We rely on a diverse set of publishers or digital media properties, including direct publishers, advertising exchange platforms 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”.sources.” The future growth of our advertising business will depend, in part, on our ability to enter into, maintain and maintainfurther develop successful business relationships with thesein order to increase the network of our supply sources. If we are unsuccessful in establishing or maintaining our relationships with supply sources on commercially reasonable terms, or if these relationships are not profitable for us and competitive in the marketplace, our ability to compete in the marketplace or to grow our revenues from our advertising business could be impaired.adversely affected. Our supply sources typically supply their advertising inventory 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.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 or whose offerings or technology are considered more beneficial. 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 qualityhigh-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:
| · | 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 specified creative content or advertising formats, which would restrain our supply of available inventory. |
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 specified creative content or advertising formats as well as content adjacent restrictions, which would restrain our supply of available inventory.
| · | 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. |
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.
| · | Social media platforms may be successful in keeping users within their sites via products such as Facebook's Instant Articles. If, as a result, users are not on the open web, advertising inventory on the open web (including our publisher’s sites) may be reduced or may become less attractive to our advertising customers. |
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 on the open web (including our publisher’s and our owned and operated sites) may be reduced or may become less attractive to our advertising customers.
| · | Supply sources may be reluctant to adopt certain of our proprietary ad formats for a variety of reasons (such as user preference changes making such ad formats less desirable) resulting in limited advertising inventory supply for such formats and inhibiting our ability to scale such formats. |
Supply sources may be reluctant or unable to adopt certain of our proprietary and unique high-impact 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.
In summary, 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, 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 this happens, our revenue could decline or our cost of acquiring inventory could increase, lowering our operating margins.
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 Undertone brandbrands 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 Undertone brand,brands, as well as on enhancing market awareness of it.them. Our Undertone brand,brands, however, may be negatively impacted by a number of factors, including but not limited to, fraudulent, inappropriate or misleading content on publisher sites on which we serve ads, service outages, product malfunctions, data protection and security issues, and exploitation of our trademarks by others without our permission. If we are unable to maintain or enhance our Undertone brandbrands in a cost-effective manner, our business and operating results could be materially adversely affected.
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 tofor 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. Unlike advertisingWhile we strive to have all of our online advertisements appear in other mediums,a brand-safe environment, we cannot guarantee that all online advertisementsthey will appearbe delivered in a brand-safesuch an environment. If we are not successful in delivering ads in such an environment,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 and operating results.
The advertising industry is highly competitive. If we cannot compete effectively 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 introduction of new technologies, products and solutions, changing branding objectives, and evolving customer demands 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 ours and that compete with us for finite advertising budgets and for limited inventory from publishers. There areis also a large number of niche companies that are competitive with us, as they provide a subset of the services that we provide. Some of our existing and potential competitors aremay be better established, benefit from greater name recognition, may offer solutions and technologies that we do not offer or that are more evolved than ours, and may have significantly more financial, technical, sales and marketing resources than we do. In addition, some competitors, particularly those with a larger and more diversified revenue base and a broader offering, may have greater flexibility than we do to compete aggressively on the basis of price and other contract terms.terms as well as respond to market changes. 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. Given that the barriers to entering the digital advertising market are relatively low, the number of competitors may increase even further. If our digital advertising platform and solutions are not perceived as competitively differentiated or we fail to develop adequately to meet market evolution, we could lose customers and market share or be compelled to reduce our prices and harm our operational results.
Our digital advertising business is susceptible to seasonality, unexpected changes in campaign size and prolonged cycle time, which could affect our business, results of operations and ability to repay indebtedness when due.
