UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For
the fiscal year ended
OR
OR
Date of event requiring this shell company report ___________
For the transition period from _____ to _____
Commission
File No.
(Exact Name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel:
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(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on which Registered |
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Securities
registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.
As
of December 31, 2021, the Registrant had outstanding
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes
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If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
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Large accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Emerging growth company ☐ |
If
an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided
pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ |
Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes
2
PRELIMINARY NOTES
Terms
As used herein, and unless the context suggest otherwise, the terms
“Perion,” “Company,” “we,” “us” or “ours” refer to Perion Network Ltd. and
subsidiaries. References to “dollar” and “$” are to U.S. dollars, the lawful currency of the United States, and
references to “NIS” are to New Israeli Shekels, the lawful currency of the State of Israel. This annual report on Form 20-F
contains translations of certain NIS amounts into U.S. dollars at specified rates solely for your convenience. These translations should
not be construed as representations by us that the NIS amounts actually represent such U.S. dollar amounts or could, at this time, be
converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated NIS amounts into U.S. dollars at an
exchange rate of NIS 3.110 to $1.00, the representative exchange rate reported by the Bank of Israel on December 31, 2021.
Changes in Share Capital
On August 26, 2018, following the approval of a special general
meeting of our shareholder held on August 2, 2018, the Company executed a 3-to-1 reverse share split of the Company’s ordinary shares,
such that each three ordinary shares, par value NIS 0.01 per share, have been consolidated into one ordinary share, par value NIS 0.03.
Unless otherwise indicated, all of the share numbers and the option numbers in this Form 20-F have been adjusted, on a retroactive basis,
to reflect this 3-to-1 reverse share split.
Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industries’
actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed, implied or inferred by these forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “could,” “would,”
“expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”
“predicts,” “projects,” “potential” or “continue” or the negative of such terms and other
comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual
events or results may differ materially from our current expectations. All forward-looking statements included in this report are based
on information available to us on the date of this report. Except as required by applicable law, we undertake no obligation to update
or revise any of the forward-looking statements after the date of this annual report on Form 20-F to conform those statements to reflect
the occurrence of unanticipated events, new information or otherwise.
You should read this annual report on Form 20-F and the documents
that we reference in this report completely and with the understanding that our actual future results, levels of activity, performance
and achievements may be materially different from what we currently expect.
Factors that could cause actual results to differ from our expectations
or projections include certain risks, including but not limited to the risks and uncertainties relating to our; business, intellectual
property, industry and operations in Israel, as described in this annual report on Form 20-F under Item 3.D. – “Key Information
– Risk Factors.” Assumptions relating to the foregoing, involve judgment with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many
of which are beyond our control. In light of the significant uncertainties, inherent in the forward-looking information included herein,
the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will
be achieved. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is
not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which
any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements.
3
We obtained statistical data, market data and other industry data
and forecasts used in preparing this annual report from market research, publicly available information and industry publications. Industry
publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee
the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and
market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of
the information.
Our estimates and forward-looking statements may be influenced
by factors including:
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Our advertising customers may reduce or
terminate their business relationship with us at any time. If customers representing a significant portion of our revenue reduce or terminate
their relationship with us, it could have a material adverse effect on our business, financial condition and results of operations.
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Large and established internet and technology
companies, such as Google, Facebook and Amazon, play a substantial role in the digital advertising market and may significantly harm our
ability to operate in this industry. |
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We depend on supply sources to provide us
with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner. |
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The advertising industry is highly competitive.
If we cannot compete effectively and overcome the technological gaps in this market, our revenues are likely to decline. |
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Increased availability of advertisement-blocking
technologies could limit or block the delivery or display of advertisements by our solutions, which could undermine the viability of our
business. |
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Our search advertising solution depends
heavily upon revenue generated from our agreement with Microsoft Bing, and any adverse change in that agreement could adversely affect
our business, financial condition and results of operations. |
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Our search advertising revenue business
is highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to publishers and generate most
of our revenues. If we were to lose all or a significant portion of those publishers, our revenues and results of operations would be
materially adversely affected. |
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Should the providers of platforms, particularly
browsers, further block, constrain or limit our ability to offer or change search properties, or materially change their guidelines, technology
or the way they operate, our ability to generate revenues from our users’ search activity could be significantly reduced.
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The global COVID-19 health pandemic has
had and still has an ongoing adverse effect and could potentially severely affect, our business, results of operations and financial condition
due to impacts on our industry, as well as impacts from remote work arrangements, actions taken to contain the virus or treat its impact,
and the speed and extent of the recovery. |
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A loss of the services of our senior management
and other key personnel could adversely affect execution of our business strategy. |
4
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Competition for highly skilled technical
and other personnel in Israel is intense, and as a result we may fail to attract, recruit, retain and develop qualified employees, which
could materially and adversely impact our business, financial condition and results of operations. |
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We have acquired and may continue to acquire
other businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future,
adversely affect our financial results. |
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Our share price has fluctuated significantly
and could continue to fluctuate significantly. |
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Our business and financial performance may
be materially adversely affected by information technology issues, data breaches, cyber-attacks and other similar incidents and other business
disruptions. |
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If we fail to detect or prevent suspicious
traffic or other invalid traffic or engagement with our ads, or otherwise prevent against malware intrusions, we could lose the confidence
of our advertisers, damage our reputation and be responsible to make-good or refund demands, which would cause our business to suffer.
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We depend on third party internet, telecommunication and hosting providers to operate our platforms, websites
and services. Temporary failure of these services, including catastrophic or technological interruptions, would materially reduce
our revenues and damage our reputation, and securing alternate sources for these services could significantly increase our expenses
and be difficult to obtain. |
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Regulatory, legislative, or self-regulatory developments relating to e-commerce, internet advertising,
privacy and data collection and protection, and uncertainties regarding the application or interpretation of existing laws and regulations,
could harm our business and subject us to significant legal liability for non-compliance. |
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Our proprietary information and intellectual
property may not be adequately protected and thus our technology may be unlawfully copied by or disclosed to other third parties.
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Our business is significantly reliant on
the North American market. Any material adverse change in that market could have a material adverse effect on our results of operations.
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Our business may be materially affected
by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding
their potential effects, could adversely affect our results of operations. |
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Political, economic and military instability
in the Middle East may impede our ability to operate and harm our financial results. |
5
TABLE OF CONTENTS
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PART III | |
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Item 19.Exhibits |
86 |
6
PART I
ITEM 1. IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY
INFORMATION
A. SELECTED
FINANCIAL DATA
Reserved.
B. CAPITALIZATION
AND INDEBTEDNESS
Not applicable.
C. REASONS
FOR OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK
FACTORS
We are subject to various risks and uncertainties relating to or
arising out of the nature of our business and general business, economic, financial, legal and other factors or conditions that may
affect us. We believe that the occurrence of any one or some combination of the following factors could have a material adverse effect
on our business, financial condition, cash flows and results of operations.
Risks Related to our Business and Industry
Our advertising customers may reduce or terminate
their business relationship with us at any time. If customers representing a significant portion of our revenue reduce or terminate
their relationship with us, it could have a material adverse effect on our business, financial condition and results of operation.
We generally do not enter into long-term contracts with our advertising
customers, and such customers do business with us on a non-exclusive basis. In most cases, our customers may terminate or reduce the scope
of their agreements with little or no penalty or notice. Accordingly, our business is highly vulnerable to adverse economic conditions,
market evolution, development of new or more compelling offerings by our competitors and development by our advertising customers of in-house
replacement services. Any reduction in spending by, or loss of, existing or potential advertisers would negatively impact our business,
financial conditions and results of operation.
Furthermore, the discretionary, non-exclusive nature of our relationships with advertising
customers subject us to increased pricing pressure. Although we believe our rates are competitive, our competitors may be able to offer
more favorable pricing or other advantageous terms. In light of the above factors, we seek to diversify our offerings and, as part of
our strategy, provide our customers with different advertising solutions and constantly adapt our relationship with our customers to respond
to their everchanging needs. As a result, we may be compelled to reduce our rates, offer other incentives or other more compelling pricing
models in order to maintain our current customers and attract new customers. If a significant number of customers are able to compel us
to charge lower rates or provide rate concessions or incentives, there is no assurance that we would be able to compensate for such price
reductions or conserve our profit margins.
Large and established internet and technology
companies, such as Google, Facebook and Amazon, play a substantial role in the digital advertising market and may significantly harm
our ability to operate in this industry.
Google, Facebook and Amazon are substantial players in the digital
advertising market and account for a large portion of the digital advertising budgets, along with other smaller players. Such high concentration
causes us to be subject to any unilateral changes they may make with respect to advertising on their respective platforms, which may be
more lucrative than alternative methods of advertising or partnerships with other publishers that are not subject to such changes. Furthermore,
we could have limited ability to respond to, and adjust for, changes implemented by such players.
These companies, along with other large and established internet and technology companies,
may also leverage their power to make changes to their web browsers, operating systems, platforms, networks or other products or services
in a way that impacts the entire digital advertising marketplace.
7
Google Chrome internet browser supports the “Better Ads Standards” implemented
by the Coalition for Better Ads, an industry body formed by leading international trade associations and companies involved in online
media (in which Undertone is also a member), and removes all ads from certain sites that violate this standard. In addition, in March
2021, Google announced the phase-out support for third-party cookies in Chrome (which is expected to come into effect in 2023). Moreover,
leading mobile operating systems, including Apple iOS and Google Android, have implemented or plan to implement advertising and targeting
restrictions within applications running on their platforms.
This, together with other advertisement-blocking technologies
incorporated in or compatible with leading internet browsers and operating systems, could impact our (as well as those of our competitors)
advertising business. These changes could materially impact the way we do business, and if we or our advertisers and publishers are unable
to quickly and effectively adjust and provide solutions to those changes, there could be an adverse effect on our revenue and performance.
The consolidation among participants within
the digital advertising market could have a material adverse impact on our business, financial condition and results of operations.
The digital advertising industry has experienced substantial evolution
and consolidation in recent years and we expect this trend to continue, increasing the capabilities and competitive posture of larger
companies, particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge.
We are currently able to serve, track and manage advertisements
for our customers as well as for our own operations, on a variety of networks and websites. The consolidation trend could substantially
harm our ability to operate if such consolidated companies decide not to permit us to serve, track or manage advertisements on their websites
and/or on our properties, if they develop ad placement systems that are incompatible with our ad serving capabilities or if they use their
market power to force their customers to use certain vendors on their networks or websites and/or on our properties.
Certain of our primary advertisers and publishers are owned, affiliated
with or controlled by a small number of large holding companies. If any of these holding companies decide to reduce, amend or terminate
their business relationship with us for any reason, and/or in case there is a rapid and/or significant decline in inventory available
to us, it may lead to a material adverse impact on our business, financial conditions and results of operation.
If the demand for digital advertising does
not continue to grow or customers do not embrace our solutions, this could have a material adverse effect on our business financial
condition results of operation.
A substantial portion of our advertising revenue is derived from
the sale of our digital advertising solutions and we have made significant investments in our ability to deliver different types of advertisements,
including high impact advertising, video advertising, CTV and iCTV which are compatible on multiple devices and channels as well as different
content monetization solutions for which we partnered with advertising networks in order to be able to serve ads on our properties as
well properties of our publishers. Nonetheless, (i) if customers do not embrace our solutions (ii) if our integration with advertising
networks is not successful, (iii) if there is a reduction in general demand for digital advertising or in spend for certain channels or
solutions, or (iv) if the demand for our specific solutions and offerings decreases, it may lead to a material adverse impact on our business,
financial conditions and results of operation.
Due to our evolving business model and rapid
changes in the industry in which we operate and the nature of services we provide, it is difficult to accurately predict our future
performance and may be difficult to increase revenue or profitability.
As the digital advertising ecosystem is dynamic, seasonal and challenging,
it is hard to predict our future performance, particularly with regard to the effect of our efforts to increase revenue and profitability.
If we are unable to continuously improve our systems and processes, adapt to the changing and dynamic needs of our customers or align
our expenses with our revenue level, it will impair our ability to be compelling and profitable.
In addition, we may experience in the future an overall decline
in advertising spend and demand for our solutions as a result of which we may experience revenue decrease due to competition, market demand
or other factors, which could influence our ability to respond to industry developments in order to remain competitive. If we are unable
to respond to such changes and timely adapt our business model, we may not be able to sustain growth, meet our business targets or achieve
or sustain profitability and our business may be adversely affected.
8
We depend on supply sources to provide us
with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner.
We rely on a diverse set of publishers including direct publishers,
advertising exchange platforms, social networks and other platforms, that aggregate advertising inventory, to provide us with high-quality
digital advertising inventory on which we deliver ads, collectively referred to as “supply sources”. The future growth of
our advertising business will depend, in part, on our ability to maintain, expand and further develop successful business relationships
in order to increase the network of our supply sources.
Our supply sources typically make their advertising inventory available
to us on a non-exclusive basis and are not required to provide any minimum amounts of advertising inventory to us or to provide us with
a consistent supply of advertising inventory, at any predetermined price or through real time bidding. Supply sources often maintain relationships
with various sources of demand that compete with us, and it is easy for supply sources to quickly shift their advertising inventory among
these demand sources, or to shift inventory to new demand sources, without notice or accountability. Supply sources may also seek to change
the terms at which they offer inventory to us, or they may allocate their advertising inventory to our competitors who offer more favorable
economic terms, better solutions and advanced technology. Supply sources may also elect to sell all, or a portion, of their advertising
inventory directly to advertisers and agencies, or they may develop their own competitive offerings, which could diminish the demand for
our solutions. In addition, significant supply sources within the industry may enter into exclusivity arrangements with our competitors,
which could limit our access to a meaningful supply of inventory. As a result of all of these factors, our supply sources may not supply
us with sufficient amounts of high-quality digital advertising inventory in order for us to fulfill the demands of our advertising customers.
Additionally, our ability to access advertising inventory in a
cost-effective manner may be constrained or affected as a result of a number of other factors, including, but not limited to:
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Supply sources may impose significant restrictions
on the advertising inventory they sell or may impose other unfavorable terms and conditions on the advertisers using their sites or platforms.
For example, these restrictions may include frequency caps, prohibitions on advertisements from specific advertisers or specific industries,
or restrictions on the use of specific creative content or advertising formats as well as content adjacent restrictions, which would restrain
our supply of available inventory. |
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Supply sources that offer online content
and mobile applications may shift from an advertising-based monetization method to a pay for content/services model, thereby reducing
available inventory. |
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Social media platforms may be successful
in keeping users within their sites via products such as Facebook’s Instant Articles which may be competitive to our offerings and
solutions. If, as a result, users are not on the open web, advertising inventory outside of such platforms (including our publisher’s
and our owned and operated sites) may be reduced or may become less attractive to our advertising customers. |
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Supply sources may be reluctant or unable
to adopt certain of our proprietary and unique high-impact, CTV, iCTV and video ad formats for a variety of reasons (such as user preference
changes making such ad formats less desirable, or technological limitations, such as connection with header bidding or the ability to
transact programmatically), resulting in limited advertising inventory supply for such formats and inhibiting our ability to scale such
formats. |
Because of these factors, we seek to expand and diversify our
supply sources; nonetheless, if our supply sources terminate or reduce our access to their advertising inventory, increase the price of
inventory or place significant restrictions on the sale of their advertising inventory, or if platforms or exchanges terminate our access
to them and we are unsuccessful in establishing or maintaining our relationships with supply sources on commercially reasonable terms,
we may not be able to replace this with inventory from other supply sources that satisfy our requirements in a timely and cost-effective
manner. If any of these happens, our revenue could decline or our cost of acquiring inventory could increase, which, in turn, could lower
our operating margins and materially adversely affect our advertising business. For additional information see also the Risk Factor titled
- “The consolidation among participants within the digital advertising market could have a material
adverse impact on our business, financial condition and results of operations.”
9
Our advertising business depends on a strong
brand reputation, and if we are not able to maintain and enhance our brand, our business and results of operations could be materially
adversely affected.
Maintaining and enhancing our brands is an important aspect of
our efforts to attract and expand our agency, advertiser, and publisher base. We have spent, and expect to continue spending considerable
sums and other resources on the establishment, building and maintenance of our brands, as well as on enhancing market awareness of them.
Our brands, however, may be negatively impacted by a number of factors, including but not limited to, fraudulent, inappropriate or misleading
content on our own sites and those we operate, as well as on publishers’ sites on which we serve ads, service outages, product malfunctions,
data protection and cybersecurity issues, and exploitation of our trademarks by others without our permission. If we are unable to maintain
or enhance our brands in a cost-effective manner, our business and operating results could be materially adversely affected.
Non-compliance with industry self-regulation could negatively
impact on our business, brand and reputation.
In addition to compliance with applicable laws and regulations, we voluntarily participate
in industry self-regulatory bodies such as the Network Advertising Initiative, or the NAI, and the Digital Advertising Alliance, or DAA,
which promulgate best practices or codes of conduct addressing, inter alia, privacy and the delivery of digital advertising. Undertone
also voluntarily participates in several of such trade associations and industry self-regulatory groups, including the NAI, the DAA, the
Internet Advertising Bureau and TAG Certified Against Fraud. If we or Undertone are unable to follow and abide by the rules and principles
provided by such self-regulatory bodies and/or align the conduct of our business and practices with changes to such rules and principles,
we may be subject to investigations by such self-regulatory bodies or other accountability groups, our customers and partners as well
as users. Handling such actions may require us to devote financial and managerial resources, require us to change our business practices,
and cause damage to our brand, which in turn could materially adversely affect our business, financial condition and results of operations.
We also could be adversely affected by new or altered self-regulatory guidelines that are inconsistent with our current practices or in
conflict with applicable laws and regulations in the United States, Europe, Israel and other regions where we do business. If we fail
to abide by or are perceived as not operating in accordance with industry best practices or any industry guidelines or codes with regard
to privacy or the delivery of digital advertising, our reputation may suffer and we could lose relationships with both buyers and sellers.
We may be unable to deliver advertising in
a brand-safe environment, which could harm our reputation and cause our business to suffer.
It is important for advertisers that their advertisements are not
placed in or near content that is unlawful or would be deemed offensive or inappropriate by their customers, or near other advertisements
for competing brands or products. While we strive to have all of our online advertisements appear in a brand-safe environment, we cannot
guarantee that they will be delivered in such an environment. If we are not successful in doing so, our reputation could suffer and our
ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may
seek to avoid payment or demand refunds, any of which could harm our business, financial conditions and results of operations.
The advertising industry is highly competitive.
If we cannot compete effectively and overcome the technological gaps in this market, our revenues are likely to decline.
We face intense competition in the marketplace. We operate in a
dynamic market that is subject to rapid development and the introduction of new technologies, products and solutions, changing branding
objectives, evolving customer demands rules, regulations and industry guidelines, all of which affect our ability to remain competitive.
There are a large number of digital media companies and advertising technology companies that offer products or services similar to or
more compelling than ours and that compete with us for finite advertising budgets and for limited inventory from publishers. Additionally,
companies that do not currently compete with us in this space may change their services to be competitive if there is a revenue opportunity,
and new or stronger competitors may emerge through consolidations or acquisitions. If our digital advertising platform and solutions are
not perceived as competitively differentiated or we fail to develop adequately to meet market evolution, or acquire companies to help
us overcome the technological gaps in a timely manner and meet the market demands, we could lose customers and market share or be compelled
to reduce our prices and harm our operational results.
Our reputation is a key factor in our ability to compete successfully.
There is no assurance that our ability to compete effectively in the future may not be affected by negative market perception. Because
of these factors, we continuously seek to diversify our product suite to respond to the changing needs and interests of our customers
to benefit from a variety of different offerings, however, we cannot guarantee that we will always be able to accommodate such needs,
that such efforts would yield the expected revenue or that we will adapt quickly enough (and/or in a cost effective manner) to evolving
changes in the industry in which we operate and related regulations, technologies, applications and devices, which could adversely impact
our reputation, and, in turn, our business, financial condition and results of operations.
10
Our advertising business is susceptible to
seasonality, unexpected changes in campaign size and prolonged cycle time, which could affect our business and results of operations.
The revenue of our advertising business is affected by a number of factors, including:
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Historically, in most cases our advertising business experienced the lowest revenue levels in the first
quarter and the highest revenue levels in the fourth quarter, with the second and third quarters being slightly stronger than the first
quarter (except for 2020 as a result of the initial effect of COVID-19); |
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Product and service revenue are influenced
by political advertising in the US, which generally occurs every two years; |
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In any single period, product and service
revenue and delivery costs are subject to significant variation based on changes in the volume and mix of deliveries performed during
such period; |
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Revenues are subject to the changes of brand
marketing trends, including when and where brands choose to spend their money in a given year; |
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Advertising customers generally retain the
right to supplement, extend, or cancel existing advertising orders at any time prior to their completion, and we have no control over
the timing or magnitude of these revenue changes; and |
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Relative complexity of individual advertising formats, and the length of the creative
design process. |
As a result, our profit from these operations is seasonal, with
the fourth quarter being the major contributor to our profits and the first quarter possibly resulting in a loss.
If our campaigns are not able to reach certain
performance goals or we are unable to measure certain metrics proving achievement of those goals, this could have a material adverse
effect on our business.
Our advertising clients expect and often demand that our advertising
campaigns achieve certain performance levels based on metrics such as user engagement, view-ability, clicks or conversions, to validate
their value proposition, particularly as our services can be costlier. We may have difficulty achieving or proving these performance levels
for a variety of reasons (for example, it may be difficult to track view-ability on our proprietary high-impact ad units, either directly
or through a third-party vendor), which could cause clients to cancel campaigns, not provide repeat business or request make-goods
or refunds.
Increased availability of advertisement-blocking
technologies could limit or block the delivery or display of advertisements by our solutions, which could undermine the viability
of our business, financial condition and results of operations.
Advertisement-blocking technologies, such as mobile apps or browser
extensions that limit or block the delivery or display of advertisements, are currently available for desktop, tablet and mobile users.
Further, new browsers and operating systems, or updates to current browsers or operating systems, offer native advertisement-blocking
technologies to their users, such as the support of Google Chrome in blocking advertisements from web sites that violate the “Better
Ads Standards” established by the Coalition for Better Ads (in which Undertone is a member). As such technologies or practices become
widespread, this could have a material adverse effect on our business, financial condition and results of operations.
Our advertising business depends on our ability
to collect and use data, and any limitation on the collection and use of this data could significantly diminish the value of our
solutions and cause us to lose customers, revenue and profit.
In most cases, when we deliver an advertisement, we are often able
to collect certain data about the content and placement of the ad, the relevancy of such ad to a user and the interaction of the user
with the ad, such as whether the user viewed or clicked on the ad or watched a video. As we collect and aggregate data provided by billions
of ad impressions and third-party providers, we analyze the data in order to measure and optimize the placement and delivery of our advertising
inventory and provide cross-channel advertising capabilities. Our ability to access and utilize such data is crucial.
11
Our publishers or advertisers may decide not to allow us to collect some or all of this
data or may limit our use of this data. Additional details regarding limitations on the collection and use of this data due to existing
and new laws and regulations are provided below under “Risks Related to Regulatory Changes— Regulatory, legislative, or self-regulatory
developments relating to e-commerce, internet advertising, privacy and data collection and protection, and uncertainties regarding the
application or interpretation of existing laws and regulations, could harm our business and subject us to significant legal liability
for non-compliance.”
If we do not continue to innovate and provide
high-quality advertising solutions and services, we may not remain competitive, and our business and results of operations could
be materially adversely affected.
Our success depends on our ability to provide customers with innovative,
high-quality advertising solutions and services that foster consumer engagement. We face intense competition in the marketplace and are
confronted by rapidly changing technology, evolving industry standards, rules and regulations and consumer needs, and the frequent introduction
of new products and solutions by competitors, as well as publishers themselves, that we must adapt and respond to in order to remain competitive.
Therefore, our continued success depends in part upon our ability to develop new solutions and technologies, enhance our existing solutions
and expand the scope of our offerings to meet the evolving needs of the industry. As a result, we must continue to invest significant
resources in research and development in order to enhance our technology and our existing solutions and services, and introduce new high-quality
solutions and services.
Our operating results will also suffer if our innovations are not
responsive to the needs of our customers, are not appropriately timed with market opportunity or are not effectively brought to market.
If we are unable to accurately forecast market demands or industry changes, if we are unable to develop or introduce our solutions and
services in a timely manner, or if we fail to provide quality solutions and services that run without complication or service interruptions
or do not respond properly to the ever changing technological landscape, we may damage our brand and our ability to retain or attract
customers. As online advertising technologies continue to develop, our competitors may be able to offer solutions that are, or that are
perceived to be, substantially similar to or better than those offered by us. Customers will not continue to do business with us if our
solutions do not deliver advertisements in an appropriate and effective manner, through a variety of distribution channels and methods,
or if the advertising we deliver does not generate the desired results. In addition, advertising customers may find that content made
available through our properties is not suitable for their advertising requirements or that our competitors offer content which is more
lucrative and relevant to their advertising needs, resulting in reduction of their advertising spend with us. If we are unable to meet
these challenges, our business, financial condition and results of operations could be materially adversely affected.
Sales efforts with advertisers and ad agencies require significant
time and expense and may ultimately be unsuccessful.
Contracting with new advertisers and ad agencies requires substantial
time and expenses, and we may not be successful in establishing new relationships or in maintaining current relationships. It is often
difficult to identify, engage, and market to potential advertising customers who are unfamiliar with our brand or services, and we may
spend substantial time and resources educating customers about our unique offerings, including providing demonstrations and comparisons
against other available solutions, without ultimately achieving the desired results. In addition, there has been commoditization of services
provided in digital advertising, resulting in margin pressure. Furthermore, many of our advertising clients’ purchasing and design
decisions generally require input from multiple internal and external parties of these clients, requiring that we identify those involved
in the purchasing decision and devote a sufficient amount of time to present our services to each of those decision-making individuals.
We may not be able to reduce our sales and marketing expenses to correspond proportionately to periods of reduced revenue. If we are not
successful in streamlining our sales processes with potential clients in a cost-effective manner, or if our efforts are unsuccessful,
our ability to grow our business may be adversely affected.
Our growth depends in part on the success of our relationships
with advertising agencies.
While we work with some brand advertisers directly, our primary
advertising customers are advertising agencies, who are paid by their brand customers to develop their media plans. The agencies, in turn,
contract with third parties, like us, to execute and fulfill their brands’ advertising campaigns. As a result, our future growth
will depend, in part, on our ability to enter into and maintain successful business relationships with advertising agencies.
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Identifying agencies, engaging in sales efforts, and negotiating
and documenting our agreements with agencies require significant time and resources. These relationships may not result in additional
brand customers or campaigns for our business, and may not ultimately enable us to generate significant revenue. Our contracts with advertising
agencies are typically non-exclusive and the agencies often work with our competitors or offer competing services or solutions.
When working with agencies to deliver campaigns on behalf of their
brand customers, we generally bill the agency for our products and services, and in most cases, the brand has no direct contractual commitment
to us to make any payments. Furthermore, some agencies contractually limit their payment obligations to us through sequential liability
provisions, whereby the agency is liable for payment if, and only to the extent, that the agency collects a corresponding payment from
the brand on whose behalf our services were rendered. These circumstances may result in longer collections periods, increased costs associated
with pursuing brands directly for payments, or our inability to collect payments. In summary, if we are unsuccessful in establishing or
maintaining our relationships with these agencies on commercially reasonable terms or if the agencies are unable to effectively collect
corresponding payments from the brands, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating
results could suffer.
If the demand for social advertising does
not grow as expected, or if our solution for advertising through those channels is not competitive, the revenue related to our actionable
performance monitoring platform could decline.
We leverage the capabilities of our actionable performance monitoring
SaaS platform to offer our customers the ability to deliver ads on social networks. The future growth of this market could be negatively
impacted if consumers decrease the time they spend engaging on social media sites or mobile applications. In addition, the demand for
advertising in these channels, and the success of our social solutions in particular, may be constrained by the limited flexibility, increased
requirements that are associated with advertising in these channels, and the social networks working through independent service providers.
As a result, it is difficult to predict the future customer demand for our solution, and there is no guarantee that we will be able to
generate significant revenue from our actionable performance monitoring platform. In addition to the foregoing, our actionable performance
monitoring platform is dependent on our ability to create, optimize, and manage our customers’ advertising campaigns as well as
retrieve and push advertising campaign data to myriad of networks and tools in real time, such as Facebook, Instagram, Messenger, Google,
TikTok, LinkedIn, Snapchat, Pinterest and Twitter. We are subject to each social network’s respective terms and conditions governing
our ability to access and utilize its platform. Our actionable performance monitoring platform would be harmed if any of these social
networks discontinues our partnership, makes changes to its platform, or modifies the terms and standards applicable to its marketing
partners or to advertising on its platform in general. Moreover, these social networks may develop offerings or features that compete
with or substitute our solution or may otherwise make changes to their platforms that would render our social advertising solution obsolete.
Further, consumers may migrate away to other social networking platforms with which we are not affiliated, which would in turn decrease
the demand for our solutions. Any of these outcomes could cause demand for our social marketing platform to decrease, our development
costs to increase, and our results of operations and financial condition to be materially adversely affected.
Our search advertising solution depends heavily
upon revenue generated from our agreement with Microsoft Bing, and any adverse change in that agreement could adversely affect our
business, financial condition and results of operations.
We are highly dependent on our search services agreement with Microsoft Irelands Operations
Limited. In November 2020, we entered into a renewed agreement with Microsoft Ireland Operations Limited effective as of January 1, 2021
until December 31, 2024 (the “Microsoft Agreement”). In 2021, the Microsoft Agreement accounted for 37% of our revenue. In
this annual report on Form 20-F we refer to Microsoft Corporation and its affiliates as Microsoft.
If our Microsoft Agreement is terminated or substantially amended (not on favorable
terms), we would experience a material decrease in our search advertising revenue or the profits it generates and would be forced to seek
alternative search providers, at less competitive terms or accelerate the business we have with such search providers. There are few companies
in the market that provide internet search and search advertising services similar to those provided by Microsoft such as Google and Verizon
Media. Such companies are substantially the only participants in western markets, and competitors do not offer as much coverage through
sponsored links or searches. If we fail to quickly locate, negotiate and finalize alternative arrangements or otherwise expediate current
operations we have with such alternative search providers, or if we do, but the alternatives do not provide for terms that are as favorable
as those currently provided and utilized, we would experience a material reduction in our revenue and, in turn, our business, financial
condition and results of operations would be adversely affected.
13
Our search advertising revenue business is
highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to publishers and generate
most of our revenue. If we were to lose all or a significant portion of those publishers, our revenue and results of operations would
be materially adversely affected.
In 2020 and 2021, the top five publishers distributing our search
services accounted for approximately 22% and 19%, respectively, of our revenue. There can be no assurance that these existing publishers
will continue utilizing the revenue-generating monetization services at the levels they did in the past or at all. The loss of a substantial
portion of our relationships with these publishers, or a substantial reduction in their level of activity, could cause a material decline
in our revenue and profitability.
The generation of search advertising revenue
through large publishers is subject to competition. If we cannot compete effectively in this market, our revenues are likely to decline.
We obtain a significant portion of our revenue through the configuration
of our search service as the default search provider during the download and installation of our publishers’ products and/or use
by their services of our search offering and the subsequent searches performed by the users thereof. To achieve these goals, we heavily
rely on third-party publishers to distribute and/or implement our search offering as a value-added component of their own offerings. We
are therefore constantly looking for more ways to distribute our search offering through various channels, including through independent
distribution efforts of our owned and operated products and services. There are other companies that generate revenue from searches, some
of them may have other monetization solutions. The large search engine companies, including Google, Microsoft, Verizon Media and others,
have become increasingly aggressive in their own search service offerings. In addition, we need to continually maintain the technological
advantage of our platform, products and other services in order to attract publishers to our offerings. If the search engine companies
engage more direct relationships with publishers or we are unable to maintain the technological advantage to service our publishers, we
may lose both existing and potential new publishers and our ability to generate revenue will be negatively impacted.
In order to receive advertising-generated
revenue from our search providers, we depend, in part, on factors outside of our control.
The amount of revenue we receive from search providers depends
upon a number of factors outside of our control, including the amount such search providers charge for advertisements, the efficiency
of the search provider’s system in attracting advertisers and syndicating paid listings in response to search queries and parameters
established by it regarding the number and placement of paid listings displayed in response to search queries. In addition, search providers
make analysis about the relative attractiveness (to their advertiser) of clicks on paid listings from searches performed on or through
our search assets, and these judgments factor into the amount of revenue we receive. Changes in the efficiency of a search providers’
paid listings network, in its judgment about the relative attractiveness of clicks on paid listings or in the parameters applicable to
the display of paid listings, which could come about for a number of reasons, including general market conditions, competition, inventory
availability or policy and operating decisions made by Microsoft or other search providers, could have an adverse effect on our business,
financial condition and our results of operations.
Should the methods used for the distribution
of our search solution, be blocked, constrained, limited, materially changed, based on a change of guidelines, technology or otherwise
(as has happened in the past), or made redundant by any of our search engine providers, our ability to generate revenue from our
users’ search activity could be significantly reduced.
Agreements with search providers, such as our agreement with Microsoft,
require compliance with certain guidelines promulgated by them for the use of the respective brands and services, including the manner
in which paid listings are displayed within search results, and the establishment of guidelines to govern certain activities of third
parties to whom the search services are syndicated, including the manner in which those parties can acquire new users and drive search
traffic. Subject to certain limitations, search partners may unilaterally update their policies and guidelines, which could, in turn,
require modifications to, or prohibit and/or render obsolete certain of our search solutions, products, services and practices, which
could be costly to address or otherwise have an adverse effect on our business, our financial condition and results of operations. Noncompliance
with the search partners’ guidelines, whether by us or by third parties to which we syndicate paid listings or by the publishers
through whom we secure distribution arrangements could, if not cured, result in such companies’ suspension of some or all of their
services to us, or to the websites of our third party publishers, or the reimbursement of funds paid to us, or the imposition of additional
restrictions on our ability to syndicate paid listings or distribute our search solution or the termination of the search distribution
agreement by our search partners.
14
These guidelines, with respect to method of distribution, homepage
resets and default search resets to search engine services, were changed by both Microsoft and Google numerous times in the past, having
negative revenue implications. Since then, both companies have continued instituting other changes to the policies governing their relationship
with search partners. Should any of our large partnerships be deemed non-compliant, blocked or partner with another provider, it could
be difficult to replace the revenue generated by that partnership and we would experience a material reduction in our revenue and, in
turn, our business, financial condition and results of operations would be adversely affected.
Should the providers of platforms, particularly
browsers, further block, constrain or limit our ability to offer or change search properties, or materially change their guidelines,
technology or the way they operate, our ability to generate revenue from our users’ search activity could be significantly
reduced.
As we provide our services through the internet, we are reliant on our ability to work
with the different internet browsers. The internet browser market is extremely concentrated with Google’s Chrome, Microsoft Edge
and Mozilla’s Firefox, accounting for over 83% of the desktop browser market in 2021, and Google’s Chrome alone accounting
for over 67%, based on StatCounter reports. In the past years, internet browser providers such as Google and Microsoft made changes and
updated their policies and technology in general, and specifically those relating to change of search settings. Each such change limits
and constrains our ability to offer or change search properties. In addition, the desktop operating system market is very concentrated
as well, with Microsoft Windows dominating over 74% of the market in 2021, and Apple operating systems accounting for 16% of that market,
based on StatCounter reports. During 2015, Microsoft announced changes to its browser modifier detection criteria and issued a new operating
system (Windows 10), which included a new default internet browser (Edge). In addition, in June 2018 Google limited the ability to install
Chrome browser extensions only from within the Chrome Web Store. Some of these changes limited our ability to maintain our users’
browser settings. If Microsoft, Google, Apple or other companies that provide internet browsers, operating systems or other platforms,
effectively further restrict, discourage or otherwise hamper companies, like us, from offering or changing search services, this would
continue to cause a material adverse effect on our revenue and our financial results.
Currently most individuals are using mobile devices to access
the internet, while substantial part of our search revenue generation and services are currently not widely spread on mobile platforms.
Also, web-based software and similar solutions are impacting the attractiveness of downloadable software products.
Historically, the market related to desktop computers has accounted for substantial
part of our search revenue. In recent years, there has been a trend towards shifting internet usage from desktop computers to mobile devices
such as mobile phones, tablets, etc. While in 2016 desktop worldwide market share was 54.09% it declined to 45.91% in 2017 and stabilizing
at 43.47% in 2021, based on StatCounter reports; on the other hand, mobile worldwide market share in 2016 was 45.91% rising to 54.09%
in 2017 and stabilizing at 56.53% in 2021, based on StatCounter reports. If this trend towards using non-desktop devices accelerates and
desktop usage will decline, our search offerings will become less relevant and may fail to attract publishers and web traffic. In addition,
even if consumers do use our services, our revenue growth will still be adversely affected if we do not rapidly and successfully implement
adequate revenue-generating models for mobile platforms to respond such decline in desktop.
