Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023 (the "2022 10-K"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors” of our 2022 10-K and other factors set forth in Part II, Item 1A, "Risk Factors" and other parts of this Quarterly Report on Form 10-Q.
Overview
Our mission is to power any video experience, for any organization. Our Video Experience Cloud powers live, real-time, and on-demand video for webinars, events, virtual classrooms, and video sites. We also offer robust Application Programming Interfaces ("APIs") and Software Development Kits ("SDKs") for developers and industry solutions for education and media and telecom. Our Video Experience Cloud is used by leading brands across all industries, reaching millions of users, at home, at school and at work, for communication, collaboration, marketing, sales, customer care, learning, and entertainment experiences. With our flexible offerings, customers can experience the benefits of video across a wide range of use cases, while customizing their deployments to meet their individual, dynamic needs.
Our business was founded in 2006.
We generate revenue primarily through the sale of Software-as-a-Service ("SaaS") and Platform-as-a-Service ("PaaS") subscriptions, and additional revenue from term license subscriptions. We also generate revenue through the sale of professional services associated with the implementation of deployments for new and existing customers.
In August 2022, our Board of Directors approved a strategic restructuring program (the “2022 Restructuring Plan”) to streamline our operations in order to support our investment in critical growth areas. The 2022 Restructuring Plan included, among other things, a workforce reduction of approximately 10% of our employees. In connection with the 2022 Restructuring Plan, during the year ended December 31, 2022, we recorded expenses of $1,238, all for one-time employee termination benefits. The 2022 Restructuring Plan was substantially completed in 2022. On January 3, 2023, our Board of Directors approved a re-organization plan (the “2023 Reorganization Plan” and together with the 2022 Restructuring Plan, the “Reorganization Plans”) that included, among other things, downsizing an additional 11% of our workforce and adapting our organizational structure, roles, and responsibilities accordingly. The total cost reduction from the downsizing in connection with the 2023 Reorganization Plan on an annualized basis is expected to be approximately $16 million. The 2023 Reorganization Plan focused on realigning our operations to further increase efficiency and productivity, in reaction to the current macro-economic climate. The 2023 Reorganization Plan's main objectives were to position the Company for lower demand, spend, and available budgets across our market segments, align our business strategy in light of these market conditions and support our growth initiatives and return path to profitability. In connection with the 2023 Reorganization Plan, we incurred pre-tax charges of approximately $1 million as of September 30, 2023.
The 2023 Reorganization Plan was substantially completed in the first half of 2023. See Note 18, Restructuring Activities, for further information.
We organize our business into two reporting segments: (i) Enterprise, Education, and Technology (“EE&T”); and (ii) Media and Telecom (“M&T”). These segments share a common underlying platform consisting of our API-based architecture, as well as unified product development, operations, and administrative resources.
| | • | Enterprise, Education & Technology: Includes revenues from all of our products, industry solutions for education customers, and Media Services (except for media and telecom customers), as well as associated professional services for those offerings. Subscription revenues are primarily generated on a per full-time equivalent basis for on-demand and live products and solutions, per host basis for real-time-conferencing products and solutions, and per participant basis for the Events product (which intersects on-demand, live, and real-time-conferencing video). Contracts are generally 12 to 24 months in length. Billing is primarily done on an annual basis. |
| | • | Media & Telecom: Includes revenues from our TV Solution and Media Services for media and telecom customers, as well as associated professional services for those offerings. Revenues are generated on a per end-subscriber basis for telecom customers, and on a per video play basis for media customers. Contracts are generally two to five years in length. Billing is generally done on a quarterly or annual basis. It generally takes from six to 12 months to implement M&T offerings. The upfront resources required for implementation of our Media & Telecom solutions generally exceed those of our other offerings, resulting in a longer period from initial booking to go-live and a higher proportion of professional services revenue as a percentage of overall revenue. Additionally, a higher proportion of revenue comes from customers who choose to license our offerings through private cloud and on-premise deployments, which also impacts our gross margin. In the long-term, we expect the margins for this segment to improve due to the following: expected increase in the ratio of subscription revenue to professional services with scale, improved efficiencies of both production and professional services costs. |
Reflected below is a summary of reportable segment revenue and reportable segment gross profit for the three and nine months ended September 30, 2023 and 2022.
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (in thousands) | |
Revenue | | | | | | | | | | | | |
Enterprise, Education & Technology | | $ | 31,095 | | | $ | 30,056 | | | $ | 93,583 | | | $ | 90,186 | |
Media & Telecom | | | 12,447 | | | | 10,995 | | | | 37,111 | | | | 34,559 | |
Total Revenue | | $ | 43,542 | | | $ | 41,051 | | | $ | 130,694 | | | $ | 124,745 | |
Gross Profit | | | | | | | | | | | | | | | | |
Enterprise, Education & Technology | | | 22,762 | | | | 21,218 | | | | 68,625 | | | | 62,685 | |
Media & Telecom | | | 4,937 | | | | 5,157 | | | | 14,962 | | | | 16,649 | |
Total Gross Profit | | $ | 27,699 | | | $ | 26,375 | | | $ | 83,587 | | | $ | 79,334 | |
We employ a "land and expand" strategy with the aim of having our customers increase their usage of our offerings and/or purchase additional offerings over time. Our ability to expand within our existing customer base is reflected by our Net Dollar Retention Rate (as defined below). For the three months ended September 30, 2023 and 2022, our Net Dollar Retention Rate was 101% and 96%, respectively. We grew our Annualized Recurring Revenue (as defined below) by 7% in the three months ended September 30, 2023, compared to the three months ended September 30, 2022, demonstrating our ability to land new customers with higher spending levels and increase revenue from our existing customers.
For any given year, a large majority of our revenue comes from existing customers, with whom we are in active dialogue and tend to have visibility into their expected usage of our offerings.
We focus our selling efforts on large organizations and sell our solutions primarily through direct sales teams and account teams. In addition, we are investing in low-touch and self-serve offerings for smaller customers.
Impact of COVID-19/Macroeconomic Events
Prior to the COVID-19 pandemic, the market demand for our solutions was growing at a robust rate, with numerous tailwinds for long-term growth, and that demand accelerated mainly in 2021 as a result of the pandemic. As the effects of the COVID-19 pandemic subsided in 2022 and the worsening economic climate and recession headwinds led to lower demand, we did not see this rapid growth trend continue in 2022 and 2023. Moreover, due to the ongoing distressed economic climate we expect to face lower demand, spend, and available budgets across our market segments, and other adverse effects, although we cannot predict nor fully assess the actual impact, length and depth of such downturn. In order to adapt to these changes, we adopted the Reorganization Plans as elaborated above, that included, among other things, downsizing our workforce and adapting our organizational structure, roles, and responsibilities accordingly. In particular, the 2023 Reorganization Plan focused on realigning our operations to further increase efficiency and productivity, in reaction to the current macro-economic climate. As market fluctuations have not yet stabilized, it is not possible at this time to estimate the ultimate impact and results of these developments on our business, financial condition and results of operations.
For additional information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Business and Industry—We may not be able to successfully assess or mitigate the worsening economic climate and its direct and indirect impact on our business and operations, including our customers and vendors, or to correctly predict the duration and depth of the current instability of the global economy and take the right or sufficient measures to address it, and as a result our business, financial condition, results of operations and prospects would be adversely affected” and “Risk Factors—Risks Related to Our Business and Industry—The COVID-19 pandemic could adversely affect our business, financial condition and results of operations” in our 2022 10-K.
Key Factors Affecting Our Performance
Expansion of our Platform
We believe our platform is ideally suited for expansion across solutions, industries, and use cases. For example, in 2020, we entered the real-time conferencing market with the introduction of our Virtual and Hybrid Events, Webinars, and Online Learning products, focusing on learning, training, events, and marketing. In 2021 and 2022 we expanded the capabilities of our Virtual and Hybrid Events product to support a broader range of event types and use cases and fitted them to also address low-touch and self-serve sales, which we are developing and investing in. Throughout 2023, we plan to focus on our goal of expanding our range of existing artificial intelligence (“AI”) services with generative AI capabilities across our products, platform and partner ecosystem. We believe these products present a significant long-term opportunity, and we intend to harness our growing presence with them. Additionally, we will continue to invest in new video products for training, communication and collaboration, sales, marketing, and customer care, as we extend our platform into more industries
Acquiring New Customers
We are focused on continuing to grow the number of customers that use our solutions. Additionally, we are investing in low-touch and self-serve offerings that can be sold by inside-sales teams or completely online, as well as in distribution channels. We believe this will enable us to efficiently acquire smaller customers across all industries – beyond large enterprises into small and medium-sized enterprises, beyond universities into K-12 schools, beyond tier 1 media and telecom companies to tier 2 and 3 media and telecom companies, and beyond providing Media Services to large technology companies to also addressing smaller technology firms and startups.