The revenue of our digital advertising business is affected by a number of factors, including:
| · | Historically, in most cases our advertising solution experienced the lowest sales in the first quarter and the highest sales in the fourth quarter, with the second and third quarters being slightly stronger than the first quarter. Fourth quarter sales tend to be the highest due to a need to utilize remaining budgets, and increased customer advertising volumes during the holiday selling season. |
| · | Product and service revenues are influenced by political advertising, which generally occurs every two years. |
Product and service revenues are influenced by political advertising, which generally occurs every two years.
| · | In any single period, product and service revenues 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 efforts, i.e., when and where brands choose to spend their money in a given year. |
In any single period, product and service revenues and delivery costs are subject to significant variation based on changes in the volume and mix of deliveries performed during such period.
| · | 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. |
Revenues are subject to the changes of brand marketing trends, including when and where brands choose to spend their money in a given year.
| · | Relative complexity of individual advertising formats, and the length of the creative design process. |
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.
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 accounting for as much as almost halfbeing the major contributor to our annual profits and the first quarter possibly resulting in a loss. Moreover, due to the long receivable cycle and shorter payable cycle, this seasonality puts strains on our cash flow through the first and second quarter of every year. These factors could adversely impact our cash flow and our ability to meet our financial debt covenants.
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, 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. Additionally, customers may request measurement of campaign metrics that are difficult or impossible to measure. 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. Accordingly, we may not be able to reach customer requested performance levels or measure certain metrics, which could cause customers 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.
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 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.Ads (in which Undertone is a member). The more such technologies become widespread, our business may be adversely affected, and so are our 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 revenue.profit.
In most cases, when we deliver an ad,advertisement, we are often able to collect certain information 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. We may also be able to collect information about the user's location. As we collect and aggregate this data provided by billions of ad impressions and third-party providers, we analyze the data in order to measure and optimize the placement and scheduling of ads across alldelivery of our advertising inventory and to measure performance.provide cross-channel advertising capabilities. Our ability to access and utilize such data is crucial.
Our publishers or advertisers might decide not to allow us to collect some or all of this data or might limit our use of this data. Our ability to either collect or use data could be restricted by new laws or regulations, including, the General Data Protection Regulation (the “GDPR”), in the European Union which will goentered into effect in May 2018, which willand presumably broaden the definition of personal data to include location data and online identifiers, which are commonly used and collected parameters in digital advertising, and impose more stringent user consent requirements, changes in technology, operating system restrictions, requests to discontinue using certain data, restrictions imposed by advertisers and publishers, industry standards or consumer choice. Interruptions, failures
Additionally, in June 2018, California passed the California Consumer Privacy Act (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for companies. Specifically, the CCPA provides that covered companies must provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information. The CCPA became operative in January 1, 2020 and additional U.S. states may begin to implement similar new laws or defects inregulation. 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. We cannot fully predict the impact of the CCPA on our business or operations, but it may require us to modify our data collection, analysispractices and policies and to incur substantial costs and expenses in an effort to comply. Some observers have noted the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business.
Further, in March 2017, the United Kingdom (“U.K.”) formally notified the European Council of its intention to leave the EU pursuant to Article 50 of the Treaty on European Union (“Brexit”) and subsequently ceased to be an EU Member State on January 31, 2020, but enacted, a Data Protection Act substantially implementing the GDPR, effective in May 2018, which was further amended to align more substantially with the GDPR following Brexit. It is unclear how U.K. data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the U.K. will be regulated. In addition, some countries are considering or have enacted legislation requiring local storage systemsand processing of data that could also limitincrease the cost and complexity of delivering our abilityservices.
In addition, failure to aggregatecomply with the Israeli Privacy Protection Law 1981, and analyze data from our advertisers' advertising campaigns.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 of the current enforcement measures and sanctions.
If this happens, we may not 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 revenues. Additional details are provided below under “Risks related to Regulatory Changes” and “— Risks Related to our Technological Environment”.Environment.”
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 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 new and existing customers or attract new 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 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 and results of operations could be materially adversely affected.
Commoditization in digital advertising could have a material adverse effect on our business.
There has been commoditization of services provided in digital advertising, resulting in margin pressure. If such commoditization occurs in areas such as high impact, this could have a material adverse effect on our business.