Web (or “cloud”) based software and similar solutions
do not require the user to download software and thus provide a very portable and accessible alternative for desktop computers, as compared
to downloadable software. While there are advantages and disadvantages to each method and system and the markets for each of them remain
large, the market for web-based systems is growing at the expense of downloadable software. Should this trend accelerate faster than our
partners’ ability to provide differentiating advantages in their downloadable solutions, this could result in fewer downloads of
their products and lower search revenue generated through the download of these products. See Item 4.B. “Business Overview—Competition”
for additional discussion of our competitive market.
15
Our software or provision of search services
or advertising is occasionally blocked by software or utilities designed to protect users’ computers, thereby causing our business
to suffer.
Some of our products and offerings are viewed by some third parties,
such as anti-virus software providers, as promoting or constituting “malware” or “spamming,” or unjustly changing
the user’s computer settings. As a result, our software, the software of our publishers, provision of search services or advertising
is occasionally blocked by software or utilities designed to detect such practices. If this phenomenon increases or if we are unable to
detect and effectively deal with such categorization of our products, we may lose both existing and potential new users and our ability
to generate revenue will be negatively impacted.
The global COVID-19 health pandemic has had
and still has an ongoing adverse effect and could potentially severely affect, our business, results of operations and financial
condition due to impacts on our industry, as well as impacts from remote work arrangements, actions taken to contain the virus or
treat its impact, and the speed and extent of the recovery.
Health pandemics, such as COVID-19, have been, and could in the
future adversely affect our business and operations. The COVID-19 pandemic and efforts to control its spread have imposed restrictions
on the movement of people, goods and services worldwide, including in the regions in which we and our clients and partners operate, and
have significantly impacted economic activity and financial markets. Many advertisers have decreased or paused their advertising
spending as a response to the economic uncertainty, decline in business activity and other COVID-19-related impacts, which have negatively
impacted, and may continue to negatively impact, our revenue and results of operations, the extent and duration of which we may not be
able to accurately predict.
As a result of the COVID-19 pandemic, we have transitioned many
of our employees into a hybrid model, where employees are working remotely for part of the week. The transition has had little impact
on our employee productivity and has not caused any interruption to our business. Due to the uncertainty of COVID-19, we will continue
to assess the situation, including abiding by any government-imposed restrictions, market by market.
It is possible that the hybrid working model could have a negative
impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event
occurred that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to
continue our business for a substantial period of time. The increase in remote working may also result in concerns related to privacy
and fraud, heighten the risk of cyber incidents. Recently, organizations worldwide, including governments and commercial enterprises,
have seen an increase in cyber-attacks, such as phishing and ransomware attacks, by bad actors taking advantage of the pandemic and remote
workforces. Our own systems and those of third parties with which we work are also subject to such increased threats.
There are additional variables that impair our ability to accurately
predict the impact that COVID-19 will have on our future operations. Despite the recent development and introduction of different vaccines
to COVID-19, there is still much uncertainty as to the length of time that the pandemic and related disruptions will continue, the impact
of governmental regulations or easement of regulations in response to the strengthening or weakening of the pandemic, and the degree of
overall changes in consumer behavior. Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place”
orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19.
For example, Israel, federal and state governments in the United States, France and Ukraine, the locations in which our primary offices
are located, have imposed limitations on gatherings, social distancing measures and restrictions on movement, only allowing essential
businesses to remain open. Such orders or restrictions have resulted in temporary store closures, work stoppages, slowdowns and delays,
travel restrictions and cancellation of events, among other effects, any of which may negatively impact workforces, customers, consumer
sentiment and the economies in many of our markets, and as a result, may further adversely affect our operations.
The COVID-19 pandemic may furthermore even lead to a global economic
downturn that is more than temporary and could adversely affect the need for our services generally. A downturn could also have a material
adverse impact on our business partners’ stability and financial strength. Given the uncertainties associated with COVID-19, it
is difficult to fully predict the magnitude of potential effects on our and our business partners’ business, financial condition
and results of operations as well as the effect on the other risk factors described herein. While we have a strong cash position and generate
positive cash flow from our operations, we cannot guarantee that our financial condition will not be adversely affected in a material
manner.
16
Risks related to our Financial and Corporate Structure
A loss of the services of our senior management
and other key personnel could adversely affect execution of our business strategy.
We depend on the capabilities and experience, and the continued
services, of our senior management. The loss of the services of members of our senior management could create a gap in management and
could result in the loss of expertise necessary for us to execute our business strategy and thereby adversely affect our business. We
do not currently have “key person” life insurance with respect to any of our senior management.
Further, our ability to execute our business strategy also depends
on our ability to continue to attract, retain and motivate qualified and skilled technical and creative personnel and skilled management,
marketing and sales personnel, as well as third party technology vendors and other consultants and contractors. We operate out of different
locations around the globe and competition for well-qualified employees in our industry is intense and our continued ability to compete
effectively depends, in part, upon our ability to retain existing key employees and to attract new skilled and qualified employees as
well, which can be difficult, expensive and time-consuming. If we cannot attract and retain additional experienced key employees or if
we lose one or more of our current key employees, our ability to develop or market our products and attract or acquire new users could
be adversely affected. Although we have established programs to attract new employees and provide incentives to retain existing employees,
particularly senior management, we cannot be assured that we will be able to retain the services of senior management or other key employees
as we continue to integrate and develop our solutions or that we will be able to attract new employees in the future who are capable of
making significant contributions and we may face challenges in adequately or appropriately integrating them into our workforce and organizational
culture. See Item 6. “Directors, Senior Management and Employees.”
Competition for highly skilled technical
and other personnel in Israel is intense, and as a result we may fail to attract, recruit, retain and develop qualified employees, which
could materially and adversely impact our business, financial condition and results of operations.
We compete in a market marked by rapidly changing technologies
and an evolving competitive landscape. In order for us to successfully compete and grow, we must attract, recruit, retain and develop
personnel with requisite qualifications to provide expertise across the entire spectrum of our intellectual capital and business needs.
Our principal research and development, certain sales and marketing
as well as significant elements of our general and administrative activities are conducted at our headquarters in Israel, and we face
significant competition for suitably skilled employees in Israel. 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 2021, both at the earlier stages
of venture capital, growth equity financings, 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 significant levels of employee attrition and is currently facing a severe shortage of
skilled human capital, including engineering, research and development, sales and customer support personnel. Many of the companies with
which we compete for qualified personnel have greater resources than we do, and we may not succeed in recruiting additional experienced
or professional personnel, retaining personnel or effectively replacing current personnel who may depart with qualified
or effective successors.
In addition, as a result of the intense competition for qualified
human resources, the Israeli high-tech market has also experienced and may continue to experience significant wage inflation. Accordingly,
our efforts to attract, retain and develop personnel may also result in significant additional expenses, which could adversely affect
our profitability. Furthermore, in making employment decisions, particularly in the high-technology industry, 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 decreased 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 heighten the risk of employee attrition.
While we offer competitive equity and compensation terms as week
as utilize non-competition agreements with our employees as a means of improving our employee retention, those terms and agreements
may not be effective towards that goal. These non-competition agreements prohibit our employees, if they cease working for us, from competing
directly with us or working for our competitors for a limited period. We may be unable to enforce these agreements under Israeli law,
and it may be difficult for us to restrict our competitors from benefiting from the expertise our former employees developed while working
for us.
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In light of the foregoing, there can be no assurance that qualified
employees will remain in our employ or that we will be able to attract and retain qualified personnel in the future. Failure to retain
or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
We have acquired and may continue to acquire
other businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future,
adversely affect our financial results.
We acquired Make Me Reach (currently, Paragone) in February 2015
and Undertone in November 2015, Captain Growth in March 2019, Content IQ in January 2020, Pub Ocean Limited, or Pub Ocean in July 2020
and Vidazoo Ltd., or Vidazoo in October 2021 and we may continue to acquire complementary products, technologies or businesses. These
acquisitions divert a substantial part of our resources and management attention and could in the future, adversely affect our financial
results. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business
concerns and is expensive and time-consuming. Acquisitions expose us and our business to unforeseen liabilities or risks associated with
the business or assets acquired or with entering new markets. In addition, we lost and might continue to lose key employees and vendors
while integrating new organizations and may not effectively integrate the acquired products, technologies or businesses or achieve the
anticipated revenue or cost benefits, and we might harm our relationships with our future or current technology suppliers. Future acquisitions
could result in customer dissatisfaction or vendor dissatisfaction or performance problems with an acquired product, technology or company.
Paying the purchase price for acquisitions in the form of cash, debt or equity securities may weaken our cash position, increase our leverage
or dilute our existing shareholders, as applicable. Furthermore, a substantial portion of the price paid for these acquisitions is typically
for intangible assets. We may be required to pay additional funds for earn-outs based on achievement of milestones, or may incur contingent
liabilities, amortization expenses related to intangible assets or possible impairment charges related to goodwill or other intangible
assets (which has occurred in the past) or become subject to litigation or other unanticipated events or circumstances relating to the
acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, acquisitions
may end up in losses, unwanted results and waste of valuable resources, time and money.
In past years, we have recognized impairments
in the carrying value of goodwill and purchased intangible assets. Additional such charges in the future could negatively affect
our results of operations and shareholders’ equity.
We continue to have a substantial amount of goodwill and purchased
intangible assets on our consolidated balance sheet as a result of historical acquisitions. The carrying value of goodwill represents
the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value
of intangible assets with identifiable useful lives represents the fair value of customer relationships, content, domain names and acquired
technology, among other things, as of the acquisition date, and are amortized based on their economic or useful lives. Goodwill that is
expected to contribute indefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually. If the
carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the goodwill
or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that
could result in impairment include adverse changes in the regulatory environment, a reduced market capitalization or other factors leading
to reduction in expected long-term growth or profitability. Goodwill impairment analysis and measurement is a process that requires significant
judgment. Our stock price and any control premium are factors affecting the assessment of the fair value of our underlying reporting units
for purposes of performing any goodwill impairment assessment.
We will continue to conduct impairment analyses of our goodwill
as required. Further impairment charges with respect to our goodwill would have a material adverse effect on our results of operations
and shareholders’ equity in future periods.
Shareholders may be able
to control us.
As of March 5, 2022,
we have one shareholder that beneficially holds more than 5% of our outstanding shares. See Item 7.A. “Major Shareholders and Related
Party Transactions—Major Shareholders” for more information. To our knowledge, this shareholder is not party to a voting agreement
with respect to our shares. However, should this shareholder or any other shareholders decide to act together, they may have the power
to control the outcome of matters submitted for the vote of shareholders. In addition, such share ownership may make certain transactions
more difficult and result in delaying or preventing a change in control of the Company, unless approved by such shareholder.
18
Our share price has fluctuated significantly and could continue to
fluctuate significantly.
The market price for our ordinary shares, as well as the prices of shares of other internet
companies, has been volatile. Between January 2021 and March 2022, our share price has fluctuated from a low of $12.24 to a high of $30.00,
and the daily average trading volume in that period was 856,284 (and for the period of January 1, 2021 and until December 31, 2021, was
905,095). The following factors may cause significant fluctuations in the market price of our ordinary shares:
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negative fluctuations in our quarterly revenue
and earnings or those of our competitors; |
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pending sales into the market due to the
sale of large blocks of shares, due to, among other reasons, the expiration of any tax-related or contractual lock–ups with respect
to significant amounts of our ordinary shares; |
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shortfalls in our operating results compared
to levels forecast by us or securities analysts; |
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changes in our senior management;
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changes in regulations or in policies of
search engine companies or other industry conditions; |
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mergers and acquisitions by us or our competitors;
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technological innovations; |
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the introduction of new products;
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the conditions of the securities markets, particularly in the internet and Israeli sectors;
and |
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political, economic and other developments
in Israel and worldwide. |
In addition, share prices of many technology companies in general
and ad-tech companies in particular fluctuate significantly for reasons that may be unrelated or disproportionate to operating results.
The factors discussed above may depress or cause volatility to our share price, regardless of our actual operating results.
Class action litigation due to share price
volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources.
Historically, public companies that experience periods of volatility in the market price
of their securities and/or engage in substantial transactions are sometimes the target of class action litigation. Companies in the internet
and software industry, such as ours, are particularly vulnerable to this kind of litigation as a result of the volatility of their stock
prices and their regular involvement in transactional activities. In the past, we were named as a defendant in this type of litigation
in connection with our acquisition of ClientConnect, and although this lawsuit was dismissed, in the future litigation of this sort could
result in considerable costs and a diversion of management’s attention and resources.
Future sales of our ordinary shares could reduce our stock price.
As of March 5, 2022, there were outstanding an aggregate of 3,977,554
options to purchase our ordinary shares. As these securities vest, the holders thereof could sell the underlying shares without restrictions,
except for the volume limitations under Rule 144 applicable to our affiliates.
Sales by shareholders of substantial amounts of our ordinary shares,
or the perception that these sales may occur in the future, could materially and adversely affect the market price of our ordinary shares.
Furthermore, the market price of our ordinary shares could drop significantly if our executive officers, directors, or certain large shareholders
sell their shares, or are perceived by the market as intending to sell them.
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Exchange rate fluctuations may harm our earnings
and asset base if we are not able to hedge our currency exchange risks effectively.
A significant portion of our costs, primarily personnel expenses,
are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. Further,
since the U.S. dollar declined in value in relation to the NIS, it has become more expensive for us to fund our operations in Israel.
A revaluation of one percent of the NIS as compared to the U.S. dollar could impact our income before taxes by approximately $0.4 million.
The exchange rate of the U.S. dollar to the NIS has been volatile in the past, decreasing by approximately 8%, 7% and 3% in 2019, 2020
and 2021, respectively. As of December 31, 2021, we had a foreign currency net liability of approximately $6.6 million (which number includes
approximately $6.4 million in NIS denominated to the Right of Use liability relates to our offices in Israel), and our total foreign exchange
loss was approximately $0.6 million for the year ended December 31, 2021. To assist us in assessing whether or not, and how to, hedge
risks associated with fluctuations in currency exchange rates, we have contracted a consulting firm proficient in this area. We may incur
losses from unfavorable fluctuations in foreign currency exchange rates.
We do not intend to pay cash dividends.
Although we have paid cash dividends in the past, our current policy
is to retain future earnings, if any, for funding growth and reducing our debt. If we do not pay dividends, long-term holders of our shares
will generate a return on their investment only if the market price of our shares appreciates between the date of purchase and the date
of sale of our shares.
See Item 8.A “Consolidated Statements and Other Financial
Information—Policy on Dividend Distribution” for additional information regarding the payment of dividends.
We are subject to ongoing costs and risks
associated with complying with extensive corporate governance and disclosure requirements.
As an Israeli public company, traded on Nasdaq, we incur significant
legal, accounting and other expenses. We incur costs associated with our public company reporting requirements as well as costs associated
with corporate governance and public disclosure requirements, including requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the Nasdaq Stock Market, regulations of the SEC, the provisions
of the Israeli Securities Law that apply to dual listed companies (companies that are listed on the Tel Aviv Stock Exchange Ltd. (“TASE”)
and another recognized stock exchange located outside of Israel) and the provisions of the Israeli Companies Law 5759-1999 (the “Companies
Law”) that apply to us. We have also contracted an internal auditor and a consultant for implementation of and compliance with the
requirements under the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires an annual assessment by our management of our
internal control over financial reporting of the effectiveness of these controls as of year-end. In connection with our efforts to comply
with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial
amount of time, and we have hired, and may need to hire, additional accounting and financial staff to assure that we comply with these
requirements. We are also required to have our independent registered public accounting firm issue an opinion on the effectiveness of
our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial
reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent
registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting,
we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common
stock to decline, and we may be subject to investigation or sanctions by the SEC. The additional management attention and costs relating
to compliance with the foregoing requirements could adversely affect our financial results. See Item 5.A “Operating and Financial
Review and Prospects—Operating Results—General and Administrative Expenses” for a discussion of our increased expenses
as a result of being a public company.
If we lose our foreign private issuer status
under U.S. federal securities laws, we would incur additional expenses associated with compliance with the U.S. securities laws applicable
to U.S. domestic issuers.
We are a foreign private issuer, as such term is defined under
U.S. federal securities laws, and, therefore, we are not required to comply with all of the periodic disclosure and current reporting
requirements applicable to U.S. domestic issuers. If we lost our foreign private issuer status, we would be required to comply with the
reporting and other requirements applicable to U.S. domestic issuers, which are more extensive than the requirements for foreign private
issuers and more expensive to comply with.
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There can be no assurance that we will not
be a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for any taxable year.
In general, a non-U.S. corporation is a PFIC for any taxable year
in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the value of its assets (generally determined
on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly,
at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate
share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive
income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes.
Goodwill is generally characterized as a non-passive or passive asset based on the nature of the income produced in the activity to which
the goodwill relates.
We believe that we were not a PFIC for our 2021 taxable year. However,
there can be no assurance that we will not be a PFIC for the current or any future taxable year because our PFIC status is an annual determination
that can be made only after the end of the relevant taxable year and will depend on the composition of our income and assets and the value
of our assets from time to time (including the value of our goodwill, which may be determined, in large part, by reference to the market
price of our ordinary shares, which has been, and may continue to be, volatile). Because the value of our goodwill may be determined by
reference to our market capitalization from time to time, and because we hold and may continue to hold significant amounts of cash and
cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase if our market capitalization declines.
If we are a PFIC for any taxable year during which a U.S. investor
owns our ordinary shares, the U.S. investor could be subject to adverse U.S. federal income tax consequences. See “Taxation –
U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”
Our business could be negatively affected
as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States
exchanges, including our Company, have been faced with governance-related demands from activist shareholders, as well as unsolicited tender
offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types of actions
by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our
employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election
of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant
time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders
also could affect the market price and volatility of our securities.
The rights and responsibilities of our shareholders
are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities
of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights
and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular,
a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things,
in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder
votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in
a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested
parties which require shareholders’ approval. There is little case law available to assist in understanding the implications of
these provisions that govern shareholder behavior.
As a foreign private issuer, whose shares
are listed on Nasdaq, we follow certain home country corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer, whose shares are listed on Nasdaq,
we are permitted to follow certain home country corporate governance practices instead of certain requirements contained in the Nasdaq
listing rules. We follow the requirements of the Companies Law in Israel, rather than comply with the Nasdaq requirements, in certain
matters, including with respect to the quorum for shareholder meetings, sending annual reports to shareholders, and shareholder approval
with respect to certain issuances of securities. See Item 16.G. “Corporate Governance” in this Annual Report on Form 20-F
for a more complete discussion of the Nasdaq Listing Rules and the home country practices we follow. As a foreign private issuer listed
on Nasdaq, we may also elect in the future to follow home country practice with regard to other matters as well. Accordingly, our shareholders
may not be afforded the same protection as provided under Nasdaq’s corporate governance rules to shareholders of U.S. domestic companies.
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Provisions of our articles of association
and Israeli law may delay, prevent or make an acquisition of our Company difficult, which could prevent a change of control and,
therefore, depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant
shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association
contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a staggered board. Furthermore,
Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this annual
report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, and Item 10.E. “Taxation—Israeli
Taxation” for additional discussion about some anti-takeover effects of Israeli law.
These provisions of Israeli law may delay, prevent or make difficult
an acquisition of our Company, which could prevent a change of control and therefore depress the price of our shares.
We must meet the Global Select Market’s
continued listing requirements and comply with the other Nasdaq rules, or we may risk delisting. Delisting could negatively affect
the price of our ordinary shares, which could make it more difficult for us to sell securities in a financing and for you to sell
your ordinary shares.
We are required to meet the continued listing requirements of the
Nasdaq Global Select and comply with the other Nasdaq rules, including those regarding minimum shareholders’ equity, minimum share
price and certain other corporate governance requirements. Delisting of our ordinary shares from the Nasdaq Global Select would cause
us to pursue eligibility for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’ ability
to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes
and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.
There can be no assurance that our ordinary shares, if delisted from the Nasdaq Global Select in the future, would be listed on a national
securities exchange or quoted on a national quotation service, the OTCQB or OTC Pink. Delisting from the Nasdaq Global Select Market,
or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult for us to raise
additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’ coverage of us and diminish
investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our share price could be negatively affected
and our shareholders would likely find it more difficult to sell, or to obtain accurate quotations as to the prices of, our ordinary shares.
Our ordinary shares are traded on more than one market and this
may result in price variations.
Our ordinary shares are traded on the Nasdaq Global Select Market
and on TASE. Trading in our ordinary shares on these markets is effected in different currencies (U.S. dollars on Nasdaq and NIS on TASE)
and at different times (resulting from different time zones, different trading days per week and different public holidays in the United
States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ, resulting from the factors
described above as well as differences in exchange rates and from political events and economic conditions in the United States and Israel.
Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary
shares on the other market.
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Risks Related to Our Technological Environment
Our business and financial performance may
be materially adversely affected by information technology issues, data breaches, cyber-attacks and other similar incidents, insufficient
cyber security and other business disruptions.
Our business is constantly challenged and may be impacted by information technology
issues, data breaches, cyber-attacks and other similar incidents, and other business disruptions experienced by us or our service providers.
Data breaches, cyber-attacks and other similar incidents, in particular, are a growing and evolving risk, and often are difficult or impossible
to detect for long periods of time or to successfully defend against. Such attacks may include, but are not limited to, malicious software,
computer viruses, ransomware attacks, denial-of-service attacks, social engineering, phishing attacks, worms, insider threats, human error
or malfeasance, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in
systems, unauthorized release of confidential or otherwise protected information, including personal data, corruption of data and overloading
our servers and systems with communications and data. Data breaches, cyber-attacks and other similar incidents are increasing in frequency,
levels of persistence, sophistication and intensity, are evolving in nature, and are conducted by organized groups and individuals with
a wide range of motives and expertise, including organized criminal groups, “hacktivists,” terrorists, nation states, nation
state-supported actors, and others. Unidentified groups have hacked numerous internet websites and servers, including our own, for various
reasons, political, commercial and other. Any such incident, or any failure to make adequate or timely disclosures to the public, regulators,
or law enforcement agencies following any such incident, could subject us or our service providers to substantial system downtimes, operational
delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of
confidential or otherwise protected information, including personal data, the destruction or corruption of data, other manipulation or
improper use of our systems and networks, violations of applicable privacy, data collection and protection and cybersecurity laws and
regulations or notification obligations, legal claims, regulatory scrutiny or enforcement actions, financial losses from remedial actions,
loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our cash
flows, competitive position, financial condition and results of operations. Although these attacks have caused certain difficulties, they
have not had, to date, a material adverse effect on our business, financial condition or results of operations. However, given the unpredictability
of the timing, nature and scope of such incidents, and because techniques used to obtain unauthorized access or sabotage systems change
frequently and generally are not identified until they are launched against a target, there can be no assurance that such attacks can
be prevented or that any such incidents will not have a material adverse effect on us in the future. We may not be able to anticipate
data breaches, cyber-attacks or other similar incidents, detect or react to such incidents in a timely manner, implement effective preventive
measures against such incidents, or adequately remediate any such incident. As cybersecurity threats continue to evolve, we may be required
to expend significant additional resources to continue to modify or enhance our protective measures or to investigate or remediate any
information security vulnerabilities, data breaches, cyber-attacks or other similar incidents.
While we generally perform cybersecurity diligence on our key service
providers, because we do not control our service providers and our ability to monitor their cybersecurity is limited, we cannot ensure
the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws and regulations
or contractual obligations, we may be held responsible for data breaches, cyber-attacks or other similar incidents attributed to our service
providers as they relate to the information we share with them. In addition, if we suffer a highly publicized data breach, cyber-attack
or other similar incident, even if our platforms and solutions perform effectively, such an incident could have an adverse effect and
cause us to suffer reputational harm, lose existing commercial relationships and customers or deter existing customers from purchasing
additional solutions and prevent new customers from purchasing our solutions.
We cannot ensure that any limitations of liability provisions in
our agreements with customers, service providers and other third parties with which we do business would be enforceable or adequate or
would otherwise protect us from any liabilities or damages with respect to any particular claim in connection with a data breach, cyber-attack
or other similar incident. Additionally, we cannot be certain that our insurance coverage will be adequate for cybersecurity liabilities
actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer
will not deny coverage as to any future claim.
If we fail to detect or prevent suspicious
traffic or other invalid traffic or engagement with our ads, or otherwise prevent against malware intrusions, we could lose the confidence
of our advertisers, damage our reputation and be responsible to make-good or refund demands, which would cause our business to suffer.
Our business relies on delivering positive results to our advertisers
and their consumers. We are exposed to the risk of fraudulent or suspicious impressions, clicks
or conversions that advertisers may perceive as undesirable. Such fraudulent activities may occur when a software program, known as a
bot, spider or crawler, intentionally simulates user activity causing impressions, ad engagements or clicks to be counted as real users.
Such malicious software programs can run on single machines or on tens of thousands of machines, making them difficult to detect and filter.
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We implement and use proprietary and third party technologies to
identify fraudulent or suspicious impressions, clicks or conversions. Despite our efforts, it can be difficult to detect fraudulent suspicious
activity for different reasons. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent
it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid or fraudulent activity
could lead to dissatisfaction with our advertising services, refusals to pay, refund or make-good demands or withdrawal of future business.
Any of these occurrences could damage our brand and lead to a loss of our revenue.
A loss of the services of our technology vendors could adversely
affect execution of our business strategy.
Should some of our technology vendors terminate their relationship
with us, our ability to continue the development of some of our products could be adversely affected, until such time that we find adequate
replacement for these vendors, or until such time that we can continue the development on our own.
We may not be able to enhance our platform to keep pace with technological
and market developments in our evolving industry.
To keep pace with technological developments, satisfy increasing
developer requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving
industry standards, we will need to regularly enhance our platform and solutions as well as develop and introduce new services on a timely
basis. We also must update our software to reflect changes in advertising networks’ application programming interfaces (“APIs”),
technological integration and terms of use. The success of any enhancement or new solution depends on several factors, including timely
completion, adequate quality testing, appropriate introduction and market acceptance. Our inability, for technological, business or other
reasons, to timely enhance, develop, introduce and deliver compelling advertising services in response to changing market conditions and
technologies or evolving expectations of advertisers or consumers could hurt our ability to grow our advertising business.
Our products operate in a variety of computer
and device configurations and could contain undetected errors or defects that could result in product failures, lost revenue and
loss of market share.
Our software and advertising products may contain undetected errors,
failures or defects, especially when the products are first introduced or when new versions are released. Our customers’ computer
and other device environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release
testing for programming or compatibility errors very difficult and time-consuming. As a result, there could be errors or failures in our
products. In addition, despite testing by us and beta testing by some of our users, errors, failures or bugs may not be found in new products
or releases until after commencement of commercial sales and distribution. In the past, we have discovered software errors, failures and
defects in certain of our product offerings after their full introduction and have experienced delayed or lost revenue during the period
required to correct these errors.
Errors, failures or defects in products released by us could result
in negative publicity, product returns, make-goods, refunds, loss of or delay in market acceptance of our products, loss of competitive
position or claims by customers. Alleviating any of these problems could require significant expense and resources and could cause interruptions
to our products.
We depend on third party internet, telecommunication and hosting
providers to operate our platforms, websites and services. Temporary failure of these services, including catastrophic or technological
interruptions, would materially reduce our revenue and damage our reputation, and securing alternate sources for these services could
significantly increase our expenses and be difficult to obtain.
Our third-party internet, hosting and telecommunication providers may experience disruptions,
which would reduce our revenue and increase our costs. We own servers located in Israel, Europe and the United States and we also rent
the services of approximately 1,000 servers located around the world, mainly through Amazon Web Services. Our servers include mainly web
servers, application servers, data collection servers, data storage servers, data processing servers, mail servers and database servers.
While we believe that there are many alternative providers of hosting and other communication services available to us, the costs associated
with any transition to a new service provider could be substantial. Furthermore, although we maintain back-up systems for most aspects
of our operations, we could still experience deterioration in performance or interruption in our systems, delays, and loss of critical
data and registered users and revenue, in addition, the services of such providers could be vulnerable to damage or interruption from
earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, power losses, telecommunications failures and similar
events. The occurrence of a natural disaster or an act of terrorism, a decision to close such providers facilities without adequate notice,
or other unanticipated problems could result in lengthy interruptions to our services. The facilities of such providers also could be
subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct.
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Our systems are also not fully redundant and our disaster recovery
planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage to compensate us for losses
from a major interruption. Furthermore, interruptions in the services of our providers or their inability to meet the service capacity
we require, could result in interruptions in the availability or functionality of our solutions or materially impede our ability to attract
and onboard new customers to services and to maintain relationships with current customers. Difficulties of this kind could damage our
reputation, be expensive to remedy and curtail our growth.
The introduction of new browsers and other
popular software products may materially adversely affect user engagement with our search services.
Users typically install new software and update their existing software as new or updated
software is introduced online by third-party developers. In addition, when a user purchases a new computing device or installs a new internet
browser, it generally uses the internet search services that are typically pre-installed on the new device or internet browser. Our products
are distributed online and are usually not pre-installed on computing devices. Further, as many software vendors that distribute their
solutions online also offer search services alongside their primary software product, users often replace our search services with those
provided by these vendors in the course of installing new software or updating existing software. After users have installed search solutions
offered by us, any event that results in a significant number of our users changing or upgrading their internet browsers could result
in the failure to generate the revenue that we anticipate from our users and result in a decline in our user base. Should we not be able
to timely respond to such changes or in the event that the search solutions offered by vendors would offer better user experience than
the one offered by us, this could have an adverse effect on our business, financial condition and our results of operations. Finally,
although we constantly monitor the compatibility of our internet search services and related solutions with such new versions and upgrades,
we may not be able to make the required adjustments to ensure constant availability and compatibility of such solutions.
Risks Related to Regulatory Changes
Regulatory, legislative, or self-regulatory developments relating
to e-commerce, internet advertising, privacy and data collection and protection, and uncertainties regarding the application or interpretation
of existing laws and regulations, could harm our business and subject us to significant legal liability for non-compliance.
Our business is conducted through the internet and therefore, among other things, we
are subject to the laws and regulations that apply to e-commerce and online businesses around the world. These laws and regulations are
becoming more prevalent in the United States, Europe, Israel, Canada and elsewhere and may impede the growth of the internet and consequently
our services. These regulations and laws may cover privacy, data collection and protection, location of data storage and processing, cybersecurity,
e-commerce, content, use of “cookies,” access changes, “net neutrality,” pricing, advertising, distribution of
“spam,” copyright and other intellectual property, libel, marketing, distribution of products, protection of minors, consumer
protection, taxation and online payment services.
Many areas of the law affecting the internet remain largely unsettled, even in areas
where there has been some legislative action.
For example, we collect, use, maintain and otherwise process certain
data about our customers (including, without limitation, customers’ clients or users), partners, employees, consultants, leads and
consumers. Our ability to collect, use, maintain or otherwise process personal data has been, and could be further, restricted by existing
and new laws and regulations relating to privacy and data collection and protection, including the EU General Data Protection Regulation
(the “GDPR”). These laws and regulations define personal data to include location data and online identifiers, which are commonly
used and collected parameters in digital advertising and, among other things, impose stringent user consent requirements and permit data
subjects to request we discontinue using certain data. In addition, some countries are considering or have enacted legislation requiring
local storage and processing of data that could increase the cost and complexity of delivering our services.
Additionally, the uncertainty created by these laws and regulations
can be compounded when services hosted in one jurisdiction are directed at users in another jurisdiction. For instance, European data
protection rules may apply to companies which are not established in the European Union (“EU”). The GDPR has an even wider
territorial scope and contains significant penalties for non-compliance. The GDPR, among other things, imposes requirements to provide
detailed and transparent disclosures about how personal data is collected and processed, grants rights for data subjects to access, delete
or object to the processing of their personal data, provides for a mandatory breach notification to supervisory authorities (and in certain
cases, affected individuals) of certain data breaches, sets limitations on the retention of personal data and outlines significant documentary
requirements to demonstrate compliance through policies, procedures, training and audits. To further complicate matters in Europe,
to date, supervisory authorities in the member states have some flexibility when implementing European Directives and certain aspects
of the GDPR, which can lead to diverging national rules. European supervisory authorities have been very active in terms of enforcing
data protection rules, including with respect to cookie-related matters.
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The withdrawal of the United Kingdom (“U.K.”) from
the EU (“Brexit”) also has created uncertainty with regard to the regulation of data protection in the United Kingdom. Since
January 1 2021, when the transitional period following Brexit expired, we have been required to comply with the GDPR as well as the U.K.’s
General Data Protection Regulation (“U.K. GDPR”) (combining the GDPR and the UK’s Data Protection Act of 2018), which
exposes us to two parallel regimes, each of which authorizes similar fines and may subject us to increased compliance risk based on differing,
and potentially inconsistent or conflicting, interpretation and enforcement by regulators and authorities (particularly, if the laws are
amended in the future in divergent ways). With respect to transfers of personal data from the European Economic Area (“EEA”),
on June 28, 2021, the European Commission issued an adequacy decision in respect of the U.K.’s data protection framework, enabling
data transfers from EU member states to the U.K. to continue without requiring organizations to put in place contractual or other measures
in order to lawfully transfer personal data between the territories. While it is intended to last for at least four years, the European
Commission may unilaterally revoke the adequacy decision at any point, and if this occurs, it could lead to additional costs and increase
our overall risk exposure. Additionally, the European Commission is currently re-examining its Decision 2011/61/EU regarding the adequacy
of Israeli law, in light of the GDPR and developments in Israeli privacy legislation, which could result in revoking Israel’s adequacy
status for purposes of transfers of personal data from the EEA to Israel. The outcome of this examination may also affect the U.K.’s
approach on the adequacy of Israeli law with respect to the U.K. GDPR, which could require us to further review and amend the lawful mechanisms
by which we make and/or receive personal data transfers from the U.K. It is unclear how U.K. data protection laws or regulations will
develop in the medium to longer term.
Additionally, recent legal developments in Europe have created
complexity and uncertainty regarding transfers of personal data from the EEA to the United States. Most recently, on July 16, 2020, in
a case known as Schrems II, the Court of Justice of the European Union (“CJEU”) invalidated the EU-US Privacy Shield Framework
(“Privacy Shield”), under which personal data could be transferred from the EEA to U.S. entities which had self-certified
under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved
by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield) (“SCCs”),
it made clear that reliance on SCCs alone may not necessarily be sufficient in all circumstances. The CJEU's decision also cast doubt
over the effectiveness of the SCCs. The European Data Protection Board, which subsequently issued a revised set of SCCs for organizations
to utilize, released their comments on the supplementary measures that can be used to ensure a sufficient level of data protection
when transferring personal data. The comments indicated that organizations need to perform a data transfer impact assessment to evaluate
the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals, and that
additional measures and/or contractual provisions may need to be put in place. However, the nature of these additional measures is currently
uncertain. Comparable risks and considerations apply with respect to transfers of personal data from the U.K. to the United States.
Similarly, there have been laws and regulations adopted throughout
the United States and in Israel that impose new obligations in areas such as privacy, in particular protection of personal information
and implementing adequate cybersecurity measures to protect such information. In the United States, both federal and state legislation
also govern the collection, use and other processing of personal data, and the advertising industry has been subject to review by the
Federal Trade Commission (the “FTC”), U.S. Congress, and individual states. For example, the California Consumer Privacy Act
(“CCPA”), provides data privacy rights for California residents and operational requirements for covered companies. Among
other things, companies covered by the CCPA must provide new disclosures to California residents and afford such residents the ability
to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right
of action for data breaches that is expected to increase data breach litigation. In addition to the CCPA, the California Privacy Rights
Act (“CPRA”), which passed in November 2020 and will take effect in January 2023, will expand the rights granted under the
CCPA and impose additional notice and opt out-obligations, including an obligation to provide California residents with the ability to
opt-out to the processing of personal information for purposes of behavioral advertising. Additional U.S. states have implemented, or
are in the process of implementing, similar new laws or regulation (for example, the Virginia Consumer Data Protection Act (“VCDPA”)
that will go into effect on January 1, 2023 and the Colorado Privacy Act (“CPA”) which will go into effect on July 1, 2023)
that impose new privacy rights and obligations. Further, laws in all 50 states require businesses to provide notice to consumers whose
personal information has been disclosed as a result of a data breach. More generally, some observers have noted that the CCPA, CPRA, VCDPA,
and CPA could mark the beginning of a trend toward more stringent United States federal privacy legislation, which could increase our
potential liability and adversely affect our business.
