There has been commoditization of services provided in digital advertising, resulting in margin pressure. If the demand forsuch commoditization occurs in areas such as high impact, digital advertising does not develop or customers do not embrace our solutions, this could have a material adverse effect on our business.

Contracting with new advertising and ad agency customers requires substantial time and expense, and we may not be successful in high impactestablishing new relationships or in maintaining current relationships. It is often difficult to identify, engage, and market to potential advertising throughcustomers 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. Furthermore, many of our advertising clients’ purchasing and design decisions generally require input from multiple internal development efforts and acquisitions. There is, however,external parties of these clients, requiring that we identify those involved in the chance that the overall market for these ads does not develop, or that it does not develop inpurchasing decision and devote a specific medium, such as mobile. Additionally, even if the market for these solutions develops, customers might not embracesufficient amount of time to presenting our offerings.  For example, competitive offerings may be offered at lower prices or be perceived as having better features and functionality.  Further, even if the market for these solutions develops, weservices to each of those decision-making individuals. We may not be able to scalereduce our creativesales and technical productionmarketing expenses to correspond proportionately to periods of high impact ad units.reduced revenues. We may not be able to reduce our sales and marketing expenses to correspond proportionately to periods of reduced revenues. 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.

 

Some of our products and thoseofferings 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 partners currently runpublishers, 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 based on Microsoft Windows operating systems. Recently Androidunable to detect and Apple have gained popularityeffectively deal with such categorization of our products, we may lose both existing and market share, particularly in the mobile market.  A decline in market acceptance of Microsoft technologies or the increased acceptance of other operating systems without products that work on these competing operating systems in a timely fashion could have a material adverse effect onpotential new users and our ability to market our products. Consumers are adopting these alternative technologies in increasing numbers and are migrating to other computing technologies that we do not currently support. In addition, our products and technologies must continue togenerate revenues will be compatible with new developments in Microsoft technologies. Microsoft could introduce new features that would make it more difficult to install our search services. We cannot always maintain such compatibility and we cannot assure you that we will not incur significant expenses or losses of income in connection therewith.negatively impacted.

 

As of December 31, 2015,2017, we had convertible bonds outstanding having an aggregate principal amount of approximately ILS 143.5NIS 86.1 million (then equivalent to approximately $36.8$24.8 million). In the event that we fail to comply with the terms and/or covenants of our convertible bonds or our $19.9 million loan agreement with Bank Leumi, and cannot obtain a waiver of noncompliance, we may be required to immediately repay all of our outstanding indebtedness and the bond trustee and the bank may be entitled to exercise the remedies available under the convertible bondsapplicable agreement and applicable law.

In addition, pursuant to the Undertone merger agreement, we are required to pay deferred consideration in the amount of $20 million, bearing interest, in November 2020. In the event that we fail to comply with certain provisions of the merger agreement, or if Undertone fails to comply with the terms and/or covenants of its $60 million secured loan agreement, and the loan is accelerated, we may be required to immediately pay the $20 million deferred consideration under the merger agreement and Undertone may be required to immediately repay all of its outstanding indebtedness under the loan agreement. In connection with the publication of our financial results for the fiscal quarter ended September 30, 2017, we affected the cure provisions under the terms of the secured loan agreement due to failure to meet certain financial covenants included therein. In March 2018, we entered into an amendment to the secured loan agreement, including, among others, adjustments to the financial covenants. For further information, see "Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Credit facilities".   

 

There is no assurance that we will be able to generate the cash necessary to fund the scheduled payments from operations or from additional equity or debt financing or other funding sources or that our operating results will enable us to meet our covenants and financial ratios as of the end of each fiscal quarter.  Our inability to comply with the repayment schedules, covenants or financial ratios under our debt instruments could result in a material adverse effect on us.

The terms of our credit facilities include customary covenants that impose restrictions on our business, financing and investing activities, subject to certain exceptions or the consent of our lenders including, among other things, limits on our ability to incur additional debt, create liens, enter into merger, acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit facilities also contain certain customary affirmative covenants and events of default. Our ability to comply with the covenants may be adversely affected by events beyond our control, including but not limited to, economic, financial and industry conditions. A breach of any credit facility covenant that is not cured or waived may result in an event of default. This may allow our lenders to terminate the commitments under the credit facilities, declare all amounts outstanding under the credit facilities, together with accrued interest, to be immediately due and payable, and to exercise other rights and remedies. If this occurs, we may not be able to refinance the accelerated indebtedness on acceptable terms, or at all, or otherwise repay the accelerated indebtedness, which could have a material adverse effect on us.