Sales efforts with advertisingadvertisers and ad agency customers, and with advertisers of mobile applications,agencies require significant time and expense and may ultimately be unsuccessful.
Contracting with new advertisingadvertisers and ad agency customersagencies requires substantial time and expense,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 presentingpresent 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 periodsOn top of reduced revenues.that, there has been commoditization of services provided in digital advertising, resulting in margin pressure. 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 effectivecost-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 requiresrequire 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 revenues. Our contracts with advertising agencies are typically non-exclusive and the agencies often work with our competitors or offer competing services.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 these relationshipsthe agencies are not profitable for us,unable to effectively collect corresponding payments from the brands, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results would 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 revenues related to our social marketingadvertising cloud platform could decline.
We leverage the capabilities of Make Me Reach, our social marketingadvertising cloud platform, to offer our customers the ability to deliver ads on social platforms.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 and in-app solutions in particular, may be constrained by the limited flexibility, increased requirements that are associated with advertising in these environments,channels, and the social platformsnetworks 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 revenues from our social marketing platform.advertising cloud platform. In addition to the foregoing, our social marketingadvertising cloud platform is dependent on our ability to create, optimize, and manage our customers’ advertising campaigns on Facebook, Instagram, Google, Amazon, LinkedIn, Snapchat, Pinterest and Twitter. As a result, we are subject to each social network’s respective terms and conditions governing our ability to access and utilize its platform. Our social marketingadvertising cloud 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 from Facebook, Twitter, Snapchat and Instagram 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 harmed.
Our search solution depends heavily upon revenues generated from our agreement with Microsoft, and any adverse change in that agreement could adversely affect our business, or its financial condition and results of operations.
We are highly dependent on our search services agreement with Microsoft Online Inc., which covers substantially all of our search solution. Our previous agreement with Microsoft Online Inc. had a term from January 1, 2015 until December 31, 2017 (the “Microsoft Agreement”).Irelands Operations Limited. In October 2017, we entered into ana renewed agreement with Microsoft Ireland Operations Limited effective as of January 1, 2018 until December 31, 2020 (the “Renewed Microsoft“Microsoft Agreement”). In 2017,2019, the Microsoft Agreement accounted for 46%63% of our revenues. In this annual report on Form 20-F we refer to Microsoft Corporation and its affiliates as Microsoft.
If our Renewed Microsoft Agreement is terminated or substantially amended (not on favorable terms), we would experience a material decrease in our search-generated revenues or the profits it generates and would be forced to seek alternative search providers, at less competitive terms. There are very few companies in the market that provide Internet search and search advertising services similar to those provided by Microsoft withsuch as Google and Yahoo being the main relevant ones. These threeVerizon Media. Such companies are substantially the only participants in western markets, and competitors do not offer as much coverage through sponsored links or searches. Although we have agreement with Google, we do not generate a significant amount of revenue from it. If we fail to quickly locate, negotiate and finalize alternative arrangements, or if we do, but the alternatives do not provide for terms that are as favorable as those currently provided and utilized, and we would experience a material reduction in our revenues and, in turn, our business, financial condition and results of operations would be adversely affected.
Our search revenue business is highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to publishers and generate most of our revenues. If we were to lose all or a significant portion of those publishers, as customers, our revenues and results of operations would be materially adversely affected.
In 2017,2019, the top tenfive publishers distributing our search services accounted for approximately 42%36% of our revenues, of which the top five publishers represented approximately 37% of our revenues (the two largest representing 15% and 11%, and the next three representing 5%, 4% and 2% of our revenues).revenues. There can be no assurance that these existing publishers will continue to distribute our search services or 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 revenues and profitability.