26
The CCPA, and eventually the CPRA, VCDPA, CPA, and other legal
and regulatory changes, are making it easier for certain individuals to opt-out of having their personal data processed and disclosed
to third parties through various opt-out mechanisms, which could result in an increase to our operational costs to ensure compliance with
such legal and regulatory changes. In recent years, there has also been an increase in attention to and regulation of privacy and data
collection and protection across the globe, including in the United States with the increasingly active approach of the FTC to enforcing
data privacy under the Section 5 of the FTC Act pursuant to the “Unfair and Deceptive Acts and Practices” framework. Similar
to the GDPR, the CCPA, and eventually the CPRA, VCDPA, CPA, and other legal and regulatory changes, will require us to devote resources
and incur additional costs associated with compliance, as well as impose additional restrictions on our and our partners’ operations.
In addition, failure to comply with the Israeli Privacy Protection Law 1981 and its
regulations, as well as the guidelines of the Israeli Privacy Protection Authority, may expose us to administrative fines, civil claims
(including class actions) and, in certain cases, criminal liability. Current pending legislation may result in a change to the current
enforcement measures and sanctions. There have also been privacy bills enacted in other countries around the world, such as Brazil, which
have introduced new or expanded privacy requirements and we expect that privacy legislation will continue to evolve in the coming years.
Therefore, it is difficult to determine whether and how such existing and laws and regulations will apply to and impact the internet and
our business.
Further, any failure or perceived failure to comply with our public
privacy policies and other public statements about privacy and cybersecurity could potentially subject us to regulatory investigations,
enforcement or legal actions, and harm to our reputation and, if such policies or statements are found to be deceptive, unfair or misrepresentative
of our actual practices, fines, monetary or other penalties, and other damage to our business and results and results of operations.
Although we strive to comply with applicable laws and regulations
the evolving global standards regarding privacy and to inform our customers of our business practices prior to any installations of our
product and use of our services, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our
data collection, use, preservation and other processing practices or that it may be argued that our practices do not comply with certain
countries’ privacy and data collection and protection laws and regulations. Due to rapid changes in technology and the inconsistent
interpretations of privacy and data collection and protection laws and regulations, we may be required to materially change the way we
do business. The challenges imposed by the ongoing need to remain compliant with such laws and regulations, as well the need to implement
any changes required based on newly introduced laws and regulations, may slow our growth, and if we are not able to cope with these challenges
as effectively as other companies, we will be competitively disadvantaged. Any limitation on our ability to collect and utilize data,
including personal data, would make it more difficult for us to be able to optimize ad placement for the benefit of our advertisers and
publishers, which could render our solutions less valuable and potentially result in loss of clients and a decline in revenue. For example,
we may need to adapt our advertising solution to a “cookie-less” environment and introduce alternative solutions which may
not provide the targeting capabilities provided by cookies. In addition, we may be required to implement physical, administrative and
technological security measures that differ from those we have now, such as different data access controls or encryption technology. Further,
we use cloud-based computing, which is not without substantial risk, particularly at a time when businesses of almost every kind are finding
themselves subject to an ever-expanding range of privacy, data collection and processing and cybersecurity laws and regulations, document
retention requirements, and other standards of accountability. Compliance with such existing and new laws and regulations can be costly
and can delay, or impede the development of new products, any and failure or perceived failure to comply with such laws and regulations
could result in negative publicity, increase our operating costs, require significant management time and attention and subject us to
inquiries or investigations, litigation (including class actions), claims, or other remedies, including penalties, fines, sanctions and
criminal and civil liabilities, or demands or orders that we modify or cease existing business practices, each of which could materially
affect our operating results and our business. Moreover, concerns about our collection, use, sharing, handling and other processing of
data or other privacy related matters, even if unfounded, could harm our reputation and operating results. For more information regarding
government regulations to which we are subject, see Item 4.B. “Business Overview— Government Regulation.”
27
If one or more states or countries determine
that we are required to collect sales, use, or other taxes on the services that we sell, this may result in liability to pay sales,
use, and other taxes (plus interest and penalties) on prior sales and a decrease in our future sales revenue.
While in some states we are subject to sales tax, in general, the
digital advertising business has not traditionally paid sales tax. However, a successful assertion by one or more cities, states or countries
that digital advertising services should be subject to such taxes or that we are not providing digital advertising services, but other
services and should collect sales, use, or other taxes on the sale of our services, or that we have failed to do so where required in
the past, could result in a decrease in future sales and/or substantial tax liabilities for past sales. Each state and country has different
rules and regulations governing sales, use, and other taxes, and these rules and regulations are subject to varying interpretations that
may change over time.
Following a US Supreme Court decision regarding the rights of individual
states to tax out of state suppliers, certain states have adapted their statutes to expand taxation on out-of-state suppliers of goods
and services. Some states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar
taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals
have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible
that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the
future which could impact our future sales, and therefore could result in a material adverse effect on our revenue.
For example, in February 2021, the State of Maryland’s House
of Delegates and Senate approved legislation to tax digital advertising revenue. Similar bills have been introduced in several other states.
Certain countries in the European Union and elsewhere have recently
adopted taxation on digital services including digital advertising, in various forms, such enacted and proposed taxes may have an impact
on us.
Under current Israeli, U.S., U.K., Ukrainian
and French law, we may not be able to enforce non-competition and non-solicitation covenants and, therefore, we may be unable to
prevent our competitors from benefiting from the expertise of some of our former employees and/or vendors, whether current or former.
We have entered into non-competition and non-solicitation agreements
with many of our employees and vendors. These agreements prohibit our employees and vendors, if they terminate their relationship with
us, from competing directly with us, working for our competitors, or soliciting current employees away from us for a limited period. Under
current Israeli, U.S., U.K. Ukrainian and French law, we may be unable to enforce these agreements, in whole or in part, and it may be
difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example,
Israeli 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 which have been recognized by
the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate
that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Risks Related to our Intellectual Property
Our proprietary information and intellectual
property may not be adequately protected and thus our technology may be unlawfully copied by or disclosed to other third parties.
We regard the protection of our proprietary information and technology
and other intellectual property as critical to our success. We strive to protect our intellectual property rights by relying on contractual
restrictions, trade secret law and other common law rights, as well as federal and international intellectual property registrations and
the laws on which these registrations are based. However, the technology we use and incorporate into our offerings may not be adequately
protected by these means.
We generally enter into confidentiality and invention assignment
agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business, in order to
limit access to, and the disclosure and use of, our proprietary information. However, we may not be successful in executing these agreements
with every party who has access to our confidential information or contributes to the development of our intellectual property. In addition,
those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. Further, these contractual
arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our intellectual
property and/or trade secrets, or deter independent development of similar intellectual property by others.
28
In addition, there is no assurance that any existing or future
patents or trademarks will afford adequate protection against competitors and similar technologies. Our intellectual property rights may
be challenged, invalidated, or circumvented by others or invalidated through administrative process or litigation. Effective trademark
and patent protections are expensive to develop and maintain, as are the costs of defending our rights. Further, we cannot assure you
that competitors will not infringe our patents or trademarks, or that we will have adequate resources to enforce our rights.
Third party claims of infringement or other
claims against us could require us to redesign our products, seek licenses, or engage in costly intellectual property litigation,
which could adversely affect our financial position and our ability to execute our business strategy.
Given the competitive and technology-driven nature of the digital
advertising industry, companies within our industry often design and use similar products and services, which may lead to claims of intellectual
property infringement and potentially litigation. We have been, and in the future may be, the subject of claims that our solutions and
underlying technology infringe or violate the intellectual property rights of others. Regardless of whether such claims have any merit,
these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Our business
may suffer if we are unable to resolve infringement or misappropriation claims without major financial expenditures or adverse consequences.
If it appears necessary or desirable, we may seek to obtain licenses
to use intellectual property rights that we are allegedly infringing, may infringe or desire to use. Although holders of these types of
intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered
licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights such as these from a third party
for technology or content, sound, or graphic used by us could cause us to incur substantial liabilities and to suspend the development
and sale of our products. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing
technology. If we are unable to re-design our products or develop non-infringing technology, our revenue could decrease and we may not
be able to execute our business strategy.
On December 22, 2015, Adtile Technologies Inc. filed a lawsuit
against Perion and Undertone alleging, inter alia, that Undertone’s UMotion advertising
format, “hand phone” image, and use of the full tilt library infringes on its intellectual property. On February 3, 2016,
Adtile Technologies Inc. filed a motion for preliminary injunction to, inter alia, prevent
Undertone from creating or selling motion-activated advertisements. On June 23, 2016, the court denied Adtile’s motion for a preliminary
injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Undertone’s motion to stay
the action and compel arbitration. As of the date of this report, Adtile had not commenced an arbitration proceeding and the court dismissed
the case for administrative reasons. We believe that we have strong defenses against this lawsuit and we intend to defend against it vigorously
if the case is ever resubmitted. However, if we do not prevail in this case, we may incur monetary damages and/or be prohibited from using
certain intellectual property.
We may also become involved in litigation in connection with the
brand name rights associated with our Company name or the names of our products. We do not know whether others will assert that our Company
name or any of our brands name infringe(s) their trademark rights. In addition, names we choose for our products may be alleged to infringe
names held by others. If we have to change the name of our Company or products, we may experience a loss in goodwill associated with our
brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be time-consuming, expensive to
resolve, and require additional management time and attention.
We may become subject to claims for remuneration
or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
A significant portion of our intellectual property has been developed
by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived
by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,”
which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights.
The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties
Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration
for his inventions. Case law clarifies that the right to receive consideration for “service inventions” can be waived by the
employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine, on a case-by-case
basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further,
the Committee has not yet determined one specific formula for calculating this remuneration (but rather uses the criteria specified in
the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals
assign to us all rights to any inventions created in the scope of their employment or engagement with us, we may face claims demanding
remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration
or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
29
We use certain “open source”
software tools that may be subject to intellectual property infringement claims or that may subject our derivative works or products
to unintended consequences, possibly impairing our product development plans, interfering with our ability to support our clients
or requiring us to allow access to the source code of our products or necessitating that we pay licensing fees.
Certain of our products contain open source code and we may use
more open source code in the future. In addition, certain third party software that we embed in our products contains open source code.
Open source code is code that is covered by a license agreement that permits the user to liberally use, copy, modify and distribute the
software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open
source code provide no warranties on such code.
As a result of the use of open source software, we could be subject
to suits by parties claiming ownership of what they believe to be their proprietary code or we may incur expenses in defending claims
alleging non-compliance with certain open source code license terms. In addition, third party licensors do not provide intellectual property
protection with respect to the open source components of their products, and we may be unable to be indemnified by such third-party licensors
in the event that we or our customers are held liable in respect of the open source software contained in such third party software. If
we are not successful in defending against any such claims that may arise, we may be subject to injunctions and/or monetary damages or
be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products,
which would negatively impact our revenue and cash flow.
Moreover, under certain conditions, the use of open source code
to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under
which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. If we are
required to publicly disclose the source code for such derivative products or to license our derivative products that use an open source
license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our
competitors may have access to our products without cost to them which could harm our business. Certain open source licenses require as
a condition to use, modification and/or distribution of such open source that proprietary software incorporated into, derived from or
distributed with such open source be disclosed or distributed in source code form, be licensed for the purpose of making derivative works,
or be redistributable at no charge. The foregoing may under certain conditions be interpreted to apply to our software, depending upon
the use of the open source and the interpretation of the applicable open source licenses.
We monitor our use of open source code to avoid subjecting our
products to conditions we do not intend. The use of open source code, however, may ultimately subject some of our products to unintended
conditions so that we are required to take remedial action that may divert resources away from our development efforts.
Risks Related to the Geographical Location of our Operations
Our business is significantly reliant on
the North American market. Any material adverse change in that market could have a material adverse effect on our results of operations.
Our revenue have been concentrated within the North American market,
accounting for approximately 89% of our revenue for 2021. A significant reduction in the revenue generated in such market, whether as
a result of a recession that causes a reduction in advertising expenditures generally or otherwise, which causes a decrease in our North
American revenue, could have a material adverse effect on our results of operations.
30
Our business may be materially affected by
changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding
their potential effects, could adversely affect our results of operations and share price.
We operate in a global market and are subject to tax in Israel
and other jurisdictions. Our tax expenses may be affected by changes in tax laws, international tax treaties, international tax guidelines
(such as the Base Erosion and Profit Shifting project of the OECD’s Inclusive Framework (“BEPS”)).
The OECD’s Inclusive Framework on BEPS has recently made
certain recommendations, informally known as BEPS 2.0, which aim to modify international taxation norms with respect to allocation of
taxing rights and introduction of minimum taxation, focusing mostly on the digital economy. Currently, there is uncertainty as to what
modifications will be made in these recommendations and how they will be implemented.
Certain of these changes could have a negative impact on our results
of operations and business. The impact of these changes is uncertain, and may not become evident for some period of time. The uncertainty
surrounding the effect of the reforms on our financial results and business could also weaken confidence among investors in our financial
condition. This could, in turn, have a materially adverse effect on the price of our ordinary shares. Shareholders are urged to consult
their tax advisors regarding the effect of these changes to the U.S. federal tax laws on an investment in our shares.
Our international operations involve special
risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.
A large portion of our operations are performed from outside the
United States. In addition, we derive and expect to continue to derive a portion of our revenue from users outside the United States.
Our international operations and sales are subject to a number of inherent risks, including risks with respect to:
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• |
potential loss of proprietary information
due to piracy, misappropriation or laws that may be less protective of our intellectual property rights than those of the United States;
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• |
costs and delays associated with translating
and supporting our products in multiple languages; |
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• |
foreign exchange rate fluctuations and economic
instability, such as higher interest rates and inflation, which could make our products more expensive in those countries; |
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• |
costs of compliance with a variety of laws
and regulations; |
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• |
restrictive governmental actions such as
trade restrictions and potential trade wars; |
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• |
limitations on the transfer and repatriation
of funds and foreign currency exchange restrictions; |
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• |
compliance with different consumer, privacy
and data collection and protection laws and regulations, and restrictions on pricing or discounts; |
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• |
lower levels of adoption or use of the internet and other technologies vital to our business
and the lack of appropriate infrastructure to support widespread internet usage; |
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• |
lower levels of consumer spending on a per
capita basis and fewer opportunities for growth in certain foreign market segments compared to the United States; |
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• |
lower levels of credit card usage and increased
payment risk; |
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• |
changes in domestic and international tax
regulations; and |
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• |
geopolitical events, including war and terrorism.
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31
Political, economic and military instability in the Middle East may
impede our ability to operate and harm our financial results.
Our principal executive offices are located in Israel. In addition,
a number of our officers and directors are residents of 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. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners
could adversely affect our operations and results of operations. In December 2008 and January 2009 there was an escalation in violence
among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the
Gaza Strip, which resulted in missiles being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles
being fired from the Gaza Strip into Southern Israel, as well at areas more centrally located near Tel Aviv and at areas surrounding Jerusalem,
occurred during November 2012 and July through August 2014. These conflicts involved missile strikes 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. Since April 2011, internal conflict in Syria has escalated, and chemical weapons have been used in the region. Foreign actors
have and continue to intervene in Syria. This instability and any intervention may lead to deterioration of the political and economic
relationships that exist between the State of Israel and some of the countries in the region, and may have the potential for additional
conflicts in the region. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran also has a strong
influence among extremist groups in the region, including Hamas in Gaza, Hezbollah in Lebanon and various rebel militia groups in Syria.
Furthermore, in early January 2020, certain events contributed to an increase in hostilities between the United States and Iran, and as
a result Iran issued multiple public statements threatening to attack Israel and the United States. These situations have escalated at
various points in recent years and may escalate in the future to more violent events, which may affect Israel and us. Any armed conflicts,
terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations
and could make it more difficult for us to raise capital. 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.
Our commercial insurance does not cover losses that may occur as
a result of events associated with the security situation in the Middle East. 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 harm 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 addition, many Israeli citizens are obligated to perform several
days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are
military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response
to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there
will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up
of members of our management. Such disruption could materially adversely affect our business, prospects, financial condition and results
of operations.
We are exposed to the risk of natural disasters,
political events, war, terrorism and pandemics, each of which could disrupt our business and adversely affect our results of operations.
Events beyond our control could have an adverse effect on our business,
financial condition, results of operations and cash flows. Disruption to our business resulting from natural disasters, political events,
war, terrorism, pandemics or other reasons could impair our ability to continue to provide uninterrupted service to our advertisers and
partners. For example, tensions between Russia and Ukraine, recently resulting in Russia’s invasion of Ukraine, and the possibility
of retaliatory measures taken by the U.S. and NATO have created global security concerns that could have a lasting adverse impact on regional
and global economies, and in turn, may lead to reduced spending on advertising and adversely affect our results of operations. Similarly,
disruptions in the operations of our key third-parties, such as data centers, servers or other technology providers, could have a material
adverse effect on our business.
32
While we have disaster recovery arrangements in place, they have
not been tested under actual disasters or similar events and may not effectively permit us to continue to provide our services. If any
of these events were to occur to our business, our business, results of operations, or financial condition could be adversely affected.
Investors and our shareholders generally
may have difficulties enforcing a U.S. judgment against us, our executive officers or our directors or asserting U.S. securities
laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service
of process on us, our Israeli subsidiaries, our directors and officers and the Israeli experts, if any, named in this annual report on
Form 20-F, substantially all of whom reside outside of the United States, may be difficult to obtain within the United States.
Furthermore, because a significant portion of our assets and investments,
and substantially all of our directors, officers and Israeli external experts are located outside the United States, any judgment obtained
in the United States against us or any of them may be difficult to collect within the United States.
We have been informed by our legal counsel in Israel that it may
also be difficult to assert U.S. securities laws claims in original actions instituted in Israel. Israeli courts may refuse to hear a
claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim.
In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the
claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed
by Israeli law.
Subject to specified time limitations and legal procedures, under
the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil matter, including
a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary or compensatory judgment in a
non-civil matter, provided that the following key conditions are met:
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subject to limited exceptions, the judgment
is final and non-appealable; |
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• |
the judgment was given by a court competent
under the laws of the state of the court and is otherwise enforceable in such state; |
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• |
the judgment was rendered by a court competent
under the rules of private international law applicable in Israel; |
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• |
the laws of the state in which the judgment
was given provide for the enforcement of judgments of Israeli courts; |
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adequate service of process has been effected
and the defendant has had a reasonable opportunity to present his arguments and evidence; |
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• |
the judgment and its enforcement are not contrary
to the law, public policy, security or sovereignty of the State of Israel; |
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• |
the judgment was not obtained by fraud and
does not conflict with any other valid judgment in the same matter between the same parties; and |
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• |
an action between the same parties in the
same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court. |
The tax benefits available to us for activities
in Israel require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and
taxes.
We have benefited and currently benefit from a variety of Israeli
government programs and tax benefits with regards to our operations in Israel, that generally carry conditions that we must meet in order
to be eligible to obtain any benefit. Our tax expenses and the resulting effective tax rate reflected in our financial statements may
increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in which we operate,
non-deductible expenses, loss and timing differences, or changes in the mix of countries, where we generate profit.
33
If we fail to meet the conditions upon which certain favorable
tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received
including interest and linkage to the Israeli consumer price index. Any of the following could have a material effect on our overall effective
tax rate:
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• |
we may be unable to meet the requirements for
continuing to qualify for some programs; |
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• |
these programs and tax benefits may be unavailable
at their current levels; or |
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• |
we may be required to refund previously recognized
tax benefits if we are found to be in violation of the stipulated conditions. |
Additional details are provided in Item 5.A “Operating Results”
under the caption “Taxes on Income,” in Item 10.E. “Taxation” under the caption “Israeli Taxation”
and in Note 15 to our Financial Statements.
ITEM 4. INFORMATION
ON THE COMPANY
A. HISTORY
AND DEVELOPMENT OF THE COMPANY
Our History
We were incorporated in the State of Israel in November 1999 under
the name Verticon Ltd., changed our name to IncrediMail Ltd. in November 2000 and in November 2011 changed our name to Perion Network
Ltd. We operate under the laws of the State of Israel. Our headquarters are located at 26 HaRokmim Street, Holon 5885849, Israel. Our
phone number is 972-73-398-1000. Our website address is www.perion.com. The information on our website does not constitute a part
of this annual report. Our agent for service in the United States is Intercept Interactive Inc. d/b/a Undertone, which is located at One
World Trade Center, 77th Floor, Suite A, New York, NY 10007.
We completed the initial public offering of our ordinary shares
in the United States on February 3, 2006. Since November 20, 2007, our ordinary shares are also traded on the TASE.
In the recent years, we completed several acquisitions, including
the acquisition of ClientConnect Ltd. in 2014, the acquisition of Interactive Holding Corp. in 2015, which we refer to, together with
its subsidiaries, as “Undertone”, the acquisition of Septa Communications LLC, also known as “Captain Growth”,
in March 2019, the acquisition of Content IQ LLC in January 2020, the acquisition of Pub Ocean in July 2020 and the acquisition of Vidazoo
in October 2021.
Our SEC filings are available to you on the SEC’s website
at http://www.sec.gov. This site contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F and is not incorporated
by reference herein.
Principal Capital Expenditures
In 2019, 2020 and 2021, capital expenditures consisted of $1.2 million, $0.5 million
and $0.6 million, respectively, mainly from investments in computer hardware and software.
To date, we have financed our general capital expenditures with
cash generated from operations and debt. To the extent we acquire new products and businesses, these acquisitions may be financed by any
of, or a combination of, cash generated from operations, or issuances of equity.
B. BUSINESS
OVERVIEW
General
Perion is a global technology innovator in the digital advertising
ecosystem, providing brands, agencies and publishers with a holistic ability to identify and reach their most valuable customers –
across all channels – with high-impact creative units that are orchestrated by its proprietary Intelligent Hub (iHUB), which, we
believe, offers untapped cross-sell opportunities that we are just starting to realize.
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Perion’s technology leadership leverages the Company’s
scale, operating across the three main pillars of digital advertising: ad search, social media, and display/video/CTV, operate in an addressable
market of more than $571 billion in 2022 that is expected to grow to $785 billion in 2025, according to eMarketer.
The advanced technological solutions offered by Perion, which apply
to the entire consumer journey and marketing funnel, are poised to benefit from the macro trends in the digital advertising ecosystem,
which include:
| • |
The growth in search driven by the growing shift to ecommerce; |
| • |
The growth in video which is outpacing other forms of digital marketing; |
| • |
The transition from linear TV to Digital TV; |
| • |
The inevitable disappearance of the cookie in an increasing privacy-centric world and the corresponding imperative of first-party
data; |
| • |
The need for high-engagement creative in what is called the “Attention Economy.”; and |
| • |
The importance brands provide to advertising creativity vs. standard formats. |
In addition, brands are seeking new solutions that enable
them to transcend the dominance of the triopoly—Google, Facebook and Amazon, which now control 86% of digital ad spend in the United
States, according to eMarketer—to enable more flexible options that respect their brands, users, and need for monetization.
Another aspect of Perion’s technological solutions, which
reflects Perion’s innovative future-forward approach, is Perion’s SORT™ technology. SORT Perion’s alternative
to 3rd party cookies is first and foremost a result of
our ability to analyze all data signal from our assets to a single central place – intelligent HUB.
SORT - which stands for “Strategic Optimization of Relevant
Traits” – is a provisional patent technology that not only eliminates the need for cookies, but is being demonstrated by actual,
real-time comparison tests to outperform first-party cookies. This technology is a replacement for third-party cookies, which are currently
an essential part of the targeting infrastructure of the digital advertising market, but are under increasing pressure for the manner
in which they violate user privacy. SORT is a competitive advantage that positions Perion to capture revenue as brands and advertisers
move away from cookies, on the one hand, and other platforms such as Google – who announced the cessation of Cookies late last year,
on the other hand.
On top of that, Perion also develops a centralized and intelligent
hub, referred to as the iHUB, which connects the supply and demand side assets of Perion and processes billions of signals. This provides
five levels of value: operational savings – shared resources; Traffic Acquisition Costs and media buying optimization; increased
customer value; market agility and creative firepower, as further described below.
| 1. |
Operational Savings – Shared Resources |
The iHUB serves as a central function to all of Perion’s
activities, acting as a shared infrastructure resource consisting of an ad-server, as well as a central real-time bidding engine, a smart
data layer, and sophisticated reporting. This efficiency eliminates excessive expenses incurred by business units when developing separate
infrastructures.
| 2. |
Traffic Acquisition Costs (TAC) Optimization |
The iHUB allows our business units to quickly balance and harmonize
demand and supply, providing optimum utilization of our owned & operated supply as well as the open web. This enables us to serve
direct demand in a closed loop, generating superior efficiency and hence performance.
Further, we offer publishers and advertisers multiple ad products
within our offering model. This enables us to capture more share, optimizing the return on our go-to-market efforts.
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| 3. |
Increased Customer Value |
Our advertisers benefit from both high scale and reach, as well
as better matching on a segment basis. This is made possible by our cross-company data layer. This same technology offers customer value
to our publishers, delivering more opportunities to monetize their inventory and generate incremental revenue - as we make multiple ad
products from different business units available through our unified platform.
The investments we have made in the scale and reach of our iHUB
have enabled us to develop our pioneering SORT technology. In fact, third-party research has shown that SORT can outperform cookies. As
the industry moves to a post-cookie, privacy-first world, this technology is expected to provide strong competitive differentiation to
the Company.
| 4. |
Market Agility and Creative Firepower |
The COVID-19 pandemic has highlighted the importance of being able
to respond to strategic shifts in advertising dollars allocated between video/CTV, display and search media. Through our diversified solutions
portfolio, and our well-known high-impact ad formats, which provide advertising performance and brand engagement across multiple platforms
and channels, we believe that Perion is well positioned to capitalize on the inevitable changes in digital advertising spending and quickly
respond to the ever changing needs of the digital advertising market.
36
Strength Through Diversification
Perion is positioned to benefit from the overall growth of the
digital marketplace, through our diversified business solutions that cover the three main pillars of digital advertising—our search
ad monetization; cross-channel high impact advertising, including through video and connected television, or CTV; social advertising through
our actionable performance monitoring platform; and our content monetization system.
Intelligent High Impact Solutions that Win the War for Attention
Brands and advertisers are in a war for attention, and it is getting
more intense. Without delivering impactful creative through the proper channels, brands cannot express a cohesive, creative campaign throughout
the purchase funnel, nor can they achieve successful ROI (Return on Investment). Perion’s High Impact Advertising (HIA), which includes
rich media and engaging iCTV, is the breakthrough answer to effective creative expression. It breaks through the clutter and ad blindness
that conventional ad units cannot overcome, enabling the upper- and mid-funnel brand objectives that all brands and agencies require,
turning awareness into performance.
We operationalize our proprietary, creatively-led solutions based
on years of user engagement and interactions with different kinds of advertising units. These units are informed by the requirements of
our advertisers and our cultural insights. Because our mission is to assure that our HIA creative can be distributed to the right audiences,
we have built and grown our curated network of publishers where our HIA are served.
Our superior performance is enabled by our proprietary cookieless
targeting solution, Smart Optimization of Responsive Traits (SORT) that allows brands to reach optimal performance by predicting how consumer
groups will respond to our HIA, without the limitations in scale of legacy 3rd
party cookie-based targeting. Our technology utilizes real-time, cookieless data signals to identify users with shared traits &
classify them into addressable SmartGroups.
Perion’s technology is designed to continually balance the
right mix of channels – from display to video/CTV – to improve ROAS (Return on Ad Spend). This complete technological moat
delivers robustly optimized campaigns that combine creativity, reach, and our proprietary targeting capabilities. This moat also includes
Perion’s white-glove service and the turnkey provision of comprehensive, full-funnel solutions to all brands and agencies.
Video Monetization & Revenue Management
Online Video is by far the most growing category in ad spends over
the last 5 years. Budgets continue shifting from traditional TV to online video and online TV. Audiences shrink and marketers pour their
advertising dollars into digital video.
As budgets continue rising, digital publishers recognize the incremental
revenue opportunity entailed in video advertising, but they require the best video technology that can manage their video content delivery,
ad serving and optimization. Vidazoo, our video optimization platform, is helping publishers with the best in class video technology and
monetization. Through Vidazoo’s proprietary platform, we offer a wide range of video products, through which publishers can deliver
a better user experience, increase video content consumption, and explore new monetization opportunities. Vidazoo’s most common
tech products that are used by their publishers are: Video player and CMS, AdServer & Yield Management Engine.
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In addition, Vidazoo also provides monetization services (Ad Marketplace)
that connect more than 25 programmatic advertisers with exclusive high quality and brand safe opportunities for video inventory across
180 publishers worldwide.
Content optimization Solution – Creating Opportunities for
Publishers Under Pressure
The nature of today’s digital ecosystem makes audience growth
challenging for publishers. This leaves them with fewer levers for growing their audiences and achieving profitable results, in a predictable
and an efficient manner.
Perion’s Content Monetization Platform (branded as Wildfire)
provides publishers with a strategic path to the future. In the face of declining revenues, Wildefire drives incremental growth with traffic
that comes from Facebook, Taboola, Yahoo and others leading sources. Wildfire customers include Entrepreneur, Newsweek and Bonnier.
Wildefire platform uses intent signals to keep users engaged –
moment-after-moment – by continually optimizing content, advertising and layout within mini-sites operated by the Wildefire platform.
Our machine learning employs AI analysis and deploy tens of thousands of combinations of content and advertising. In addition, the Wildfire
capabilities allow us to optimize revenue-per-session as well as refine and inform our decision-making by identifying pockets of profitability
and loss.
Search monetization solution - Transforming Search into Revenue
Capturing consumers at the moment of highest intent simply works
- so it’s no wonder that brands and publishes are allocating more and more dollars to search advertising.
Perion, through its publisher network, delivered approximately
16.7 million average daily searches in 2021 compared to 13.4 million daily searches in 2020, which represents an increase of 24% Year-over-Year.
Searching is a fundamental digital habit that we expect will continue
to grow and hence we are continuously innovating and advancing our solutions to provide more value to our publishers. We deploy advanced
AI, neural networks, and machine learning to optimize yield for our publishers and transform search into revenue.
At Perion we are poised to seize this shift, thanks to our longstanding
relationship with Microsoft Bing and other leading search and content partners, across 34 countries.
U.S. search advertising market is estimated at $97 billion for
2022 according to eMarketer reports, which represents 40% of US digital ad spending. Microsoft Advertising has been our partner for over
a decade, and in late 2020 we extended our partnership for four additional years.
In February 2022 we were named Microsoft Advertising’s 2021
Supply Partner of the Year EMEA. This prestigious award goes to the business that has shown excellence in partnership with Microsoft Advertising
across all areas of collaboration. This recognition is based on key partnership results that include engagement, revenue growth, feature
adoption in Search and Native, and the scale of joint activities.
According to Statista, as of April 2021, Microsoft BING had 1.08
billion of unique monthly global visitors, delivered 12 billion monthly searches over PC. According to Statista, as of January 2022, Microsoft
BING had 7.61% worldwide PC market share. In addition, it generated approximately $8.5 billion in revenue in the 2021 fiscal year.
Our Search monetization solution is comprised of the following
3 offerings:
Website Monetization
Leveraging intent signals to deliver text ads, shopping offers,
and premium news that enable site owners to gain higher revenues and enhanced user engagement.
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Search Mediation
Enables media traders to monetize search demand and achieve higher
yields by leveraging the machine learning that drives our mediation platform.
App Monetization
Using intent-based search signals to monetize publishers' desktop
and mobile apps, white-label search engines, and more.
Paragone’s The Cross-Channel Digital Advertising SaaS platform:
Maximize Reach, Optimize Revenue, and Improve Efficiency
Paragone allows you to observe, in real time, paid digital advertising
activities - across social networks and google - allowing performance marketers to easily identify opportunities for improvement, use
AI to predict campaign success, and take action to maximize performance.
Paragone’s, through its Cross-Channel Digital Advertising
SaaS platform, transferred approximately $380 million social budget in 2021 compared to $278 million social budget in 2020, which represents
an increase of 37% Year-over-Year.
The steady growth of digital advertising has been accelerated by
COVID-19 and the boom in e-commerce. This dramatic shift creates the existential challenge of running scaled campaigns across multiple
networks and optimizing them for engagement in real-time. This requires the connection of massive amounts of cross-network data.
We collect and centralize previously siloed data enabling agencies
and brands to manage cross-platform campaigns. We identify performance bottlenecks, improve productivity, customize metrics, predict results,
and test new networks.
Our platform works with all the largest networks: Facebook, Instagram, Messenger, LinkedIn,
Snapchat, Pinterest, Twitter, and Google and synthesizes data from attribution vendor including AppsFlyer, At Internet (Microsoft), Adjust,
Moat and Google Analytics. The result is improved productivity and improved ROAS.
Industry Overview
Advertising
Our search advertising and display advertising are driven mainly
by the integration of AI-based ad-tech, video, display, search, and social ad units - address the majority of digital ad spend.
Based on eMarketer reports, digital advertising spend accounted
for approximately 55% of total worldwide media advertising during 2021, reaching $492 billion and expected to increase to $785 billion
and approximately 57% of worldwide advertising spend by 2025. In 2021, US display advertising spend, including banners, rich media, video
and social, was approximately $119 billion and expected to increase by 57% and reach $186 billion in 2025, according to eMarketer.
We believe the continued growth of digital ad spend will, in part,
be driven by the convergence of television advertising and digital mediums, including instream and outstream digital video and CTV. Furthermore,
cross-channel technologies such as automatic content recognition (ACR), which allows advertisers to connect brand messaging across television
and digital channels, will further enable the convergence of ad spend. Our solution positions us in the sweet spot of these trends by
providing a connective technology layer, which tracks the entire consumer journey and marketing funnel.
Advertisers, including major brands, are increasingly allocating
media advertising budgets to digital channels and formats. While we work with some advertisers directly, our primary customers are advertising
and media agencies, who are engaged by brand advertisers to develop and implement their media plans. We work with both sides of the market
to plan, design, deliver, manage, and measure their digital advertising investments. We generally do not enter into long term contracts
with our advertising customers, but respond to specific campaign requests, and are compensated based on ad formats, campaign complexity,
impressions, and creative requirements.
We address the display advertising market through direct and programmatic
media sales as well as managed and self-service advertising campaign management tools. Programmatic customers benefit from increased automation,
transparency and resulting efficiency. Clients receive support throughout the campaign cycle, which starts with a consultative sales process
to shape the best offering for that customer.
39
Beyond ad-tech automation, advertisers are also increasingly looking
for unique ad formats that are able to tell impactful stories on digital, by utilizing content, rich media, and digital video/CTV. We
believe the shift beyond standard banner ad formats is unstoppable. Rich media, including our high-impact ad formats, as well as outstream
and instream video accounted for $70 billion of US digital display ad spend in 2021 and is expected to increase by 67%, reaching approximately
$117 billion in 2025, according to eMarketer. Digital video, including instream formats such as “pre-roll” and outstream formats
such as “inline” represented the vast majority of rich media ad spend in 2021, topping $60 billion, and is expected to reach
$105 billion by 2025, representing an increase of 75%, according to eMarketer. US Connected TV accounted for $10 billion, and is expected
to reach $19 billion by 2023, representing an increase of 90%, according to eMarketer.
Social networks are expected to continue to be a major platform
for digital advertising, and with a lot of innovation in the sector, advertisers will look for emerging platforms to reach existing and
new audiences. According to eMarketer, in 2021, social networks accounted for $62 billion representing 29% of the US digital ad spending,
which is expected to increase by 32% and reach $82 billion of US digital ad spending by 2023, which would represent 30% of the US digital
ad spending.
Users are devoting more and more time to social networks, estimated
to reach approximately 71 minutes per day on social networks in 2022 in the US, representing 15% of time spent on digital media in 2022.
Furthermore, emerging and new social networks, such as Instagram, Snapchat and TikTok, are further expanding social networks’ audiences
and demographic reach.
It is estimated that 91% of digital display ads will be transacted
through programmatic channels by 2023, including programmatic direct and real time bidding (RTB) campaigns, according to eMarketer. Driven
by this trend, we invested and continue to make significant investments in AI-based technologies, which optimize both the price and performance
of our digital advertising campaigns, including our acquisition of Captain Growth, which automates campaign performance with the capability
of testing multiple ads and campaigns in real time.
In light of regulatory developments, including GDPR and CCPA, as
well as existing and planned limitations to be enacted by major web browser publishers, including Google (who announced, in March 2021
the phase-out the support for third-party cookies in Chrome), Apple, and Mozilla, we expect advertisers to increasingly seek alternatives
to third-party “cookie”-based targeting. We are focusing investments and R&D on opportunities in alternative targeting
technologies.
Search
In 2021, US search advertising spend reached $86 billion and is
expected to increase by 42% reaching $122 billion in 2025, representing 41% of US digital ad spending, according to eMarketer.
Search is the most intent-based form of advertising, as advertisements are served in
direct response to the search queries, resulting in relevant advertisements yielding significant revenue to the search engine companies.
Our search-related products address the market by engaging with premium search providers like Microsoft, and offer end users the ability
to search the internet via easily embedded search functionality in different search assets.
