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.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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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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.
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.
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.
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:
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The growth in search driven by the growing shift to ecommerce; |
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The growth in video which is outpacing other forms of digital marketing; |
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The transition from linear TV to Digital TV; |
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The inevitable disappearance of the cookie in an increasing privacy-centric world and the corresponding imperative of first-party
data; |
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The need for high-engagement creative in what is called the “Attention Economy.”; and |
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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.
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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.
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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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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.
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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.
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.
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.
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.
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.
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.
Technology
The Design principles of our technologies and research and development
efforts consist of the following elements:
|
• |
Supply and publisher integration;
|
|
• |
AI and optimization; and |
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; |
|
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.
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 |
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.
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.
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.
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
Acquisition
of Vidazoo
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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. |