The generation of revenues from search activity 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 revenues through designating the Companyconfiguration of our search service as the default search provider during the download and installation of our publishers’ products and theand/or use of their services of our search servicesoffering and the subsequent searches performed by the users thereof. We therefore are constantly looking for more ways to distribute our search services through various means and collaborations. To achieve these goals, we rely heavily on third-party publishers to distribute our search syndication servicesoffering 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 with a more significant presence than ours and with greater capability to offer substantially more content.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 partnerspublishers to our offering. If the search engine companies engage more direct relationships with publishers or we are unable to maintain the technological advantage to service our partners,publishers, we may lose both existing and potential new partner publishers and our ability to generate revenues will be negatively impacted.impacted.
In order to receive advertisement-generated revenues from our search partners,providers, we depend, in part, on factors outside of our control.
The amount of revenue we receive from each of our search partnersproviders depends upon a number of factors outside of our control, including the amount thesesuch 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, each of the search partners makes judgmentsproviders make analysis about the relative attractiveness (to thetheir 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 partner’sproviders’ 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, could have an adverse effect on our business, financial condition and our results of operations. Such changeswhich could come about for a number of reasons, including general market conditions, competition or policy and operating decisions made by Microsoft or Google or our other search partners.providers, could have an adverse effect on our business, financial condition and our results of operations.
We have experienced a decline inMarket perception of our search solution has not always been favorable. Accordingly, we may experience difficulty expanding our search solution to new markets and extend our solution offerings in the event we suffer negative market perception has not been favorable. As a result,of our search activity or any other solution we may have difficulty stemming this decline or offsetting it by entering new markets.provide to our clients.
If we cannot maintain the commitment of our employees, recruit new employees and make the acquisitions required to enhance our organic activity, we may not be able to stem the decline in this businesscontinue to develop and grow our search activity and our financial results will suffer.be negatively impacted.
Our reputation has been and may continue to be negatively impacted by a number of factors, including the negative reputation associated with search assets, search setting take-over, toolbars,configuration, product and service quality concerns, complaints by publishers or end users or actions brought by them or by governmental or regulatory authorities and related media coverage and data protection and security breaches. Moreover, the inability to develop and introduce monetization products and services that resonate with consumers and/or the inability to adapt quickly enough (and/or in a cost effective manner) to evolving changes to the Internet and related technologies, applications and devices, could adversely impact our reputation, and, in turn, our business, financial condition and our results of operations.
We rely heavily onShould the ability to offermethods used for the distribution of our search services to our publishers and, as a result of such action, to obtain and retain the search properties of their users. Should this method of distributionsolution, 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, particularly Microsoft, our ability to generate revenues from our users’ search activity could be significantly reduced.
Our
Agreements with search distributionproviders, such as our agreements with Microsoft, and other search partners require that we complycompliance with certain guidelines promulgated by them for the use of theirthe respective brands and services, including the manner in which their paid listings are displayed within search results, and that we establishthe establishment of guidelines to govern certain activities of third parties to whom we syndicate the search services are syndicated, including the manner in which those parties can acquire new users and drive search traffic to their websites and display paid listings.. Subject to certain limitations, our 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 ourthe search partners'partners’ guidelines, particularly Microsoft’s,whether by us or by third parties to which we syndicate paid listings or by the publishers through whom we secure distribution arrangements for our products could, if not cured, result in such companies'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, by our search partners, or the imposition of additional restrictions on our ability to syndicate paid listings or distribute our productssearch 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.
As a result, fewer and fewer substantial publishing partners are compliant with these requirements, resulting in the termination of our business relationship with them and increasing the concentration of revenues generated through each of our remaining partners. Should any of our large partnerships be deemed non-compliant, blocked or partner with another provider, it could be difficult to replace the revenues generated by that partnership and we would experience a material reduction in our revenues and, in turn, our business, financial condition and results of operations would be adversely affected.