The search engine market is highly competitive as providers such
as Google, Microsoft, Verizon Media and other smaller players, seek to gain more market share. We believe such competition will increase
the utilization of our search solution, which enables search providers to increase their market share.
The factors that drive the ability of our search engine partners
to increase their revenue per search, include the availability of search advertising inventory relative to demand, as well as internal
pricing dynamics. As the search market continues to grow and we continue to expand our search solution, the revenue earned by us and our
partners is expected to grow as well. An example of such is the launch of our click-to-buy functionality – within user search activity
– positions the Company for future growth and revenue.
40
Growth Strategy
High level Growth Plan
Our strategy is to grow our business by offering innovative and
diversified advertising, search, awareness and performance solutions to the world’s leading brands, agencies and publishers. These
solutions, driven by advanced technology, will make each component of the funnel – awareness, consideration, intent and purchase
– operate more effectively.
We will achieve this by offering compelling data-driven, digital advertising solutions and search monetization
through holistic customer experiences and innovative platforms that cover the three main pillars of digital advertising - ad search, social
media and display / video / CTV.
Growth through Innovation
Innovation, driven by the introduction of new technologies, tools,
services and offerings, will address one of our key priorities, which is to make our revenue models more predictable, sustainable and
resilient. We are expanding our product portfolio to provide added value to our clients without adding silos and overhead, while always
maintaining efficiency across our different business units. The investments we have made in the scale and reach of our business have enabled
us to develop a pioneering technology called SORT – Smart Optimization of Relevant Traits – which enables advertisers to identify
consumers most likely to respond to their message without resorting to cookies. In fact, third-party research has shown that SORT can
outperform cookies. As the industry moves to a post-cookie, privacy-first world, this technology is expected to provide strong competitive
differentiation to the Company.
To accelerate this process, we completed several acquisitions,
including the most recent acquisitions of Septa Communication LLC in March 2019 (known as “Captain Growth”), the acquisition
of Content IQ LLC in January 2020, the acquisition of Pub Ocean in July 2020 and the acquisition of Vidazoo in October 2021, to allow
us to expand our capabilities and maximize our existing businesses.
Growth through Connected Devices
Our advertising offering targets brands that are focused on their
relationship with consumers. They recognize that their reputation and ability to compete are determined by meaningful connections that
are sequentially delivered by relevant, high-quality creative and advertising contexts, across all platforms, including video, CTV and
iCTV, in brand-safe environments.
Our growth strategy also contemplates the migration to 5G networks and the growing access
to high-speed internet. Streaming of video content that takes advantage of faster delivery, as well as the growth of CTV and internet-connected
devices, is something we are investing in so we will be able to take advantage of upgraded user experiences.
We also intend to continue to invest in technology, partnerships
and sales that offer our advertising clients enhanced features and functionalities to reach their consumers, including through using analytic
tools such as ACR (Automated Content Recognition) TV viewership data.
Growth Through iHUB
Our iHUB, connects the supply and demand side assets and processes billions of signals.
Our advertisers benefit from both high scale and reach, as well as better matching on a segment basis. This is made possible by our cross-company
data layer. This same technology offers customer value to our publishers, delivering more opportunities to monetize their inventory and
generate incremental revenue - as we make multiple ad products from different business units available through our unified platform.
Growth Through Search Monetization
Our search monetization solution, leverages our relationship with
Microsoft Bing and other leading search and content partners, to drive innovation and revenue based on AI and analytic tools as part of
our ongoing effort to provide comprehensive and compelling search solutions and monetization tools to diversified publishers around the
globe. We do this through a variety of digital properties, including websites, apps, extensions, and search engines.
In addition to strategically diversifying our revenue sources and
extending our products suite and partners, we are embedding our search functionality in our new products, thus increasing our monetization
potential.
41
Technology
The Design principles of our technologies and research and development
efforts consist of the following elements:
|
• |
Supply and publisher integration;
|
|
• |
Innovative Creative; |
|
• |
Demand generation; |
|
• |
Data and Analytics; |
|
• |
AI and optimization; and |
|
• |
Executional channels. |
Advertising Solutions
The technology backbone behind our advertising solutions is designed
to connect brands with consumers via meaningful digital interactions and experiences. This is done through 8 key components:
| 1. |
Supply Management Platform; |
| 2. |
Demand Management Platform; |
| 3. |
Analytics Platform; |
| 4. |
Creative Platform; |
| 5. |
AI Platform; |
| 6. |
Actionable Performance Monitoring; |
| 7. |
Online video player; and |
| 8. |
Content monetization system. |
Supply Management Platform
The Supply management platform operationalizes relationships with
our publishers by treating every impression in an optimal manner. According to the business requirements and monetary expectations that
derive from which ads are allowed, what prices are expected, and what is the allowable frequency. All components in our supply management
platform are based on proprietary technology and are based on our specific needs and use cases.
Demand Management
The demand management platform addresses the needs of advertisers
for campaign planning and design with a system that delivers a recommendation that will hit the goals of the advertisers. It will recommend
advertising channels, audience targeting strategy and ad product mix which are all based on benchmarks and past experiences of the advertiser.
Once the plan is created, the platform pushes instructions to the campaign management system for execution, based on parameters like dates,
volume level, list of supply sources and campaign goal.
Analytics Platform
Our Analytics platform provides information and performance insights
on the results of campaign investment and other campaign metrics - demonstrating the value of our solutions for our customers. This is
a flexible system that reports all the required data based on the delivery of reach and impressions, budget invested engagement metrics,
etc. The analytics platform supports our data driven culture – providing business stakeholders full visibility of KPI’s on
key processes while facilitating data and reporting in a self-service manner, with pre-build dashboards and reports.
Creative Platform
The creative platform is a key component of our solution and allows
us to innovate quickly on end user experiences. Our full-blown rich media platform leverages our proprietary ad units, and is tailored
to the needs of our advertisers, providing them with a comprehensive solution to create compelling, engaging, dynamic, cross-platform
and high-impact advertisements.
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AI Platform
Our AI platform uses machine learning to bring deep intelligence
to the various phases of campaigns: planning, activation and reporting which utilize models built on top of our data platforms. Based
on campaign-to-campaign learnings and heuristics, the platform generates better performance for our customers and improved efficiency
by providing rules-based and budget optimizations.
Actionable Performance Monitoring
The Actionable Performance Monitoring platform supports the various
phases of campaign management across different channels. The platform manages each of the planning, execution, optimization and measurement
phases and simplifies the complexity of cross channel advertising for brands and agencies while optimizing performance through AI in one
unified, actionable holistic and intuitive dashboard.
Online video player (OVP)
A proprietary online video player and integrated ad server, which
allows publishers and brands to upload, manage and stream video content. Vidazoo’s OVP is certified with the major advertising platforms
and compatible with all devices and video formats. The Vidazoo OVP is integrated with a proprietary ad server, ensuring a consistent user
experience by reducing latency and errors, adding to its inherent power and efficiency.
Content Monetization System
The content monetization system provides publishers the tools to
maximize ad revenues from reader sessions. The system integrates ads within the content layouts, at the page level, maintaining a user-friendly
experience while driving monetization from a variety of programmatic sources. This system is powered by a highly customized header bidding
technology which controls ad delivery with optimal view ability measures.
Search Solution
The technology of our search solution is composed of the following
systems:
| 1. |
Publishers management system; |
| 2. |
Search demand management system; |
| 3. |
Monetization products; and |
| 4. |
AI system. |
Publisher Management System
The publisher management system provides publishers access to an
online dashboard providing them analytics and performance optimization tools, as well as reports that enable them to maximize their distribution
and monetization.
Search Demand Management System
The search demand management system integrates and onboards demand
vendors to our monetization products. The integration supports multiple vendors according to predefined configurations and rules, enabling
various business models and offerings.
Monetization Products
Our monetization products are designed to deliver algorithmic search
results concurrently with sponsored listings which are served for the same search queries. They can be operationalized in different ways,
including the transmission of search queries to search engines such as Bing, search Feed APIs operated on the publisher’s domain
and an enriched and optimized hosted search results page which offers an enhanced user experience.
AI System
The AI technology behind our search solutions optimizes the various
phases of the funnel including intent detection and demand optimization to yield performance optimization and maximized consumer experience.
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Products Under Development
Innovation is a core driver of our culture and operations and essential for our growth.
Hence we invest substantial resources in research and development to develop new solutions, offerings, applications and services, improve
our core technologies and enhance our technology facilities and infrastructure and capabilities. Our research and development activities
are primarily conducted internally in Israel and Europe, focusing on the development of new services, platforms and SaaS based solutions
that will offer our customers (i) standout brand experience (ii) effective distribution tools, (iii) increased monetization capabilities
through content features and applications, and (iv) enhanced optimization via powerful and reliable data analytics driven by AI. Additionally,
we focus our research and development efforts on developing new products and improving existing products through software updates and
upgraded features. Our research and development department is divided into groups based on scientific disciplines and types of applications
and products.
Breakdown of Revenues
Our search monetization solutions, advertising and other, are distributed and sold throughout
the world (mainly in North America and Europe). The following table shows the revenues, presented in our statement of operations, generated
by territory in the years ended December 31, 2019, 2020 and 2021.
|
2019 |
2020 |
2021 |
||||||||||||||||||||||
|
Search Advertising Revenues
|
Display Advertising
Revenues |
Search Advertising Revenues
|
Display Advertising
Revenues |
Search Advertising Revenues
|
Display Advertising
Revenues |
|||||||||||||||||||
|
North America (Mainly U.S.) |
67 |
% |
91 |
% |
73 |
% |
95 |
% |
80 |
% |
95 |
% | ||||||||||||
|
Europe |
25 |
% |
9 |
% |
24 |
% |
5 |
% |
18 |
% |
4 |
% | ||||||||||||
|
Other |
8 |
% |
0 |
% |
3 |
% |
0 |
% |
2 |
% |
1 |
% | ||||||||||||
|
Total |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
100 |
% | ||||||||||||
Intellectual Property
Our research and development efforts and the underlying proprietary technologies, solutions
and products we develop, are meaningful to our operations and competitive advantage and we rely upon trade secret, trademark, copyright,
and patent laws in the United States and abroad to establish and protect our intellectual property.
Although we have a number of patents, copyrights, trademarks and trade secrets and confidentiality
and invention assignment agreements to protect our intellectual property rights, we believe that our competitive advantage depends primarily
on our marketing, business development, services, applications, know-how and ongoing research and development efforts. Accordingly, we
believe that the expiration of any of our patents or patent licenses, or the failure of any of our patent applications to result in issued
patents, would not be material to our business or financial position.
Part of the components of our software products were developed solely by us. We have
licensed certain components of our software from third parties. We believe that the components we have licensed are not material to the
overall performance of our software and may be replaced without significant difficulty.
We enter into licensing arrangements with third parties for the use of software components,
graphic, sound and multimedia content integrated into our products.
All employees and consultants are required to execute confidentiality covenants in connection
with their employment and consulting relationships with us. These agreements (excluding those with our former German and U.K. employees)
also contain assignment and waiver provisions relating to the employee’s or consultant’s rights in respect of inventions.
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Competition
The markets in which we are active are subject to intense competition.
We compete with many other companies offering solutions for online publishers and developers,
including search services and other software in conjunction with changing a user’s default search settings.
The advertising technology industry is highly competitive. There are a large number
of digital media companies and advertising technology companies that offer services similar to those of our advertising solution and that
compete for finite advertiser/agency budgets and publisher inventory. There are a large number of niche companies that are competitive
with our advertising solution because they provide a subset of the services that we provide (e.g., mobile in-app ad networks). Some of
these companies are larger and have more financial resources than we have, including, Google, Facebook and Microsoft. New entrants and
companies that do not currently compete with our advertising solution such as Amazon may compete in the future given the relatively low
barriers to entry in the industry.
As a major part of our revenues stem from our offering of search properties, we compete
with search engine providers themselves such as Google, Microsoft, Verizon Media, IAC and others. We also compete with many other companies
offering consumer software, albeit totally different software, utilizing the same strategy, to offer their search properties, such as
Interactive Corporation, Oath, System1 and others.
Our ability to attract developers is largely dependent on our ability to pay higher
rates to our publishers and developers, our success in creating strong commercial relationships with developers that have successful software,
websites or distribution channels, and our ability to differentiate our distribution, monetization, and optimization tools from those
of our competitors.
As we innovate evolve and introduce new solutions, and as our competitors as well as
other companies introduce new products and services, we may be subject to additional competition. Many of our current and potential competitors
may have significantly greater financial, research and development, back-end analytical systems, manufacturing, and sales and marketing
resources than we have. These competitors could potentially use their greater financial resources to acquire other companies to gain even
further enhanced name recognition and market share, as well as to develop new technologies, enhanced systems and analytical capabilities,
products or features that could effectively compete with our existing solutions, products and search services. Demand for our solutions,
products and search services could be diminished by solutions, products, services and technologies offered by competitors, whether or
not their solutions, products, services and technologies are equivalent or superior.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations
that affect companies conducting business on the Internet. The manner in which existing laws and regulations will be applied to the Internet
in general, and how they will relate to our business in particular is unclear. Accordingly, we cannot be certain how existing laws will
be interpreted or how they will evolve in areas such as user privacy, data protection, content, use of “cookies,” access changes,
“net neutrality,” pricing, advertising, distribution of “spam,” intellectual property, distribution, protection
of minors, consumer protection, taxation and online payment services.
For example, we are subject to U.S. federal and state laws regarding copyright infringement,
privacy and protection of user data, many of which are subject to regulation by the Federal Trade Commission. These laws include the California
Consumer Privacy Act, which provides data privacy rights for consumers and operational requirements for companies, the Digital Millennium
Copyright Act, which aims to reduce the liability of online service providers for listing or linking to third-party websites that include
materials that infringe copyrights or the rights of others, and other federal laws that restrict online service providers’ collection
of user information on minors as well as distribution of materials deemed harmful to minors. In addition to the CCPA, the California Privacy
Rights Act (“CPRA”) which passed in November 2020 will take effect in January 2023, will expand the rights granted under the
CCPA and impose additional notice and opt out obligations, including an obligation to provide an opt-out for behavioral advertising and
may affect us. Many U.S. states, such as California, are adopting statutes that require online service providers to report certain security
breaches of personal data and to report to consumers when personal data will be disclosed to direct marketers. There are also a number
of legislative proposals pending before the U.S. Congress and various state legislative bodies concerning data protection which could
affect us. The interpretation of data protection laws, and their application to the Internet, is unclear and in a state of flux. There
is a risk that these laws may be interpreted and applied in conflicting ways and in a manner that is not consistent with our current data
protection practices.
45
Foreign data protection, privacy and other laws and regulations may affect our business,
and such laws can be more restrictive than those in the United States. For example, in Israel, privacy laws require that any request for
personal information for use or retention in a database, be accompanied by a notice that indicates: whether a person is legally required
to disclose such information or that such disclosure is made at such person’s free will and consent; the purpose for which the information
is requested; and to whom the information is to be delivered and for which purposes. A breach of privacy under such laws is considered
a civil wrong and subject to administrative fines as well as civil damages. Certain violations of the law are considered criminal offences
punishable by imprisonment. In the European Union, similar data protection rules exist as well was privacy legislation restricting the
use of cookies and similar technologies. Subject to some limited exceptions, the storing of information, or the gaining of access to information
already stored, in the terminal equipment of a subscriber or user is only allowed on condition that the subscriber or user concerned has
given his or her informed consent. Moreover, the General Data Protection Regulation (which became effective in May 2018) presumably have
an even wider territorial scope, broadened the definition of personal data to include location data and online identifiers, and imposes
more stringent user consent requirements. Further, it includes stringent operational requirements for companies that process personal
data and will contain significant penalties for non-compliance. Also in other relevant subject matters, such as cyber security, e-commerce,
copyright and cookies, new European initiatives have been announced by the European regulators. To further complicate matters in Europe,
to date, member States have some flexibility when implementing European Directives and certain aspects of the General Data Protection
Regulation, which can lead to diverging national rules.
Because our services are accessible worldwide, certain foreign jurisdictions may claim
that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees or infrastructure.
These regulations result in significant compliance costs and could result in restricting
the growth and profitability of our business.
Recent Acquisitions
On October 4, 2021, we entered into and consummated a Share Purchase Agreement, for
the acquisition of all the shares of Vidazoo, an Israeli privately held company founded in 2014. Vidazoo is a leading video technology
company that enables both advertisers and publishers to deliver high impact content and advertising to consumers. The acquisition was
made for a total consideration of $93.5 million, consisting of $35.0 million in cash upon closing with an additional maximum of $58.5
million structured as a performance earn-out, if certain EBITDA-based targets are achieved.
Acquisition of Content IQ
On January 14, 2020, we entered into and consummated a Membership
Interest Purchase Agreement, or MIPA, with Asaf Katzir and Ziv Yirmiyahu, or the Sellers, Content IQ and Perion for the acquisition of
all the shares of Content IQ, a privately held company founded in 2014, based in New York City with offices in Tel Aviv. Content IQ has
created data algorithm and analytics tools that deconstruct content, revenue and distribution to solve digital publishing challenges.
The acquisition was made for a total consideration of $73.05 million, of which $15 million in cash was paid upon closing, with an additional
maximum $11 million will be paid as a retention incentive. As part of the total consideration, there is a maximum of $47.05 million in
earn-outs over a period of two years. The earn-outs are tied to revenue and EBITDA-based metrics that would be paid in full if Content
IQ generates $158 million in revenue and more than $17 million of EBITDA in aggregate, over the next two years. The agreement also contains
customary representations, warranties, covenants and indemnification provisions.
On July 22, 2020, in connection with the acquisition of Pub Ocean,
we amended the MIPA. Under the terms of the amended MIPA, it was agreed with the Sellers, that (i) revenue and EBITDA of Pub Ocean will
be attributed towards Sellers’ revenue and EBITDA targets under the MIPA with Perion; and (ii) Sellers will bear 40% of the cost
of milestone payments that are ultimately payable to Pub Ocean under the Asset Purchase Agreement (as defined below), which will be paid
solely by deductions from their own earn-out payments and certain escrowed amounts.
Acquisition of Pub Ocean
On July 22, 2020, we entered into an agreement to acquire the assets
of Pub Ocean, or the Asset Purchase Agreement a rapidly-growing digital publisher-focused technology company with scalable content distribution
and real-time revenue analytics technology. Pub Ocean offers significant and immediate synergies to Content IQ, driving incremental revenue
opportunities and enhanced profitability. The acquisition was for an aggregate cash consideration of up to $22 million, of which (i) $4
million was paid upon signing, (ii) $17 million of earn-out payments tied to financial targets to be paid over a two-year period, and
(iii) an additional amount of $1 million in retention incentives to be paid over a two-year period. The agreement also contains customary
representations, warranties, covenants and indemnification provisions.
Search Services Agreement with Microsoft
In November 2020, we entered into a renewed agreement with Microsoft
Ireland Operations Limited effective as of January 1, 2021 until December 31, 2024 which includes desktop and mobile distribution with
limited exclusivity in the United States and an extended geography distribution.
46
C. ORGANIZATIONAL
STRUCTURE
Our subsidiaries and the countries of their incorporation are as
follows:
|
• |
Codefuel Ltd., our wholly-owned Israeli
subsidiary, incorporated on November 6, 2019. |
|
• |
IncrediMail, Inc., our wholly-owned Delaware
subsidiary, owns all of the outstanding shares of common stock of Smilebox Inc., a Washington corporation and all of the outstanding shares
of common stock of IncrediTone Inc. and Pub Ocean Inc., our wholly-owned Delaware subsidiaries. IncrediTone Inc. owns all of the outstanding
shares of common stock of Interactive Holding Corp., a Delaware corporation, which was acquired, together with its subsidiaries, in November
2015. |
|
• |
Content IQ LLC, our wholly-owned New York
subsidiary, was acquired in January 2020, owns all of the membership interest of BT Media LLC, a Nevada limited liability company.
|
|
• |
Pub Ocean Media UK Limited, our wholly-owned
England and Wales subsidiary, was incorporated in July 2020. |
|
• |
Make Me Reach SAS, dba Paragone, our wholly
owned French subsidiary, was acquired in February 2015. |
|
• |
Portilev Ltd., our wholly-owned Israeli
subsidiary, incorporated on September 22, 2019 and was merged into the Company on October 25, 2021. |
|
• |
Vidazoo Ltd., our wholly-owned Israeli subsidiary,
was acquired on October 4, 2021. |
D. PROPERTY,
PLANTS AND EQUIPMENT
Our headquarters are located in Holon, Israel. As of December 31,
2021, we lease approximately 36,113 square feet, excluding office space which we currently sublease. The lease expires in 2025, with an
option to extend for two additional two-year periods at its sole discretion and upon 180-day prior written notice. Annual net cost is
approximately $0.8 million.
As of December 31, 2021, we lease office spaces in various locations
in the United States, excluding office spaces we currently sublease. Our primary locations, and their principal terms, are as follows:
|
Square feet
(net) |
Annual Rent
for 2021 in
US$ in
thousands
(net) |
Lease expires
on (not
including
options) |
||||||||||
|
New York, New York |
25,550 |
$ |
1,737 |
2026 |
||||||||
|
Chicago, Illinois |
3,984 |
$ |
89 |
2023 |
||||||||
Undertone’s offices are located at the World Trade Center (WTC) New York and Chicago,
pursuant to a lease agreement that expires in May 2026 and September 2023, respectively. Under the lease agreement, we are entitled to
terminate the lease of our offices in New York in 2024, at our sole discretion.
ITEM 4A. UNRESOLVED
STAFF COMMENTS
None.
ITEM 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition
and results of operations should be read in conjunction with our consolidated Financial Statements. In addition to historical financial
information, the following discussion and analysis contains forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including, without limitation, statements regarding the Company’s expectations, beliefs,
intentions, or future strategies that are signified by the words “expects,” “anticipates,” “intends,”
“believes,” or similar language. These forward looking statements involve risks, uncertainties and assumptions. Our actual results
and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors,
including those discussed under Item 3.D. “Risk Factors” and elsewhere in this annual report.
47
Certain information called for by this Item
5, including a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 has been reported
previously in our annual report on March 25, 2021 under Item 5 “Operating and Financial Review and Prospects”.
A. OPERATING
RESULTS
General
Perion is a global technology company that delivers holistic strategic
business solutions that enable brands and advertisers to efficiently “Capture and Convince” users across multiple platforms
and channels, including interactive connected television – or iCTV. Perion achieves this through its Synchronized Digital Branding
capabilities, which are focused on high impact creative; content monetization; its branded search network, in partnership with Microsoft
Bing; and social media management that orchestrates and optimizes paid advertising. This diversification positions Perion for growth as
budgets shift across categories.
Our headquarters and primary research and development facilities
are located in Israel and Kiev, we have our primary sales office in the United States and several other offices located in Europe.
The following describes the nature of our principal items of income and expense:
Revenue
We generate our revenue primarily from two major sources: (i) Display
Advertising; and (ii) Search Advertising. The following table shows our revenue by category (in thousands of U.S. dollars):
|
Year Ended December 31, |
||||||||
|
2020 |
2021 |
|||||||
|
Display Advertising |
$ |
148,698 |
$ |
265,323 |
||||
|
Search Advertising |
179,365 |
213,175 |
||||||
|
Total Revenue |
$ |
328,063 |
$ |
478,498 |
||||
In 2021, revenue increased by 46% compared to 2020, primarily due
to 78% growth in Display Advertising resulting from growth in video and CTV. Search Advertising revenue increased by 19% as a result of
higher numbers of daily monetizable searches that were delivered to Microsoft Bing and others as well as increased numbers of publishers.
Cost of Revenue
Cost of revenue consists primarily of salaries and related expenses, license fees and
payments for content and server maintenance. Cost of revenue were $22.5 million or 7% of revenue in 2020 and $25.2 million or 5% of revenue
in 2021. The decrease as a percentage of revenue results from our efforts to enhance process automation, the iHUB that acts as a shared
infrastructure resource and offshoring our operations.
The number of employees included in cost of revenue as of December
31, 2020 and 2021 were 73 and 83, respectively.
Traffic Acquisition Costs and Media Buy
Our traffic acquisition costs and media buy consist primarily of payments to publishers
and developers who distribute our search properties together with their products, as well as the cost of distributing our own products.
In addition, media buy costs consist of the costs of advertising inventory incurred to deliver ads. Traffic acquisition costs are primarily
based on revenue share agreements with our traffic sources and the media buy cost are primarily based on CPC and CPM. Customer acquisition
and media buy costs were $197.6 million or 60% of revenue and $288.0 million or 60% of revenue in 2020 and 2021, respectively. The stabilization
of traffic acquisition costs and media buy level results from the continuous iHUB efforts to serve direct demand and supply in a closed
loop and the product mix.
48
Research and Development Expenses
Our research and development expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, subcontractors and consulting fees. Research and development expenses
were $30.9 million or 9% of revenue in 2020 and $35.3 million or 8% of revenue in 2021. Our research and development expenses in 2021
increased compared to the prior year, primarily as a result of full year of payroll and subcontractors expenses related to the acquisition
of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) and our continued investment in technology to strengthen our
technology moat.
The number of employees in research and development were 135 and
115 as of December 31, 2020 and 2021, respectively.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, as well as other outsourced marketing activities. Selling and marketing
expenses were $39.1 million or 12% of revenue in 2020 and $53.2 million or 11% of revenue in 2021. The increase was primarily as a result
of full year of payroll and related expenses related to the acquisitions of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October
2021) as well as headcount increase, overachievement commissions, retention plans related to acquisitions and increased stock-based compensation
expenses.
The number of employees in sales and marketing was 146 and 154 as of December 31, 2020
and 2021, respectively.
General and Administrative Expenses (“G&A”)
Our general and administrative expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, professional fees and other general corporate expenses. General and
administrative expenses were $15.8 million or 5% of revenue in 2020 and $20.9 million or 4% of revenue in 2021. The increase was primarily
due to headcount increase, overachievement bonuses, increased stock-based compensation expenses and consulting expenses related to M&A
transactions.
The number of G&A employees was 63 and 68 as of December 31, 2020 and 2021, respectively.
Impairment, loss of goodwill on intangible assets
Goodwill and intangible assets has been recorded as a result of
prior acquisitions. Goodwill represents the excess of the consideration over the net fair value of the assets of the businesses acquired,
the fair value of intangible assets was based on the market participant approach to valuation, performed by a third-party valuation firm,
using estimates and assumptions provided by management.
We perform tests for impairment of goodwill and intangible assets
at the reporting unit level at least annually, or more frequently if events or changes in circumstances occur that would more likely than
not reduce the fair value of a reporting unit below its carrying value.
Following an impairment review of our goodwill and intangible assets
for 2020 and 2021, it was concluded that no such impairment charges should be recorded.
Depreciation and amortization
Depreciation and amortization consist primarily of depreciation
of our property and equipment and the amortization of our intangible assets as a result of our acquisitions. Depreciation and amortization
expenses in 2020 and 2021 were $9.9 million.
Income Tax Expense
A significant portion of our income is taxed in Israel and, as
a result of previous acquisitions, in the United States. The standard corporate tax rate in Israel was 23% in 2020 and 2021. For our Israeli
operations we have elected to implement a tax incentive program pursuant to a 2011 Israeli tax reform, referred to as a “Preferred
Enterprise,” according to which a reduced tax rate of 16.0% has applied to our preferred income in 2016. Starting in 2017 and in
2018, 2019, 2020 and 2021, we elected to implement the “Preferred Technological Enterprise” benefits pursuant to an amendment
to the taxation laws which went into effect in 2017, under which a tax rate of 12% is applied to a portion of our income which qualifies
for the benefits. Any other income which does not qualify for special benefits is subject to the standard corporate tax rate. With respect
to U.S. tax, we continue to utilize accumulated losses. The federal statutory income tax rate in the United States was 21% in 2018, 2019,
2020 and 2021. Subsidiaries in Europe are taxed according to the tax laws in their respective countries of residence.
49
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results
of operation are based on our financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses,
and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. We base our estimates on
our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. Under U.S. GAAP, when more than one
accounting method or policy or its application is generally accepted, our management selects the accounting method or policy that it believes
to be most appropriate in the specific circumstances. Our management considers some of these accounting policies to be critical.
A critical accounting policy is an accounting policy that management
believes is both most important to the portrayal of our financial condition and results and requires management’s most difficult
subjective or complex judgment, often as a result of the need to make accounting estimates about the effect of matters that are inherently
uncertain. While our significant accounting policies are discussed in Note 2 of the Financial Statements, we believe the following accounting
policies to be critical:
Stock-Based Compensation
We account for stock-based payment awards made to employees and
directors in accordance with ASC 718, “Compensation – Stock Compensation”, which requires the measurement and recognition
of compensation expense based on estimated fair values. Determining the fair value of stock-based awards at the grant date requires the
exercise of judgment, as well as the determination of the amount of stock-based awards that are expected to be forfeited. We adopted ASU
2016-09 on January 1, 2017, and chose to continue to use the current method of estimating forfeitures each period rather than accounting
for forfeitures as they occur. The adoption of the new standard had no material impact on our consolidated financial statements. If actual
forfeitures differ from our estimates, stock-based compensation expense and our results of operations would be impacted. Expense is recognized
for the value of the awards, which have graded vesting based on service conditions, using the straight-line method, over the requisite
service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
For performance-based stock units, expense is recognized for the value of such awards, if and when we conclude that it is probable that
a performance condition will be achieved. We are required to reassess the probability of the vesting at each reporting period for awards
with performance conditions and adjust compensation cost based on its probability assessment.
We account for changes in award terms as a modification in accordance
with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total
compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under
ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current
circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances.
In order to keep our competitive hiring position in the industry,
following our board of directors’ approval in December 2017, we effected in 2018 an option repricing plan. Under the repricing plan,
among others, options granted to all of our employees, with certain limited exceptions and other than our directors, were adjusted to
have an exercise price per share equal to $3.24, which was the weighted average price of our ordinary shares on Nasdaq in the last 90
days prior to the date of approval of the plan by our board of directors as well as have a new vesting schedule. The total incremental
fair value of these repriced options amounted to $1.5 million, and was determined based on the binomial pricing options model.
Total stock-based compensation expense recorded during 2021 was
$7.0 million, of which $0.2 million was included in cost of revenue, $1.0 million in research and development costs, $3.2 million in selling
and marketing expenses, and $2.6 million in general and administrative expenses.
50
As of December 31, 2021, the maximum total compensation cost related
to options, granted to employees and directors not yet recognized amounted to $16.3 million. This cost is expected to be recognized over
a weighted average period of 1.59 years.
We estimate the fair value of standard stock options granted using
the Binomial method option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant is
expected stock price volatility. Expected volatility was calculated based upon actual historical stock price movements of our stock. The
risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The fair value of RSUs is
based on the market value of the underlying shares at the date of grant.
Taxes on Income
We are subject to income taxes primarily in Israel and the United
States. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based
on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain
tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To
the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision
for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions
and changes to reserves that are considered appropriate.
Accounting for tax positions requires judgments, including estimating
reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards
for which the benefits have already been reflected in the financial statements. We record valuation allowances for deferred tax assets
that we believe are not more likely than not to be realized in future periods. While we believe the resulting tax balances as of December
31, 2021 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to
our consolidated financial statements and such adjustments could be material. See Note 14 of the Financial Statements for further information
regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective
tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments.
We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future
results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved,
audits are closed or when statutes of limitation on potential assessments expire.
Business Combinations
We allocate the fair value of purchase consideration to the tangible
assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value
of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining
the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect
to intangible assets.
Critical estimates in valuing certain intangible assets include
but are not limited to future expected cash flows from customer relationships and acquired patents and developed technology; and discount
rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable and, as a result, actual results may differ from estimates.
Goodwill
Goodwill is allocated to reporting units expected to benefit from
a business combination. We perform tests for impairment of goodwill at the reporting unit level at least annually, or more frequently
if events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying
value. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets and liabilities
to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
No impairment of goodwill charges were recorded in 2020 nor 2021.
51
Impairment of Long-Lived Assets
We are required to assess the impairment of tangible and intangible
long-lived assets and right-of-use assets subject to amortization, under ASC 360 “Property, Plant and Equipment”, on a periodic
basis and when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include
any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry
or economic trends and significant decline in our share price for a sustained period.
Upon determination that the carrying value of a long-lived asset
may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows from the use of the asset or asset
group to the carrying amount of the asset, an impairment charge is recorded for the excess of carrying amount over the fair value. We
measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable,
but these estimates are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. In 2020 and
2021 no impairment of long-lived assets charges were recorded.
Derivative and Hedge Accounting
During fiscal 2020 and 2021, approximately 8% and 9%, respectively,
of our operating expenses, were denominated in NIS. In order to mitigate the potential adverse impact on cash flows resulting from fluctuations
in the NIS exchange rate, we started to hedge portions of our NIS forecasted expenses with derivatives contracts. We implement hedge accounting
under ASC-815, therefore, the effective portion of the change in fair value on the derivatives is reported as a component of other comprehensive
income and gains or losses are reclassified into the relevant period earnings. We recognize in “financial income, net” the
ineffective portion of a derivative change in fair value, if any, as well as the change in fair value of all non-designated under hedge
accounting derivatives.
Establishing and accounting for foreign exchange contracts involve
judgments, such as determining the fair value of the contracts, determining the nature of the exposure, assessing its amount and timing,
and evaluating the effectiveness of the hedging arrangement.
Although we believe that our estimates are accurate and meet the
requirement of hedge accounting, if actual results differ from these estimates, such difference could cause fluctuation of our recorded
expenses.
Recent Accounting Standards
In December 2019, the FASB issued Accounting Standards Update No.
2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income
taxes. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,
and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s condensed consolidated
financial statements.
In October 2021 the FASB issued Accounting Standards Update No.
2021-08, Business Combinations (Topic 805): “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”.
The amendments in this update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired
in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts
in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic
606 to determine what to record for the acquired revenue contracts. The amendments in this update are effective for fiscal years beginning
after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently
assessing the impact of the new guidance on its consolidated financial statements.
52
Results of Operations
The following table presents, for the periods indicated, our costs
and expenses of our continuing operations, by category (in thousands of U.S. dollars):
|
Year ended December 31, |
||||||||
|
2020 |
2021 |
|||||||
|
Cost of revenue |
$ |
22,477 |
$ |
25,197 |
||||
|
Traffic acquisition costs and media buy |
197,626 |
288,018 |
||||||
|
Research and development |
30,880 |
35,348 |
||||||
|
Selling and marketing |
39,085 |
53,209 |
||||||
|
General and administrative |
15,819 |
20,933 |
||||||
|
Depreciation and amortization |
9,923 |
9,897 |
||||||
|
Total Costs and Expenses |
$ |
315,810 |
$ |
432,602 |
||||
The following table sets forth, for the periods indicated, our
statements of operations expressed as a percentage of total revenue (the percentages may not equal 100% because of the effects of rounding):
|
Year Ended December 31, |
||||||||
|
2020 |
2021 |
|||||||
|
Revenue: |
||||||||
|
Display Advertising |
45 |
% |
55 |
% | ||||
|
Search Advertising |
55 |
45 |
||||||
|
Total revenue |
100 |
% |
100 |
% | ||||
|
|
||||||||
|
Costs and expenses: |
||||||||
|
Cost of revenue |
7 |
% |
5 |
% | ||||
|
Traffic acquisition costs and media buy |
60 |
60 |
||||||
|
Research and development |
9 |
8 |
||||||
|
Selling and marketing |
12 |
11 |
||||||
|
General and administrative |
5 |
4 |
||||||
|
Depreciation and amortization |
3 |
2 |
||||||
|
Total costs and expenses |
96 |
90 |
||||||
|
|
||||||||
|
Operating income |
4 |
10 |
||||||
|
Financial expenses, net |
1 |
(0 |
) | |||||
|
Income before taxes on income |
3 |
10 |
||||||
|
Income tax expense (benefit) |
(0 |
) |
2 |
|||||
|
Net Income |
3 |
% |
8 |
% | ||||
Year Ended December 31, 2021 Compared to Year Ended December 31,
2020
Revenue. Revenue increased by 46%, from
$328.1 million in 2020 to $478.5 million in 2021.
Display Advertising revenue.
Display Advertising revenue increased by 78% in 2021, from $148.7 million in 2020 to $265.3 million in 2021. This increase was a result
of the acceleration of our Connected TV advertising offering.
Search Advertising revenue.
Search Advertising revenue increased by 19% in 2021, from $179.4 million in 2020 to $213.2 million in 2021. This increase is result of
higher numbers of daily monetizable searches that were delivered to Microsoft Bing and others as well as increased numbers of publishers.
Cost of revenue. Cost of revenue increased by
12%, from $22.5 million in 2020 to $25.2 million in 2021. Cost of revenue decreased in terms of the percentage of revenue, representing
7% of revenue in 2020 and 5% in 2021. The decrease as a percentage from revenue results from our efforts to enhance process automation,
the iHUB that acts as a shared infrastructure resource and offshoring our operations.