Increasing Revenue from Existing Customers
We are focused on increasing sales within our existing customer base through increased usage of our platform and the cross-selling of additional products and solutions. For the three months ended September 30, 2023, our Net Dollar Retention was 101%. In order for us to increase revenue within our customer base, we will need to maintain engineering-level customer support and continue to introduce new products and features as well as innovative new use cases that are tailored to our customers' needs.
Continued Investment in Growth
Although we have invested significantly in our business to date, we believe that we still have a significant market opportunity ahead of us. We intend to continue to make investments to support the growth and expansion of our business and to increase revenue. We believe there is a significant opportunity to continue our growth. We expect that our cost of revenue and operating expenses will fluctuate over time.
Key Financial and Operating Metrics
We measure our business using both financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time, and technology investments, and assess the near-term and long-term performance of our business. The key financial and operating metrics we use are:
| | | Three Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| | | (in thousands, except percentages) | |
Annualized Recurring Revenue | | $ | 163,069 | | | $ | 152,926 | |
Net Dollar Retention Rate | | | 101 | % | | | 96 | % |
Remaining Performance Obligations | | $ | 163,995 | | | $ | 169,183 | |
Annualized Recurring Revenue
We use Annualized Recurring Revenue ("ARR") as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring customer contracts. We calculate ARR by annualizing our recurring revenue for the most recently completed fiscal quarter. Recurring revenues are generated from SaaS and PaaS subscriptions, as well as term licenses for software installed on the customer’s premises (“On-Prem”). For the SaaS and PaaS components, we calculate ARR by annualizing the actual recurring revenue recognized for the latest fiscal quarter. For the On-Prem components for which revenue recognition is not ratable across the license term, we calculate ARR for each contract by dividing the total contract value (excluding professional services) as of the last day of the specified period by the number of days in the contract term and then multiplying by 365. Recurring revenue excludes revenue from one-time professional services and setup fees. ARR is not adjusted for the impact of any known or projected future customer cancellations, upgrades or downgrades, or price increases or decreases.
The amount of actual revenue that we recognize over any 12-month period is likely to differ from ARR at the beginning of that period, sometimes significantly. This may occur due to new bookings, cancellations, upgrades or downgrades, pending renewals, professional services revenue, foreign exchange rate fluctuations and acquisitions or divestitures. ARR should be viewed independently of revenue as it is an operating metric and is not intended to be a replacement or forecast of revenue. Our calculation of ARR may differ from similarly titled metrics presented by other companies.
Net Dollar Retention Rate
Our Net Dollar Retention Rate, which we use to measure our success in retaining and growing recurring revenue from our existing customers, compares our recognized recurring revenue from a set of customers across comparable periods. We calculate our Net Dollar Retention Rate for a given period as the recognized recurring revenue from the latest reported fiscal quarter from the set of customers whose revenue existed in the reported fiscal quarter from the prior year (the numerator), divided by recognized recurring revenue from such customers for the same fiscal quarter in the prior year (denominator). For annual periods, we report Net Dollar Retention Rate as the arithmetic average of the Net Dollar Retention Rate for all fiscal quarters included in the period. We consider subdivisions of the same legal entity (for example, divisions of a parent company or separate campuses that are part of the same state university system) to be a single customer for purposes of calculating our Net Dollar Retention Rate. Our calculation of Net Dollar Retention Rate for any fiscal period includes the positive recognized recurring revenue impacts of selling new services to existing customers and the negative recognized recurring revenue impacts of contraction and attrition among this set of customers. Our Net Dollar Retention Rate may fluctuate as a result of a number of factors, including the growing level of our revenue base, the level of penetration within our customer base, expansion of products and features, and our ability to retain our customers. Our calculation of Net Dollar Retention Rate may differ from similarly titled metrics presented by other companies.
Remaining Performance Obligations
Remaining Performance Obligations represents the amount of contracted future revenue that has not yet been delivered, including both subscription and professional services revenues. Remaining Performance Obligations consists of both deferred revenue and contracted non-cancelable amounts that will be invoiced and recognized in future periods. As of September 30, 2023, our Remaining Performance Obligations was $164.0 million, which consists of both billed consideration in the amount of $59.8 million and unbilled consideration in the amount of $104.2 million that we expect to invoice and recognize in future periods. We expect to recognize 59% of our Remaining Performance Obligations as revenue over the next 12 months and the remainder thereafter, in each case, in accordance with our revenue recognition policy.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that Adjusted EBITDA, a non-GAAP financial measure, is useful in evaluating the performance of our business.
We define EBITDA as net profit (loss) before interest expense, net, provision for income taxes and depreciation and amortization expenses. Adjusted EBITDA is defined as EBITDA (as defined above), adjusted for the impact of certain non-cash and other items that we believe are not indicative of our core operating performance, such as non-cash stock-based compensation expenses, facility exit and transition costs and restructuring.
Adjusted EBITDA is a supplemental measure of our performance, is not defined by or presented in accordance with GAAP, and should not be considered in isolation or as an alternative to net profit (loss) or any other performance measure prepared in accordance with GAAP. Adjusted EBITDA is presented because we believe that it provides useful supplemental information to investors and analysts regarding our operating performance and is frequently used by these parties in evaluating companies in our industry. By presenting Adjusted EBITDA, we provide a basis for comparison of our business operations between periods by excluding items that we do not believe are indicative of our core operating performance. We believe that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Additionally, our management uses Adjusted EBITDA as a supplemental measure of our performance because it assists us in comparing the operating performance of our business on a consistent basis between periods, as described above.
Although we use EBITDA and Adjusted EBITDA, as described above, EBITDA and Adjusted EBITDA, have significant limitations as analytical tools. Some of these limitations include:
| | • | such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
| | • | such measures do not reflect changes in, or cash requirements for, our working capital needs; |
| | • | such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| | • | such measures do not reflect our tax expense or the cash requirements to pay our taxes; |
| | • | although depreciation and amortization expense and non-cash stock-based compensation expense are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and |
| | • | other companies in our industry may calculate such measures differently than we do, thereby further limiting their usefulness as comparative measures. |
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. Adjusted EBITDA includes an adjustment for non-cash stock-based compensation expenses. It is reasonable to expect that this item will occur in future periods. However, we believe this adjustment is appropriate because the amount recognized can vary significantly from period to period, does not directly relate to the ongoing operations of our business, and complicates comparisons of our internal operating results between periods and with the operating results of other companies over time. Each of the normal recurring adjustments and other adjustments described above help to provide management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. Nevertheless, because of the limitations described above, management does not view EBITDA, or Adjusted EBITDA in isolation and also uses other measures, such as revenue, operating loss, and net loss, to measure operating performance.
The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (in thousands) | |
Net loss | | $ | (10,726 | ) | | $ | (19,443 | ) | | $ | (34,299 | ) | | $ | (53,716 | ) |
Financial expenses (income), net (a) | | | (95 | ) | | | 3,002 | | | | (3,047 | ) | | | 2,945 | |
Provision for income taxes | | | 2,507 | | | | 1,589 | | | | 7,510 | | | | 5,756 | |
Depreciation and amortization | | | 1,248 | | | | 521 | | | | 3,409 | | | | 1,874 | |
EBITDA | | | (7,066 | ) | | | (14,331 | ) | | | (26,427 | ) | | | (43,141 | ) |
Non-cash stock-based compensation expense | | | 7,370 | | | | 6,099 | | | | 21,956 | | | | 17,827 | |
Facility exit and transition costs (b) | | | — | | | | 154 | | | | 154 | | | | 367 | |
Restructuring (c) | | | 5 | | | | 884 | | | | 973 | | | | 884 | |
Adjusted EBITDA | | $ | 309 | | | $ | (7,194 | ) | | $ | (3,344 | ) | | $ | (24,063 | ) |
| | (a) | The three months ended September 30, 2023 and 2022, and the nine months ended September 30, 2023, and 2022, include $789, $594, $2,400 and $1,581 respectively, of interest expenses. |
| | (b) | Facility exit and transition costs for the three months ended September 30, 2022, and the nine months ended September 30, 2023, and 2022, include losses from sale of fixed assets and other costs associated with moving to our temporary office in Israel. |
| | (c) | The three months ended September 30, 2023 and 2022, and the nine months ended September 30, 2023 and 2022 include one-time employee termination benefits incurred in connection with the 2023 Reorganization Plan and the 2022 Restructuring Plan . |
Components of Our Results of Operations
Revenue
Subscriptions
Our revenues are mainly comprised of revenue from SaaS and PaaS subscriptions. SaaS and PaaS subscriptions provide access to our Video Experience Cloud which powers all types of video experiences: live, real-time, and on-demand video. We provide access to our platform either as a cloud-based service, which represent most of our SaaS and PaaS subscriptions, or, less commonly, as a term license to software installed on the customer's premises. Revenue from SaaS and PaaS subscriptions is recognized ratably over the time of the subscription, beginning from the date on which the customer is granted access to our Video Experience Cloud. Revenue from the sale of a term license is recognized at a point in time in which the license is delivered to the customer. Revenue from post-contract services ("PCS") included in On-Prem deals is recognized ratably over the period of the PCS.