 

We acquired Smilebox in August 2011, SweetIM in November 2012, ClientConnect in January 2014, Grow Mobile in July 2014, Make Me Reach in February 2015, and Undertone in November 2015, and we intend tomay continue to acquire complementary products, technologies or businesses. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business concerns and is expensive and time-consuming. New acquisitions couldAcquisitions 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 revenues or cost benefits, orand 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 couldmay weaken our cash position, increase our leverage or dilute our existing shareholders, as the case may be.applicable. Furthermore, a substantial portion of the price paid for these acquisitions is typically for intangible assets. We 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 acquisition,acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, not all acquisitions result in better results of the acquiring company. All acquisitions may end up in losses, unwanted results and waste of valuable resources, time and money.

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 relationships, content, domain names and acquired technology, among other things, as of the acquisition date, and are amortized based on their economic 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.

As a result of the ClientConnect Acquisition, several shareholders of Conduit became significant shareholders of Perion, including three shareholders that each beneficially own more than 5% of our outstanding shares as of March 12, 2018. One of these shareholders is currently a member of our board of directors. See Item 7.A for more information. To our knowledge, these shareholders are not party to a voting agreement with respect to our shares. However, should they or similar risks relatingother large shareholders decide to acquiring products, technologiesact 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 businesses shouldpreventing a change in control of the company, unless approved by them.

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.

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, whenever the U.S. dollar declines in value in relation to the NIS, it will 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 $0.1 million. The exchange rate of the U.S. dollar to the NIS has been volatile in the past, increasing by less than 1% in 2015, decreasing by approximately 1% in 2016 and decreasing by approximately 10% in 2017. As of December 31, 2017, we had a foreign currency net liability of approximately $15.8 million (which number includes approximately $16.7 million in long-term NIS denominated convertible bonds that we issued in Israel in September 2014), and our total foreign exchange gain was approximately $0.2 million for the year ended December 31, 2017. 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, and are generally implementing their proposals. However, due to market conditions, volatility and other factors, we do not always implement our consultant’s proposals in full and our consultant’s proposals do not always prove to be effective and may even prove harmful. We may incur losses from unfavorable fluctuations in foreign currency exchange rates. See “Item 11 Quantitative and Qualitative Disclosure of Market Risks” for further discussion of the effects of exchange rate fluctuations on earnings.

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 scalereturn 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. 

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. For example, as a public company, we have created additional board committees and elected two external directors pursuant to the Companies Law. 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 greatereffective. 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 Operating and Financial Review and Prospects — Overview — General and Administrative Expenses” for a discussion of our increased expenses as a result of being a public company.

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 positive effects of the acquisition described above, ourrequirements for foreign private issuers and more expensive to comply with.

 

 

Our business is constantly challenged and may be impacted by disruptions, including information technology attacks or failures. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, 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 and corruption of data and overloading our servers and systems with communications and data. Unidentified groups have hacked numerous Internet websites and servers, including our own, for various reasons, political, commercial and other. Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject 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, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks, 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 cause certain difficulties, they have not had a material effect on our business, financial condition or results of operations. However, 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.

 

Historically, public companiesOur 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 experience periods of volatility in the market price of their securities and/or engage in substantial transactions, are sometimes met with class action litigation. Companies in the Internet andadvertisers may perceive as undesirable.  Such fraudulent activities may occur when a software industry, such as ours, are particularly vulnerable to this kind of litigationprogram, known as a resultbot, 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 the volatilitythousands of their stock pricesmachines, making them difficult to detect 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.filter.

 

If fraudulent or other malicious activity is perpetrated by others, and we are deemedunable to be non-compliantdetect 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 applicable data protection laws,our advertising services, refusals to pay, refund or are even thoughtmake-good demands, or withdrawal of future business. Any of these occurrences could damage our brand and lead to be so,a loss of our operating results could be materially affected.