Traffic acquisition costs (“TAC”) and media
buy. TAC and media buy increased by 46%, from $197.6 million or 60% of revenue in 2020 to $288.0 million or 60% of revenue in 2021.
The stabilization of traffic acquisition costs and media buy level results from the continuous iHUB efforts to serve direct demand and
supply in a closed loop and the product mix.
53
Research and development expenses
(“R&D”). R&D increased by 14%, from $30.9 million in 2020 to $35.3 million in 2021. Our research and development
expenses in 2021 increased compared to the prior year, primarily as a result of full year of payroll and subcontractors expenses related
to the acquisition of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) and our continued investment in technology
to strengthen our technology moat.
Selling and marketing expenses
(“S&M”). S&M expenses increased by 36%, from $39.1 million in 2020 to $53.2 million in 2021. The increase was
primarily as a result of full year of payroll and related expenses related to the acquisitions of Pub Ocean (in July 2020), the acquisition
of Vidazoo (in October 2021) as well as headcount increase, overachievement commissions, retention plans related to acquisitions and increased
stock-based compensation expenses.
General and administrative expenses
(“G&A”). G&A increased by 32%, from $15.8 million in 2020 to $20.9 million in 2021. The increase was primarily
due to headcount increase, overachievement bonuses, increased stock-based compensation expenses and consulting expenses related to M&A
transactions.
Depreciation and amortization.
Depreciation and amortization expenses remained stable in the amount of $9.9 million in 2021 and 2020. Depreciation and amortization consist
primarily of depreciation of our property and equipment and the amortization of our intangible assets as a result of our acquisitions.
Taxes on income (benefit). Taxes
on income increased by $7.2 million from a tax income of $0.6 million in 2020 to $6.6 million tax expense in 2021. The increase was primarily
a result of higher pre-tax income in 2021 ($9.6 million pre-tax tax income in 2020 vs. $45.3 million pre-tax income in 2021) in addition
to internal entities merger completed during 2020, which enabled the company to utilize its tax attributes more efficiently.
B. LIQUIDITY
AND CAPITAL RESOURCES
As of December 31, 2021, we had $321.6 million in cash, cash equivalents and short-term
deposits, compared to $60.4 million at December 31, 2020. The $261.3 million increase is primarily the result of $230.5 million cash provided
from issuance of shares in private placement, net, $71.1 million cash provided by operating activities and $6.9 million cash provided
from exercise of share options, offset by $38.4 million cash paid in connection with acquisitions and $8.3 million repayment of our debt
and $0.5 million used in other investing activities.
Net cash provided by operating activities
In 2021, our operating activities provided cash in the amount of
$71.1 million, primarily as result of income in the amount of $38.7 million, decreased by non-cash expenses, depreciation and amortization
of $9.9 million, stock-based compensation expenses of $7.0, change in Accrued severance pay, net of $0.7 and net change of $17.7 million
in operating assets and liabilities million offset by change in deferred taxes of $2.8 million.
In 2020, our operating activities provided cash in the amount of
$22.2 million, primarily as result of income in the amount of $10.2 million, decreased by non-cash expenses, depreciation and amortization
of $9.9 million, stock-based compensation expenses of $4.4, change in payment obligation related to acquisitions of $4.6 million offset
by change in deferred taxes of $3.1 million and net change of $3.9 million in operating assets and liabilities.
Net cash used in investing activities
In 2021, we used in our investing activities $243.5 million cash,
primarily due to $204.5 million investment in short-term deposits, $38.4 million cash paid in connection to acquisitions and $0.5 million
purchase of property plant and equipment.
In 2020, we used in our investing activities $8.9 million cash,
primarily due to $19.0 million cash paid in connection to acquisitions and $0.5 million purchase of property plant and equipment offset
by a $10.5 million withdrawal from short-term deposits.
54
Net cash used in financing activities
In 2021, our financing activities provided cash in the amount of
$229.1 million, primarily due to $230.5 million issuance of shares in private placement, net, and exercise of options in the amount of
$6.9 million, offset by $8.3 million repayment of our long-term loan.
In 2020, we used in our financing activities $4.0 million cash,
primarily due to $8.3 million repayment of our long and short-term loan offset by proceeds from exercise of options in the amount of $4.3
million.
Bank Mizrahi Credit Facility
On December 17, 2018, ClientConnect Ltd. (“ClientConnect”),
a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a new loan facility with Bank Mizrahi in the
amount of $25 million. As of March 8, 2021, this credit facility was repaid in full.
Financing Needs
We believe that our current working capital and cash flow from
operation, in addition to proceeds from our January 2022 public offering, are sufficient to meet our operating cash requirements for at
least the next twelve months, including payments required under our existing bank loans.
Off Balance
Sheet Arrangements
We do not have off-balance sheet arrangements (as such term is
defined by applicable SEC regulations) that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial conditions, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
C. RESEARCH,
DEVELOPMENT, PATENTS AND LICENSES, ETC.
Our research and development activities are conducted internally
by 115 persons at December 31, 2021. Research and development expenses were $30.9 million and $35.3 million in the years ended December
31, 2020 and 2021, respectively. In 2021, our efforts were focused on adapting, extending (organically and in-organically through acquisitions)
and maintaining compatibility with the ever-changing business landscapes and automation of our platforms and operating systems.
For a discussion of our intellectual property and how we protect
it, see “Business Overview—Intellectual Property” under Item 4.B. above.
D. TREND
INFORMATION
Industry trends expected to affect our revenue,
income from continuing operations, profitability and liquidity or capital resources:
1. The digital advertising environment is very crowded and consumers
suffer from over exposure to advertising promotions. This in turn has brought on a certain level of blindness to advertising, decreasing
their effectiveness and value to advertisers. We are therefore concentrating on unique stand-out quality ad formats with great creative
execution that grabs the attention of consumers, increasing the effectiveness of the ad and ultimately the value to advertisers.
2. The digital advertising environment is also complex and fragmented.
As a result, it is increasingly difficult for advertisers, including brands and agencies, as well as investors, to discern the difference
between the offerings, and this situation requires that advertisers to maintain only small number of relationships which provide a comprehensive
and holistic solution and service. In addition, advertisers are looking for clean, safe and transparent solutions. We are attempting to
address these needs in our various revenue streams by providing robust, scalable and differentiated products across multiple platforms.
Our solution offers a full suite of services for the advertising brand and agency, including the entire advertising process from creative
through analytic data collection and processing which is also utilized through programmatic capabilities which has an increasing demand.
Through Content IQ, we provide advertisers the ability to serve advertisements which are targeted to the end-user’s interests alongside
relevant optimized content and page-level reader engagement. Our solution also includes a technology platform for buying media on social
and mobile platforms which helps optimize the money spent by agencies and advertisers. In turn, we also provide the publisher a solution
for creating new advertising inventory and increasing their revenue.
55
3. Our search monetization revenue is predominantly within the
desktop computers environment. The transition in recent years of consumer consumption of applications, services and content from desktop
towards mobile platforms has accelerated and, as a result, an increasing share of advertising campaigns are channeled towards mobile platforms
resulting in fewer consumer software downloadable products are being developed. To address this trend, we have shifted the growth focus
of all parts of this business away from downloadable desktop software towards the monetization of other search assets.
4. In past years the browser companies, particularly Google and
Microsoft, as well as others, have been instituting policy changes, regulations and technologies that is making it increasingly difficult
to change a browser’s settings even with user consent, including the ability to change a browser’s default search settings.
Changing such settings has been a major part of the Company’s monetization model and until now we have been successful in dealing
with these measures, within the framework allowed by these companies We continue to believe, as supported by the level of revenue over
the last couple of years, that as the market continues to consolidate around accepted marketing practices, there remains sufficient business
at a level sufficient to generate significant revenue and profits.
For more information on uncertainties, demands, commitments or
events that are reasonably likely to have a material effect on our business, see Item 3.D “Key Information—Risk Factors.”
For additional trend information, see the discussion in Item 5.A.
“Operating and Financial Review and Prospects—Operating Results.”
E. TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual commitments as of
December 31, 2021 and the effect those commitments are expected to have on our liquidity and cash flow in future periods. All numbers
below are in US dollars in thousands.
|
Payments Due by Period(****) |
||||||||||||||||||||
|
Contractual Commitments as of December 31, 2021 |
Total |
Less than
1 year |
1-3 Years |
3-5 Years |
More than
5 Years |
|||||||||||||||
|
Accrued severance pay (1)
|
2,371 |
|||||||||||||||||||
|
Uncertain tax positions (ASC-740)
(2) |
6,928 |
|||||||||||||||||||
|
Operating leases |
15,368 |
4,485 |
8,205 |
2,678 |
- |
|||||||||||||||
|
Total |
$ |
24,667 |
$ |
4,485 |
$ |
8,205 |
$ |
2,678 |
$ |
- |
||||||||||
_________________
| (1) |
Prior notice to our executive employees as well as severance
pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable
only upon termination, retirement or death of the respective employee. Of this amount, $1.8 million is unfunded as of December 31,
2021. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table.
See also Note 2 to our consolidated financial statements appearing in “ITEM 18. Financial Statements” of this annual report.
|
| (2) |
Consists of accruals for certain income tax positions under ASC 740 that are paid upon settlement, and
for which we are unable to reasonably estimate the ultimate amount and timing of settlement. See Note 14(h) to our consolidated financial
statements included in ITEM 18 of this annual report for further information regarding our liability under ASC 740. Payment of these obligations
would result from settlements with tax authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations
are only presented in their total amount. |
56
ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
| A. |
DIRECTORS AND SENIOR MANAGEMENT |
The following table sets forth information regarding our executive officers and directors
as of 5, 2022:
|
Name |
Age |
Position | ||
|
Eyal Kaplan*(1)(2)
|
62 |
Chairman of the Board of Directors | ||
|
Doron Gerstel |
61 |
Chief Executive Officer; Director | ||
|
Maoz Sigron |
44 |
Chief Financial Officer | ||
|
Dror Erez*(1)(3)
|
52 |
Director | ||
|
Sarit Firon*(1)(4)
|
55 |
Director | ||
|
Rami Schwartz* (3)(4)
|
64 |
Director | ||
|
Michael Vorhaus*(2)(4)
|
64 |
Director | ||
|
Joy Marcus*(2)(3)
|
60 |
Director | ||
|
Daniel E. Aks |
62 |
President, Undertone | ||
|
Tal Jacobson |
47 |
General Manager, CodeFuel | ||
|
Eliran Ben Yehuda |
37 |
General Manager, CIQ |
_________________________
* “Independent director” under the Nasdaq Listing Rules.
(1) Member of our investment committee.
(2) Member of our nominating and governance committee.
(3) Member of our compensation committee.
(4) Member of our audit committee.
Effective as of August 26, 2019, our board of directors adopted
the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside
of Israel), 2000, or the Regulation, as a result our director in office who was elected and classified as external director, Ms. Sarit
Firon, is no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such
former external directors have the right to remain in office as company’s directors at their option after the exemption under the
Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders
after the adoption of the exemption under the Regulation. Ms. Sarit Firon’s term of office expired in January 2020, however our
board of directors has re-appointed Ms. Firon with the term of office that expired on our 2021 annual meeting of shareholders. Ms. Sarit
Firon was re-elected on our 2021 annual general meeting of shareholders to serve as our director until our 2024 annual general meeting
of shareholders.
There are no arrangements or understandings between any of our
directors or executive officers and any other person pursuant to which our directors or executive officers were selected.
Eyal Kaplan has been
the chairperson of the board of directors of the Company since May 2018. Mr. Kaplan is also the chairperson of Expand Investments, an
advisory and consulting firm focusing on growth-through-innovation and corporate strategies. Prior to that, he was Managing General Partner
with Walden Israel, a venture capital firm, during which time he was Director and chairperson of numerous portfolio companies. In 1990
he co-founded Geotek Communications, an international wireless communications company, and served as senior vice president with broad
strategic, managerial and operational responsibilities until 1995. Mr. Kaplan has been a member of the Technion (Israel Institute of Technology)
Council (executive board) since January 2014, where he chairs the Finance Committee and is a member of the Endowment Investment Committee.
Since 2012 he has been a member of the Technion Board of Governors, a body of some 300 high-profile visionaries and decision makers with
outstanding achievements in the fields of science, technology, economy, industry, culture and society. From 2007 to 2012, Mr. Kaplan was
a member of the Advisory Committee of Caesarea Center for Capital Markets & Risk Management, and from 2005 to 2014, he was a member
of the Advisory Committee of the Global Consulting Practicum at the Wharton School of the University of Pennsylvania. Mr. Kaplan holds
an MBA from the Wharton School of the University of Pennsylvania, a Master of Arts in International Studies from the Lauder Institute
of the University of Pennsylvania, and a Bachelor of Science degree (with Honors) in economics and management from the Technion - Israel
Institute of Technology.
57
Doron Gerstel has
been a director of the Company since May 2018, and the Chief Executive Officer of the Company since April 2017. In his previous role as
CEO of Panaya Ltd., Mr. Gerstel led a company turnaround that saw an increase in annual revenue and the company’s acquisition by
Infosys Limited. Mr. Gerstel has also held CEO positions at Nolio Ltd., Syneron Medical Ltd. and Zend Technologies Ltd. Mr. Gerstel holds
a BSc. in Economics and Management from the Technion Institute of Technology in Haifa, and an MBA from Tel Aviv University.
Maoz Sigron has been
the Chief Financial Officer of the Company since February 2018. Prior to that, since September 2017 until February 2018, Mr. Sigron served
as our VP Finance. Previously, he served in various finance leadership and senior accounting positions at Tnuva Dairy Corporation, Allot
Communications Ltd. (Nasdaq:ALLT) and Stratasys Ltd. (Nasdaq:SSYS) as well served as a CPA with PwC. Mr. Sigron holds a B.A in accounting
and Economics from the College of Management.
Dror Erez has been
a director of the Company since January 2014. In 2005, Mr. Erez co-founded Conduit and served as its Chief Technology Officer until January
2014, when he became Conduit’s President and in May, 2018 became Conduit’s chairperson of the board of directors for a year.
Mr. Erez is also a member of the Conduit board of directors. Mr. Erez is now acting as a CEO of Trevi, io and is also advising for startups
on strategy, product and technology. Prior to founding Conduit, he served in various executive roles in private technology companies.
Mr. Erez holds a B.A. in Physics and Computer Science from Bar Ilan University.
Sarit Firon has been
an external director of the Company since January 2017 and following the Company’s opt out from the Israeli external directors regime
in August 2019, continued as an independent director. Ms. Firon is managing partner of Team8 Group and co-founder and managing partner
of Team8 Capital, the investment arm of Team8 Group, which invests in early stage technology startups. Previously, she was a managing
partner of Cerca Partners, an Israeli venture capital fund. She has served at Extreme Reality Ltd., as its chief executive officer from
December 2012 to November 2014 and as a director since December 2014. From November 2011 to November 2012, Ms. Firon was the Chief Financial
Officer of Kenshoo Ltd. From November 2007 to October 2011, Ms. Firon was the Chief Financial Officer of MediaMind Technologies Inc.,
a Nasdaq listed company which was acquired by DG, Inc. in August 2011. From May 2005 to June 2007, Ms. Firon was the Chief Financial Officer
of OliveSoftware and from January 2000 to October 2004, she was the CFO of P-Cube, a private company which was acquired in October 2004
by Cisco Systems, Inc. (Nasdaq:CSCO). From October 2004 to January 2005, Ms. Firon was employed by Cisco to be responsible for the post-merger
integration of P-Cube. From January 1995 to December 1999, Ms. Firon served in various positions at Radcom Ltd. (Nasdaq:RDCM), including
as its Chief Financial Officer from September 1997 to December 1999. Since July 2015, she has served as chairperson of the board of directors
of myThings Israel Ltd. Since June 2014, Ms. Firon has served as a director of Mediwound Ltd. (Nasdaq:MDWD), and since June 2012, Ms.
Firon has served as a director of Datorama Ltd. From October 2000 to December 2006, Ms. Firon served as a director of MetaLink Ltd. (OTCMKTS:MTLK).
Ms. Firon holds a B.A. in Accounting and Economics from Tel-Aviv University, Israel.
Rami Schwartz has
been a director of the Company since January 2019. Mr. Schwartz joined The Portland Trust as Managing Director of the Tel Aviv office
in April 2018. Mr. Schwartz also serves as an advisory board member of Algosec. Previously, Mr. Schwartz was the President of the Amdocs
Products and Amdocs Delivery groups for 7 years. Prior to joining Amdocs, Mr. Schwartz was the chairperson of Olive Software (acquired
by ESW Capital), and Comply, the co-founder and CEO of Zizio and DigiHOO, and an EIR at Cedar Fund. Mr. Schwartz was CEO and director
of Exanet (acquired by Dell) and General Manager of Precise Software (acquired by Veritas software) and an EIR at Cedar Fund. Mr. Schwartz
holds a B.Sc. in excellence, in Mathematics and Computer Science from the Hebrew University in Jerusalem.
Michael Vorhaus has
been a director of the Company since April 2015. Mr. Vorhaus also serves as a director of Altimar Acquisitions Corporation (NYSE: ATAC).Starting
December of 2018, Mr. Vorhaus has founded Vorhaus Advisors and is CEO of the firm. From 1994 to November 2018, he was in a variety of
positions at of Frank N. Magid Associates, Inc., a research-based strategic consulting firm. From 1994 to 2008, he served as its Senior
Vice President and Managing Director and from 2008 to 2018 he served as the President of Magid Advisor, a unit of Magid Associates. From
2013 to 2014, Mr. Vorhaus served as a director of Grow Mobile. In 1987, he founded Vorhaus Investments. Mr. Vorhaus holds a B.A. in Psychology
from Wesleyan University and completed the Management Development Program at the University of California, Berkeley’s Haas School
of Business.
Joy Marcus has been
a director of the Company since November 2019. Ms. Marcus has a wealth of experience in the media industry, including as EVP and GM Digital
Video at Conde Nast Entertainment, CEO of Bloglovin’ (acquired by Impact), SVP Global Marketing Solutions at Time Warner (now WarnerMedia),
VP International at MTV Networks, a division of Viacom and GM North America for Dailymotion (acquired by Orange/France Telecom). Ms. Marcus
is a board member at digital media company Qwire and the non-profits New York Tech Alliance, The Video Consortium and Hoops4Hope. Joy
is currently Co-Founder of the female focused investment group Brilliant Friends, a full-time Lecturer at Princeton University, where
she was the James Wei Visiting Professor in Entrepreneurship in 2014, and a Venture Fellow at VC firm JVP, where she advises the firm
on digital media, advertising and consumer investments. Joy graduated with Magna Cum Laude, Phi Beta Kappa from Princeton University,
has a JD from NYU Law School and completed the management course in finance and accounting from Columbia University.
58
Daniel E. Aks has
been the President of Undertone since August 2019 and an external director of the Company from August 2018 until August 2019. Since December
2017, Mr. Aks is the Chief Executive Officer of Antenna International, a story-maker and creative technology company devoted to cultural,
iconic site and commercial attractions. Prior to Antenna, from December 2010 to December 2017 he was the owner of C3 Multimedia LLC.,
a consulting firm in the fields of information, education K-16 and media and during his term with C3 was, inter-alia, the Acting Chief
Operating Officer for the Educational Records Bureau (ERB), a K-12 assessment organization serving private education and high performing
public institutions (from March 2015 until December 2017). From January 2014 until December 2017, Mr. Aks was the Co-Founder of The EdTech
Fund, an investment vehicle for seed capital investments in educational technologies. He also served as the Senior Vice President and
Chief of Staff for McGraw-Hill Education (MHE) from September 2008 until November 2010 where he was responsible for information technology,
public relations, strategy and business development, K-12 differentiated instruction pilots, and content management system development.
From July 2007 until April 2008 he served as the Chief Operating Officer and Executive Vice President at The Greenspun Companies, where
he had general management responsibility of the company’s magazine and companion web site businesses. Prior to that from January
2006 to July 2007, he held positions with MTV Networks (MTVN) as a Senior Vice President of both Operations and Consumer Products. Prior
to MTVN from August 1999 to June 2004, Mr. Ask served PRIMEDIA’s Consumer Magazine Group as Chief Operating Officer, where he managed
the Direct Response Advertising Group, Manufacturing, Production, Distribution, IT, Strategy, Business Development, Global Sourcing, and
at times Circulation. He was also President of PRIMEDIA Consumer Magazine Internet Group during that term. Prior to joining PRIMEDIA,
Mr. Aks was a partner with the Booz Allen Hamilton consulting firm where he specialized in business growth, operations strategy and restructuring
in the media, education, telecommunications and consumer goods industries. Mr. Aks holds a BS in Manufacturing/Industrial Engineering
and a B.A. in Business Administration from Rutgers University and earned an MBA from the Harvard University Graduate School of Business
Administration, where he graduated with second-year honors.
Tal Jacobson has been
the General Manager of CodeFuel since November 2018. Mr. Jacobson has been an executive in the Israeli high-tech industry for over 20
years. Previously to joining Perion, Mr. Jacobson served as the Chief Revenue Officer and Chief Business Development Officer at SimilarWeb.
He also founded Monotizer, which provided a technology for generating traffic to online retailers. Previously, Mr. Jacobson was the VP
of Business at McCann Erickson as well as held the position of CEO at Watchitoo - a video collaboration platform. Mr. Jacobson was also
the Director of Business Development at AOL as part of the IM division (ICQ).
Eliran Ben Yehuda has been
the General Manager of CIQ since January 2022. Mr. Ben Yehuda has served in senior management positions for over 10 years. Prior to joining
Perion, Mr. Ben Yehuda served as a Director at Taboola.com Ltd. (TBLA, TBLAW), where he also served as country manager for Israel. Mr.
Ben Yehuda also serves as an advisory board member for Papaya Global Ltd. Mr. Ben Yehuda holds an LL.B and B.A. in Business Administration
both from Reichman University.
There are no family relationships between any of our directors or executive officers.
B. COMPENSATION
The aggregate direct compensation we paid to our officers as a
group (4 persons) for the year ended December 31, 2021, was approximately $6.8 million, which included approximately $0.4 million that
was set aside or accrued to provide for pension, retirement, severance or similar benefits. This amount includes bonuses paid to our officers
pursuant to our executive bonus plan based on company performance measures, in accordance with our Compensation Policy for Directors and
Officers. This amount does not include expenses we incurred for other payments, including dues for professional and business associations,
business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel.
59
The aggregate compensation we paid to our directors who are not
officers for their services as directors as a group for the year ended December 31, 2021 was approximately $0.4 million. In addition,
our directors are reimbursed for expenses incurred in order to attend board of directors or committee meetings.
In the year ended December 31, 2021, we granted to our officers
(i) 157,700 restricted share units (“RSUs”), which vest over a three-year period; and (ii) 110,300 performance-based share
units (“PSUs”), linked to certain financial KPI’s. These awards were granted under our Equity Incentive Plan, as amended,
formerly known as the 2003 Israeli Share Option Plan (the “Incentive Plan”).
In 2021, we paid each of our non-executive directors $50,000 per
year. Following the approval of the annual general meeting of our shareholders held on December 23, 2020, the annual equity grant structure
to our non-executive directors has been changed from a grant of options to a grant of RSUs, with a variable value based on the role held
by such member of the board of directors. With respect to new appointed directors, such grant shall be made initially upon the initial
election or appointment and on each anniversary of such date. With respect to our incumbent non-executive directors, the initial grant,
was made on February 6, 2021, the date of the first anniversary of the most recent option grant. Such RSU grant was made in lieu (and
not in addition) to the scheduled grant of options to our directors. The RSUs granted are subject to the terms and conditions of the Incentive
Plan and the RSU agreement pursuant to the Incentive Plan. The RSUs shall vest on a quarterly basis, in equal tranches, during the year
following the grant. All unvested RSUs held by a director in office will automatically vest upon a change of control of the Company, which
is defined for this purpose as (i) a merger, acquisition or reorganization of the Company with one or more other entities in which the
Company is not the surviving entity, (ii) a sale of all or substantially all of the assets of the Company, or (iii) a transaction or a
series of related transactions as a result of which more than 50% of the outstanding shares or the voting rights of the Company are beneficially
owned by one person or group (as defined in the SEC rules) (the “Change of Control”). Accordingly, each non-executive director
was granted with an annual RSU grant according to his/her role, with a value as follows:
|
• |
chairperson of our audit committee: $110,000;
|
|
• |
chairperson of our compensation committee:
$107,500; |
|
• |
chairperson of our nominating and governance
committee: $105,000; and |
|
• |
other non-executive directors: $97,500.
|
The compensation we paid to our chairman of the board of directors,
Mr. Kaplan, for the year ended December 31, 2021 was $100,000 plus VAT, paid in four quarterly payments and reimbursement of out-of-pocket
expenses incurred in connection with Mr. Kaplan’s services as chairman. Mr. Kaplan is also entitled for indemnification and liability
insurance as provided to other members of the board of directors. Mr. Kaplan’s services agreement also includes customary non-disclosure,
non-compete, and ownership assignment of intellectual property undertakings.
Following the approval of the extraordinary general meeting of
our shareholders held on August 2, 2018, Mr. Kaplan was granted with a one-time grant of options to purchase 66,666 Ordinary Shares, with
a 3-year vesting schedule, commencing on May 9, 2018 (the “August 2018 Grant”). In addition, following the approval of the
annual general meeting of our shareholders held on February 6, 2020, and subject to the continued engagement as our chairman of the board
of directors, Mr. Kaplan was granted with a one-time grant of options to purchase 90,000 Ordinary Shares with a 3-year vesting schedule
(the options will vest quarterly in equal tranches over a three-year period), commencing on May 9, 2021, at an exercise price per share
equal to the average stock market price of the 90 days period preceding the date of the general meeting of our shareholders, as reported
by the Nasdaq Stock Market (together with August 2018 Grant, the “Chairperson’s Previous Grants”). The options granted
are subject to the terms and conditions of the Incentive Plan and the option agreement pursuant to the Incentive Plan. Upon removal of
Mr. Kaplan from office either by a vote of the board of directors or by a vote of the Company’s shareholders, either (i) as a direct
result of the negotiation of a Change of Control; or (ii) within six months following a Change of Control event (for the avoidance of
doubt, in both (i) and (ii), other than for “cause” – as such term defined in the Incentive Plan) all unvested options
shall automatically be accelerated and become fully vested on the effective date of any such event described in either (i) or (ii).
Following the approval of the annual general meeting of our shareholders
held on December 23, 2020, the equity grant structure to Mr. Kaplan, our chairperson of the board of directors, was changed as well, from
grant of option to grant of RSUs. Accordingly, Mr. Kaplan was granted an annual grant with a value of up to $200,000, such annual grant,
which shall be made in the form of RSUs, shall be equal to the difference between the fair market value per vesting annum of the Chairperson’s
Previous Grants and the approved cap of $200,000. The initial grant was made on February 6, 2021. With respect to new appointed chairperson
of our board of directors, such grant shall be made initially upon the initial election or appointment and on each anniversary of such
date. The RSUs granted are subject to the terms and conditions of the Incentive Plan and the RSU agreement pursuant to the Incentive Plan.
The RSUs shall vest on a quarterly basis, in equal tranches, during the year following the grant. All unvested RSUs held by a chairperson
in office will automatically vest upon a Change of Control event. In addition, the Company’s shareholders approved a one-time special
grant of 19,000 fully vested RSUs. The grant date of the special grant is the date of our board of directors’ approval which occurred
on October 27, 2020.
60
The table below reflects the compensation granted to our five most
highly compensated office holders during or with respect to the year ended December 31, 2021. We refer to the five individuals for whom
disclosure is provided herein as our “Covered Executives.”
For purposes of the table below, “compensation” includes
salary cost, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social
benefits and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized
in our financial statements for the year ended December 31, 2021, including the compensation paid to such Covered Executive following
the end of the year in respect of services provided during the year. Each of the Covered Executives was covered by our D&O liability
insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association.
All numbers below are in US Dollars in thousands.
|
Name and Principal Position (1)
|
Salary Cost (2)
|
Bonus (3)
|
Equity-Based
Compensation (4)
|
Total |
||||||||||||
|
Doron Gerstel, Chief Executive Officer |
634 |
1,254 |
946 |
2,834 |
||||||||||||
|
Maoz Sigron, Chief Financial Officer |
343 |
535 |
514 |
1,392 |
||||||||||||
|
Daniel E. Aks, President, Undertone Business Unit |
540 |
600 |
202 |
1,342 |
||||||||||||
|
Tal Jacobson, General Manager, CodeFuel Business Unit |
387 |
677 |
260 |
1,324 |
||||||||||||
_________________
(1) Unless otherwise indicated herein, all Covered Executives are employed on a full-time (100%) basis.
(2) Salary cost includes the Covered Executive’s gross salary plus payment of
social benefits made by the Company on behalf of such Covered Executive. Such benefits may include, to the extent applicable to the
Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers’
Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”),
pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social
security and tax gross-up payments, vacation, car, medical insurances and benefits, phone, convalescence or recreation pay and other benefits
and perquisites consistent with the Company’s policies.
(3) Annual bonuses granted to the Covered Executives based on formulas set forth in
the annual compensation plan approved by the board of directors.
(4) Represents the equity-based compensation expenses recorded in our consolidated
financial statements for the year ended December 31, 2021. Such numbers are based on the option grant date fair value in accordance
with accounting guidance for equity-based compensation and does not necessarily reflect the cash proceeds to be received by the applicable
officer upon the vesting and sale of the underlying shares. For a discussion of the assumptions used in reaching this valuation, see Note
2 to our Financial Statements.
Compensation Terms of our Chief Executive Officer
Doron Gerstel serves as our Chief Executive Officer from April
2017 and as a director of the Company since May 2018. His monthly base salary is NIS 130,000 (equivalent to approximately $41,800), effective
as of January 1, 2021, as approved by the annual general meeting of our shareholders held on December 23, 2020. Mr. Gerstel also entitled
to customary benefits (including those mandated by applicable law and/or generally provided to other executive officers of the Company),
including managers’ insurance or pension arrangement, disability insurance, severance pay (pursuant to Section 14 of the Severance
Pay Law), educational savings fund, private health insurance, indemnification, liability insurance (including for the period of seven
years following termination), convalescence pay, meal plan, cellular telephone and personal computer. Mr. Gerstel is not compensated for
his role as director.
61
Mr. Gerstel is also entitled for a target annual cash bonus of
up to a maximum of twelve (12) monthly salaries, or eighteen (18) in case of over achievement, subject to performance matrix to be approved
by the Company’s compensation committee and board of directors on an annual basis, while up to 25% of such annual bonus may be discretionary
and not subject to measurable performance indexes. In addition, our compensation committee and the board of directors are authorized to
grant Mr. Gerstel, from time to time, a special bonus in accordance with and subject to our Compensation Policy for Directors and Officers.
Upon joining the Company, Mr. Gerstel was granted with two stock
option grants under the Company’s Incentive Plan: (i) option to purchase up to 387,278 ordinary shares at an exercise price per
share of $4.89 (which was the approximate market price per ordinary shares on the Nasdaq Stock Market on the date of the employment agreement);
and (ii) option to purchase up to 387,278 ordinary shares at an exercise price per share of $7.89 (together, the “Options”).
The Options are exercisable for cash or on a “cashless”
basis, at the election of Mr. Gerstel, and have a term of six years, which will not be reduced in the event that employment terminates
prior thereto, except in the event of termination for “Cause” (as defined in the employment agreement). The Options vest during
the term of employer-employee relations, in quarterly installments, over a period of four years. The vesting schedule of the Options will
fully accelerate (i) upon the closing of a “Transaction” (as defined below) or (ii) if Mr. Gerstel is terminated without “Cause”
or if he resigns as a result of being demoted or relocated, in each case, within 12 months following a “Change of Control”
(as defined below).
Each grant constitutes approximately 0.9% of the outstanding ordinary shares as of March
5, 2022.
At the annual general meeting of our shareholders held on February
15, 2018, and as part of a cross-company repricing plan designed mainly to keep our competitive hiring position in the industry, the repricing
of options granted to Mr. Gerstel was approved. The first tranche of 387,278 options was adjusted to have an exercise price per of $3.24
(which is equal to the weighted average price of our ordinary shares on Nasdaq in the last 90 days prior to the date of approval of the
repricing plan by our board of directors) (the “Adjusted Exercise Price”), and the second tranche of 387,278 options was adjusted
to have an exercise price per share equal to $4.23, which is 130% of the Adjusted Exercise Price.
At the extraordinary meeting of our shareholders held on April
11, 2019, Mr. Gerstel was granted with additional grant of options to purchase 150,000 Ordinary Shares, with a 3-year vesting schedule
(the options will vest on a quarterly basis in equal tranches over a three-year period), commenced on January 15, 2019 (the “2019
Options”). The exercise price per share for the shares underlying the 2019 Options is as follows: (i) the first 75,000 of shares
underlying the 2019 Options will be exercised at a price per share equal to $2.87, which is the weighted average closing price of our
ordinary shares on Nasdaq in the last 90 days prior to the date of approval of the grant by our board of directors on February 12, 2019,
as reported by the Nasdaq Stock Market (the “Base PPS”); and (ii) the remaining 75,000 of shares underlying the 2019 Options
will be exercised at a price per share equal to $3.30 which is a price 15% higher than the Base PPS. The 2019 Options will be subject
to the terms and conditions of the Company’s Incentive Plan, as amended and the terms of the option agreement issued to Mr. Gerstel
pursuant to the Company’s Incentive Plan. The vesting schedule of the Option will fully accelerate in accordance of the acceleration
provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the shareholders meeting).
Each grant constitutes approximately 0.2% of the outstanding ordinary shares as of March
5, 2022.
At the annual general meeting of our shareholders held on December
23, 2020, Mr. Gerstel was granted with 500,000 RSUs, which is vesting over a three-year period commenced on February 1, 2021, with a 6-month
cliff after which the RSUs will continue to vest on a quarterly basis over the following ten (10) quarters, unless such RSUs have been
cancelled in accordance with the employment terms of Mr. Gerstel (the “RSU Grant”). The grant date is the date of the board
of directors’ approval, which occurred on October 27, 2020. The vesting schedule of the RSU Grant will fully accelerate in accordance
with the acceleration provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date
of the shareholders meeting). Consistent with the previous options grants granted to Mr. Gerstel, the RSU Grant will be subject to the
same terms and conditions of prior grants, the terms and conditions of the Company’s Incentive Plan and the terms of the grant agreements
issued to Mr. Gerstel pursuant to the Company’s Incentive Plan.
Such grant constitutes approximately 1.1% of the outstanding ordinary shares as of March
5, 2022.
62
In addition, at the same meeting, our shareholders approved a one-time
grant to Mr. Gerstel of performance based options to purchase 225,000 ordinary shares linked to certain KPI’s in connection with
the renewal of the strategic partnership agreement with Microsoft Bing (the “2020 Options”), approved by our board of directors
on July 28, 2020, to those members of our management who participated in the efforts for the renewal of the strategic partnership for
a period of four additional years, whereas 50% of the 2020 Options vested upon the renewal of the Search Distribution Agreement by and
between the Company and Microsoft Ireland Operations Limited which occurred on November 2, 2020 (the “Renewal Date”), and
the remaining 50% of the 2020 Options will vest in two equal portions on each anniversary of the Renewal Date. The exercise price per
share for the ordinary shares underlying the 2020 Options is the weighted average closing price of our ordinary shares in the last 90
days, as reported by the Nasdaq Stock Market, prior to the date of approval of the grant by the board which occurred on July 28, 2020.
The vesting schedule of the 2020 Options will fully accelerate in accordance with the acceleration provisions of the options previously
granted to Mr. Gerstel (with Change in Board Event measured as of the date of the shareholders meeting). Consistent with the previous
options grants granted to Mr. Gerstel, the 2020 Options will be subject to the same terms and conditions of prior grants, the terms and
conditions of the Company’s Incentive Plan and the terms of the grant agreements issued to Mr. Gerstel pursuant to the Company’s
Incentive Plan.
Such grant constitutes approximately 0.5% of the outstanding ordinary shares as of March
5, 2022.
For the purpose of Mr. Gerstel’s employment agreement, “Transaction”
means the occurrence and closing, in a single transaction or in a series of related transactions, of any one or more of the following
events pursuant to the approval or recommendation of the board of directors: (i) a sale or other disposition of 90% or more of the consolidated
assets of the Company and its subsidiaries; (ii) a sale or other disposition of 90% of more of the outstanding securities of the Company
resulting in a Change of Control; or (iii) a merger, consolidation or similar transaction involving 90% of more of the outstanding securities
of the Company, resulting in a Change of Control.
“Change of Control” will occur if any person
or “group” of persons becomes the “beneficial owner” (as such terms are used for purposes of Section 13(d) of
the U.S. Securities Exchange Act of 1934, as amended), directly or indirectly, of 35% or more of the outstanding share capital of the
Company, excluding a reorganization resulting in the Company being held by an entity beneficially owned by the holders of the Company’s
share capital immediately prior to the transaction or any Change in Board Event (as defined below).
