
	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
	32		Section 1350 Certifications
	101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
	101.SCH		Inline XBRL Taxonomy Extension Schema Document.
	101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document.
	101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
	104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

	By: /s/ Stephen C. Walker
	Name:	Stephen C. Walker
	Title:	Chief Financial Officer