 

Should some of our product and usetechnology vendors terminate their relationship with us, our ability to continue the development of some of our services, it is possible that these laws mayproducts could be interpreted and applied in a manner that is inconsistent with our data collection, use, and preservation practices or that it may be argued that our practices do not comply with other countries' privacy and data protection laws and regulations. In addition to the possibility of fines,adversely affected, until such a situation could result in the issuance of an order requiringtime that we change our data collectionfind adequate replacement for these vendors, or retention practices, which in turn could have a material adverse effectuntil such time that we can continue the development on our business. See "Item 4.B Business Overview — Government Regulation"own.

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 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 additional discussiontechnological, 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 applicable regulations.advertisers or consumers could hurt our ability to grow our mobile marketing business.

 

 

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. 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 revenues during the period required to correct these errors.

Errors, failures or defects in products released by us could result in negative publicity, product returns, makegoods,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.interruptions to our products.

 

 

Each of our third partyOur third-party Internet and telecommunication providers may not continue to provide services to us withoutexperience disruptions, at the current cost or at all. Moreover, as traffic to our websites and applications increases and the number of new (and presumably more complex) products and services that we introduce continues to rise, we will need to upgrade our systems, infrastructures and technologies generally to facilitate this growth. Although there is certain overlap between the companies that provide such services, such a disruption in services by any one of them, even if temporary,which would reduce our revenues from product sales and possibly even from search, depending on the extent of disruption.increase our costs. We also rent the services of approximately 530400 servers located around the world, mainly through Amazon Web Services. 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 and require us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider. Such processes could be both expensive and time consuming and could result in lost business both during the transition period and after.

 

We currently rely solely on the Internet as a means to sell our products. Accordingly, if we, or our customers, are unable to utilize the Internet due to a failure of technology or infrastructure, hacking, terrorist activity or other reasons, we could lose current or potential customers and revenues. While we haveOur backup systems for most aspects of our operations, 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 our website could materially impede our ability to attract new companies to advertise on our website and to maintain relationships with current advertisers. Difficulties of this kind could damage our reputation, be expensive to remedy and curtail our growth.

 

 

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 revenues that we anticipate from our users and result in a decline in our user base. 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.

 

Our business depends on a strong brand reputation,is conducted through the Internet and iftherefore, 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 user privacy, data collection and protection, location of data storage and processing, content, use of “cookies,” access changes, “net neutrality,” pricing, advertising, distribution of “spam,” intellectual property, 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. This uncertainty 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 ableestablished in the European Union. The General Data Protection Regulation (which will go into effect in May 2018) will likely have an even wider territorial scope, broaden the definition of personal data to maintaininclude location data and enhanceonline identifiers, and impose more stringent user consent requirements. Further, it will include 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, which can lead to diverging national rules.  Similarly, there have been laws and regulations adopted in Israel and throughout the United States that would impose new obligations in areas such as privacy, in particular protection of personally identifiable information and implementing adequate security measures to protect such information, and liability for copyright infringement by third parties. Therefore, it is difficult to determine whether and how existing laws, such as those governing intellectual property, privacy, data collection and protection, libel, marketing, data security and taxation, apply to the Internet and our brand,business. 

Due to rapid changes in technology and the inconsistent interpretations of privacy and data protection laws, we may be required to materially change the way we do business. For example, 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. In addition, 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 state and federal data security and privacy laws, document retention requirements, and other standards of accountability. Compliance with such existing and proposed laws and regulations can be costly and can delay, or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.

In addition to compliance with government regulations, Undertone voluntarily participates in several trade associations and resultsindustry self-regulatory groups that promulgate best practices or codes of operationsconduct relating to digital advertising, including the Internet Advertising Bureau, the Network Advertising Initiative and the Digital Advertising Alliance. We could be materially adversely affected.

For more information regarding government regulations to fraud on publisher sites on which we serve ads, service outages, product malfunctions, data protection and security issues, and exploitationare subject, see “Item 4.B Business Overview — Government Regulation” for additional discussion of applicable regulations affecting our trademarks by others without our permission.  business.