Professional Services
Our revenue also includes professional services, which consist of consulting, integration and customization services, technical solution services and training related to our video experience. In some of our arrangements, professional services are accounted for as a separate performance obligation, and revenue is recognized upon rendering of the service.
In some of our SaaS and PaaS subscriptions, we determined that the professional services are solely set up activities that do not transfer goods or services to the customer and therefore are not accounted for as a separate performance obligation and are recognized ratably over the time of the subscription.
Cost of Revenue
Cost of subscription revenue consists primarily of employee-related costs including payroll, benefits and stock-based compensation expense for operations and customer support teams, costs of cloud hosting providers and other third-party service providers, amortization of capitalized software development costs and acquired technology or licenses and allocated overhead costs.
Cost of professional services consists primarily of personnel costs of our professional services organization, including payroll, benefits, and stock-based compensation expense, allocated overhead costs and other third-party service providers.
The costs associated with providing professional services are significantly higher as a percentage of related revenue than the costs associated with delivering our subscriptions due to the labor costs of providing professional services. As such, the implementation and professional services costs relating to an arrangement with a new customer are more significant than the costs to renew an existing customer’s license and support arrangement.
Cost of revenue increased in absolute dollars from the three and nine months ended September 30, 2022 to the three and nine months ended September 30, 2023. For the three months ended September 30, 2023 and 2022, and for the nine months ended September 30, 2023 and 2022, our cost of revenue was $15,843, $14,676, $47,107 and $45,411, respectively.
Gross Margins
Gross margins have been and will continue to be affected by a variety of factors, including the average sales price of our products and services, volume growth, the mix of revenue between SaaS and PaaS subscriptions, software licenses, maintenance and support and professional services, onboarding of new media and telecom customers, hosting of major virtual events and changes in cloud infrastructure and personnel costs. In particular, the gross margins in our M&T segment have been negatively impacted due to the resources required for implementation of our TV Solution and Media Services for TV experiences, which generally exceed those of our other offerings, resulting in a longer period from initial booking to go-live and a higher proportion of professional services revenue as a percentage of overall revenue. Additionally, a higher proportion of revenue comes from customers who choose to license our offerings through private cloud and on-premise deployments, which also impacts our gross margin. In the long-term, we expect the margins for this segment to improve due to the following: expected increase in the ratio of subscription revenue to professional services with scale, improved efficiencies of both production and professional services costs, and an increase in the proportion of revenues from media customers, which generally entail simpler deployments compared to telecom customers. However, in the near and medium term, our gross margins in our M&T segment will vary from period to period based on the onboarding of new customers, as well as the timing and aggregate usage of our solutions by such customers.
For the three months ended September 30, 2023 and 2022, our gross margins were 64% (73% for subscriptions and (80)% for professional services) and 64% (74% for subscriptions and (56)% for professional services), respectively. For the nine months ended September 30, 2023 and 2022, our gross margins were 64% (73% for subscriptions and (60)% for professional services) and 64% (74% for subscriptions and (37)% for professional services), respectively.
For our EE&T segment, gross margins for the three months ended September 30, 2023 and 2022, were 73% (79% for subscription and (105)% for professional services), and 71% (78% for subscription and (88)% for professional services), respectively. For the nine months ended September 30, 2023 and 2022, our gross margins were 73% (79% for subscriptions and (73)% for professional services) and 70% (77% for subscriptions and (50)% for professional services), respectively.
For our M&T segment, gross margins for the three months ended September 30, 2023 and 2022 were 40% (55% for subscriptions and (63)% for professional services) and 47% (62% for subscriptions and (31)% for professional services), respectively. For the nine months ended September 30, 2023 and 2022, our gross margins were 40% (56% for subscription and (52)% for professional services) and 48% (64% for subscription and (26)% for professional services), respectively.
Research and Development
Our research and development expenses consist primarily of costs incurred for personnel-related expenses for our technical staff, including salaries and other direct personnel-related costs. Additional expenses include consulting and professional fees for third-party development resources and software subscriptions. We expect our research and development expenses in both absolute dollars and as a percentage of revenue to stay relatively consistent for the near term and to decrease for the medium-term, as a result of improving efficiency and productivity while further dedicating substantial resources to develop, improve, and expand the functionality of our solutions.
Sales and Marketing Expenses
Our sales and marketing expenses consist primarily of personnel related costs for our sales and marketing functions, including salaries and other direct personnel-related costs, such as sales commissions. Additional expenses include marketing program costs and amortization of acquired customer relationships intangible assets. We expect our sales and marketing expenses to stay relatively consistent both on an absolute dollar basis and as a percentage of revenue for the near and medium-term, through improving efficiency and productivity while we continue our focused investment to support our growth.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel-related costs for our executive, finance, human resources, information technology, and legal functions, including salaries and other direct personnel-related costs. We expect our general and administrative expenses to be stable near term and then decrease for the medium-term both on an absolute dollar basis and as a percentage of revenue, as a result of improved efficiency.
We allocate overhead costs such as rent, utilities, and supplies to all departments based on relative headcount to each operating expense category.
Financial Expenses (Income), Net
Financial expenses (income), net consists of interest expense accrued or paid on our indebtedness - net of interest income earned on our cash balances and marketable securities. Financial expenses, net also includes foreign exchange gains and losses and bank fees. We expect interest expenses to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates.
We expect interest income will vary in each reporting period depending on our average cash and marketable securities balances during the period and applicable interest rates.
Provision for Income Taxes
We are subject to taxes in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to current U.S. income tax. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Realization of our U.S. deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.
Results of Operations
The following tables summarize key components of our results of operations 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.
| | | Three Months Ended September 30, | | | Period-over-Period Change | | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | | | (in thousands, except percentages) | |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Enterprise, Education & Technology | | $ | 31,095 | | | $ | 30,056 | | | $ | 1,039 | | | | 3 | % | | $ | 93,583 | | | $ | 90,186 | | | $ | 3,397 | | | | 4 | % |
Media & Telecom | | | 12,447 | | | | 10,995 | | | | 1,452 | | | | 13 | % | | | 37,111 | | | | 34,559 | | | | 2,552 | | | | 7 | % |
Total revenue | | | 43,542 | | | | 41,051 | | | | 2,491 | | | | 6 | % | | | 130,694 | | | | 124,745 | | | | 5,949 | | | | 5 | % |
Cost of revenue | | | 15,843 | | | | 14,676 | | | | 1,167 | | | | 8 | % | | | 47,107 | | | | 45,411 | | | | 1,696 | | | | 4 | % |
Total gross profit | | | 27,699 | | | | 26,375 | | | | 1,324 | | | | 5 | % | | | 83,587 | | | | 79,334 | | | | 4,253 | | | | 5 | % |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development expenses | | | 12,558 | | | | 13,891 | | | | (1,333 | ) | | | (10 | )% | | | 39,663 | | | | 43,205 | | | | (3,542 | ) | | | (8 | )% |
Sales and marketing expenses | | | 11,683 | | | | 15,040 | | | | (3,357 | ) | | | (22 | )% | | | 36,489 | | | | 46,072 | | | | (9,583 | ) | | | (21 | )% |
General and administrative expenses | | | 11,767 | | | | 11,412 | | | | 355 | | | | 3 | % | | | 36,298 | | | | 34,188 | | | | 2,110 | | | | 6 | % |
Restructuring | | | 5 | | | | 884 | | | | (879 | ) | | | (99 | )% | | | 973 | | | | 884 | | | | 89 | | | | 10 | % |
Other operating expenses | | | — | | | | — | | | | — | | | | 0 | % | | | — | | | | — | | | | — | | | | 0 | % |
Total operating expenses | | | 36,013 | | | | 41,227 | | | | (5,214 | ) | | | (13 | )% | | | 113,423 | | | | 124,349 | | | | (10,926 | ) | | | (9 | )% |
Loss from operations | | | 8,314 | | | | 14,852 | | | | (6,538 | ) | | | (44 | )% | | | 29,836 | | | | 45,015 | | | | (15,179 | ) | | | (34 | )% |
Financial expenses (income), net | | | (95 | ) | | | 3,002 | | | | (3,097 | ) | | | (103 | )% | | | (3,047 | ) | | | 2,945 | | | | (5,992 | ) | | | (203 | )% |
Loss before provision for income taxes | | | 8,219 | | | | 17,854 | | | | (9,635 | ) | | | (54 | )% | | | 26,789 | | | | 47,960 | | | | (21,171 | ) | | | (44 | )% |
Provision for income taxes | | | 2,507 | | | | 1,589 | | | | 918 | | | | 58 | % | | | 7,510 | | | | 5,756 | | | | 1,754 | | | | 30 | % |
Net loss | | $ | 10,726 | | | $ | 19,443 | | | $ | (8,717 | ) | | | (45 | )% | | $ | 34,299 | | | $ | 53,716 | | | $ | (19,417 | ) | | | (36 | )% |
Segments
We manage and report operating results through two reportable segments.