“Change in Board Event” shall mean any time at which
individuals who, as of April 2, 2017, constitute the board of directors (the “Incumbent Board”) cease for any reason to constitute
at least a majority of the board of directors; provided, however, that any individual becoming a director subsequent to April 2, 2017
whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board but excluding,
for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened (in writing) election
contest with respect to the election or removal of directors or other actual or threatened (in writing) solicitation of proxies or consents
by or on behalf of a person other than the board of directors.
The agreement also includes customary covenants regarding confidentiality, IP assignment,
non-competition and non-solicitation.
The employment term is for an indefinite period. We may terminate
the employment upon 12 months’ prior notice and Mr. Gerstel may resign upon nine months’ prior notice. During the notice period,
Mr. Gerstel will be entitled to all benefits under the employment agreement, including the continued vesting of stock options, even if
the Company waives its right to continued service. In the event of termination for “Cause” (as defined in the employment agreement),
we may terminate the employee without prior notice.
We also have employment agreements with our other executive officers.
These agreements usually do not contain any change of control provisions and otherwise contain salary, benefit and non-competition provisions
that we believe to be customary in our industry.
C. BOARD
PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various
corporate governance practices under the Companies Law, relating to such matters as external directors (or, to the extent applicable,
the provisions of the opt-out from external directors), the audit committee, the internal auditor and approvals of interested party transactions.
These matters are in addition to the ongoing listing conditions of Nasdaq and other relevant provisions of U.S. securities laws. Under
the Nasdaq Listing Rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the
comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee. For further
information, see Item 16.G “Corporate Governance.”
63
Nasdaq Requirements
As required by the Nasdaq Listing Rules, a majority of our directors
are “independent directors” as defined in the Nasdaq Listing Rules.
As contemplated by the Nasdaq Listing Rules, we have an audit committee,
a compensation committee and a nominating and governance committee, all of whose members are independent directors.
See Item 16.G. “Corporate Governance” for exemptions that we have taken
from certain Nasdaq Listing Rule requirements.
Israeli Companies Law
Board of Directors
According to the Companies Law and our articles of association, our board of directors
is responsible, among other things, for:
|
• |
establishing our policies and overseeing
the performance and activities of our chief executive officer; |
|
• |
convening shareholders’ meetings;
|
|
• |
approving our financial statements;
|
|
• |
determining our plans of action, principles
for funding them and the priorities among them, our organizational structure and examining our financial status; and |
|
• |
issuing securities and distributing dividends.
|
Our board of directors may exercise all powers and may take all
actions that are not specifically granted to our shareholders. Our board of directors also appoints and may remove our chief executive
officer and may appoint or remove other executive officers, subject to any rights that the executive officers may have under their employment
agreements.
As of March 5, 2022, our board of directors consists of seven directors.
Our directors (other than the directors who were in the position of external directors until August 2019) are elected in three staggered
classes by the vote of a majority of the ordinary shares present and entitled to vote at meetings of our shareholders at which directors
are elected. The members of only one staggered class will be elected at each annual meeting for a three-year term, so that the regular
term of only one class of directors expires annually. Our annual meeting of shareholders is required to be held at least once during every
calendar year and not more than fifteen months after the last preceding meeting. Effective as of August 2019, following our adoption of
the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside
of Israel), 2000, or the Regulation, our director in office who was elected and classified as external directors, Ms. Sarit Firon, is
no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such directors
have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier
of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption
under the Regulation. Ms. Firon’s term of office expired in January 2020, accordingly our board of directors has re-appointed Ms.
Firon with the term of office that expired as of our 2021 annual meeting of shareholders. Ms. Sarit Firon was re-elected on our 2021 annual
general meeting of shareholders to serve as our director until our 2024 annual general meeting of shareholders.
64
If the number of directors constituting our board of directors
is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as
nearly equal as possible, but in no case will a decrease in the number of directors constituting our board of directors reduce the term
of any then current director.
Our board of directors may appoint any other person as a director,
whether to fill a vacancy or as an addition to the then current number of directors, provided that the total number of directors shall
not, at any time, exceed seven directors. Any director so appointed shall hold office until the annual meeting of shareholders at which
the term of his class expires, unless otherwise determined by our board of directors. There is no limitation on the number of terms that
a non-external director may serve.
Shareholders may remove a non-external director from office by
a resolution passed at a meeting of shareholders by a vote of the holders of more than two-thirds of our voting power.
A resolution proposed at any meeting of our board of directors
is deemed adopted if approved by a majority of the directors present and voting on the matter. Under the Companies Law, our board of directors
must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations that our board
of directors should have. In determining the number of directors required to have such expertise, the board of directors must consider,
among other things, the type and size of the company and the scope and complexity of its business and operations. Our board of directors
has determined that we require at least one director with the requisite financial and accounting expertise and that Ms. Sarit Firon has
such expertise.
Under the Companies Law, a person, who is, directly or indirectly
subordinated to the chief executive officer of a public company, may not serve as the chairman of its board of directors. In addition,
neither the chief executive officer nor his relative is eligible to serve as chairman of the board of directors (and vice versa), unless
such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and either: (i) such
majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not controlling
shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal
did not exceed 2% of company voting shareholders. The term can be extended for additional three year terms, in the same manner.
External Directors
Under the Companies Law, Israeli companies whose shares have been
offered to the public in or outside of Israel are required to appoint at least two individuals to serve as external directors.
Pursuant to regulations promulgated under the Companies Law, companies
with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt
out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition
of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in August 2019, we
elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning
the composition of the audit committee and compensation committee of the board of directors (the “Opt-Out”).
Under these regulations, the exemptions from such Companies Law
requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term
is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and
(iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements,
under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation
committee, an investment committee and a nominating and governance committee.
Audit Committee
Our audit committee is comprised of Ms. Sarit Firon (chairperson),
Mr. Michael Vorhaus and Mr. Rami Schwartz, and operates pursuant to a written charter.
65
Nasdaq Requirements
Under the listing requirements of the Nasdaq Stock Market, a foreign
private issuer is required to maintain an audit committee that has certain responsibilities and authority. The Nasdaq Listing Rules require
that all members of the audit committee must satisfy certain independence requirements, subject to certain limited exceptions. We have
adopted an audit committee charter as required by the Nasdaq Listing Rules. Our audit committee assists the board of directors in fulfilling
its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial
statements. Our audit committee is also responsible for the establishment of policies and procedures for review and pre-approval by the
committee of all audit services and permissible non-audit services to be performed by our independent auditor, in order to ensure that
such services do not impair our auditor’s independence. For more information see Item 16.C “Principal Accountant Fees and
Services.” Under the Nasdaq Listing Rules, the approval of the audit committee is also required to effect related-party transactions
that would be required to be disclosed in our annual report.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company
must establish an audit committee. The audit committee must consist of at least three directors who meet certain independence criteria.
The responsibilities of the audit committee under the Companies Law include to identify and address problems in the management of the
company, review and approve interested party transactions, establish whistleblower procedures and procedures for considering controlling
party transactions and oversee the company’s internal audit system and the performance of the internal auditor.
Compensation Committee
Pursuant to the Companies Law, the compensation committee of a
public company must be comprised of at least three directors, include all of the external directors (and also the chairman is required
to be an external director), and any other members must satisfy certain independence standards under the Companies Law. Following the
Opt-Out, our compensation committee is comprised of Ms. Joy Marcus (chairperson), Mr. Dror Erez and Mr. Rami Schwartz, all of whom satisfy
the respective “independence” requirements of the Companies Law, SEC and Nasdaq Listing Rules for compensation committee members.
Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.
Our compensation committee is authorized to, among other things,
review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock
option grants, employment agreements, and any other benefits, compensation or arrangements of our executive officers and directors. In
addition, our compensation committee is required to propose for shareholder approval by a special majority, a compensation policy governing
the compensation of office holders based on specified criteria, to review, from time to time, modifications to the said compensation policy
and examine its implementation, and to approve the actual compensation terms of office holders prior to approval thereof by the board
of directors. Our shareholders adopted a new Compensation Policy for Directors and Officers on February 6, 2020. Our compensation committee
also oversees the administration of our Incentive Plan.
Investment Committee
Our investment committee is comprised of Mr. Eyal Kaplan (chairperson),
Ms. Sarit Firon and Mr. Rami Schwartz. The Investment Committee is responsible for formulating the overall investment policies of the
Company, and establishing investment guidelines in furtherance of those policies. The Committee monitors the management of the portfolio
for compliance with the investment policies and guidelines and for meeting performance objectives over time as well as assist the board
of directors in fulfilling its oversight responsibility for the investment of assets of the company.
Nominating and Governance Committee
Our nominating and governance committee is comprised of Mr. Michael
Vorhaus (chairperson), Mr. Eyal Kaplan, and Ms. Joy Marcus, and operates pursuant to a written charter. It is responsible for making recommendations
to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee
is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate
governance matters. Under the Companies Law, nominations for director are generally made by our board of directors but may be made by
one or more of our shareholders pursuant to applicable law and our articles of association.
66
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor nominated based on the audit committee’s recommendation. The role of the internal auditor is to
examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of
the company employed specifically to perform internal audit functions but may not be an interested party or office holder, or a relative
of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative.
The Companies Law defines an interested party as a substantial shareholder of 5% or more of the shares or voting rights of a company,
any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person
who serves as a director or as the general manager of a company. The internal auditor’s term of office shall not be terminated without
his or her consent, nor shall he or she be suspended from such position unless the board of directors has so resolved after hearing the
opinion of the audit committee and after giving the internal auditor a reasonable opportunity to present his or her position to the board
and to the audit committee. Our internal auditor is Ms. Linur Dloomy, CPA, of Brightman Almagor Zohar & Co., a member of Deloitte
Touche Tohmatsu.
D. EMPLOYEES
The breakdown of our employees, by department, as of the end of each of the past three
fiscal years is as follows:
|
December 31, |
||||||||||||
|
2019 |
2020 |
2021 |
||||||||||
|
Cost of sales |
79 |
73 |
83 |
|||||||||
|
Research and development |
117 |
135 |
115 |
|||||||||
|
Selling and marketing |
136 |
146 |
154 |
|||||||||
|
General and administration |
67 |
63 |
68 |
|||||||||
|
Total |
399 |
417 |
420 |
|||||||||
As of December 31, 2021, 191 of our employees were located in Israel,
168 of our employees were located in the United States and 61 employees were located in Europe.
In Israel we are subject to certain labor statutes and national
labor court precedent rulings, as well as to some provisions of the collective bargaining agreements. These provisions of collective bargaining
agreements apply to our Israeli employees by virtue of extension orders issued in accordance with relevant labor laws by the Israeli Ministry
of Economy and Industry, and which apply such provisions under the extension orders to certain or all Israeli employees including our
employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court
rulings that apply to our employees principally concern, among others, minimum wage laws, procedures for dismissing employees, determination
of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The extension
orders which apply to our employees principally concern, among others, the requirement for the length of the workday and the work-week,
annual recuperation pay and commuting expenses, and payments to pension funds. As mentioned above, we are required to insure all of our
employees by a comprehensive pension plan or a managers’ insurance according to the terms and the rates detailed in the extension
order. In addition, Israeli laws determine minimum wages for workers, minimum paid leave or vacation, sick leave, working hours and days
of rest, insurance for work-related accidents, determination of severance pay, the duty to give notice of dismissal or resignation and
other benefits and terms of employment. We have never experienced a work stoppage, and we believe our relations with our employees are
good.
Israeli law generally requires the payment of severance by employers
upon the retirement or death of an employee or upon termination of employment by the employer or, in certain circumstances, by the employee.
Substantially all of our agreements with employees in Israel contain an arrangement made in accordance with Section 14 of the Severance
Pay Law, 1963 (“Section 14”), where our contributions for severance pay are paid in lieu of any severance liability. Upon
termination of employment, for any reason, and subject to contribution of the employee’s entire monthly salary as of the commencement
date of his/her employment, and release of the policy to the employee, no additional severance payments are required to be made by us
to the employee. Additionally, the related obligation and amounts deposited pursuant to such obligation are not stated on the balance
sheet, as we are legally released from any obligation to employees once the deposit amounts have been paid.
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which covers, amongst other benefits, payments for state retirement benefits and
survivor benefits (similar to the United States Social Security Administration), as well as state unemployment benefits. These amounts
also include payments for national health insurance. The payments to the National Insurance Institute can equal up to approximately 19.6%
of wages subject to a cap if an employee’s monthly wages exceed a specified amount, of which the employee contributes up to approximately
12% and the employer contributes approximately 7.6%.
67
E. SHARE
OWNERSHIP
Security Ownership of Directors and Executive Officers
The following table sets forth information regarding the beneficial
ownership of our ordinary shares as of March 5, 2022 by all of our directors and executive officers as a group and by each officer and
director who beneficially owns 1% or more of our outstanding ordinary shares.
Beneficial ownership of shares is determined in accordance with
the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary
shares that are subject to warrants, RSUs or stock options that are vested or will vest within 60 days of a specified date are deemed
to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership
of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Except as indicated in the footnotes to this table, each officer
and director in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership
is based on 44,292,780 ordinary shares outstanding as of March 5, 2022 (such amount excludes 115,339 Ordinary Shares held by the Company).
|
Name |
Number of Ordinary
Shares Beneficially Owned |
Percentage of Ordinary
Shares Outstanding |
||||||
|
All directors and officers as a group (11 persons) (1)
|
1,233,406 |
2.78 |
% | |||||
|
(1) |
Includes options to purchase 632,539 ordinary shares that are vested or will vest within 60 days of March
5, 2022. |
Employee Benefit Plans
The Incentive Plan, our current equity incentive plan, was initially
adopted in 2003, providing certain tax benefits in connection with stock-based compensation under the tax laws of Israel and the United
States. The term of the Incentive Plan will expire on December 9, 2022. Please also see Note 13 to our Financial Statements for information
on the options issued under the Incentive Plan.
Under the Incentive Plan, as amended from time to time, we may
grant to our directors, officers, employees, consultants, advisers, service providers and controlling shareholders options to purchase
our ordinary shares, restricted shares and RSUs. As of December 31, 2021, a total of 4,478,301 ordinary shares were subject to the Incentive
Plan. As of March 5, 2022, options to purchase a total of 3,977,554 ordinary shares were outstanding under our Incentive Plan, of which
options to purchase a total of 1,427,188 ordinary shares were held by our directors and officers (11 persons) as a group. The outstanding
options are exercisable at purchase prices which range from $0.01 to $7.97 per share. Any expired or cancelled options are available for
reissuance under the Incentive Plan.
68
Our Israeli employees and directors may be granted awards under
Section 102 (“Section 102”) of the Israeli Income Tax Ordinance [New Version], 1961 (the “Ordinance”), which provides
them with beneficial tax treatment, and non-employees (such as service providers, consultants and advisers) and controlling shareholders
may only be granted awards under section 3(i) of the Ordinance, which does not provide for similar tax benefits. In order to be eligible
for tax benefits under Section 102, the securities must be issued through a trustee, and if held by the trustee for the minimum required
period, the employees and directors are entitled to defer any taxable event with respect to the award until the earlier of (the “Exercise
Date”) (i) the transfer of securities from the trustee to the employee or director or (ii) the sale of securities to a third
party. Our board of directors has resolved to elect the “Capital Gains Route” (under Section 102) for the grant of awards
to Israeli grantees under the Company's incentive plan. Based on such election, and subject to the fulfillment of the conditions of Section
102, under the Capital Gains Route, gains realized from the sale of shares issued pursuant to the Incentive Plan will generally be taxed
at the capital gain tax rate of 25%, provided the trustee holds the securities for 24 months following the date of grant of the award.
To the extent the conditions of Section 102 are not met, tax will be payable at the Exercise Date at the marginal income tax rate applicable
to the employee or director (47% in 2020 and additional National Security contributions). In addition, in certain circumstances, an excess
tax of 3% will be imposed as well. We are not entitled to deduct for Israeli tax purposes the expenses recorded with respect to grant
of awards on the “Capital Gains Route.” However, in case the employee has an ordinary income component under section 102(b)(3)
of the Ordinance, that component is deductible by the company for tax purposes. The voting rights of any shares held by the trustee under
Section 102 remain with the trustee.
The Incentive Plan contains a U.S. addendum that provides for the
grant of awards to U.S. citizens and resident aliens of the United States for U.S. tax purposes. Pursuant to the approval of our board
of directors and shareholders, stock options granted to U.S. citizens and resident aliens may be either incentive stock options under
the Code or nonqualified options that do not qualify as incentive stock options. Subject to the fulfillment of the applicable conditions
of the Code, an incentive stock option may provide tax benefits to the holder in that it converts ordinary income into income taxed at
capital gain rates and defers the tax until the sale of the underlying share. In that event, we would not recognize a tax deduction with
respect to such capital gain.
Our board of directors has the authority to administer, and to
grant awards, under the Incentive Plan. However, the compensation committee appointed by the board provides recommendations to the board
with respect to the administration of the plan. Generally, RSUs and options granted under the Incentive Plan vest in two or three installments
on each anniversary of the date of grant.
See Item 6.B. “Compensation” for a description of awards
granted under the Incentive Plan to our directors and officers in 2020.
ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR
SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our shares as of March 5, 2022, by each person or entity known by us to beneficially own 5% or more of our outstanding
Ordinary Shares.
Beneficial ownership of shares is determined in accordance with
the Exchange Act and the rules promulgated thereunder, and generally includes any shares over which a person exercises sole or shared
voting or investment power. Ordinary Shares that are issuable pursuant to an outstanding right within 60 days of a specified date are
deemed to be outstanding and beneficially owned by the person holding the right for the purpose of computing the percentage ownership
of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
For the purpose of calculating the percentage of shares beneficially
owned by any shareholder, this table lists the applicable percentage ownership based on 44,292,780 Ordinary Shares issued and outstanding
as of March 5, 2022 (such amount excludes 115,339 Ordinary Shares held by the Company).
Except as indicated in the footnotes to this table, to our knowledge,
the shareholder in the table has voting and investment power for the shares shown as beneficially owned by such shareholder, except to
the extent the power is shared by spouses under community property law. Our major shareholder does not have different voting rights than
our other shareholders.
|
Name of Beneficial Owner |
Shares Beneficially Owned |
|||||||
|
Number |
Percentage |
|||||||
|
|
||||||||
|
The Phoenix Holdings Ltd.
(1) |
2,443,477 |
5.52 |
% | |||||
(1) Based solely upon information written statement provided to us by Phoenix Holdings
Ltd., as of December 31, 2021. The shares are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries
of the Phoenix Holdings Ltd. (the “Subsidiaries”). The Subsidiaries manage their own funds and/or the funds of others,
including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual
funds, and portfolio management clients. Each of the Subsidiaries operates under independent management and makes its own independent
voting and investment decisions. The address of the Phoenix Holdings Ltd. is Derech Hashalom 53, Givataim, 53454, Israel.
69
To our knowledge, the significant changes in the percentage of
ownership held by our major shareholders during the past three years preceding the date of this annual report on Form 20-F have been:
(i) the decrease in the percentage of ownership held by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation
below 5% during the year 2021; (ii) the decrease in the percentage of ownership held by Private Capital Management, LLC below the 5% during
the year 2021 (iii) the decrease in the percentage of ownership held by Dror Erez below the 5% during the year 2019; (iv) the decrease
in the percentage of ownership held by Ronen Shilo below the 5% during the year 2019; (v) the decrease in the percentage of ownership
held by J.P. Morgan Investment Management Inc., Digital Growth Fund L.P. and Project Condor LLC below the 5% during the year 2019; (vi)
the decrease in the percentage of ownership held by Benchmark Israel II, L.P. below the 5% during the year 2020; (viii) the increase in
the percentage of ownership held by Private Capital Management, LLC above 5% in 2020; (ix) the increase in the percentage of ownership
held by The Phoenix Holdings Ltd., and its various direct or indirect, majority or wholly-owned subsidiaries, above 5% during the year
2020; and (x) the decrease in the percentage of ownership held by EA2K Ltd. below the 5% during the year 2020.
To our knowledge, as of March 5, 2022, we had 5 shareholders of
record of which 5 (excluding the Depository Trust Company) were registered with addresses in the United States. These U.S. holders were,
as of such date, the holders of record of approximately 0.1% of our outstanding shares. The number of record holders in the United States
is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since
many of these ordinary shares were held of record by brokers or other nominees.
B. RELATED
PARTY TRANSACTIONS
It is our policy that transactions with office holders or transactions
in which an office holder has a personal interest will be on terms that, on the whole, are no less favorable to us than could be obtained
from independent parties.
See Exhibit 2.1 to this annual report on Form 20-F, which is incorporated
by reference into this annual report on Form 20-F, for a discussion of the requirements of Israeli law regarding special approvals for
transactions involving directors, officers or controlling shareholders.
The following is a description of some of the transactions with
related parties to which we are party and which were in effect within the past three fiscal years. The descriptions provided below are
summaries of the terms of such agreements and do not purport to be complete and are qualified in their entirety by the complete agreements.
Indemnification Agreements
Our articles of association permit us to exculpate, indemnify and
insure our directors and officeholders to the fullest extent permitted by the Companies Law. We have obtained directors’ and officers’
insurance for each of our officers and directors and have entered into indemnification agreements with all of our current officers and
directors.
We have entered into indemnification and exculpation agreements
with each of our current office holders and directors exculpating them to the fullest extent permitted by the law and our articles of
association and undertaking to indemnify them to the fullest extent permitted by the law and our articles of association, including with
respect to liabilities resulting from this annual report, to the extent such liabilities are not covered by insurance. See also Item 10.B.
“Related Party Transactions—Indemnification Agreements.”
Employment and Consulting Agreements
We have or have had employment, consulting or related agreements
with each member of our senior management. For more information on employment and consulting agreements see Item 6.B. “Compensation.”
C. INTERESTS
OF EXPERTS AND COUNSEL
Not applicable.
70
ITEM 8. FINANCIAL
INFORMATION
A. CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
Our Financial Statements are included in this annual report pursuant to Item 18.
Legal Proceedings
On December 22, 2015, Adtile Technologies Inc. (“Adtile”)
filed a lawsuit against Perion and its wholly-owned subsidiary, Intercept Interactive Inc. (“Intercept”) in the United States
District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept related to Intercept’s
alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. Adtile is seeking injunctive
relief and unspecified monetary damages. We are unable to predict the outcome or range of possible loss at this stage. On June 23, 2016,
the court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to
dismiss and (ii) granted Intercept’s motion to stay the action and compel arbitration. As of the date of this report, Adtile had
not commenced an arbitration proceeding and the court dismissed the case for administrative reasons. We believe that we have strong defenses
against this lawsuit and we intend to defend against it vigorously if the case is ever resubmitted.
Policy on Dividend Distribution
It is currently our policy not to distribute dividends.
B.SIGNIFICANT CHANGES
Since the date of our audited Financial Statements incorporated
by reference in this report, there have not been any significant changes other than as set forth in note 20 to our Financial Statements.”
ITEM 9. THE
OFFER AND LISTING
A. OFFER
AND LISTING DETAILS
Our ordinary shares have been listed on the Nasdaq Stock Market
since January 2006. Our ordinary shares commenced trading on the TASE on December 4, 2007. Our trading symbol on Nasdaq is “PERI”
and on TASE is “PERION.”
B. PLAN
OF DISTRIBUTION
Not applicable.
C. MARKETS
See “—Listing Details” above.
D. SELLING
SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES
OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL
INFORMATION
A. SHARE
CAPITAL
Not applicable
71
B. MEMORANDUM
AND ARTICLES OF ASSOCIATION
A copy of our amended and restated articles of association is attached
as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item is set forth in Exhibit 2.1 to this annual
report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.
C. MATERIAL
CONTRACTS
We have not entered into any material contract within the two years
prior to the date of this Annual Report, other than contracts entered into in the ordinary course of business, or as otherwise described
herein in Item 4.A “History and Development of the Company,” Item 4.B “Business
Overview,” Item 5.B “Operating and Financial Review and Prospects—Liquidity
and Capital Resources,” Item 6.C “Board Practices” and Item 7.B “Related
Party Transactions.”
Bank Mizrahi Credit Facility
On May 10, 2017, ClientConnect, a former Israeli subsidiary of
Perion, which merged into Perion on June 30, 2020, executed a credit facility with Mizrahi Tefahot Bank Ltd. (“Bank Mizrahi”),
an Israeli bank, pursuant to which ClientConnect was permitted to borrow up to $17.5 million. This facility was repaid in full from the
proceeds of the new Bank Mizrahi facility.
On December 17, 2018, ClientConnect executed a new loan facility
with Bank Mizrahi in the amount of $25 million. Proceeds of the loan facility were applied to the refinancing of existing debt of ClientConnect
with Bank Mizrahi as well as existing debt of Undertone with SunTrust Bank. See Note 9 of the Financial Statements for further information.
As of March 8, 2021, this credit facility was repaid in full.
Bank Mizrahi 2020 Credit Line
On May 19, 2020, we entered into a short-term secured credit line
in the amount of up to $20 million with Bank Mizrahi, which was scheduled to mature on May 18, 2021. On August 11, 2020, we withdrawn
an amount of $12.5 million from this credit line. Such a withdrawal was a short-term revolving loan for a three-month period. As of December
21, 2020, this credit facility was repaid in full.
D. EXCHANGE
CONTROLS
Non-residents of Israel who hold our ordinary shares are able to
receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repatriable in
non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been
paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.
E. TAXATION
The following is a general summary only and should not be considered
as income tax advice or relied upon for tax planning purposes.
ISRAELI TAXATION
THE FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE
ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
The following is a summary of the material Israeli tax laws applicable
to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to
persons acquiring our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular
investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli
law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not
covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial
or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed
in this discussion.
The discussion below should not be construed
as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult
their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares,
including, in particular, the effect of any foreign, state or local taxes.
72
General Corporate Tax Structure in Israel
Taxable income of Israeli companies is generally subject to corporate
tax at the rate of 23% for 2018 and subsequent tax years. However, the effective tax rate payable by a company that derives income from
a Preferred Enterprise (as further discussed below) may be considerably lower.
Under Israeli tax legislation, a corporation is considered as an
“Israeli resident company” under the Ordinance if it meets one of the following: (i) it was incorporated in Israel; or (ii)
the control and management of its business are exercised in Israel.
Foreign Currency Regulations
We are permitted to measure our Israeli taxable income in U.S.
dollars pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for doing so. We believe that
we meet and will continue to meet, the necessary conditions and as such, we measure our results for tax purposes based on the U.S. dollar/NIS
exchange rate as of December 31st of each year.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959 (the “Investment
Law”) provides tax benefits for income of Israeli companies meeting certain requirements and criteria. The Investment Law has undergone
certain amendments and reforms in recent years.
The Israeli parliament enacted a reform to the Investment Law,
effective January 2011 (the “2011 Amendment”). The reform introduced new benefits instead of the benefits granted in accordance
with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment
Law in effect up to January 1, 2011, which were referred to as an Approved Enterprise and Benefited Enterprise, were entitled to choose
to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and
elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing
tax benefits. According to the 2011 Amendment, a flat rate tax applies to companies eligible for the “Preferred Enterprise”
status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establish that it contributes
to the country’s economic growth and is a competitive factor for the Gross Domestic Product (a competitive enterprise).
We elected “Preferred Enterprise” status commencing
in 2011. We believe that the Company and certain of its Israeli subsidiaries, qualify as a “Preferred Technological Enterprise”
in 2021 and therefore, the portion of the income derived from “Preferred Technology Income”, as defined in the Investment
Law, which qualifies for the benefits, is subject to a lower tax rate of 12% according to Amendment 73 to the Law, as described below.
On December 31, 2019 the Israeli subsidiary – ClientConnect
Ltd., was merged into the Company. In 2020 the Company elected to implement “Preferred Technological Enterprise” benefits.
Benefits granted to a Preferred Enterprise’s Preferred Income
include reduced tax rates. In peripheral regions (Development Area A) the reduced tax rate was 7.5% starting from 2017 and thereafter.
In other regions the tax rate was 16% in 2015 and thereafter. Preferred Enterprises in peripheral regions will be eligible for grants
from the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), as well
as the applicable reduced tax rates.
A dividend distribution from a Preferred Enterprise out of the
“Preferred Income” would be subject to 20% withholding tax for Israeli-resident individuals (in the case of non-Israeli shareholders
- subject to the receipt in advance of a valid certificate from the Israel Tax Authority ("ITA") allowing for a reduced tax rate, 20%
or such lower rate as may be provided under an applicable double tax treaty). Dividend distributions out of “Preferred Income”
to an Israeli company, are not subject to withholding tax.
73
In December 2016, the Economic Efficiency Law (Legislative Amendments
for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes Amendment 73 to the Law for the Encouragement
of Capital Investments, was published. Amendment 73 prescribes special tax routes for technological enterprises as described below, and
is in addition to the other existing tax beneficial programs under the Investment Law. On June 30, 2021, certain grandfather rules in
Amendment 73 pertaining the preferred enterprises have expired, most significantly the limitation of Preferred Income to exclude such
which is generated by intangible assets not related to the manufacturing or such that would not have been recognized as Preferred Technological
Income.
Tax benefits under Amendment 73 that became effective on January
1, 2017.
Amendment 73 provides tax benefits for two types of “Technology
Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
Amendment 73 applies to “Preferred Technology Enterprise” that meet certain
condition, including all of the following:
|
• |
A company's average R&D expenses in
the three years prior to the current tax year must be greater than or equal to 7% of its total revenue or exceed NIS 75 million (approximately
$21 million) per year; and |
|
• |
A company must also satisfy one of the following
conditions: (1) at least 20% of the workforce (or at least 200 employees) are employed in R&D; (2) a venture capital investment of
an amount approximately equivalent to at least NIS 8 million was previously made in the company; or (3) growth in sales or workforce by
an average of 25% over the three years preceding the tax year. |
A “Special Preferred Technological Enterprise” is an
enterprise that meets conditions one and two above, and in addition is a part of a group of companies that have total annual consolidated
revenue in excess of NIS 10 billion (approximately $2.8 billion).
A “Preferred Technology Enterprise” satisfying the
required conditions will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income,”
as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development
area A. In addition, a Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 12% on capital gain derived from the
sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted
Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives
prior approval from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist),
to which we refer as IIA.
A “Special Preferred Technology Enterprise” satisfying
the required conditions, will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless
of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced
corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign
company if the Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign
company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires
Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten
years, subject to certain approvals as specified in the Investment Law.
Dividends distributed to Israeli shareholders by a Preferred Technology
Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding
tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from
the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends
are paid to an Israeli company, no tax is required to be withheld. If more than 90% of the Preferred Technology Enterprise or Special
Preferred Technology Enterprise are held by foreign company shareholders and other conditions are met, such dividends, distributed to
a foreign company, will be subject to a 4% withholding tax rate (or a lower rate under a tax treaty, if applicable, subject to the receipt
in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
74
We believe that we qualified as a “Preferred Technological
Enterprise” in 2020 and 2021, that our Israeli subsidiary Vidazoo qualified as “Preferred Technological Enterprise”
in 2021, and that our former Israeli subsidiary, ClientConnect, qualified as a “Preferred Technological Enterprise” in 2017,
2018 and 2019 and was subject to a lower tax rate of 12% according to Amendment 73 to the Law, as described above.
Law for the Encouragement of Industry (Taxes), 1969
We believe that we currently qualify as an “Industrial Company”
within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement
Law defines “Industrial Company” as a company resident of Israel which was incorporated in Israel, of which 90% or more of
its income in any tax year, other than of income from defense loans, is derived from an “Industrial Enterprise” owned by it
and located in Israel or in the “Area”, in accordance with the definition in section 3A of the Ordinance. An “Industrial
Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
|
• |
Amortization of the cost of purchased know-how,
patents, and right to use patent or know how, which are used for the development or promotion of the Industrial Enterprise, over an eight-year
period; |
|
• |
Accelerated depreciation rates on equipment
and buildings; |
|
• |
Under specified conditions, an election
to file consolidated tax returns with additional related Israeli Industrial Companies; and |
|
• |
Deduction of expenses related to a public
offering in equal amounts over three years. |
Eligibility for the benefits under the Industry Encouragement Law
is not subject to receipt of prior approval from any governmental authority. We cannot assure that we qualify or will continue to qualify
as an “Industrial Company” or that the benefits described above will be available in the future.
Transfer Pricing
In accordance with Section 85A of the Ordinance and the regulations
promulgated under it, an international transaction (where at least one party is a non-Israeli or the income from such transaction, in
whole or in part, is taxable income abroad as well as in Israel) of which the parties are related (including relations between a person
and their relative, and also control of one party to the transaction over the other, control of one person over the parties to the transaction,
whether direct or indirect, alone or together with another), and due to this relationship the price set for an asset, right, service or
credit was determined or other conditions for the transaction were set such that a smaller profit was realized rather than what would
have been realized, if the price or the conditions had been set between parties that are not related (the "Market Terms"), then such transaction
shall be reported in accordance with the Market Terms. The assessment of whether a transaction falls under the aforementioned definition
shall be implemented in accordance with one of the procedures mentioned in the regulations and is based, among others, on comparisons
of characteristics which portray similar transactions in ordinary market conditions, such as profit, the area of activity, nature of the
asset, the contractual conditions of the transaction and according to additional terms and conditions specified in the regulations.
Taxation of our Shareholders
Capital Gains Taxes Applicable
to Non-Israeli Resident Shareholders. The Israeli Income Tax Ordinance [New Version], 5721-1961, or the Tax Ordinance, generally
imposes a capital gains tax on the disposition of capital assets by non-Israeli tax residents if those assets (i) are located in Israel,
(ii) are shares or a right to shares in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets
located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country
of residence provides otherwise. The Tax Ordinance distinguishes between real capital gain and inflationary surplus. The inflationary
surplus is a portion of the total capital gain equivalent to the increase of the relevant asset’s tax basis attributable to an increase
in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the
date of disposition. Inflationary surplus is not currently subject to tax in Israel. The real capital gain is the excess of the total
capital gain over the inflationary surplus.
75
Generally, a non-Israeli resident (whether an individual or a corporation)
who derives capital gains from the sale of shares in an Israeli resident company purchased upon or after the registration of the shares
on the TASE or on a regulated market outside of Israel (such as Nasdaq) should be exempt from Israeli capital gains tax unless, among
others, (i) the shares were held through a permanent establishment that the non-Israeli resident shareholder maintains in Israel, or (ii)
the Israeli resident company is classified as a real estate investment trust or ceased to be a real estate investment trust (as defined
in the Tax Ordinance). If not exempt, a non-Israeli resident shareholder would generally be subject to tax on capital gain at the ordinary
corporate tax rate (23% in 2021), if generated by a company, or at the rate of 25%, if generated by an individual, or 30%, if generated
by an individual who is a “substantial shareholder” (as defined under the Tax Ordinance), at the time of sale or at any time
during the preceding 12-month period (or if the shareholder claims a deduction for interest and linkage differences expenses in connection
with the purchase and holding of such shares). A “substantial shareholder” is generally a person who alone or together with
such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly,
at least 10% of any of the “means of control” of the corporation. “Means of control” generally include, among
others, the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone
who holds any of the aforesaid rights how to act, regardless of the source of such right. Individual and corporate shareholders dealing
in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation (23% in 2021)
and a marginal tax rate of up to 47% for an individual in 2021 (excluding excess tax as discussed below)) unless contrary provisions in
a relevant tax treaty apply. Non-Israeli entities (including corporations) will not be entitled to the foregoing exemption if Israeli
residents, whether directly or indirectly: (i) have a controlling interest of more than 25% in such non-Israeli entity or (ii) are the
beneficiaries of, or are entitled to, 25% or more of the revenue or profits of such non-Israeli entity. Such exemption is not applicable,
inter alia, to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of shares by a non-Israeli resident may be
exempt from Israeli capital gains tax under the provisions of an applicable tax treaty between Israel and the shareholder’s country
of residence. For example, under the Convention Between the Government of the United States and the Government of the State of Israel
with respect to Taxes of Income, as amended, or the United States-Israel Tax Treaty, the disposition of shares by a shareholder who (i)
is a U.S. resident (for purposes of the United States-Israel Tax Treaty), (ii) holds the shares as a capital asset, and (iii) is entitled
to claim the benefits afforded to such person by the United States-Israel Tax Treaty, is generally exempt from Israeli capital gains tax.
Such exemption will not apply, inter alia, if (a) the capital gain arising from such sale, exchange or disposition is attributed to a
permanent establishment that the shareholder maintains in Israel, (b) the shareholder holds, directly or indirectly, shares representing
10% or more of the voting capital of the company at any time in the 12-month period preceding such sale, exchange or disposition, subject
to certain conditions, (c) such U.S. resident is an individual and was present in Israel for a period or periods aggregating to 183 days
or more during the relevant taxable year, (d) the capital gains arising from such sale, exchange or disposition is attributed to real
estate located in Israel, or (e) the capital gain arising from such sale, exchange or disposition is attributed to royalties. In each
case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable.