If we are unabledeemed to maintainbe non-compliant with applicable data protection laws, or enhanceare even thought to be so, our Undertone brand in a cost-effective manner, our business and operating results could be materially adversely affected.

 

We may be unablecollect, use, and maintain certain data about our customers, partners, employees and consumers. Such collection and maintenance of information is subject to deliver advertisingdata protection laws and regulations. A failure to comply with applicable regulations could result in a brand safe environment,class actions, governmental investigations and orders, and criminal and civil liabilities, which could materially affect our operating results. Moreover, concerns about our collection, use, sharing or handling of such data or other privacy related matters, even if unfounded, could harm our reputation and causeoperating results. 

Although we strive to comply with the applicable laws and regulations and use our best efforts to comply with the evolving global standards regarding privacy and inform our customers of our business practices prior to suffer.

In general, the digital advertising business has not traditionally paid sales tax. However, a successful assertion by their customers. Unlikeone or more cities, states or countries that digital advertising in other mediums, we cannot guaranteeservices should be subject to such taxes or that online advertisements will not appear in such an environment. If we are not successfulproviding 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 delivering adsthe 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.

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 an environment,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 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 ofclients in the future which could harmimpact our businessfuture sales, and operating results.therefore result in a material adverse effect on our revenue.

 

We have experienced a decline in business,entered into non-competition and market perceptionnon-solicitation agreements with many of our search business has not been favorable. Asemployees 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 result,limited period. Under current Israeli, U.S., U.K., French and German 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 difficulty achieving revenue growth and entering new markets.

 

 

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. 

 

 

Given the competitive and technology-driven nature of the digital advertising industry, companies within our industry companies often design and use similar products and services.  At times, this can causeservices, which may lead to claims of intellectual property infringement and potentially litigation.  Further,We have been, and in the appealfuture may be, the subject of some of our products is largely the result of the graphics, sound and multimedia content that we incorporate into our products. We enter into licensing arrangements with third parties for some of these uses. However, other third parties may from time to time claimclaims that our currentsolutions and underlying technology infringe or future use of content, sound and graphics infringe theirviolate the intellectual property rights and seek to prevent, limit or interfere with our ability to make, use or sell our products. We have experiencedof others. Regardless of whether such claims inhave any merit, these claims are time-consuming and costly to evaluate and defend, and the past although ultimately with no material consequence.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 forto 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 revenues 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. IfOn 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.

 

 

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 partythird-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 revenues 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.

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 (“BEPS”)).

 

Our principal executive offices are located in Israel. Accordingly, political, economic and military conditions in the Middle East may affect our business directly. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors, Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent political uprisings, social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries and have raised concerns regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel and is believed to be developing nuclear weapons. Iran is also believed to have a strong influence among the Syrian government, Hamas and Hezbollah. These situations may potentially escalate in the future to more violent events which may affect Israel and us. These situations, including conflicts which involved missile strikes against civilian targets in various parts of Israel, such as the Gaza conflict in the summer of 2014, have in the past negatively affected business conditions in Israel. Any hostilities involving Israel could have a material adverse effect on our business, operating results and financial condition. Although such hostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not be renewed and have such an effect in the future. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions. These or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Since our headquarters are located in Israel, we could experience serious disruptions if acts associated with this conflictany and all of the above mentioned conflicts result in any serious damage to our facilities. Our business interruption insurance may not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. Any future armed conflicts in the region would likely negatively affect business conditions, harm our results of operations and make it more difficult for us to raise capital.

Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli companies based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our business and results of operations.

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, substantially all of whom reside outside of the United States, may be difficult to obtain within the United States.

 

Furthermore, because the majoritya 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:

 

 

 

 

 

 

 

 

 

 

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. Any of the following could have a material effect on our overall effective tax rate:

 

 

 

 

Additional details are provided in "Item“Item 5 – Operating and Financial Review and Products"Products” under the caption "Taxes“Taxes on income,"” in "Item“Item 10 – Additional Information"Information” under the caption "Israeli“Israeli taxation, foreign exchange regulation and investment programs"programs” and in note 10Note 14 to our Financial Statements.