| | • | Enterprise, Education & Technology (71% and 73% of revenue for the three months ended September 30, 2023 and 2022, respectively, and 72% for each of the nine months ended September 30, 2023 and 2022): Our EE&T segment represents revenues from all of our products, industry solutions for education customers, and Media Services (except for M&T customers), as well as associated professional services for those offerings. |
| | • | Media & Telecom (29% and 27% of revenue for the three months ended September 30, 2023 and 2022, respectively, and 28% for each of the nine months ended September 30, 2023 and 2022): Our M&T segment primarily represents revenues from our TV Solution and Media Services sold to media and telecom customers.
|
Comparison of the three months ended September 30, 2023 and 2022
Enterprise, Education & Technology
The following table presents our EE&T segment revenue and gross profit (loss) for the periods indicated:
| | | Three Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
Enterprise, Education & Technology revenue: | | | | | | | | | | | | |
Subscription revenue | | $ | 30,043 | | | $ | 28,676 | | | $ | 1,367 | | | | 5 | % |
Professional services revenue | | | 1,052 | | | | 1,380 | | | | (328 | ) | | | (24 | )% |
Total Enterprise, Education & Technology revenue | | $ | 31,095 | | | $ | 30,056 | | | $ | 1,039 | | | | 3 | % |
| | | | | | | | | | | | | | | | | |
Enterprise, Education & Technology gross profit (loss): | | | | | | | | | | | | | | | | |
Subscription gross profit | | $ | 23,866 | | | $ | 22,438 | | | $ | 1,428 | | | | 6 | % |
Professional services gross profit (loss) | | | (1,104 | ) | | | (1,220 | ) | | | 116 | | | | (10 | )% |
Total Enterprise, Education & Technology gross profit | | $ | 22,762 | | | $ | 21,218 | | | $ | 1,544 | | | | 7 | % |
Enterprise, Education & Technology Revenue
Total EE&T revenue increased by $1.0 million, or 3%, to $31.1 million for the three months ended September 30, 2023, from $30.1 million for the three months ended September 30, 2022. The increase is mainly due to a $1.8 million increase in revenue from new customers, partially offset by an $0.8 million decrease in revenue from existing customers.
EE&T subscription revenue increased by $1.4 million, or 5%, to $30.0 million for the three months ended September 30, 2023, from $28.7 million for the three months ended September 30, 2022.
EE&T professional services revenue decreased by $0.3 million, or 24%, to $1.1 million for the three months ended September 30, 2023, from $1.4 million for the three months ended September 30, 2022. The decrease is mainly due to fewer large-scale virtual events of the type that typically require substantial professional services.
Enterprise, Education & Technology Gross Profit
EE&T gross profit increased by $1.5 million, or 7%, to $22.8 million for the three months ended September 30, 2023, from $21.2 million for the three months ended September 30, 2022. This increase was mainly due to a $1.0 million increase in revenue and decreased compensation costs as a result of lower headcount, offset by increased production costs associated mainly with subscription cloud costs, leading to a 2 percentage point increase in gross margin to 73% for the three months ended September 30, 2023 from 71% for the three months ended September 30, 2022.
EE&T subscription gross profit increased by $1.4 million, or 6%, to $23.9 million for the three months ended September 30, 2023, from $22.4 million for the three months ended September 30, 2022. The increase was mainly from the increase in subscription revenue and lower compensation costs, partially offset by an increase in production costs.
EE&T professional services gross loss decreased by $0.1 million, or 10%, to a gross loss of $1.1 million for the three months ended September 30, 2023, from a gross loss of $1.2 million for the three months ended September 30, 2022. This decrease is mainly attributable to a $0.4 million decrease in professional services costs (mainly compensation costs), partially offset by a $0.3 million decrease in revenue.
Media & Telecom
The following table presents our M&T segment revenue and gross profit for the periods indicated:
| | | Three Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
Media & Telecom revenue: | | | | | | | | | | | | |
Subscription revenue | | $ | 10,804 | | | $ | 9,239 | | | $ | 1,565 | | | | 17 | % |
Professional services revenue | | | 1,643 | | | | 1,756 | | | | (113 | ) | | | (6 | )% |
Total Media & Telecom revenue | | $ | 12,447 | | | $ | 10,995 | | | $ | 1,452 | | | | 13 | % |
| | | | | | | | | | | | | | | | | |
Media & Telecom gross profit (loss): | | | | | | | | | | | | | | | | |
Subscription gross profit | | $ | 5,977 | | | $ | 5,705 | | | $ | 272 | | | | 5 | % |
Professional services gross profit (loss) | | | (1,040 | ) | | | (548 | ) | | | (492 | ) | | | 90 | % |
Total Media & Telecom gross profit (loss) | | $ | 4,937 | | | $ | 5,157 | | | $ | (220 | ) | | | (4 | )% |
Media & Telecom Revenue
M&T revenue increased by $1.5 million, or 13%, to $12.4 million for the three months ended September 30, 2023, from $11.0 million for the three months ended September 30, 2022. The increase is mainly attributable to a $0.5 million increase in revenue from existing customers, and an additional $0.9 million increase in revenue from new customers.
M&T subscription revenue increased by $1.6 million, or 17%, to $10.8 million for the three months ended September 30, 2023, from $9.2 million for the three months ended September 30, 2022.
M&T professional services revenue decreased by $0.1 million, or 6%, to $1.6 million for the three months ended September 30, 2023, from $1.8 million for the three months ended September 30, 2022.
Media & Telecom Gross Profit
M&T gross profit decreased by $0.2 million, or 4%, to $4.9 million for the three months ended September 30, 2023, from $5.2 million for the three months ended September 30, 2022. This decrease was mainly due to a 7 percentage point decrease in gross margin to 40% for the three months ended September 30, 2023 from 47% for the three months ended September 30, 2022, partially offset by a $1.5 million increase in revenue. The decrease in gross margin was attributable primarily to higher production costs as a percentage of subscription revenue and depreciation of an internal use software.
M&T subscription gross profit increased by $0.3 million, or 5%, to $6.0 million for the three months ended September 30, 2023, from $5.7 million for the three months ended September 30, 2022.
M&T professional services gross loss increased by $0.5 million, or 90%, to a gross loss of $1.0 million for the three months ended September 30, 2023, from a gross loss of $0.5 million for the three months ended September 30, 2022.
Operating Expenses
Research and Development expenses
| | | Three Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
Employee compensation | | $ | 8,440 | | | $ | 10,595 | | | $ | (2,155 | ) | | | (20 | )% |
Subcontractors and consultants | | | 1,832 | | | | 1,290 | | | | 542 | | | | 42 | % |
IT related | | | 1,406 | | | | 1,238 | | | | 168 | | | | 14 | % |
Other | | | 880 | | | | 768 | | | | 112 | | | | 15 | % |
Total research and development expenses | | $ | 12,558 | | | $ | 13,891 | | | $ | (1,333 | ) | | | (10 | )% |
Research and development expenses decreased by $1.3 million, or 10%, to $12.6 million for the three months ended September 30, 2023, from $13.9 million for the three months ended September 30, 2022. The decrease was primarily due to a $2.2 million decrease in compensation expenses, which mainly related to lower headcount as a result of our Reorganization Plans.
Sales and Marketing expenses
| | | Three Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
Employee compensation & commission | | $ | 9,380 | | | $ | 12,517 | | | $ | (3,137 | ) | | | (25 | )% |
Marketing expenses | | | 947 | | | | 1,344 | | | | (397 | ) | | | (30 | )% |
Travel and entertainment | | | 391 | | | | 366 | | | | 25 | | | | 7 | % |
Other | | | 965 | | | | 813 | | | | 152 | | | | 19 | % |
Total sales and marketing expenses | | $ | 11,683 | | | $ | 15,040 | | | $ | (3,357 | ) | | | (22 | )% |
Sales and marketing expenses decreased by $3.4 million, or 22%, to $11.7 million for the three months ended September 30, 2023, from $15.0 million for the three months ended September 30, 2022. The decrease was primarily due to a $3.2 million decrease in compensation related to lower headcount as result of our Reorganization Plans.
General and Administrative expenses
| | | Three Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
Employee compensation | | $ | 8,677 | | | $ | 7,757 | | | $ | 920 | | | | 12 | % |
Professional fees and insurance | | | 980 | | | | 1,488 | | | | (508 | ) | | | (34 | )% |
Subcontractors and consultants | | | 225 | | | | 362 | | | | (137 | ) | | | (38 | )% |
Travel and entertainment | | | 222 | | | | 102 | | | | 120 | | | | 118 | % |
Other | | | 1,663 | | | | 1,703 | | | | (40 | ) | | | (2 | )% |
Total general and administrative expenses | | $ | 11,767 | | | $ | 11,412 | | | $ | 355 | | | | 3 | % |
General and administrative expenses increased by $0.4 million, or 3%, to $11.8 million for the three months ended September 30, 2023, from $11.4 million for the three months ended September 30, 2022. The increase was primarily due to a $0.9 million increase in compensation costs related to increased stock-based compensation expenses due to recent equity grants made to our executives, partially offset by a $0.5 million decrease in professional fees and insurance expenses.