Regardless of whether non-Israeli shareholders may be liable for
Israeli capital gains tax on the sale of our ordinary shares, the payment of the consideration may be subject to the withholding of Israeli
tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding
at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations
in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli
tax residents, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
In addition, with respect to mergers involving an exchange of shares,
Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions,
including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares
of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions in which
the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time,
and when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax
deferral, a pre-ruling from the Israel Tax Authority might be required.
76
Taxation of Non-Israeli Resident
Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) are generally subject to
Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless relief is provided under the provisions
of an applicable tax treaty between Israel and the shareholder’s country of residence (provided that a certificate from the Israel
Tax Authority allowing for a reduced withholding tax rate or a tax exemption is obtained in advance). With respect to a person who is
a “substantial shareholder” (described above) at the time of receiving the dividend or on any time during the preceding 12
months, the applicable tax rate is 30%. Dividends paid on publicly traded shares, like our ordinary shares, to non-Israeli residents,
are generally subject to Israeli withholding tax at a rate of 25%, so long as the shares are registered with a nominee company (whether
or not the recipient is a substantial shareholder), unless a lower rate is provided under an applicable tax treaty (provided that a certificate
from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance). However, a distribution of dividends
to non-Israeli residents is generally subject to withholding tax at source at a rate of 15% if the dividend is distributed from income
attributed to an “Approved Enterprise” or a “Benefited Enterprise” and 20% if the dividend is distributed from
income attributed to a “Preferred Enterprise” (as such terms are defined in the Law for the Encouragement of Capital Investments,
5719-1959, or the Encouragement Law), subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax
rate, or such lower rate as may be provided under an applicable tax treaty. If such dividends are distributed by a “Preferred Technological
Enterprise” or a “Special Preferred Technological Enterprise”, paid out of “Preferred Technological Income”
(as such terms are defined under the Encouragement Law), to a non-Israeli company that holds, alone or together with other foreign companies,
90% or more in the Israeli company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty,
if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
For example, under the United States-Israel Tax Treaty and subject
to the eligibility to the benefits under such treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder
of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, for dividends not
generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprises and paid to a U.S. corporation holding 10% or more
of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year,
the maximum rate of withholding tax is generally 12.5%, provided that not more than 25% of the gross income of the Israeli resident paying
corporation for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed
from income attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are not entitled to such reduction under
such tax treaty but are subject to withholding tax at the rate of 15% or 20% for such a United States corporate shareholder (subject to
the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate), provided that the conditions related to the
holding of 10% of our voting capital and to our gross income for the previous year (as set forth in the previous sentence) are met. The
aforementioned rates under the United States-Israel Tax Treaty would not apply if the dividend income is derived through a permanent establishment
of the U.S. resident in Israel.
If the dividend is attributable partly to income derived from an
Approved Enterprise, Benefited Enterprise or Preferred Enterprise, and partly to other sources of income, the withholding rate will be
a blended rate reflecting the relative portions of the two types of income. U.S. residents (for purposes of the United States-Israel Tax
Treaty) who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income
tax purposes up to the amount of the taxes withheld, subject to detailed rules contained in U.S. tax law.
We cannot assure you that we will designate the profits that we
may distribute in a way that will reduce shareholders’ tax liability.
A non-Israeli resident who receives dividends from which tax was
withheld is generally exempt from the obligation to file tax returns in Israel in respect of such income, provided, inter alia, that (i)
such income was not derived from a business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income
in Israel with respect to which a tax return is required to be filed and (iii) the taxpayer is not obliged to pay excess tax (as further
explained below).
Excess Tax. Individuals
who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional
tax at a rate of 3% on annual income exceeding NIS 647,640 for 2021 (which amount is linked to the annual change in the Israeli consumer
price index), including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax. Israeli tax law
presently does not impose estate or gift taxes.
77
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of material U.S. federal income
tax consequences to the U.S. Holders described below of owning and disposing of our ordinary shares, but this discussion does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to own,
or dispose of, our ordinary shares.
This discussion applies only to a U.S. Holder that holds the ordinary
shares as capital assets for U.S. federal income tax purposes (generally, property held for investment). It does not describe all of the
tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative minimum tax,
the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such
as:
|
• |
certain financial institutions; |
|
• |
dealers or traders in securities that use
a mark-to-market method of tax accounting; |
|
• |
persons holding ordinary shares as part
of a straddle, integrated or similar transaction; |
|
• |
persons whose functional currency for U.S.
federal income tax purposes is not the U.S. dollar; |
|
• |
entities classified as partnerships for
U.S. federal income tax purposes and their partners; |
|
• |
tax-exempt entities, “individual retirement
accounts” or “Roth IRAs”; |
|
• |
persons who acquired our ordinary shares
pursuant to the exercise of an employee stock option or otherwise as compensation; |
|
• |
persons that own or are deemed to own 10%
or more of our stock by voting power or value; or |
|
• |
persons holding ordinary shares in connection
with a trade or business outside the United States. |
If a partnership (or other entity that is classified as a partnership
for U.S. federal income tax purposes) owns ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on
the status of the partner and the activities of the partnership. Partnerships owning ordinary shares and their partners should consult
their tax advisers as to their particular U.S. federal income tax consequences of owning and disposing of ordinary shares.
This discussion is based on the Internal Revenue Code of 1986,
as amended, or the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, and the
income tax treaty between the United States and Israel, or the Treaty, all as of the date hereof, any of which is subject to change, possibly
with retroactive effect.
As used herein, a “U.S. Holder” is a person that is
eligible for the benefits of the Treaty and is, for U.S. federal income tax purposes, a beneficial owner of ordinary shares and:
|
• |
a citizen or individual resident of the
United States; |
|
• |
a corporation, or other entity taxable as
a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
|
|
• |
an estate or trust the income of which is
subject to U.S. federal income taxation regardless of its source. |
Treasury regulations that apply to taxable years beginning on or
after December 28, 2021 may in some circumstances prohibit a U.S. person from claiming a foreign tax credit with respect to certain non-U.S.
taxes that are not creditable under applicable income tax treaties. Accordingly, U.S. investors that are not eligible for Treaty benefits
should consult their tax advisers regarding the creditability or deductibility of any Israeli taxes imposed on them. This discussion does
not apply to investors in this special situation.
This discussion does not address any U.S. federal taxes (such as
estate or gift taxes) other than income taxes, nor does it address any state, local or non-U.S. tax considerations. U.S. Holders should
consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of our ordinary
shares in their particular circumstances.
78
Taxation of Distributions
This discussion is subject to the discussion under “—Passive Foreign Investment
Company Rules” below.
We currently do not intend to make distributions on the ordinary
shares. Any distributions (other than certain pro rata distributions of ordinary shares) will be treated as dividends to the extent paid
out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain
calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be
reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S.
corporations under the Code. Subject to applicable limitations, dividends paid on our ordinary shares to certain non-corporate U.S. Holders
may be taxable at a favorable rate, provided that we are not a passive foreign investment company, or PFIC, for our taxable year in which
the dividend is paid or the preceding taxable year. Non-corporate U.S. Holders should consult their tax advisers regarding the availability
of this favorable rate in their particular circumstances.
Dividends will generally be included in a U.S. Holder’s income
on the date of receipt. If any dividend is paid in NIS, the amount of dividend income will be the U.S. dollar amount of the dividend calculated
by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars.
If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency
gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into
U.S. dollars after the date of receipt. Such gain or loss will generally be treated as U.S.-source ordinary income or loss.
Dividend income will include any amounts withheld in respect of
Israeli taxes and will be treated as foreign-source income. Subject to applicable limitations, some of which vary depending upon the U.S.
Holder’s circumstances, Israeli taxes withheld from dividends on our ordinary shares generally will be creditable against the U.S.
Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and U.S. Holders should consult
their tax advisers regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a foreign tax credit,
U.S. Holders may elect to deduct foreign taxes (including Israeli taxes) in computing their taxable income, subject to applicable limitations.
An election to deduct creditable foreign taxes instead of claiming foreign tax credits applies to all such foreign taxes paid or accrued
in the taxable year.
Sale or Other Taxable Disposition of Ordinary Shares
This discussion is subject to the discussion under “—Passive
Foreign Investment Company Rules” below.
Gain or loss realized on the sale or other taxable disposition
of our ordinary shares will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder has owned the ordinary
shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the
ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss
will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Israeli taxes on capital gains will generally not be eligible for foreign tax credits. U.S. Holders should consult their tax advisers
with respect to the creditability or deductibility of Israeli taxes, if any, on disposition gains in their particular circumstances.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation is a PFIC for any taxable year
in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the value of its assets (generally determined
on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly,
at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate
share of the assets of the other corporation or partnership and received directly its proportionate share of the income of the other corporation
or partnership. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive
asset for these purposes. Goodwill is generally characterized as a non-passive or passive asset based on the nature of the income produced
in the activity to which the goodwill relates.
79
We believe that we were not a PFIC for our 2021 taxable year. However,
there can be no assurance that we will not be a PFIC for the current or any future taxable year because our PFIC status is an annual determination
that can be made only after the end of the relevant taxable year and will depend on the composition of our income and assets and the value
of our assets from time to time (including the value of our goodwill, which may be determined, in large part, by reference to the market
price of our ordinary shares, which has been, and may continue to be, volatile). Because the value of our goodwill may be determined by
reference to our market capitalization from time to time, and because we hold and may continue to hold significant amounts of cash and
cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase if our market capitalization declines.
If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries
or other companies in which we own equity interests is also a PFIC (any such entity, a “Lower-tier PFIC”), a U.S. Holder will
be deemed to own a proportionate amount (by value) of the shares of any Lower-tier PFIC and will be subject to U.S. federal income tax
according to the rules described in the subsequent paragraph on (i) certain distributions by the Lower-tier PFIC and (ii) dispositions
of shares of the Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though the U.S. Holder will not receive
the proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which
a U.S. Holder holds ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of
its ordinary shares will be allocated ratably over the U.S. Holder’s holding period. The amounts allocated to the taxable year of
the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income. The amount allocated to each other taxable
year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and
an interest charge will be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions received
by a U.S. Holder in any year on its ordinary shares exceed 125% of the average of the annual distributions on the ordinary shares received
during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, such distributions will be subject to
taxation in the same manner. If we are a PFIC for any taxable year during which a U.S. Holder owns ordinary shares, we will generally
continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding years during which the U.S. Holder owns the ordinary
shares, even if we cease to meet the threshold requirements for PFIC status. If we are a PFIC for any taxable year but cease to be a PFIC
for subsequent years, U.S. Holders should consult their tax advisers regarding the advisability of making a “deemed sale”
election that will allow them to eliminate the continuing PFIC status under certain circumstances.
Alternatively, if we are a PFIC for any taxable year and if our
ordinary shares are “regularly traded” on a “qualified exchange,” a U.S. Holder can make a mark-to-market election
that will result in tax treatment different from the general tax treatment for PFICs described above. The ordinary shares will be treated
as “regularly traded” for any calendar year in which more than a de minimis quantity of the ordinary shares are traded on
a qualified exchange on at least 15 days during each calendar quarter. Nasdaq, where the ordinary shares are listed, is a qualified exchange
for this purpose. If a U.S. Holder of ordinary shares makes a timely mark-to-market election, the U.S. Holder generally will recognize
as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year over their adjusted tax
basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-
to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ordinary shares will be adjusted to
reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares in a year in which
we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount
of income previously included as a result of the mark-to-market election, with any excess treated as a capital loss). If a U.S. Holder
of ordinary shares makes a timely mark-to-market election, distributions paid on ordinary shares will be treated as discussed under “—Taxation
of Distributions” above. U.S. Holders should consult their tax advisers regarding the availability and advisability of making a
mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market
election with respect to their ordinary shares given that we may have Lower-tier PFICs and that there is no provision in the Code, Treasury
regulations or other official guidance that would permit them to make a mark-to-market election with respect to any Lower-tier PFIC the
shares of which are not “regularly traded” as described above.
We do not intend to provide information necessary for U.S. Holders
to make “qualified electing fund” elections which, if available, would result in tax treatment different from the general
tax treatment for PFICs described above.
If we are a PFIC for any taxable year during which a U.S. Holder
owns any ordinary shares, the U.S. Holder will generally be required to file annual reports with the Internal Revenue Service. U.S. Holders
should consult their tax advisers regarding the determination of whether we are a PFIC for any taxable year and the potential application
of the PFIC rules to their ownership of our ordinary shares.
80
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the
United States or through certain U.S.-related intermediaries may be subject to information reporting and backup withholding, unless (i)
the U.S. Holder is a corporation or other “exempt recipient” and (ii) in the case of backup withholding, the U.S. Holder provides
a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional
tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s
U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal
Revenue Service.
Certain U.S. Holders who are individuals (or certain specified
entities) may be required to report information relating to their ownership of ordinary shares or non-U.S. accounts through which the
ordinary shares are held. U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to our ordinary
shares.
F. DIVIDENDS
AND PAYING AGENTS
Not applicable.
G. STATEMENT
BY EXPERTS
Not applicable.
H. DOCUMENTS
ON DISPLAY
We are subject to the informational requirements of the Exchange
Act that are applicable to foreign private issuers, and under those requirements file reports with the SEC. Those other reports or other
information may be inspected without charge at the locations described above. As a foreign private issuer, we are exempt from the rules
under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders
will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently
or as promptly as United States companies whose securities are registered under the Exchange Act. However, we will file with the SEC,
within 120 days after the end of each subsequent fiscal year, or such applicable time as required by the SEC, an annual report on Form
20-F containing financial statements audited by an independent registered public accounting firm, and will submit to the SEC reports on
Form 6-K containing unaudited quarterly financial information.
Our filings with the SEC are also available to the public through
the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F
and is not incorporated by reference herein.
I. SUBSIDIARY
INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Risk. A
portion of our revenue and expenses are denominated in foreign currencies. As a result, numerous balances are denominated or linked to
these currencies. Foreign currency related fluctuations resulted in $1.0 million net losses in 2019, $1.3 million net losses in 2020 and
$0.6 million net losses in 2021. These losses are included in financial expenses, net, as presented in our statements of income.
81
As of December 31, 2021, balance sheet financial items in U.S.
dollars, our functional currency, and those currencies other than the U.S. dollars were as follows:
|
U.S. dollars |
NIS |
Other Currencies |
Total |
|||||||||||||
|
In thousands of U.S. dollars |
||||||||||||||||
|
Current assets |
435,033 |
6,590 |
4,548 |
446,171 |
||||||||||||
|
Long-term assets |
1,239 |
3,088 |
980 |
5,307 |
||||||||||||
|
Current liabilities |
(174,474 |
) |
(14,823 |
) |
(558 |
) |
(189,855 |
) | ||||||||
|
Long-term liabilities |
(46,124 |
) |
(6,188 |
) |
(253 |
) |
(52,565 |
) | ||||||||
|
Total |
215,674 |
(11,333 |
) |
4,717 |
209,058 |
|||||||||||
In addition, in territories where our prices are based on local
currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. We may compensate for such fluctuations by
changing product prices accordingly. We also hold a small part of our financial investments in other currencies, mainly NIS and Euro.
The dollar value of those investments may decline. A revaluation of 1% of the foreign currencies (i.e. other than U.S. dollar) would not
have a material effect on our income before taxes possibly reducing it by $0.4 million.
A significant portion of our costs, including salaries and office
expenses are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel.
If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations
in Israel. A revaluation of 1% of the New Israeli Shekel will affect our income before tax by approximately 0.4%. The exchange rate of
the U.S. dollar to the New Israeli Shekel, based on exchange rates published by the Bank of Israel, was as follows:
|
Year Ended December 31, |
||||||||||||
|
2019 |
2020 |
2021 |
||||||||||
|
Average rate for period |
3.564 |
3.437 |
3.231 |
|||||||||
|
Rate at year-end |
3.456 |
3.215 |
3.110 |
|||||||||
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS
AND PROCEDURES
| (a) |
Disclosure controls and procedures |
Our chief executive officer and chief financial officer, after evaluating the effectiveness
of our disclosure controls and procedures as of December 31, 2021, which did not include the internal controls of the business of Vidazoo,
our recent acquisition in 2021, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured
that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated
to our management, including our interim chief executive officer and chief financial officer, to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
| (b) |
Management annual report on internal control over financial reporting |
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting and has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in “Internal Control – Integrated Framework” (2013 framework). Our management has
concluded, based on its assessment, that our internal control over financial reporting was effective as of December 31, 2021.
82
| (c) |
Attestation Report of the Registered Public Accounting Firm |
Kost Forer Gabbay & Kasierer, an independent registered accounting
firm and a member firm of Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial
reporting, as stated in their report included herein. See “Report of Independent Registered Public Accounting Firm” on page
F-6.
| (d) |
Changes in internal control over financial reporting |
During the period covered by this report, no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16.
RESERVED
ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Sarit Firon, who
is an independent director (as defined in the Nasdaq Listing Rules) and serves as our chairperson of the audit committee, qualifies as
an “audit committee financial expert” as defined in Item 16A of Form 20-F.
ITEM 16B. CODE
OF ETHICS
Our board of directors has adopted a code of business conduct and
ethics (which was amended in February 2017) applicable to all of our directors, officers and employees as required by the Nasdaq Listing
Rules, which also complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of
2002. A copy of the code of ethics can be found on our website at: http://www.perion.com/governance-documents. We granted no waivers
under our code of business conduct and ethics in 2021.
ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Fees for the professional services rendered by our independent
accountants Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for each of the last two fiscal years were as follows
(in thousands):
|
2020 |
2021 |
|||||||
|
Audit Fees |
$ |
500 |
$ |
568 |
||||
|
Tax Fees |
236 |
181 |
||||||
|
Audit Related fees |
86 |
394 |
||||||
|
|
||||||||
|
Total |
$ |
822 |
$ |
1,143 |
||||
Audit fees include
fees for professional services rendered by our principal accountant in connection with the annual audit, review of quarterly consolidated
financial data, internationally required statutory audits, consents and assistance with review of documents filed with the SEC.
Tax fees include services
related to tax compliance and claims for refunds, tax planning and advice, including assistance with tax audits and appeals, advice related
to additional efforts required in connection with mergers and acquisitions and assistance with respect to requests for rulings from tax
authorities.
Audit-related fees principally
include assistance with audit services and consultations, mainly related to follow-on public offerings, mergers and acquisitions.
Our audit committee provides assistance to our board of directors
in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control
and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts
of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent
of management. Our audit committee has authorized all auditing and non-auditing services provided by our independent accountants during
2020 and 2021 and the fees paid for such services.
83
ITEM 16D. EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE
IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE
GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed
on the Nasdaq Global Select Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley
Act, and the Nasdaq Listing Rules, including the Nasdaq corporate governance requirements. The Nasdaq Listing Rules provide that foreign
private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and
except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign private issuer discloses
that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below
is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements
of Nasdaq applicable to domestic U.S. listed companies:
Shareholder Approval. Although
the Nasdaq Listing Rules generally require shareholder approval of equity compensation plans and material amendments thereto, we follow
Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless such arrangements are for
the compensation of chief executive officer or directors, in which case they also require the approval of the compensation committee and
the shareholders.
In addition, rather than follow the Nasdaq Listing Rules requiring
shareholder approval for the issuance of securities in certain circumstances, we follow Israeli law, under which a private placement of
securities requires approval by our board of directors and shareholders if it will cause a person to become a controlling shareholder
(generally presumed at 25% ownership) or if:
|
• |
the securities issued amount to 20% or more
of our outstanding voting rights before the issuance; |
|
• |
some or all of the consideration is other
than cash or listed securities or the transaction is not on market terms; and |
|
• |
the transaction will increase the relative
holdings of a shareholder that holds 5% or more of our outstanding share capital or voting rights or will cause any person to become,
as a result of the issuance, a holder of more than 5% of our outstanding share capital or voting rights. |
Shareholder Quorum. The
Nasdaq Listing Rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding
shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements
of an adjourned shareholders meeting. Our articles of association, as permitted under the Companies Law, provide that if at the adjourned
meeting a legal quorum is not present after 30 minutes from the time specified for the commencement of the adjourned meeting, then the
meeting shall take place regardless of the number of members present and in such event the required quorum shall consist of any number
of shareholders present in person or by proxy.
Executive Sessions. While
the Nasdaq Listing Rules require that “independent directors,” as defined in the Nasdaq Listing Rules, must have regularly
scheduled meetings at which only “independent directors” are present. Israeli law does not require, nor do our independent
directors necessarily conduct, regularly scheduled meetings at which only they are present.
84
Approval of Related Party Transactions. Although
the Nasdaq Listing Rules require the approval of the audit committee or another independent body of a Company’s board of directors
for all “related party transactions” required to be disclosed pursuant to Item 7.B. of Form 20-F, we follow the provisions
of the Israeli Companies Law. Specifically, that all related party transactions are approved in accordance with the requirements and procedures
for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Israeli Companies Law, and the regulations
promulgated thereunder, which allow for the approval of certain related party transactions, which are immaterial, in the normal course
of business and on market terms, by the board of directors. Other specified transactions can require audit committee approval and shareholder
approval, as well as board approval. See also Exhibit 2.1 to this annual report on Form 20-F, which is incorporated by reference into
this annual report on Form 20-F, for the definition and procedures for the approval of related party transactions.
ITEM 16H. MINE
SAFETY DISCLOSURE
Not applicable.
|
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION |
Not applicable.
PART III
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
The following financial statements and related auditors’ report are filed as part
of this annual report on Form 20-F:
85
PERION NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021
IN U.S. DOLLARS
INDEX
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
To the Shareholders and the Board of directors of Perion Network Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Perion Network Ltd. and subsidiaries ("the Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2022, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F - 2
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
Revenue Recognition Gross versus Net presentation |
|
|
|
|
Description of the Matter |
As described in Note 2 to the consolidated financial statements, the Company’s revenues are comprised primarily of Search Advertising Revenues and Display Advertising Revenues. To determine whether Search Advertising and Display Advertising revenues should be presented on a gross or net basis, the Company considers whether it controls the promised good or service before transferring that good or service to the customer.
Auditing the Company's gross or net basis evaluation was complex and required a high degree of auditor judgment due to the significant judgment and subjectivity used by the Company in determining whether revenue should be presented on a gross or net basis. The significant judgment was primarily due to the evaluation, for each contract, of whether the Company is the primary obligor in the arrangement. |
|
|
|
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company’s revenue recognition process, including controls over the review of contracts and assessment of principal versus agent, and controls over the completeness and accuracy of data.
Our substantive audit procedures included, among others, reviewing, on a sample basis, the terms of contracts with publishers, evaluating management’s assessment on the principal versus agent analysis, discussing the terms of contracts with legal and finance personnel responsible for managing the contractual arrangements and evaluating the related disclosures in the consolidated financial statements. |
F - 3
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
|
|
Acquisition accounting for Vidazoo Ltd (Vidazoo) business combination |
|
|
|
|
Description of the Matter |
As described in Note 4.c to the consolidated financial statements, on October 04, 2021, the Company acquired 100% of the shares of Vidazoo Ltd ("the Vidazoo Acquisition") for a total consideration of $77.7 million, of which $35 million was paid in cash upon the completion of the transaction and $36.6 million as earn-out tied to financial targets over a two-year period. The Vidazoo Acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations". Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including total identified intangible assets of $39.2 million, which consist primarily of $31 million of technology intangible asset.
Auditing the Company's accounting for the Vidazoo acquisition was complex and involved subjective auditor judgment in applying procedures relating to the fair value measurement of the technology intangible asset. The Company used the discounted cash flow method under the income approach ("the valuation model") to measure the fair value of the technology intangible asset. The significant assumptions used to estimate the fair value of the technology intangible asset included the discount rate applied and certain assumptions that form the basis of the forecasted results, such as revenue growth rates and profitability margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. |
|
|
|
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's accounting for acquisitions process, such as controls over the measurement of the technology intangible asset, including the valuation model and underlying assumptions used to develop such estimates.
We performed substantive audit procedures that included, among others, evaluating the completeness and accuracy of the underlying data and the reasonableness of management’s significant assumptions and estimates. These procedures included comparing the significant assumptions to current industry, market and economic trends, historical results of the acquired business and to other relevant third-party industry outlooks. We involved our valuation specialists to assist us in evaluating the appropriateness of the Company’s valuation model as well as the significant assumptions used to estimate the fair value of the technology intangible asset such as the weighted average cost of capital calculation. Our audit procedures included comparing the Company’s discount rate to a discount rate range that was independently developed using publicly available market data for comparable peers. We also evaluated the appropriateness of the related disclosures included in Note 4.c to the consolidated financial statements in relation to the Vidazoo Acquisition. |
/s/
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company‘s auditor since 2004.
Tel-Aviv, Israel
March 16, 2022
F - 4
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Perion Network Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Perion Network Ltd. and it's subsidiaries' ("the Company") internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the business of Vidazoo Ltd. ("Vidazoo") that was acquired during 2021 and included in the 2021 consolidated financial statements of the Company and constitute 4% of total net assets as of December 31, 2021 and 6% of revenues, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the business of Vidazoo.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes, and our report dated March 16, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F - 5
|
|
Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
A Member of Ernst & Young Global
March 16, 2022
F - 6
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands (except share data)
|
|
|
December
31, |
| |||||
|
|
|
2021
|
|
|
2020
|
| ||
|
Assets
|
|
|
|
|
|
| ||
|
Current Assets:
|
|
|
|
|
|
| ||
|
Cash
and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Restricted
cash |
|
|
|
|
|
|
|
|
|
Short-term
bank deposits |
|
|
|
|
|
|
|
|
|
Accounts
receivable (net of allowance of $ |
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets |
|
|
|
|
|
|
|
|
|
Total
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net |
|
|
|
|
|
|
|
|
|
Operating lease
right-of-use assets |
|
|
|
|
|
|
|
|
|
Intangible assets,
net |
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
|
|
|
$ |
|
|
|
Accrued
expenses and other liabilities |
|
|
|
|
|
|
|
|
|
Short-term
operating lease liability |
|
|
|
|
|
|
|
|
|
Short-term
loans and current maturities of long-term loans |
|
|
|
|
|
|
|
|
|
Deferred
revenues |
|
|
|
|
|
|
|
|
|
Short-term
payment obligation related to acquisitions |
|
|
|
|
|
|
|
|
|
Total
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities: |
|
|
|
|
|
|
|
|
|
Long-term operating
lease liability |
|
|
|
|
|
|
|
|
|
Payment obligation
related to acquisition |
|
|
|
|
|
|
|
|
|
Other long-term
liabilities |
|
|
|
|
|
|
|
|
|
Total
Liabilities |
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies |
|
|
|
|
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
|
|
|
|
|
|
Ordinary
shares of ILS |
|
|
|
|
|
|
|
|
|
Additional
paid-in capital |
|
|
|
|
|
|
|
|
|
Treasury
shares at cost ( |
|
|
(
|
) |
|
|
(
|
) |
|
Accumulated
other comprehensive income |
|
|
(
|
) |
|
|
|
|
|
Accumulated
deficit |
|
|
(
|
)
|
|
|
(
|
)
|
|
Total
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity |
|
$
|
|
|
|
$
|
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
F - 7
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands (except share and per share data)
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
Revenues:
|
|
|
|
|
|
|
|
|
| |||
|
Display
Advertising |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Search
Advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Traffic
acquisition costs and media buy |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses,
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Taxes on Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
(benefit) |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings per Share - Basic: |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings per Share - Diluted: |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares – Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares – Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
F - 8
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Net
income |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign
currency translation adjustment |
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
Cash Flow Hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) from cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
reclassification adjustment for net gain (loss) included in net income (loss) |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
) |
|
Net change
|
|
|
|
|
|
(
|
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
F - 9
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands (except share data)
|
|
|
Common
shares |
|
|
Additional
paid-in capital |
|
|
Accumulated Other
Comprehensive income
(loss) |
|
|
Retained earnings
(Accumulated deficit)
|
|
|
Treasury
shares |
|
|
Total
shareholders' equity |
| ||||||||||
|
|
|
Number
of Shares |
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance
as of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
Net income
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
Net income
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares - Offering
|
|
|
|
|
||||||||||||||||||||||||
|
Stock-based compensation
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
Net income
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
F - 10
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
Operating
activities: |
|
|
|
|
|
|
|
|
| |||
|
Net
income |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
required to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation |
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
Accrued
interest, net |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
) |
|
Deferred
taxes, net |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
) |
|
Accrued
severance pay, net |
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Change
in payment obligation related to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value revaluation - convertible debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from sale of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net |
|
|
(
|
)
|
|
|
(
|
) |
|
|
|
|
|
Prepaid
expenses and other current assets |
|
|
(
|
)
|
|
|
(
|
) |
|
|
|
|
|
Operating
lease right-of-use assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease liabilities |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
) |
|
Accounts
payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenues |
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
Proceeds
from sale of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
deposits, net |
|
|
(
|
) |
|
|
|
|
|
|
(
|
) |
|
Cash
paid in connection with acquisitions, net of cash acquired |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
) |
|
Net
cash used in investing activities |
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in private placement, net |
|
|||||||||||
|
Proceeds
from exercise of stock-based compensation |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Payments
made in connection with acquisition |
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
Repayment
of convertible debt |
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
Repayment
of long-term loans |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
Net cash
provided by (used in) financing activities |
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents |
|
|
(
|
)
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents and restricted cash |
|
$
|
|
|
|
$
|
|
|
|
$
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at end of year |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
F
- 11
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
|
Year
ended December 31 |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
Reconciliation
of cash, cash equivalents, and restricted cash to the consolidated
balance sheet |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Cash
and cash equivalents |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Restricted
cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash, cash equivalents, and restricted cash |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Creation
of new lease right-of-use assets arising from lease liability |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Purchase
of property and equipment on credit |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
F - 12
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands (except share and per share data)
NOTE
1:GENERAL
Perion
Network Ltd. ("Perion") and its wholly-owned subsidiaries (collectively referred to as the "Company"), is a global technology company
that delivers strategic business solutions that enable brands and advertisers to efficiently “Capture and Convince” users
across multiple platforms and channels, including interactive connected television – or iCTV. Perion achieves this through its Synchronized
Digital Branding capabilities, which are focused on high impact creative; content monetization; its branded search network, in partnership
with Microsoft Bing; and social media management that orchestrates and optimizes paid advertising.
On January 14, 2020, the Company completed the acquisition of Content IQ LLC and on July 22, 2020, the assets acquisition of Pub Ocean Limited was consummated.
On October 4, 2021, we also completed the acquisition of Vidazoo Ltd. (for additional information on these acquisitions, see Note 4)
NOTE
2: SIGNIFICANT ACCOUNTING POLICIES
Basis
of consolidation
The
consolidated financial statements include the accounts of Perion and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements
and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company's management
evaluates its estimates, including those related to sales allowances and allowance for credit losses, fair value of intangible assets
and goodwill, useful lives of intangible assets, fair value of share-based awards, realizability of deferred tax assets, tax uncertainties,
and contingent liabilities, among others. Such estimates are based on historical experience and on various other assumptions
that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of the Company’s
assets and liabilities.
Financial
statements in U.S. dollars
The
reporting currency of the Company is the U.S. dollar (“USD”). Major parts of the Company’s operations are carried out
by the Company and its subsidiaries in the United States and Israel. The functional currency of these entities is the USD.
Accordingly, monetary accounts maintained in currencies other than the USD are remeasured into USD, in accordance with ASC 830, "Foreign
Currency Matters". All transaction gains and losses resulting from the re-measurement of the monetary balance sheet items are reflected
in the statements of income as financial income or expenses, as appropriate.
Management
believes that the USD is the currency of the primary economic environment in which the Company operates. The financial statements of other
subsidiaries, whose functional currency is determined to be their local currency, have been translated into USD. All balance sheet accounts
have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated
using the average exchange rate for each applicable quarter. The resulting translation adjustments are reported as an accumulated other
comprehensive income (loss) component of shareholders' equity.
F - 13
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Cash
and cash equivalents and short-term deposits
The
Company considers all short-term, highly liquid and unrestricted cash balances, with stated maturities of three months or less from date
of purchase, as cash equivalents. Short-term deposits are bank deposits with maturities of more than three months but less than one year.
The short-term deposits as of December 31, 2021 and 2020 are denominated primarily in USD and bear interest at an average annual rate
of 0.79 %
and 0.67 %,
respectively.
Restricted
cash
Restricted
cash is comprised primarily of security deposits that are held to secure the Company’s lease obligations. As of December 31, 2021
and 2020, restricted cash balances were $1,089
and $1,222
respectively.
Accounts
receivable and allowance for credit losses
Trade
accounts receivables are stated at realizable value, net of an allowance for credit losses. The Company evaluates its outstanding accounts
receivable and establishes an allowance for credit losses based on information available on their credit condition, current aging, historical
experience and future economic and market conditions. These allowances are reevaluated and adjusted periodically as additional information
is available.
As of December 31, 2021 and 2020,
the Company has recorded an allowance for doubtful debts in the amounts of $
Total
expenses for doubtful debts during 2021, 2020 and 2019 amounted to $82 ,
$323
and $78 ,
respectively.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets at the following annual rates:
|
|
%
|
|||
|
Computers
and peripheral equipment |
||||
|
Office
furniture and equipment |
Leasehold
improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the improvements,
whichever is shorter.
Leases
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, other current liabilities and operating lease liabilities in the Company’s consolidated balance sheets.
F - 14
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments
over the lease term.
The
Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the
lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expenses for lease payments are recognized on a straight-line basis over the lease term.
Impairment
of long-lived assets, Right-of-use assets and intangible assets subject to amortization
The
Company’s long-lived assets (assets group) to be held or used, including property and equipment, right
of use assets and intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360, "Accounting for the
Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. The recoverability of these assets is measured by comparing the carrying amounts to the future undiscounted cash
flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
In
determining the fair values of long-lived assets for the purpose of measuring impairment, the Company's assumptions include those that
market participants will consider in valuations of similar assets.
Goodwill
and intangible assets
Intangible
assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. The Customer Relationship,
technology and trade name are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting
policy results in accelerated amortization of such intangible assets as compared to the straight-line method.
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at the reporting unit level, at least annually at December 31 each year, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Following the early adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment" by the Company in January 2017, any excess of the carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.
The
majority of the inputs used in the discounted cash flow model to determine the fair value of the reporting units are unobservable and
thus are considered to be Level 3 inputs.
F - 15
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Revenue recognition
The Company applies the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606" or "Topic 606").
The Company applies the practical expedient for incremental costs of obtaining contracts when the associated revenues is recognized over less than one year.
The
Company generates revenues primarily from two major sources:
Display
Advertising Revenues (“Advertising”) - the Company generates advertising revenues from
delivering high impact ad formats through different channels – display, social and video/CTV, creatively designed to capture consumer
attention and drive engagement, across a hand-picked portfolio of websites and mobile applications. In addition, the Company also generates
advertising revenues from content optimization solutions and services, which are being recognizes once the advertisement partners serve
their advertisement across owned and operated properties as well as those of our publishers.
Search
Advertising Revenues (“Search Monetization”) - the Company obtains its search revenues
from service agreements with its search partners. Search revenue is generated primarily from monthly transaction volume-based fees earned
by the Company for making its applications available to online publishers and app developers on a revenue share basis relative to the
revenue generated by the search partners.
For
more disaggregated information of revenues refer to Note 17.
The
Company’s payments terms are less than one year. Therefore, no finance component is recognized.
The
Company evaluates whether Search and Advertising Revenues should be presented on a gross basis, which is the amount that a customer pays
for the service, or on a net basis, which is the amount of the customer payment less amounts the Company pays to publishers. In making
that evaluation, the Company considers whether it controls the promised good or service before transferring that good or service to the
customer. The Company considers indicators such as whether the Company is the primary obligor in the arrangement and assumes risks and
rewards as a principal or an agent, including the credit risk, whether the Company has latitude in establishing prices and
selecting its suppliers and whether it changes the products or performs part of the service. The evaluation of these factors is subject
to significant judgment and subjectivity. Generally, in cases in which the Company is primarily obligated in a transaction, is subject
to risk, involved in the determination of the product (or the service) specifications, separately negotiates each revenue service agreement
or publisher agreement and can have several additional indicators, revenue is recorded on a gross basis.
Remaining
performance obligations (RPOs) represent amounts collected on contracted revenues that have not yet been recognized. As of December 31,
2021, the aggregate amount of the RPOs was $3,852 .
The Company anticipates that it will satisfy all of its remaining performance obligation associated with the deferred revenue within the
prospective fiscal year.
Accounts
receivable includes amounts billed and currently due from customers.