 

Non-U.S. corporations generally may be characterized as a passive foreign investment company ("PFIC"(“PFIC”) for any taxable year, if, after applying certain look through rules, either (1) 75% or more of such company’s gross income is passive income, or (2) at least 50% of the average percentage, generally determined by fair value of all such company’s assets (determined on a quarterly basis) are held for the production of, or produce, passive income.For this purpose, passive income includes, for example, dividends, interest, certain rents and royalties, and gain from the disposition of property that produces such income.

If we are characterized as a PFIC for any taxable year, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares taxed at ordinary income rates, rather than capital gain rates. Similar rules apply to distributions that are "excess“excess distributions."” In addition, both gains upon disposition and amounts received as excess distributions could be subject to an additional interest charge. A determination that we are a PFIC could also have an adverse effect on the price and marketability of our ordinary shares.

 

We do not believe that in 2015 we were a PFIC for our prior taxable year and we intend to conduct our business so that we should not be treated as a PFIC. PFIC for our current taxable year or any future taxable year. However, because the PFIC determination is highly fact intensive and made at the end of each taxable year, it is possible that we may be a PFIC for the current or any future taxable year or that the IRS may challenge our determination concerning our PFIC status. Whether we are a PFIC is based upon certain factual matters such as the valuation of our assets. In calculating the value of our assets, we value our total assets, in part, based on our total market capitalization. We believe this valuation approach is reasonable. There is no assurance whetherHowever, if the IRS will challengesuccessfully challenged our valuations. Ifvaluation of our assets, or if the IRSmarket price of our ordinary shares were to successfully challenge such valuations, we may potentially be classifiedfluctuate, it could result in our classification as a PFIC. Because the market price of our ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC, for the 2015 taxable year or prior taxable years. Furthermore, there can be no assurancewe cannot give any assurances that we will not becomebe considered a PFIC in the future. for any future taxable year.

See a discussion of our PFIC status in Item 10.E under "U.S.“U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Considerations."

 

 

 

 

 

We completed the initial public offering of our ordinary shares in the United States on February 3, 2006.

 

On August 31,Since 2011, we completed several acquisitions, including the purchase of Smilebox Inc., a Washington corporation.

 

 

 

In 2016, we expect to continue our growth strategy of acquiring products and businesses, in addition to organic capital investments. Our organic investments are expected to consist primarily of acquiring computer hardware, software, peripheral equipment and installation, all of which are expected to be financed by our existing resources. We currently expect that outside of possible acquisitions of products and companies, our capital expenditures will be approximately at the same level in 2016. To date, we have financed our general capital expenditures with cash generated from operations and debt and equity financings.  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 or debt securities.

 

 

Perion is a global technology company that delivers high-quality advertising solutions to brands and publishers. Perion is committed to providing outstanding execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform.

 

WhileOur advertising solution specializes in 2015, we generated most of our revenues from search-based monetization solutions, we expect to devote most of our future growth efforts towards the advertising market.  Our Undertone business is an advertising technology business focused on delivering standout brand experiences. We do so by developingproviding digital advertising creativelysolutions for some of the world’s leading brands, agencies and publishers. We provide our customers high-quality, cross-screen digital advertising across desktop, mobile (web and app) and social channels. Our ad formats, coupled with award-winning creative, are designed to capture consumer attentionattract and engage audiences, helping brands connect to consumers and drive engagement, delivering these ads across a hand-picked portfolio of websites and mobile applications. With the Undertone acquisition, we are now able to deliver standard and proprietary display, mobile, video, and high impact ad formats, leveragingbusiness results. We leverage our proprietary technology platform and programmatic capabilities to ensure that ads are deliveredgive our customers the ability to serve the right creative to the right audience at the right time, and across the right websites and mobile applications.

Our proprietary social and mobile marketing platform offers a single dashboard for marketers that makes mobile media buying more efficient across adon Facebook, Instagram, Twitter and other social networks exchanges and direct publishers. Advertising networks, agencies and mobile application developers looking to promote their applications often struggle with inefficient and disorganized practices of media buying, campaign measurement and optimization. Our advertising platform simplifies the complexity of mobile app advertising, enabling companies to rapidly acquire new customers, increase user engagement and maximize revenue. It streamlines the process of buying ads across multiple channels, with an integrated solution suite that delivers sophisticated reports for quick results analysis, performance optimization and an increased return on investment.platforms.