Restructuring
Restructuring expenses were immaterial for the three months ended September 30, 2023, due to the 2023 Reorganization Plan being implemented in the first quarter of 2023, and primarily consisted of employee severance and related costs.
Financial Income, net
Financial Income, net increased by $3.1 million, to $0.1 million for the three months ended September 30, 2023, from $3.0 million loss for the three months ended September 30, 2022. The increase was primarily due to $3.0 million related to exchange rate differences between the periods.
Provision for Income Taxes
Provision for income taxes increased by $0.9 million, or 58%, to $2.5 million for the three months ended September 30, 2023, from $1.6 million for the three months ended September 30, 2022, primarily due to increased tax liability related to income generated by our subsidiaries organized under the laws of Israel and UK.
Comparison of the nine months ended September 30, 2023 and 2022
Enterprise, Education & Technology
The following table presents our EE&T segment revenue and gross profit (loss) for the periods indicated:
| | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
| | | | | | | | | | | | | |
Enterprise, Education & Technology revenue: | | | | | | | | | | | | |
Subscription revenue | | $ | 90,175 | | | $ | 84,558 | | | $ | 5,617 | | | | 7 | % |
Professional services revenue | | | 3,408 | | | | 5,628 | | | | (2,220 | ) | | | (39 | )% |
Total Enterprise, Education & Technology revenue | | | 93,583 | | | | 90,186 | | | | 3,397 | | | | 4 | % |
| | | | | | | | | | | | | | | | | |
Enterprise, Education & Technology gross profit: | | | | | | | | | | | | | | | | |
Subscription gross profit | | | 71,105 | | | | 65,473 | | | | 5,632 | | | | 9 | % |
Professional services gross profit (loss) | | | (2,480 | ) | | | (2,788 | ) | | | 308 | | | | (11 | )% |
Total Enterprise, Education & Technology gross profit | | $ | 68,625 | | | $ | 62,685 | | | $ | 5,940 | | | | 9 | % |
Enterprise, Education & Technology Revenue
Total EE&T revenue increased by $3.4 million, or 4%, to $93.6 million for the nine months ended September 30, 2023, from $90.2 million for the nine months ended September 30, 2022. The increase is mainly attributable to a $3.5 million increase in revenue from new customers partially offset by a $0.1 million decrease in revenue from existing customers.
EE&T subscription revenue increased by $5.6 million, or 7%, to $90.2 million for the nine months ended September 30, 2023, from $84.6 million for the nine months ended September 30, 2022.
EE&T professional services revenue decreased by $2.2 million, or 39%, to $3.4 million for the nine months ended September 30, 2023 from $5.6 million for the nine months ended September 30, 2022. The decrease is mainly due to fewer large-scale virtual events of the type that typically require substantial professional services.
Enterprise, Education & Technology Gross Profit
EE&T gross profit increased by $5.9 million, or 9%, to $68.6 million for the nine months ended September 30, 2023, from $62.7 million for the nine months ended September 30, 2022. This increase was mainly due to a $3.4 million increase in revenue and an increase in the gross margin by 3 percentage points to 73% in the nine months ended September 30,2023 from 70% in the nine months ended September 30,2023 mainly due to higher efficiency in production and lower compensation costs as a result of our cost reduction measures.
EE&T subscription gross profit increased by $5.6 million, or 9%, to $71.1 million for the nine months ended September 30, 2023, from $65.5 million for the nine months ended September 30, 2022.
EE&T professional services gross loss decreased by $0.3 million, or 11%, to a gross loss of $2.5 million for the nine months ended September 30, 2023, from a gross loss of $2.8 million for the nine months ended September 30, 2022.
Media & Telecom
The following table presents our M&T segment revenue and gross profit for the periods indicated:
| | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
| | | | | | | | | | | | | |
Media & Telecom revenue: | | | | | | | | | | | | |
Subscription revenue | | $ | 31,787 | | | $ | 28,346 | | | $ | 3,441 | | | | 12 | % |
Professional services revenue | | | 5,324 | | | | 6,213 | | | | (889 | ) | | | (14 | )% |
Total Media & Telecom revenue | | $ | 37,111 | | | $ | 34,559 | | | $ | 2,552 | | | | 7 | % |
| | | | | | | | | | | | | | | | | |
Media & Telecom gross profit: | | | | | | | | | | | | | | | | |
Subscription gross profit | | $ | 17,751 | | | $ | 18,239 | | | $ | (488 | ) | | | (3 | )% |
Professional services gross loss | | | (2,789 | ) | | | (1,590 | ) | | | (1,199 | ) | | | 75 | % |
Total Media & Telecom gross profit | | $ | 14,962 | | | $ | 16,649 | | | $ | (1,687 | ) | | | (10 | )% |
Media & Telecom Revenue
M&T revenue increased by $2.6 million, or 7%, to $37.1 million for the nine months ended September 30, 2023, from $34.6 million for the nine months ended September 30, 2022. The increase is mainly attributable to revenue from existing customers.
M&T subscription revenue increased by $3.4 million, or 12%, to $31.8 million for the nine months ended September 30, 2023, from $28.3 million for the nine months ended September 30, 2022.
M&T professional services revenue decreased by $0.9 million, or 14%, to $5.3 million for the nine months ended September 30, 2023, from $6.2 million for the nine months ended September 30, 2022.
Media & Telecom Gross Profit
M&T gross profit decreased by $1.7 million, or 10%, to $15.0 million for the nine months ended September 30, 2023, from $16.6 million for the nine months ended September 30, 2022. This decrease was mainly due to a decrease in gross margin to 40% for the nine months ended September 30, 2023 from 48% for the nine months ended September 30, 2023. The decrease in gross margin was attributable primarily to an increase in production cost as a percentage of subscription revenue partially offset by a $2.6 million increase in revenue.
M&T subscription gross profit decreased by $0.5 million, or 3%, to $17.8 million for the nine months ended September 30, 2023, from $18.2 million for the nine months ended September 30, 2022.
M&T professional services gross loss increased by $1.2 million, or 75%, to $2.8 million for the nine months ended September 30, 2023, from $1.6 million for the nine months ended September 30, 2022.
Operating Expenses
Research and Development expenses
| | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
| | | | | | | | | | | | | |
Employee compensation | | $ | 27,791 | | | $ | 33,236 | | | $ | (5,445 | ) | | | (16 | )% |
Subcontractors and consultants | | | 4,815 | | | | 3,805 | | | | 1,010 | | | | 27 | % |
IT related | | | 4,519 | | | | 3,913 | | | | 606 | | | | 15 | % |
Other | | | 2,538 | | | | 2,251 | | | | 287 | | | | 13 | % |
Total research and development expenses | | $ | 39,663 | | | $ | 43,205 | | | $ | (3,542 | ) | | | (8 | )% |
Research and development expenses decreased by $3.5 million, or 8%, to $39.7 million for the nine months ended September 30, 2023, from $43.2 million for the nine months ended September 30, 2022. The decrease was primarily due to a $5.4 million decrease in compensation expenses, which mainly related to lower headcount as a result of our Reorganization Plans .
Sales and Marketing expenses
| | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
| | | | | | | | | | | | | |
Employee compensation & commission | | $ | 29,515 | | | $ | 37,783 | | | $ | (8,268 | ) | | | (22 | )% |
Marketing expenses | | | 3,007 | | | | 4,113 | | | | (1,106 | ) | | | (27 | )% |
Travel and entertainment | | | 1,226 | | | | 718 | | | | 508 | | | | 71 | % |
Other | | | 2,741 | | | | 3,458 | | | | (717 | ) | | | (21 | )% |
Total sales and marketing expenses | | $ | 36,489 | | | $ | 46,072 | | | $ | (9,583 | ) | | | (21 | )% |
Sales and marketing expenses decreased by $9.6 million, or 21%, to $36.5 million for the nine months ended September 30, 2023, from $46.1 million for the nine months ended September 30, 2022. The decrease was primarily due to a $8.9 million decrease in compensation which mainly related to lower headcount as a result of our Reorganization Plans, and a $1.1 million decrease in marketing related expenses.