Deferred
revenues are recorded when payments are received from customers in advance of the Company's rendering of services.
Revenues
recognized during 2021 from amounts included within the Deferred revenues balance at the beginning of the period amounted to $5,711 .
F - 16
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Cost
of revenues
Cost
of revenues consists primarily of expenses associated with the operation of the Company’s server hosting, data verification and
targeting, campaign creative, labor, as well as content acquisition costs and customer support.
Traffic
acquisition costs and media buy
Traffic acquisition
costs and media buy consist primarily of payments to publishers and developers who distribute our search properties together with their
products, as well as the cost of distributing our own products. In addition, media buy costs consist of the costs of advertising inventory
incurred to deliver ads. Traffic acquisition costs are primarily based on revenue share agreements with our traffic sources and the media
buy cost are primarily based on CPC and CPM, which are charged as incurred.
Research
and development costs
Research
and development costs are charged to the statement of income as incurred, except for certain costs relating to internally developed software,
which are capitalized.
The
Company capitalizes certain internal and external software development costs, consisting primarily of direct labor associated with creating
the internally developed software. Software development projects generally include three stages: (i) the preliminary project stage (all
costs expensed as incurred); (ii) the application development stage (costs are capitalized) and (iii) the post implementation/operation
stage (all costs expensed as incurred). The costs capitalized in the application development stage primarily include the costs of designing
the application, coding and testing of the system. Capitalized costs are amortized using the straight-line method over the estimated useful
life of the software, generally three years, once it is ready for its intended use. The Company believes that the straight-line recognition
method best approximates the manner in which the expected benefit will be derived. Management evaluates the useful lives of these assets
on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of
these assets.
Capitalized
software development costs, net of accumulated amortization, of $1,392
is included in property and equipment in the consolidated balance sheet as of December 31, 2020. No capitalized software development costs,
net of accumulated amortization, is included in the consolidated balance sheet as of December 31, 2021 (see Note 5).
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method,
whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected
to reverse. To the extent necessary, the Company provides a valuation allowance to reduce deferred tax assets to their estimated realizable
value.
The
Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach for recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if
the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is
more than 50% likely to be realized upon ultimate settlement.
F - 17
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Severance
pay
The
Company's agreements with employees in Israel are in accordance with section 14 of the Severance Pay Law, 1963 (“Section 14”),
where the Company's contributions for severance pay is paid to the employee upon termination instead of the severance liability that would
otherwise be payable under the law as aforementioned. Upon contribution to a fund, based on the full amount of the employee's monthly
salary, and release of the fund to the employee, no additional severance payments are required to be made by the Company to the employee.
Therefore, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as the Company
is legally released from obligation to such employees once the deposit amounts have been paid.
Severance
expenses for the years ended December 31, 2021, 2020 and 2019 amounted to $1,802 ,
$1,755 ,
and $1,270 ,
respectively. The balances of severance deposits and accrued severance pay are immaterial and included in other assets and other long-term
liabilities on the accompanying balance sheets, respectively.
Employee
benefit plan
The
Company’s U.S. operations maintain a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings,
up to the Internal Revenue Service’s annual contribution limit. The Company matches up to 100% of each participant’s contributions,
up to 4% of employee deferral. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated
statement of income.
Total
employer 401(k) contributions for the years ended December 31, 2021, 2020 and 2019 were $683 ,
$624 ,
and $691 ,
respectively.
Comprehensive
income (loss)
The
Company accounts for comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income". This statement establishes standards
for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive
income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions
to, shareholders. The Company determined that its other comprehensive income (loss) relates to hedging derivative instruments and foreign
currency translation adjustments.
Net
earnings per share
In
accordance with ASC 260, "Earnings Per Share", basic net earnings per share ("Basic EPS") is computed by dividing net earnings attributable
to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net earnings per share
("Diluted EPS") reflects the potential dilution that could occur if share options and other commitments to issue ordinary shares were
exercised or equity awards vested, resulting in the issuance of ordinary shares that could share in the net earnings of the Company.
The
weighted average number of ordinary shares related to the outstanding options, restricted shares, convertible debt and warrants excluded
from the calculations of diluted net earnings per ordinary share, as these securities are anti-dilutive, was 1,035,307 ,
3,178,024 ,
and 4,087,559
for the years ended December 31, 2021, 2020 and 2019, respectively.
F - 18
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Concentrations
of credit risk
Financial
instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash equivalents,
bank deposits, restricted cash and accounts receivable.
The
majority of the Company’s cash and cash equivalents, bank deposits and restricted cash are invested in USD instruments with major
banks in the U.S. and Israel. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.
The
Company’s major customers are financially sound, and the Company believes low credit risk is associated with these customers. To
date, the Company has not experienced any material credit losses.
The allowance against gross trade receivables reflects the current expected credit loss inherent in the receivables portfolio determined based on the Company’s methodology. The Company’s methodology is based on historical collection experience, customer creditworthiness, current and future economic condition, and market condition. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Trade receivables are written off after all reasonable means to collect the full amount have been exhausted.
Share-based
compensation
The
Company accounts for share-based compensation under ASC 718, "Compensation - Stock Compensation", which requires the measurement and recognition
of compensation expense based on estimated fair values for all share-based payment awards made to employees, contractors and directors.
ASC 718 requires companies to estimate the fair value of equity-based awards on the date of grant, using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in
the Company's consolidated statement of income. The Company estimates forfeitures to be estimated at the time of grant, and
revised if necessary in subsequent periods, if actual forfeitures differ from those estimates.
The Company
recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using the straight-line
method, over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual
historical pre-vesting forfeitures. For performance-based share units, the Company recognizes compensation expenses for the value of such
awards, if and when the Company concludes that it is probable that a performance condition will be achieved based on the accelerated attribution
method over the requisite service period. The Company reassess the probability of vesting at each reporting period for awards with performance
conditions and adjust compensation cost based on its probability assessment.
The
Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should
be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the
original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based
on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured
immediately before its terms are modified based on current circumstances.
The
Company estimates the fair value of its new share-based awards using the Binomial option-pricing model.
F - 19
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
The
following table presents the various assumptions used to estimate the fair value of the Company's share-based awards granted to employees
and directors in the periods presented:
|
|
Year ended December 31 | |||||||||||
|
|
2021
|
2020
|
2019
|
|||||||||
|
|
||||||||||||
|
Risk-free
interest rate |
||||||||||||
|
Expected
volatility |
||||||||||||
|
Early
exercise factor |
||||||||||||
|
Forfeiture
rate post vesting |
||||||||||||
|
Dividend
yield |
||||||||||||
The
expected volatility is calculated based on the actual historical share price movements of the Company’s share. The expected option
term represents the period that the Company’s share options are expected to be outstanding. The early exercise factor and the forfeiture
rate post-vesting are calculated based on the Company’s estimated early exercise and post-vesting forfeiture multiples, which are
based on comparable companies and on actual historical data. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon
bonds, with a term which is equivalent to the expected term of the share-based awards. The dividend yield is based on the current decision
of the Company’s management not to distribute any dividends.
The
fair value of restricted share units (“RSU”) is based on the market value of the underlying shares on the date of grant.
Derivative
instruments
The
Company accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging", which requires recognizing all derivatives on
the balance sheet at fair value. If the derivatives meet the definition of a cash flow hedge and are so designated, depending on the nature
of the hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and
reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. The ineffective portion
of a derivative’s change in fair value, if any, is recognized in earnings, as well as gains and losses from a derivative’s
change in fair value that are not designated as hedges are recognized in earnings immediately.
In
order to mitigate the potential adverse impact on cash flows resulting from fluctuations in the exchange rate of the new Israeli shekels
(“ILS”), the Company hedges portions of its forecasted expenses denominated in ILS with SWAP, forward and options contracts.
The Company does not speculate in these hedging instruments in order to profit from foreign currency exchanges, nor does it enter into
trades for which there are no underlying exposures.
To
protect against the increase in value of forecasted foreign currency cash flow resulting mainly from salaries and related benefits paid
in ILS during the year, the Company hedges portions of its anticipated payroll denominated in ILS for a period of one to twelve months
with forward and options contracts (the “Hedging Contracts”). Accordingly, when the USD strengthens against the ILS, the decline
in present value of future ILS currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the
USD weakens, the increase in the present value of future ILS expenses is offset by gains in the fair value of the Hedging Contracts. These
Hedging Contracts are designated as cash flow hedges.
The
Company follows the requirements of ASC No. 815, Derivatives and Hedging (“ASC 815”), which requires companies to recognize
all of their derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in
fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging
transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge,
or a hedge of a net investment in a foreign operation.
F - 20
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Additionally,
in order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate in connection with the convertible
debt, the Company has entered into a cross currency interest rate SWAP agreement (the “SWAP”) in order to hedge the future
interest and principal payments, which are all denominated in ILS. However, since the convertible debt was measured at fair value at each
reporting date, the SWAP does not qualify and was not designated as hedge under ASC 815. Therefore, gains or losses resulted from the
change of the SWAP's fair value were recognized immediately as incurred in "financial expenses, net". The Company measured the fair value
of these contracts in accordance with ASC 820, "Fair Value Measurement and Disclosures", and they were classified as level 2. On
June 6, 2019, the SWAP agreements were terminated concurrently with the early redemption of the convertible bond.
The
notional value of the Company’s derivative designed as hedging instruments as of December 31, 2021 and 2020, amounted to $5,071
and $0 ,
respectively.
The
notional value of the Company’s derivative not designed as hedging instruments as of December 31, 2021 and 2020, amounted to $2,876
and $0 ,
respectively. Notional values in USD are translated and calculated based on the spot rates for options and swap. Gross notional amounts
do not quantify risk or represent assets or liabilities of the Company; however, they are used in the calculation of settlements under
the contracts.
Fair
value of financial instruments
The
carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term deposits, restricted cash,
accounts receivable, and other assets, accounts payable, accrued expenses and other liabilities approximate their fair value due to the
short-term maturities of such instruments.
The
Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date.
In
determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based
on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market participants
would use in pricing an asset or liability, based on the best information available under given circumstances.
The
hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:
• Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
• Level 2 - Other inputs that are directly or indirectly observable in the market place.
• Level 3 - Unobservable inputs which are supported by little or no market activity.
Treasury
shares
In
the past, the Company repurchased its ordinary shares on the open market. The Company holds the shares as treasury shares and presents
their cost as a reduction of shareholders' equity.
F - 21
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Business
combinations
The
Company accounted for business combination in accordance with ASC 805, "Business Combinations". ASC 805 requires recognition of assets
acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date.
Any excess of the fair value of net assets acquired over purchase price is allocated to goodwill and any subsequent changes in estimated
contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and
in acquired income tax position are to be recognized in earnings.
Acquisition
related costs are expensed to the statement of income in the period incurred.
Recent
Adopted Accounting Pronouncements:
In
December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for
Income Taxes” (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020, and early adoption is permitted. The adoption of this
standard did not have a material impact on the Company’s condensed consolidated financial statements.
Recent Accounting Pronouncements not yet adopted
In October
2021 the FASB ASU 2021-08, Topic 805 “Business Combinations” – Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers. The amendments in this update require that an entity (acquirer) recognize and measure contract assets
and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should
account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer
may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. The amendments in this update
are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption
is permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.
F - 22
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 3:FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table present assets and liabilities measured at fair value on a recurring basis as of December 31, 2021:
|
|
|
Fair value measurements using input type |
| |||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
| ||||
|
Assets: |
||||||||||||||||
|
Derivative assets |
$ |
|
$ |
$ |
$ |
|
||||||||||
|
Total financial assets |
$ |
$ |
$ |
$ |
|
|||||||||||
|
|
||||||||||||||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration in connection to the acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table present assets measured at fair value on a recurring basis as of December 31, 2020:
|
|
|
Fair value measurements using input type |
| |||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
| ||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Contingent consideration in connection to the acquisitions |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 4:ACQUISITIONS
a.Content IQ LLC
On January 14, 2020, the Company consummated the acquisition of Content IQ LLC (“Content IQ”), a privately held company founded in 2014, based in New York City. Content IQ has created data algorithm and analytics tools that deconstruct content, revenue and distribution to solve current major digital publishing challenges.
The
total consideration for the acquisition was $
F - 23
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
b.Pub Ocean
On July 22, 2020, the Company acquired the net assets of Pub Ocean Limited, also known as “Pub Ocean” (the "Pub Ocean Acquisition"), a rapidly growing digital publisher-focused technology company with scalable content distribution and real-time revenue analytics technology.
The
total consideration for the acquisition was $
c.Vidazoo
On
October 4, 2021, the Company consummated the acquisition of Vidazoo Ltd., also known as “Vidazoo” (the “Vidazoo Acquisition”),
a leading video technology company that enables both advertisers and publishers to deliver high impact content and advertising to consumers.
The total consideration
for the acquisition was $77,748 ,
comprised of $35,000
paid in cash at closing, contingent consideration (with a maximum amount of up to $58,545 ),
tied to financial targets over a period of 2.25
years, estimated at fair value of $36,613
on the acquisition date, and a net working capital in the amount of $6,135
which will be set-off against collection. As of December 31, 2021, the contingent consideration is estimated at fair value of $36,743 .
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
|
Fair value |
||||
|
Net Assets |
|
|||
|
Technology |
|
|||
|
Customer Relationship |
|
|||
|
Deferred Taxes |
(
|
) | ||
|
Goodwill |
|
|||
|
Net assets acquired |
$ |
|
||
Technology
includes publishing orchestration system with proprietary data algorithms and analytic tools which deconstruct content, revenue and distribution
to solve digital publishing challenges. The technology is amortized over the estimated useful life of 7 years using the straight-line
method.
Customer
relationships is derived from customer contracts and related customer relationships with existing customers. Customer relationships
is amortized based on the accelerated method over the estimated useful life of 8 years.
Pro forma results of operations related to this acquisition have not been presented because they are not material to the Company’s consolidated statements of operations.
F - 24
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 5: PROPERTY AND EQUIPMENT, NET
|
|
|
December 31, |
| |||||
|
|
|
2021 |
|
|
2020 |
| ||
|
Cost: |
|
|
|
|
|
| ||
|
Computers and peripheral equipment |
|
$ |
|
|
|
$ |
|
|
|
Office furniture and equipment |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
Capitalized software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation
expenses totaled to $3,022 ,
$4,662 ,
and $5,455 ,
for the years ended December 31, 2021, 2020 and 2019, respectively.
Depreciation
expense for the related capitalized internally developed software in the consolidated statements of income amounted to $1,392 ,
$3,056 ,
and $3,607
during 2021, 2020 and 2019, respectively.
NOTE 6:GOODWILL AND OTHER INTANGIBLE ASSETS, NET
a.Goodwill
The changes in the net carrying amount of goodwill in 2021 and 2020 were as follows:
|
Balance as of January 1, 2020 |
$ |
|
||
|
Acquisition of Content IQ |
$ |
|
||
|
Acquisition of Pub Ocean |
$ |
|
||
|
Balance as of December 31, 2020 |
$ |
|
||
|
Acquisition of Vidazoo |
$ |
|
||
|
Balance as of December 31, 2021 |
$ |
|
Goodwill has been recorded as a result of prior acquisitions and represents excess of the consideration over the net fair value of the assets of the businesses acquired. As of December 31, 2021, the Company has two reporting units – Display advertising and Search advertising. The Company performs tests for impairment of goodwill at the reporting unit level at least annually, or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.
No impairment was incurred for the years ended December 31, 2021, 2020 and 2019.
F - 25
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
b.Intangible assets, net
The following is a summary of intangible assets as of December 31, 2021:
|
|
December
31, 2020 |
Additions
|
Amortization
|
December
31, 2021 |
||||||||||||
|
|
||||||||||||||||
|
Acquired technology |
$ | $ | $ | $ | ||||||||||||
|
Accumulated amortization |
( |
) | ( |
) | ( |
) | ||||||||||
|
Impairment |
( |
) | ( |
) | ||||||||||||
|
Acquired technology, net |
( |
) | ||||||||||||||
|
|
||||||||||||||||
|
Customer relationships |
||||||||||||||||
|
Accumulated amortization |
( |
) | ( |
) | ( |
) | ||||||||||
|
Impairment |
( |
) | ( |
) | ||||||||||||
|
Customer relationships, net |
( |
) | ||||||||||||||
|
|
||||||||||||||||
|
Tradename and other |
||||||||||||||||
|
Accumulated amortization |
( |
) | ( |
) | ( |
) | ||||||||||
|
Impairment |
( |
) | ( |
) | ||||||||||||
|
Tradename and other, net |
( |
) | ||||||||||||||
|
|
||||||||||||||||
|
Intangible assets, net |
$ | $ | $ | ( |
) | $ | ||||||||||
The following is a summary of intangible assets as of December 31, 2020:
|
|
|
December
31, 2019 |
|
|
Additions
|
|
|
Amortization |
|
|
OCI |
|
|
December 31, 2020 |
|
|||||
|
Acquired technology |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accumulated amortization |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Impairment |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Acquired technology, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Impairment |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Customer relationships, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Impairment |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Tradename and other, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
F - 26
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
The estimated useful life of the intangible assets are as follows:
|
|
|
Estimated useful life |
| |
|
Acquired technology |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Tradename and other |
|
|
|
|
Amortization of intangible assets, net, in each of the succeeding five years and thereafter is estimated as follows:
|
2022 |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
NOTE 7: ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
December 31, |
| |||||
|
|
|
2021 |
|
|
2020 |
| ||
|
|
|
|
|
|
|
| ||
|
Employees and payroll accruals |
|
$ |
|
|
|
$ |
|
|
|
Obligation related to acquisitions |
|
|||||||
|
Government authorities |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Other short-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
F - 27
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 8: DERIVATIVES AND HEDGING ACTIVITES
The fair value of the Company’s outstanding derivative instruments is as follows:
|
|
December 31, | ||||||||
|
|
Balance sheet |
2021 |
2020 |
||||||
|
|
|||||||||
|
Derivatives designate as hedging instruments: |
|||||||||
|
Foreign exchange forward contracts and other derivatives |
''Prepaid expenses and other current assets'' |
$ | $ | ||||||
|
|
''Accumulated other comprehensive income'' |
||||||||
|
|
|||||||||
|
Derivatives not designated as hedging instruments: |
|||||||||
|
|
|||||||||
|
Foreign exchange forward contracts and other derivatives |
''Prepaid expenses and other current assets'' |
$ | $ | ||||||
|
|
''Accrued expenses and other liabilities'' |
||||||||
The net amounts reclassified from accumulated other comprehensive loss to the operating expenses are as follows:
|
Gain
recognized in |
Gain (loss) recognized in consolidated statements of Income |
||||||||||||||||
|
|
|
Year ended December 31, |
|
|
|
Year ended December 31, |
|
||||||||||
|
|
|
2021 |
|
Statement of Income |
|
2021 |
|
|
2020 |
|
|
2019 |
|
||||
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Foreign exchange options and forward contracts |
|
$ |
( |
) |
"Operating expenses" |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange options and forward contracts |
|
|
- |
|
"Financial expenses" |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
SWAP |
|
|
- |
|
"Financial expenses" |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
( |
) |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
| |
F - 28
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 9: SHORT TERM AND LONG-TERM DEBT
On
December 17, 2018, ClientConnect Ltd., a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a new
loan facility, in the amount of $
On March 8, 2021,
the Company early repaid the full amount of its loan facility with bank Mizrachi of a principal amount of $
NOTE 10: LEASES
In
January 2014, the Company entered into a lease agreement for new corporate offices in Holon, Israel. The lease expires in , with an option by the Company to extend for
In June 2018, Undertone entered into a lease agreement for its office at World Trade Center (WTC) New York. The lease expires in May 2026. Additionally, the Company may choose an early termination in 2024.
In January 2019, the Company’s French subsidiary entered into a lease agreement for its office at Paris, France. The Company chose an early termination during December 2021.
Certain other facilities of the Company are rented under operating lease agreements, which expire on various dates, the latest of which is in 2023. The Company recognizes rent expense under such arrangements on a straight-line basis.
The
Company's capitalized operating lease agreements have remaining lease terms ranging from
The following table represents the weighted-average remaining lease term and discount rate:
|
|
|
Year ended |
| |
|
|
|
December 31, 2021 |
| |
|
Weighted average remaining lease term |
|
|
| |
|
Weighted average discount rate |
|
|
|
|
The discount rate was determined based on the estimated collateralized borrowing rate of the Company, adjusted to the specific lease term and location of each lease.
F - 29
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
Maturities of operating lease liabilities were as follows:
|
Year ending December 31, |
|
|
| |
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
Total lease payments *) |
|
|
|
|
|
|
|
|
|
|
|
Less – imputed interest |
|
|
( |
) |
|
|
|
|
|
|
|
Present
value of lease liabilities |
|
$ |
|
|
*)
Facilities
leasing expenses (net) in the years 2021, 2020 and 2019 were $
Cash
paid for amounts included in measurement of lease liabilities during 2021 was $
NOTE 11:COMMITMENT AND CONTINGENT LIABILITIES
a.Contingent purchase obligation
On November 30,
2012, the Company completed the acquisition of
b.Legal Matters
On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against the Company and Intercept Interactive Inc. (“Intercept”), a subsidiary of Interactive Holding Corp., in the United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Undertone related to Undertone’s alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. Adtile is seeking injunctive relief and, unspecified monetary damages. On June 23, 2016, the court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted the Company’s motion to dismiss, and (ii) granted Intercept’s motion to stay the action and compel arbitration. In November 2017, the court dismissed the case for administrative reasons, since Adtile had not commenced arbitration proceedings. The Company is still unable to predict the outcome or range of possible loss as of the date of these financial statements, since to date Adtile had not commenced arbitration procedures. Regardless, the Company believes it has strong defenses against this lawsuit and intends to defend against it vigorously.
In addition, from time to time, the Company is party to other various legal proceedings, claims and litigation that arise in the ordinary course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
F - 30
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 12:SHAREHOLDERS' EQUITY
a.Ordinary shares
The ordinary shares of the Company entitle their holders to voting rights, the right to receive cash dividend and the right to a share in excess assets upon liquidation of the Company.
b.Share Options, Restricted Share Units and Warrants
In 2003, the Company's Board of Directors approved the 2003 Equity Incentive Plan (the "Plan") for an initial term of ten years from adoption and on December 9, 2012, extended the term of the Plan for an additional ten years. On August 7, 2013, the Company’s Board of Directors approved amendments to the Plan which include the ability to grant RSUs and restricted shares.
The
contractual term of the share options is generally no more than
As
of December 31, 2021, there were
The following table summarizes the activities for the Company’s service-based share options for the year ended December 31, 2021:
|
Weighted average |
||||||||||||||||
|
|
|
Number of options |
|
|
Exercise price |
|
|
Remaining contractual term (in years) |
|
|
Aggregate intrinsic value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Outstanding at January 1, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Cancelled |
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Outstanding at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
The
weighted-average grant-date fair value of options granted during the years ended December 31, 2021, 2020 and 2019 was $
F - 31
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
The aggregate intrinsic value of the outstanding share options at December 31, 2021, represents the intrinsic value of all outstanding options since they were all in-the-money as of such date.
The number of options expected to vest reflects an estimated forfeiture rate.
The following table summarizes the activities for the Company’s performance-based share options for the year ended December 31, 2021:
|
|
Weighted average | |||||||||||||||
|
|
Number
of |
Exercise price |
Remaining |
Aggregate
intrinsic |
||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 1, 2021 |
$ | |||||||||||||||
|
Granted |
- | - | ||||||||||||||
|
Exercised |
( |
) | - | |||||||||||||
|
Cancelled |
( |
) | - | - | ||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 31, 2021 |
$ | $ | ||||||||||||||
|
|
||||||||||||||||
|
Exercisable at December 31, 2021 |
$ | $ | ||||||||||||||
|
|
||||||||||||||||
|
Vested and expected to vest at December 31, 2021 |
$ | $ | ||||||||||||||
The
weighted-average grant-date fair value of options granted during the year ended December 31, 2021 and 2020 was $
The aggregate intrinsic value of the outstanding performance-based options at December 31, 2021, represents the intrinsic value of all outstanding options since they were all in-the-money as of such date.
F - 32
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
The following table summarizes additional information regarding outstanding and exercisable service-based options under the Company's share Option Plan as of December 31, 2021:
|
Outstanding |
Exercisable |
|||||||||||||||||||||||||
|
Range of exercise price |
Number of options |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Number of options |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
||||||||||||||||||||
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
$ |
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
$ |
|
|
|
$ |
|
|||||||||||||||||||
The following table summarizes additional information regarding outstanding and exercisable performance-based options under the Company's share Option Plan as of December 31, 2021:
|
|
|
|
Outstanding |
|
|
Exercisable |
|
||||||||||||||||||||
|
Range of exercise price |
|
|
Number of options |
|
|
Weighted
average remaining contractual |
|
|
Weighted average exercise price |
|
|
Number of options |
|
|
Weighted
average remaining contractual |
|
|
Weighted average exercise price |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
- |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
The Company recognized share-based compensation expenses related to its share-based awards in the consolidated statements of operations as follows:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Cost of revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As
of December 31, 2021, there was $
F - 33
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
c.As
part of the acquisition of Undertone, the Company granted warrants to purchase
NOTE 13:FINANCIAL INCOME (EXPENSE), NET
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Financial income: |
|
|
|
|
|
|
|
|
| |||
|
Interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Change in fair value of SWAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation losses |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Interest expense on debts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Change in fair value of convertible debt |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Bank charges and other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) | |
NOTE 14:INCOME TAXES
a.Income
before taxes on income
Income
before taxes on income is comprised as follows:
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Domestic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Foreign
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
F - 34
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
b.Taxes on income
Taxes
on income are comprised as follows:
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Current
taxes |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Taxes
in respect of previous years |
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
Deferred
tax benefit |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
|
|
Taxes
on income by jurisdiction were as follows:
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Domestic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Foreign
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
taxes |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Deferred tax benefit |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
Taxes
in respect of previous years |
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
- Domestic |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
taxes |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Deferred
tax benefit |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
Taxes
in respect of previous years |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
- Foreign |
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
$
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax expense (benefit) |
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
|
|
F - 35
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
c.Deferred
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets
and liabilities are as follows:
|
|
|
December
31, |
| |||||
|
|
|
2021
|
|
|
2020
|
| ||
|
Deferred
tax assets: |
|
|
|
|
|
| ||
|
Net
operating loss and other losses carry forwards |
|
$
|
|
|
|
$
|
|
|
|
Research
and development |
|
|
|
|
|
|
|
|
|
Intangible
assets |
|
|
(
|
)
|
|
|
|
|
|
Other
temporary differences mainly relating to reserve and allowances |
|
|
|
|
|
|
|
|
|
Deferred
tax assets, before valuation allowance |
|
$
|
|
|
|
$
|
|
|
|
Valuation
allowance |
|
|
|
|
|
|
|
|
|
Total
deferred tax assets, net |
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
Long term deferred tax asset (liability), net |
|
$
|
(
|
)
|
|
$ |
|
|
|
|
|
$
|
(
|
) |
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
||||||||
|
Long term deferred tax asset, net |
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax asset, net |
|
$
|
|
|
|
$
|
|
|
The
$390
change in the total valuation allowance for the year ended December 31, 2021, relates to the projected utilization of certain operating
loss carry-forwards and temporary differences for which a full valuation allowance was previously recorded.
F - 36
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
d.Reconciliation
of the Company’s effective tax rate to the statutory tax rate in Israel
A
reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the
Company, and the actual tax expense as reported in the statement of income is as follows:
|
|
|
Year
ended December 31, |
| |||||||||
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Income
before taxes on income |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Statutory
tax rate in Israel |
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
Theoretical
tax expense |
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in tax expenses resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
"Preferred
Enterprise" benefits * |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
Non-deductible
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
adjustment in respect of different tax rate of foreign subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
taxes related to prior years |
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
Previous years taxes |
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
Change
in valuation allowance |
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
Other
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income |
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Benefit per ordinary share from "Preferred Enterprise" status: |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
e.Income
tax rates
Taxable
income of Israeli companies was generally subject to corporate tax at the rate of 23
Non-Israeli
subsidiaries are taxed according to the tax laws in their respective countries of residence.
Deferred
taxes were not provided for undistributed earnings of the Company’s foreign subsidiaries. Currently, the Company does not intend
to distribute any amounts of its undistributed earnings as dividends. Accordingly, no deferred income taxes have been provided in respect
of these subsidiaries. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject
to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. The amount of undistributed
earnings of foreign subsidiaries is immaterial.
F - 37
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
f.Law
for the Encouragement of Capital Investments, 1959
The
Law for Encouragement of Capital Investments, 1959 (the "Investment Law") provides tax benefits for Israeli companies meeting certain
requirements and criteria. The Investment Law has undergone certain amendments and reforms in recent years.
The
Israeli parliament enacted a reform to the Investment Law, effective January 2011 (which was amended in August 2013). According to the
reform, a flat rate tax applies to Preferred Income of companies eligible for the "Preferred Enterprise" status. In order to be eligible
for Preferred Enterprise status, a company must meet minimum requirements to establish that it contributes to the country’s economic
growth and is a competitive factor for the gross domestic product.
The
Company’s Israeli operations elected “Preferred Enterprise” status, starting in 2011.
Benefits
granted to a Preferred Enterprise include reduced tax rates. As part of the Economic Efficiency Law (Legislative Amendments for Accomplishment
of Budgetary Targets for Budget Years 2017-2018), 5777-2016, the tax rate is 16 %
for all areas other than Development Area A (which was 7.5 %
from 2017 onward).
A
distribution from a Preferred Enterprise out of the "Preferred Income" would be subject to 20 %
withholding tax for Israeli-resident individuals and non-Israeli residents (subject to applicable treaty rates), for dividends which are
distributed on or after January 1, 2014 and from “Preferred Income” that was produced or accrued after such date. A distribution
from a Preferred Enterprise out of the "Preferred Income" would be exempt from withholding tax for an Israeli-resident company.
g.The
New Technological Enterprise Incentives Regime (Amendment 73 to the Investment Law)
In
December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years),
2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("Amendment 73") was published and came into
effect in May 2017 when regulations were promulgated by the Finance Ministry to implement the "Nexus Principles" based on OECD guidelines
published as part of the Base Erosion and Profit Shifting (BEPS) project. According
to Amendment 73, a Preferred Technological Enterprise, as defined in Amendment 73, with total consolidated revenues of less than NIS 10
billion, shall be subject to 12% tax rate on income derived from intellectual property (in development area A—a tax rate of 7.5%).
In order to qualify as a Preferred Technological Enterprise certain criteria must be met, such as a minimum ratio of annual R&D expenditure
and R&D employees, as well as having at least 25% of annual revenues derived from exports .
The Company assessed the criteria for qualifying as a “Preferred Technological Enterprise,” status and concluded that the Company and certain of its Israeli subsidiaries are eligible to the above-mentioned benefits.
F - 38
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
h.Uncertain
tax positions
A
reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
|
|
|
December
31, |
| |||||
|
|
|
2021
|
|
|
2020
|
| ||
|
|
|
|
|
|
|
| ||
|
Balance
at the beginning of the year |
|
$
|
|
|
|
$
|
|
|
|
Increase related to prior year tax positions, net |
|
|
|
|
|
|
|
|
|
Increase related to current year tax positions, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the end of the year |
|
$
|
|
|
|
$
|
|
|
In
2021, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in tax expenses. The Company had $834
and $1,017
for the payment of interest and penalties accrued at December 31, 2021, and 2020, respectively which are included in the balance at the
end of the year.
The
Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with
tax authorities, the likelihood and timing of which are difficult to estimate.
The
Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlements, although
the final tax outcome of its tax audits could be different from that which is reflected in the Company's income tax provisions and accruals.
Such differences could have a material effect on the Company's income tax provision and net income in the period in which such determination
is made.
The
Company’s tax assessments in Israel and the U.S. Federal for tax years prior to 2016 and 2017 respectively are considered final.
The Company has net operating losses in the U.S. from prior tax periods beginning in 2011 which may be subject to examination upon utilization
in future tax periods.
i.Tax
loss carry-forwards
As
of December 31, 2021, the Company’s U.S. subsidiaries have Federal net operating loss carry-forwards of $
As
of December 31, 2021, the Company’s European subsidiaries have net operating loss carry-forwards of $
The Company
has accumulated net operating losses for Israeli tax purposes as of
December 31, 2021, in the amount of approximately $
j.US
Tax Reform:
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”).
The TCJA makes broad and complex changes to the Code.
In
March 2020, in response to the COVID-19 pandemic the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted.
The CARES Act comprises of a spending package and tax reliefs in order to reduce the impact of the pandemic. The tax portion of the CARES
Act includes several corporate tax relief provisions such as: eliminating the taxable income limitation and allowing carryback to the
prior 5 years for net operating losses (“NOLs”) arising in 2018, 2019 and 2020; increasing the business interest deduction
limitation from
F - 39
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 15:EARNINGS PER SHARE
The table below presents the computation of basic and diluted net earnings per common share:
|
Year ended December 31, | ||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
| |||
|
Numerator: |
|
|
|
|
|
|
|
|
| |||
|
Net income attributable to ordinary shares - basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of ordinary shares outstanding during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee options and restricted share units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted number of ordinary shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per ordinary share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per ordinary share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential ordinary shares equivalents excluded because their effect would have been anti-dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16:MAJOR CUSTOMERS
A substantial portion of the Company's revenue is derived from search fees and online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or in customer buying behavior would adversely affect the Company’s operating results.
The following table sets forth the customers that represent 10% or more of the Company’s total revenues in each of the years presented below:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
Customer A |
|
|
|
|
|
|
|
|
|
|
|
|
F - 40
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 17:GEOGRAPHIC INFORMATION
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the Chief Operating Decision Maker, who is the Chief Executive Officer, in deciding how to allocate resources and assessing performance. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand its offerings, presence and reach in various markets. While the Company has offerings in multiple enterprise markets, the Company’s business operates in one segment which is the High Impact Advertising solutions, and the Company’s Chief Operating Decision Maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis.
The following table presents the total revenues for the years ended December 31, 2021, 2020 and 2019, allocated to the geographic areas in which they were generated:
|
|
|
Year ended December 31, |
| |||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
North America (mainly U.S.) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The total revenues are attributed to geographic areas based on the location of the end-users.
The following table presents the locations of the Company’s long-lived assets as of December 31, 2021 and 2020:
|
|
|
December 31, |
| |||||
|
|
|
2021 |
|
|
2020 |
| ||
|
|
|
|
|
|
|
| ||
|
Israel |
|
$ |
|
|
|
$ |
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
F - 41
|
Incorporation
by Reference | |||||||
|
Exhibit
No. |
Description |
Form |
File
No. |
Exhibit
No. |
Filing
Date |
Filed
/ Furnished | |
|
* | |||||||
|
* | |||||||
|
* | |||||||
|
20-F |
000-51694 |
4.1 |
April
29, 2013 |
||||
|
6-k |
000-51694 |
99.9 |
October
15, 2013 |
||||
|
* | |||||||
|
20-F |
000-51694 |
4.16 |
March
19, 2019 |
||||
|
20-F |
000-51694 |
4.17 |
March
27, 2018 |
||||
|
20-F |
000-51694 |
4.6 |
March
25, 2021 |
||||
|
20-F |
000-51694 |
4.7 |
March
25, 2021 |
||||
|
20-F |
000-51694 |
4.8 |
March
16, 2020 |
||||
|
* | |||||||
|
* | |||||||
|
* | |||||||
|
** | |||||||
|
** | |||||||
|
* | |||||||
|
101.INS |
Inline
XBRL Instance Document | ||||||
|
101.SCH |
Inline
XBRL Taxonomy Extension Schema Document | ||||||
|
101.CAL |
Inline
XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
|
101.DEF |
Inline
XBRL Taxonomy Definition Linkbase Document | ||||||
|
101.LAB |
Inline
XBRL Taxonomy Extension Label Linkbase Document | ||||||
|
101.PRE |
Inline
XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
|
104** |
Inline
XBRL for the cover page of this Annual Report on Form 20-F (embedded within the Inline XBRL document) | ||||||
_________________
|
* |
Filed herewith. |
|
** |
Furnished herewith. |
|
*** |
Certain confidential
information contained in this document, marked by brackets, was omitted because it is both (i) not material and (ii) would likely cause
competitive harm to the Company if publicly disclosed. “[***]” indicates where the information has been omitted from this
exhibit. |
|
† |
Indicates management
contract or compensatory plan or arrangement. |
86
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
|
PERION NETWORK LTD. |
|||
|
|
|||
|
By: |
/s/ Doron Gerstel |
||
|
Name: Doron Gerstel |
|||
|
Title: Chief Executive
Officer |
|||
|
|
|||
|
By: |
/s/ Maoz Sigron |
||
|
Name: Maoz Sigron |
|||
|
Title: Chief Financial
Officer |
|||
Date: March 16, 2022
87