 

 

 

In general, we work with advertising agencies, advertisers, publishers and other inventory suppliers, and search partners. While we work with some advertisers directly, our primary advertising customers are advertising agencies, who are paid by brand advertisers to develop their media plans. We work with these advertisers and agencies to plan, design, deliver, manage, and measure their digital advertising campaigns.

We generally do not enter into long term contracts with our advertising customers. We charge customers variedvariable rates based on ad format,formats, campaign complexity, and creative requirements. We then engage in a consultative sales process to determine the best planoffering for that customer. Our customers generally purchase our products based on impressions served for each ad type, either using traditional insertion orders, or alternatively, programmatically, with options for managed service or self-service. Programmatic customers have access to the same ad formats as traditional customers but can leverage programmatic direct delivery in order to increasebenefit from increased automation and efficiency.efficiency of their campaigns All our advertising customers receive support throughout the campaign cycle, with service and support teams including planning, client solutions, campaign management, performance, and insights.

Our analytics platform enables app developers to manage their distribution and monetization activities and better optimize their offerings. Most app developers are small businesses without analytical capabilities orIn the required funds to improve customer “funnel” conversion, create the necessary systems for tracking revenue per user, or implement traffic acquisition with positive return on investment. Through our analytics platform,past, we provide our clients with real-time analytics, custom reports, and advanced optimization and editing tools, which together act as a springboard to higher conversions and increased return on investment.

We are currentlycurrently one of the largest redistributors of search monetization in the United States and have agreements withwe generate substantially all the majorour search engine companies. Our agreementrevenues through our relationship with Microsoft our largest search engine partner, is for a three-year term, from January 1, 2015 through December 31, 2017, and upon mutual agreement, the agreement may be renewed for an additional 12-month period, until the end of 2018. In the past, theBing. The fees payable by Microsoft under the Renewed Microsoft Agreement were payable based on either a fixed price, pay-per-search basis that is tied to(as the number of searches conducted by end users, or in certain instances on a share of the revenue generated as a result of searches conducted by end users who utilize the search engine that appears on toolbars created by publishers through our platform or through other search related products. The fees payable by Microsoft had varied annually over the term of the agreement, decreasing significantly in 2013 and 2014, as compared to 2011 and 2012. As of 2015, the fees payable by Microsoft undercase was with the Microsoft 2015 AgreementAgreement), are payable based on a share of the revenue generated as a result of searches conducted by end users who utilize the search engine that appears on our product, the publisher’s product, search assets and websites.

 

 

Our goal through our advertising high quality offering is to be the leader in high-quality advertising solutions that cut through the digital clutter and deliver messages that stand out to consumers, through innovative “high impact” ad units. We define high impact as advertising that has a great effect on consumers, such as non-standard rich mediaand engaging ad units. To address all of our customers’ digital advertising needs with a comprehensive solution, in addition to high impactwe offer “high impact” ad units we also offeras well as standard and non-standard ad formats in display,desktop, mobile (web and app), and social channels. We define “high impact” as advertising that captures the attention of consumers, including video and mobile.

 

High impact advertising requiresWe offer our clients creative ad units that capture consumer attention, as well as functionality that drives consumer engagement. We have an in-house full-service creative team PIXL Studios, whichthat works with clients to design, build and execute custom high impact ad units. We currently offer 12 different high impactcampaigns.

Our formats, each with a suite of interactive functionality, thatfeatures, can be deployed across desktop, mobile and tablet (“cross-screen”).  Eight and through web, app and social channels, depending on the specific needs of the customer.  Most of these are our proprietary formats. We use HTML5 and responsive design to detect device type and screen size in order to deliver a seamless advertising experience across screens. Other proprietary formats such as UMotion and Tapestry, leverage mobile-native functionality such as tap, swipe, shake and tilt in order to deliver an engaging consumer experience.

 

 

In order to be effective, advertisements must be delivered in media environments that reach the right audiences. We hand-pickedhand-pick a broad portfolio of premium media properties that weare rigorously vetted using quantitative and qualitative criteria. Qualified publishers are then put through a certification process to ensure proper delivery of our high impact formats. Approved publishers are then placed on Undertone’s “Green List” and are subsequently continuously monitored for inappropriate content and non-humansuspicious traffic.