General and Administrative expenses
| | | Nine Months Ended September 30, | | | Period-over-Period Change | |
| | | 2023 | | | 2022 | | | Dollar | | | Percentage | |
| | | (in thousands, except percentages) | |
| | | | | | | | | | | | | |
Employee compensation | | $ | 26,590 | | | $ | 23,628 | | | $ | 2,962 | | | | 13 | % |
Professional fees and insurance | | | 3,558 | | | | 4,777 | | | | (1,219 | ) | | | (26 | )% |
Subcontractors and consultants | | | 847 | | | | 932 | | | | (85 | ) | | | (9 | )% |
Travel and entertainment | | | 649 | | | | 303 | | | | 346 | | | | 114 | % |
Gain on sale of property and equipment | | | — | | | | — | | | | — | | | | * | |
Other | | | 4,654 | | | | 4,548 | | | | 106 | | | | 2 | % |
Total general and administrative expenses | | $ | 36,298 | | | $ | 34,188 | | | $ | 2,110 | | | | 6 | % |
General and administrative expenses increased by $2.1 million, or 6%, to $36.3 million for the nine months ended September 30, 2023, from $34.2 million for the nine months ended September 30, 2022. The increase was primarily due to a $3.0 million increase in stock-based compensation expenses due to recent equity grants made to our executives, partially offset by a $1.2 million decrease in professional fees and insurance expenses.
Restructuring
Restructuring expenses were $0.9 million for the nine months ended September 30, 2023 due to the 2023 Reorganization Plan being implemented in the third quarter of 2023 and primarily consisted of employee severance and related costs.
Financial Income, net
Financial income, net increased by $6.0 million to $3.0 million for the nine months ended September 30, 2023, from $2.9 million loss for the nine months ended September 30, 2022. The increase was primarily due to $1.3 million interest income and $4.4 million income related to exchange rate differences.
Provision for Income Taxes
Provision for income taxes increased by $1.8 million, or 30%, to $7.5 million for the nine months ended September 30, 2023, from $5.8 million for the nine months ended September 30, 2022, primarily due to increased tax liability related to income generated by our subsidiaries organized under the laws of Israel and the United Kingdom.
Liquidity and Capital Resources
Overview
Since our inception, we have financed our operations primarily through net cash provided by operating activities, equity issuances, and borrowings under our long-term debt arrangements. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. Our principal sources of liquidity are expected to be our cash on hand and borrowings available under our Revolving Credit Facility (as defined below). During December 2021, we repaid in full the outstanding principal balance under our Revolving Credit Facility. Therefore, as of September 30, 2023, we had no balance outstanding under the Revolving Credit Facility and the total revolving commitment of $35.0 million is available for future borrowings.
We believe that our net cash provided by operating activities, cash on hand, and availability under our Revolving Credit Facility will be adequate to meet our operating, investing, and financing needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth, the timing and extent of investments to support such growth, the expansion of sales and marketing activities, increases in general and administrative costs and many other factors as described under Part I, Item 1A. “Risk Factors” of our 2022 10-K, Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q and “—Key Factors Affecting Our Performance.” In addition, our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.
If necessary, we may borrow funds under our Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. In particular, the widespread pandemic related to COVID-19 and its variants, the ongoing conflict between Russia and Ukraine and rising inflation and interest rates have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. Our ability to access capital may also be impacted by political, economic, and military conditions in Israel, including the current security situation or any escalation of conflicts with Israel, and in other regions in which we operate, or changes in the business environment in those regions. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected.
Credit Facilities
In January 2021, we entered into a new credit agreement (as amended, the “Credit Agreement”) with one of our existing lenders, which provides for a new senior secured term loan facility in the aggregate principal amount of $40.0 million (the “Term Loan Facility”) and a new senior secured revolving credit facility in the aggregate principal amount of $10.0 million (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”). In June 2021, we entered into an amendment to the Credit Agreement to, among other things, increase commitments under the Revolving Credit Facility to $35.0 million, and make certain other changes to certain covenants and definitions. In May 2023, we entered into an amendment to the Credit Agreement (the “Fourth Amendment”) to replace the London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”) as the benchmark rate under the Credit Agreement. The amount available for borrowing under the Revolving Credit Facility is limited to a borrowing base, which is equal to the product of (a) 800% (which will automatically reduce to 350% on the date the Term Loan Facility is repaid in full), multiplied by (b) monthly Recurring Revenue for the most recently ended monthly period, multiplied by (c) the Retention Rate (in each case, as defined in the Credit Agreement). The Revolving Credit Facility includes a sub-facility for letters of credit in the aggregate availability amount of $10.0 million and a swingline sub-facility in the aggregate availability amount of $5.0 million, each of which reduces borrowing availability under the Revolving Credit Facility.
Borrowings under the Credit Facilities bear interest, determined as follows: (a) Term SOFR Borrowing accrue interest at a rate per annum equal to the Adjusted Term SOFR (as defined in the Credit Agreement) for the Interest Period therefor plus margin of 3.50% (the Adjusted Term SOFR (as defined in the Credit Agreement) is subject to a 1.00% floor), and each Daily Simple SOFR Borrowing shall accrue interest at a rate per annum equal to Adjusted Daily Simple SOFR (as defined in the Credit Agreement, including an adjustment of 0.10% per annum) plus the Applicable Margin of 3.5%; and (b) ABR loans accrue interest at a rate per annum equal to the ABR plus a margin of 2.50% (ABR is equal to the highest of (i) the prime rate and (ii) the Federal Funds Effective Rate plus 0.50%, subject to a 2.00% floor). As of September 30, 2023, the current rate of interest under the Credit Facilities was equal to a rate per annum of 8.92%, consisting of 5.32% (the 3-month SOFR rate as of September 30, 2023), 0.10% credit spread adjustment and the margin of 3.50%.
We are required to prepay amounts outstanding under the Term Loan Facility with 100% of the net cash proceeds of any indebtedness incurred by us or any of our subsidiaries other than certain permitted indebtedness. In addition, we are required to prepay amounts outstanding under the Credit Facilities with the net cash proceeds of any Asset Sale or Recovery Event (each as defined in the Credit Agreement), subject to certain limited reinvestment rights.
Amounts outstanding under the Credit Facilities may be voluntarily prepaid at any time and from time to time, in whole or in part, without premium or penalty. All voluntary prepayments (other than ABR loans borrowed under the Revolving Credit Facility) must be accompanied by accrued and unpaid interest on the principal amount being prepaid and customary “breakage” costs, if any, with respect to prepayments of Eurodollar loans.
The Term Loan Facility is payable in consecutive quarterly installments on the last day of each fiscal quarter in an amount equal to (x) $250,000 for installments payable on March 31, 2021 through December 31, 2021, (y) $750,000 for installments payable on March 31, 2022 through December 31, 2022, and (z) $1.5 million for installments payable on and after March 31, 2023. The remaining unpaid balance on the Term Loan Facility is due and payable on January 14, 2024, together with accrued and unpaid interest on the principal amount to be paid to, but excluding, the payment date. Borrowings under the Revolving Credit Facility do not amortize and are due and payable on January 14, 2024. The Company currently expects to amend the Credit Agreement to, among other things, extend the term of the Credit Facilities.
Our obligations under the Credit Facilities are currently guaranteed by Kaltura Europe Limited, and are required to be guaranteed by all of our future direct and indirect subsidiaries other than certain excluded subsidiaries and immaterial foreign subsidiaries. Our obligations and those of Kaltura Europe Limited are, and the obligations of any future guarantors are required to be, secured by a first priority lien on substantially all of our respective assets.
The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability, and the ability of our subsidiaries, to:
| | • | create, issue, incur, assume, become liable in respect of or suffer to exist any debt or liens; |
| | • | consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve, or dispose of all or substantially all of our or their respective property or business; |
| | • | dispose of property or, in the case of our subsidiaries, issue or sell any shares of such subsidiary’s capital stock; |
| | • | repay, prepay, redeem, purchase, retire or defease subordinated debt; |
| | • | declare or pay dividends or make certain other restricted payments; |
| | • | make certain investments; |
| | • | enter into transactions with affiliates; |
| | • | enter into new lines of business; and |
| | • | make certain amendments to our or their respective organizational documents or certain material contracts. |
The Credit Agreement also contains certain financial covenants that require us to maintain (i) a minimum amount of Annualized Recurring Revenue (as defined in the Credit Agreement) as of the last day of each fiscal quarter (which minimum amount increases through the fiscal quarter ending December 31, 2023) (the “ARR Covenant”), and (ii) Liquidity (as defined in the Credit Agreement) of at least $10 million as of the last day of any calendar month. We were in compliance with these covenants as of September 30, 2023.
The Credit Agreement also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations. In addition, the lenders under the Credit Facilities will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain judgments and Change of Control events. “Change of Control” is defined as (a) any “person” or “group” (as defined in Sections 13(d) and 14(d) of the Exchange Act) becoming the beneficial owner of 40% or more of the ordinary voting power for the election of our directors, (b) during any 24-month period, a majority of the members of our board of directors ceasing to be composed of individuals (i) who were members thereof on the first day of such period, (ii) whose election or nomination thereto was approved by individuals referred to in the foregoing clause constituting at least a majority of such board, or (iii) whose election or nomination thereto was approved by individuals referred to in the foregoing clauses (i) and (ii) constituting at least a majority of such board; or (c) at any time, if we cease to own and control 100% of each class of outstanding capital stock of each guarantor free and clear of all liens (other than certain permitted liens).