 

 

Our proprietary technology platform supports our mission of delivering standout brandhigh-quality digital experiences for advertisers:our clients. Key features of our platform include:

 

 

 

 

 

We provide our clients with service and support before, during and after the campaign cycle.  Our sales, client solutions, and planning teams utilize a consultative, solutions-driven approach in order to develop the appropriate campaign strategy for each individual client. Our campaign management and performance teams oversee all aspects of client campaigns in order to ensure that they meet the clients’ objectives.  Finally, our research and insights team provides clients with campaign results, key performance metrics and critical analysis in order to provide useful feedback to clients.

 

 

To maintain our edge and uniqueinnovative offering, we must continue to develop new solutions and services that foster consumer engagement.for our clients.  To accomplish this, we have an in-house research and development team known as Future Proof Labs. Future Proof Labs. This team researches, prototypes and tests emerging technology in order to determine how best to reach and influence consumers. The team also conducts consumer research studies of consumer interactions with ad formats, features and functionalities to determine the potential effectiveness of innovations.preferences and usage behavior.

 

Future Proof LabsOur innovation team focuses on three types of innovations:

 

 

 

 

With the solutions we provide to our publisher partners, in the turbulent marketplace we currently act in, we intend to differentiate ourselves by providing solutions with three major advantages:

 

 

 

 

We provide a broad spectrum of solutions for our clients' monetization challenges. Through a sophisticated, data driven recommendation engine, we assist publishers to create new revenue streams and advertisers to hit targeted audiences- all while increasing site performance. We offer clients the ability to easily incorporate targeted ads into the download and installation process of their products as well as tailored and engaging advertising solutions for web content publishers, thereby further increasing monetization opportunities. The engine allows for funnel monetization opportunities on post-install and uninstall pages, as well. Altogether, the engine provides end users with more relevant offers, enhancing their experience by delivering relevant content and optimizing conversion for both advertisers and publishers, ultimately increasing end user satisfaction and monetization.

 

Through our search agreements with the world's leading search providers we enable our clients to monetize their search assets. Publishers and developers may incorporate a search box, generic or tailored to the publisher’s offering that is powered by our search providers, who in turn pay us fees for searches emanating from such search boxes. Depending on the payment model adopted, we pay our clients a fee on a pay-per-search or revenue sharing basis for search activity emanating from the incorporated search boxes.

 

 

Our research and development activities are primarily conducted internally, focusing on the development of new high impact ad formats and platform-based solutions that will offer developers (i) stand outstandout brand experience (ii) effective distribution tools, (iii) increased monetization capabilities through content, and (iv) enhanced optimization via powerful, reliable, and easy-to-use analytics. Additionally, we focus our research and development efforts on developing new products and improving existing products through software updates and upgraded features. Our Research & Development department is divided into groups based on scientific disciplines and types of applications and products.

 

 

 

Our search monetization solutions, advertising platforms and other, are distributed and sold throughout the world (mainly in more than 100 countries.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, 2013, 20142015, 2016 and 2015. As explained in Item 5.A, as a result of the ClientConnect Acquisition, which closed on January 2, 2014, our 2014 and 2015 financial statements include ClientConnect's comparative numbers for 2013.2017.

 

 

 

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, 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. Except for our agreements regarding anti-spam software and some of our content licenses, most of these licenses entailed a one-time fee or are "freeware." 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 have six issued patents in the United States and one in Israel, as well as several patent applications pending in the United States, Israel and the European Union.

 

 

 

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 Undertone businessadvertising solution and that compete for finite advertiser/agency budgets and publisher inventory. There are also a large number of niche companies that are competitive with our Undertone businessadvertising 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, AOL,Oath, Google, and Facebook. New entrants and companies that do not currently compete with our Undertone businessadvertising solution such as Amazon and Samsung 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, Yahoo, Ask 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, AOL, BlucoraOath, InfoSpace and others.

 

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.

 

Finally, 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.

 

 

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,"“cookies,” access changes, "net“net neutrality,"” pricing, advertising, distribution of "spam,"“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 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. 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.