In December 2021, we repaid in full the outstanding principal balance under our Revolving Credit Facility. As of September 30, 2023, we had no balance outstanding under the Revolving Credit Facility and the total revolving commitment of $35.0 million remains available for future borrowings. As of September 30, 2023, we had approximately $31.5 million million of borrowing under the Term Loan Facility.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| | | Nine Months Ended September 30, | |
| | | 2023 | | | 2022 | |
| | | (in thousands) | |
| | | | | | | |
Net cash used in operating activities | | | (9,904 | ) | | $ | (40,982 | ) |
Net cash provided by (used in) investing activities | | | 1,081 | | | $ | (49,204 | ) |
Net cash used in financing activities | | | (3,276 | ) | | | (65 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 439 | | | | — | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | | (11,660 | ) | | | (90,251 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | | 45,833 | | | | 144,371 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 34,173 | | | $ | 54,120 | |
Operating Activities
Net cash flows used in operating activities decreased by $31.1 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Net cash used in operating activities of $9.9 million for nine months ended September 30, 2023, was primarily due to $34.3 million incremental net loss, adjusted for non-cash charges of $33.0 million, and net cash outflows of $8.6 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $3.4 million, stock-based compensation expenses of $22.0 million and amortization of deferred contract acquisitions and fulfillment costs of $8.8 million. The main drivers of net cash outflows were derived from the changes in operating assets and liabilities and were related to a decrease of trade payable of $5.6 million, an increase of deferred contract acquisition and fulfillment cost of $4.9 million, an aggregate decrease in employees accruals, and accrued expenses and other liabilities of $2.4 million and a decrease in deferred revenue of $1.3 million, partially offset by a decrease of receivables of $6.9 million
Net cash used in operating activities of $41.0 million for nine months ended September 30, 2022, was primarily due to $53.7 million incremental net loss, adjusted for non-cash charges of $27.5 million, and net cash outflows of $15.0 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $1.9 million, stock-based compensation expenses of $17.8 million and amortization of deferred contract acquisitions and fulfillment costs of $7.9 million. The main drivers of net cash outflows were derived from the changes in operating assets and liabilities and were related to an increase of trade receivables of $5.8 million, increase of deferred contract acquisition and fulfillment cost of $8.7 million, an aggregate decrease in employees accruals, and accrued expenses and other liabilities of $5.8 million and an increase of $0.7 million in prepaid expenses and other current assets and other assets, noncurrent, partially offset by a increase in deferred revenue of $6.1 million.
Investing Activities
Net cash flows provided by investing activities increased by $50.3 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Net cash provided by investing activities of $1.1 million for the nine months ended September 30, 2023 was related to $39.0 million sales and maturities of available-for-sale marketable securities, partially offset by $1.5 million of capitalized internal use software, investment in available-for-sale marketable securities of $33.6 million, investment in bank deposit of $1.0 million and $1.8 million of capital expenditure.
Net cash used in investing activities of $49.2 million for the nine months ended September 30, 2022 was related to $4.6 million of capitalized internal use software, investment in available-for-sale marketable securities of $47.4 million, investment in bank deposit of $1.9 million and $1.0 million of capital expenditure, partially offset by sales and maturities of available-for-sale marketable securities of $5.7 million.
Financing Activities
Net cash flows used in financing activities increased by $3.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Net cash used in financing activities of $3.3 million for the nine months ended September 30, 2023 was primarily due to repayment of long-term loans of $4.5 million, offset by $1.2 million due to proceeds from the exercise of stock options.
Net cash used in financing activities of $0.1 million for the nine months ended September 30, 2022, was primarily due to repayment of long-term loans of $2.3 million, repayment of finance lease liabilities of $0.1 million, and payment of debt issuance costs of $0.1 million, offset by $2.4 million due to proceeds from the exercise of stock options.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating and finance leases, purchase obligations with third-party providers for the use of cloud hosting and other services and outstanding debt. There were no material changes to our commitments and contractual obligations during the nine months ended September 30, 2023 from the commitments and contractual obligations disclosed in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of our 2022 10-K other than the changes in our purchase commitments to third party providers of cloud services reflected in Note 8 of the notes to our unaudited condensed consolidated financial statements included in Pat 1, Item 1 of this Quarterly Report in Form 10-Q. For further information on our commitments and contractual obligations, refer also to Note 7 and Note 14 of the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, including the anticipated impact of COVID-19, macroeconomic uncertainty, and the political, economic, and military conditions in the regions in which we operate, rising interest rates and inflation, and other macro- and microeconomic trends. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods.
Our critical accounting policies and estimates were disclosed in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of our 2022 10-K. There have been no significant changes to these policies and estimates during the nine months ended September 30, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in exchange rates, interest rates and inflation. All of these market risks arise in the ordinary course of business, as we do not engage in speculative trading activities. The following analysis provides additional information regarding these risks.
Foreign Currency and Exchange Risk
Our revenue and expenses are primarily denominated in U.S. dollars. Our functional currency is the U.S. dollar. Our sales are mainly denominated in U.S. dollars and Euros. A significant portion of our operating costs are in Israel, consisting principally of salaries and related personnel expenses, and facility expenses, which are denominated in NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS and Euros. Furthermore, we anticipate that a significant portion of our expenses will continue to be denominated in NIS.
To reduce the impact of foreign currency exchange risks associated with forecasted future cash flows and certain existing assets and liabilities and the volatility in our consolidated statements of operations, we established a hedging program. Currently, our hedging activity relates to U.S. dollar/NIS exchange rate exposure. We do not intend to enter into derivative instruments for trading or speculative purposes. We account for our derivative instruments as either assets or liabilities and carry them at fair value in the condensed consolidated balance sheets. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. Our hedging activities are expected to reduce but not eliminate the impact of currency exchange rate movements.
A hypothetical 10% change in foreign currency exchange rates applicable to our business would have had an impact on our results for the nine months ended September 30, 2023, of $1.9 million due to NIS (after considering cash-flow hedges) and $3.5 million due to Euros.
Interest Rate Risk
As of September 30, 2023, we had outstanding floating rate debt obligations of $31.5 million (consisting of the outstanding principal balance under our credit facilities). Accordingly, fluctuations in market interest rates may increase or decrease our interest expense which will, in turn, increase or decrease our net income and cash flow. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. At this time, we do not use derivative instruments to mitigate our interest rate risk. A hypothetical 10% change in interest rates during the periods presented would not have a material impact on our results for the nine months ended September 30, 2023.
Impact of Inflation
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we do not believe inflation has had a material effect on our historical results of operations and financial condition. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset higher costs through price increases or other corrective measures, and our inability or failure to do so could adversely affect our business, financial condition, and results of operations.
Item 4. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.
Item 1A. Risk Factors.
A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, "Risk Factors" of our 2022 10-K. Except as set forth below, there have been no material changes from the risk factors previously disclosed in our 2022 10-K.
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new offerings could reduce our ability to compete and could adversely affect our business.
Historically, we have funded our operations and capital expenditures primarily through net cash provided by operating activities, equity issuances and borrowings under our long-term debt arrangements. Although we currently anticipate that our net cash provided by operating activities, cash on hand and availability under our Revolving Credit Facility will be adequate to meet our operating, investing, and financing needs for at least the next twelve months, we may require additional financing. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance, the condition of the capital markets as well as in part on the stability in Israel and the other geographic regions where we are located or operate, at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. Moreover, due to the worsening economic climate and increased inflation and interest rates, the net cash derived from our operations may be reduced while the availability of new financing may be limited, costly or unavailable. If we raise additional funds through the issuance of equity or equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our stockholders may experience dilution.
We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
| | • | develop or enhance our platform, products, or solutions or introduce or adapt new technologies; |
| | | |
| | • | continue to expand our research and development and sales and marketing organizations; |
| | | |
| | • | acquire complementary technologies, products, or businesses; |
| | | |
| | • | expand operations in the United States or internationally; |
| | | |
| | • | hire, train, and retain employees; or |
| | | |
| | • | respond to competitive pressures or unanticipated working capital requirements. |
Our failure to have sufficient capital to do any of these things could adversely affect our business, financial condition and results of operations, and our ability to execute our growth strategy.
We may face risks associated with our use of certain artificial intelligence and machine learning models
Our business utilizes artificial intelligence and machine learning technologies some of which are offered by third parties, to add AI-based applications to our offering and to drive efficiencies in our business. As with many technological innovations, artificial intelligence presents risks and challenges that could affect its adoption, and therefore our business. Our offerings utilize, and we plan to further examine, develop and introduce, machine learning algorithms, predictive analytics, and other artificial intelligence technologies to offer new applications, upgrade our solutions and enhance our capabilities, among other things, to identify trends, anomalies and correlations, provide alerts and initiate business processes. If these artificial intelligence or machine learning models are incorrectly designed, the performance of our products, services, and business, as well as our reputation, could suffer or we could incur liability through the violation of laws or contracts to which we are a party.
Additionally, we are making, and plan to make in the future, significant investments in adopting artificial intelligence and machine learning technologies across our business, including introducing generative AI capabilities both within the product layer and at the platform level across the platform’s application programming interfaces. Artificial intelligence and machine learning technologies are complex and rapidly evolving, and we face significant competition from other companies in our industry as well as an evolving regulatory landscape. These efforts, including the introduction of new products or changes to existing products, may result in new or enhanced governmental or regulatory scrutiny, litigation, ethical concerns, or other complications that could adversely affect our business, reputation, or financial results. Changes to existing regulations, their interpretation or implementation or new regulations could impede our use of artificial intelligence and machine learning technology and also may increase our estimated costs in this area. In addition, market acceptance of artificial intelligence and machine learning technologies is uncertain, and we may be unsuccessful in our product development efforts.Further, developers or artificial intelligence technologies may enter into agreements with labor guilds or content owners that require additional payments be made for use of the likeness of individuals, or the content of IP owners, to train AI models. Such agreements may result in increased costs to our development and use of artificial intelligence technologies. Any of these factors could adversely affect our business, financial condition, and results of operations.
Political, economic, and military conditions in Israel could materially and adversely affect our business.
We have offices near Tel Aviv, Israel where our primary research and development, human resources, and certain other finance and administrative activities are based. In addition, a number of our officers and directors, as well as our co-founders, are residents of Israel. As of September 30, 2023, we had 351 full-time employees in Israel. Accordingly, political, economic, and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as terrorist acts committed within Israel by hostile elements. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip and proxies thereof in the West Bank, with Hezbollah, an Islamist terrorist group that controls large portions of southern Lebanon, and with Iranian-backed military forces in Syria. Recently, an attack on October 7, 2023 by Hamas on Israeli civilians, supported by further military activities of Hezbollah from Lebanon, led the government of Israel to declare war on Hamas and to initiate ground operations and other military efforts in Gaza.
In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Some of these hostilities were accompanied by missiles being fired and attacks launched against civilian targets in various parts of Israel, including areas in which our employees, and some of our consultants are located, and negatively affected business conditions in Israel. Any hostilities, armed conflicts, terrorist activities involving Israel, including the current conflict with Hamas, or the interruption or curtailment of trade between Israel and its trading partners, or any significant political instability in the region could adversely affect business conditions and our results of operations and could make it more difficult for us to raise capital. Specifically, our operations could be disrupted by the obligations of our personnel to perform military service. Many of our employees based in Israel have been called upon to perform military reserve duty as a result of the current conflict with Hamas and, in emergency circumstances, may be called to immediate and unlimited active duty. As a result, the current security situation in Israel has at times limited our employees’ availability or connectivity, and our employees could face risk of injury or loss of life. Our operations may therefore be disrupted by the absence or reduced productivity or availability of a significant number of employees, which could materially adversely affect our business and results of operations. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Continued hostilities between Israel and its neighbors, including the current conflicts with Hamas and Hezbollah, or any future armed conflict, terrorist activity or political instability in the region could adversely affect our operations in Israel and adversely affect the market price of our common stock. An escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and our business.
Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could adversely affect our results of operations.
Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition, or the expansion of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact our business.
In the past months, the Israeli government has pursued extensive changes to Israel’s judicial system, which efforts have since been paused due to the current security situation in Israel. In response to the foregoing developments, individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or transact business in Israel as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets, and other changes in macroeconomic conditions. If the Israeli government renews its pursuit of changes to Israel's judicial system, then such changes, could adversely affect our ability to access capital or to attract and retain highly skilled personnel. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors.
We depend on our management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously and adversely affect our business, financial condition, and results of operations. Although we have entered into employment offer letters with our key personnel, their employment is for no specific duration and constitutes at-will employment. We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of our products.
Our future performance also depends on the continued services and continuing contributions of our senior management team, which includes Ron Yekutiel, our co-founder and Chief Executive Officer, to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of our senior management team, particularly our Chief Executive Officer, could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition, and results of operations.
Additionally, the industry in which we operate is generally characterized by significant competition for skilled personnel, as well as high employee attrition. There is a shortage in personnel with the relevant know-how and experience for the development of our Video Products and Media Services, particularly for DevOps, engineering, research and development, sales, and support positions, and we may not be successful in attracting, integrating, and retaining qualified personnel to fulfill our current and future needs. While there has been intense competition for qualified human resources in the Israeli high-tech industry historically, the industry experienced record growth and activity in recent years, both at the earlier stages of venture capital and growth equity financings, and at the exit stage of initial public offerings and mergers and acquisitions. This flurry of growth and activity has caused a sharp increase in job openings in both Israeli high-tech companies and Israeli research and development centers of foreign companies, and intensification of competition between these employers to attract qualified employees in Israel. As a result, the high-tech industry in Israel has experienced levels of employee attrition and is currently facing shortage of skilled human capital, including engineering, research and development, sales and customer support personnel. Many of the companies against which we compete for personnel have greater financial resources, scale and branding than we do, and it may be more difficult for us to attract and retain qualified personnel predominately in Israel, where most of our research and development positions are located, and in New York, where our headquarters is located. These competitors may also actively seek to hire our existing personnel away from us, even if such an employee has entered into a non-compete agreement. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work. For example, Israeli labor courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the protection of a company’s confidential information or other intellectual property, taking into account, among other things, the employee’s tenure, position, and the degree to which the non-compete undertaking limits the employee’s freedom of occupation. We may not be able to make such a demonstration. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged their former employers’ proprietary or other confidential information or incorporated such information into our products, which could include claims that such former employers therefore own or otherwise have rights to their inventions or other work product developed while employed by us.
In addition, in making employment decisions, particularly in the internet and high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Employees may be more likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly appreciated or significantly reduced in value. Many of our employees may receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us and could lead to employee attrition. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business, financial condition, results of operations and growth prospects could be adversely affected.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
Recent Sales of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser
None.
Use of Proceeds
On July 23, 2021, we completed our IPO, in which we issued and sold 15,000,000 shares of our common stock at a price to the public of $10.00 per share. On August 6, 2021, we issued and sold an additional 2,250,000 shares of our common stock at a price of $10.00 per share in connection with the underwriters’ exercise in full of their option to purchase additional shares of our common stock. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333- 253699), as amended (the “Registration Statement”), declared effective by the SEC on July 20, 2021. Other than as reported in Part I, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in our 2022 10-K, there has been no material change in the expected use of the net proceeds from our IPO as described in the Registration Statement.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the three months ended September 30, 2023, the following directors and officers of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K:
Director/Sec. 16 Officer | Action | Date | Total Shares to be Sold | Expiration Date |
Rule 10b5-1* | Non-Rule 10b5-1** |
Naama Halevy | Adopt | 08/14/2023 | 412,736 | X | 08/12/2024 |
Shay David | Adopt | 08/08/2023 | 294,018 | X | 05/30/2024 |
* Intended to satisfy the affirmative defense of Rule 10b5-1(c)
** Not intended to satisfy the affirmative defense of Rule 10b5-1(c)
Item 6. Exhibits
The documents listed below are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated below.
| Exhibit Number | | Exhibit Description | | Incorporated by Reference | | |
| | | Form | | File No. | | Exhibit | | Filing Date | | Filed/Furnished Herewith |
| | | | | | | | | | | | | |
| | | | 8-K | | 001-40644 | | 3.1 | | 07/23/2021 | | |
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| | | | 8-K | | 001-40644 | | 3.1 | | 08/08/2022 | | |
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| | | | 8-K | | 001-40644 | | 3.2 | | 07/23/2021 | | |
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| | | | S-1/A | | 333-253699 | | 4.1 | | 03/23/2021 | | |
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| | | | S-1/A | | 333-253699 | | 4.2 | | 03/23/2021 | | |
| | | | | | | | | | | | | |
| | | | S-1/A | | 333-253699 | | 4.3 | | 03/23/2021 | | |
| | | | | | | | | | | | | |
| | | | 8-K | | 001-40644 | | 4.1 | | 08/08/2022 | | |
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| | Fourth Amendment to Credit Agreement, dated as of May 23, 2023, by and among Kaltura, Inc. (the “Borrower”), the subsidiaries of the Borrower party thereto, the several banks and other financial institutions or entities party thereto, and Silicon Valley Bank, a Division of First-Citizens Bank & Trust Company, as the Administrative Agent, the Issuing Lender and the Swingline Lender. | | | | | | | | | | |
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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 | | | | | | | | | * |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | * |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | * |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | * |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | * |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | * |
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104 | | Cover Page Interactive Data File (as formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | | * |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | KALTURA, INC. | |
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Date: November 8, 2023 | By: | /s/ Ron Yekutiel | |
| | | Ron Yekutiel | |
| | | Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
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Date: November 8, 2023 | By: | /s/ Yaron Garmazi | |
| | | Yaron Garmazi | |
| | | Chief Financial Officer | |
| | | (Principal Financial and Accounting Officer) | |
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