Should the providers of the underlying platforms, particularly browsers, further block, constrain or limit our ability to offer or change search properties, or materially change their guidelines, technology or the way they operate, our ability to generate revenues from our users'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’s Internet Explorer, Microsoft Edge and Mozilla’s Firefox, accounting for over 90%88% of the desktop browser market in the aggregate in 2017,2019, and Google’s Chrome alone accounting for over 63%69%, based on StatCounter reports. In June 2014,the past years, Internet browser providers such as Google restricted the ability to install multi-purpose extensions onto its Chrome Internet browser. As most of our products and services offered such multi-purpose extensions at that time, this policy shift adversely affected our business. Since then, Google continued to further changeMicrosoft made changes and update itsupdated their policies and technology in general, and specifically those relating to Chrome.change of search settings. Each such change further limits and constrains our ability to offer or change search properties. TheIn addition, the desktop operating system market is very concentrated as well, with Microsoft Windows dominating over 83%77% of the market in 2017,2019, and Apple operating systems accounting for 11%14% of that market, based on StatCounter reports. In addition, duringDuring 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 underlying 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 substantially allsubstantial part of our search revenue generation and services are currently not usable on mobile platforms. Also, web-based software and similar solutions are impacting the attractiveness of downloadable software products.
TheHistorically, the market related to desktop computers has accounted for substantially allsubstantial part of our search revenues. AsIn recent years, there has been a trend towards shifting Internet usage continues to shift from desktop computers to mobile devices there is downward pressure on desktop revenues in general and in our search solution in particular. Recently, the number of individuals who access the Internet through devices other than desktop computers, such as mobile phones, tablets, etc., has While in 2014 desktop worldwide market share was 71.03% it declined to 45.71% in 2017 and was later stabilized and increased dramatically. While we have begun developingto 47.74% in 2019, based on StatCounter reports; on the other modelshand, mobile worldwide market share in 2014 was 28.97% rising to 54.09% in 2017 and solutions for mobile platforms and we have acquired Make Me Reach SAS (“Make Me Reach”) and Interactive Holding Corp. and its subsidiaries (collectively referreddeclining to as “Undertone”), our search and application services are not yet compatible with these alternative platforms and devices and substantially all of our search revenue to date has come from desktop computers.52.26% in 2019, based on StatCounter reports. If this trend towards using the Internet on non-desktop devices accelerates some ofand desktop usage will decline, our servicessearch offerings will become less relevant and may fail to attract advertiserspublishers 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. 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 revenues 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 revenues will be negatively impacted.
We may incur losses as a result of unforeseen or catastrophic events, including the recent outbreak of the Coronavirus
The occurrence of unforeseen or catastrophic events such as terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency), could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our business. In particular, the current outbreak of novel coronavirus (2019-nCov) that was first reported from Wuhan, China, on December 31, 2019, presents concerns that may dramatically affect our ability to conduct our business effectively, including, but not limited to, our inability to attend certain industry-related conferences in the affected region. The trajectory of the coronavirus remains uncertain and it is becoming increasingly plausible, notwithstanding the travel restrictions and quarantines already imposed by China and other countries, that our business, including the livelihood of our employees and customers upon both of which our business relies, may be directly affected. At this stage, we are unable to asses the scope of the impact on our business and operations and in the event that the economic effect of the outbreak deepens and has a long term effect on the global economy, our business and operations may be adversely effected.
Risks related to our Financial and Corporate Structure
If we fail to comply with the terms or covenants of our debt obligations, our financial position may be adversely affected.
As ofIn December 31, 2017, we had convertible bonds outstanding having2018, ClientConnect Ltd. entered into a new loan facility with Mizrahi Tefahot Bank Ltd., an aggregate principalIsraeli bank, in the amount of approximately NIS 86.1$25 million (then equivalent to approximately $24.8 million).which includes certain financial covenants In the event that we fail to comply with the terms or covenants of our convertible bondsthe loan facility and cannot obtain a waiver of noncompliance, we may face certain deteriorations in the terms of the loan facility and be required to immediately repay all of our outstanding indebtedness and the bond trusteebank may be entitled to exercise the remedies available under the applicable agreementloan facility and applicable law.
In addition, if Undertone fails to comply with the terms and/or covenants secured loan agreement, 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 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 instrumentsloan facility could result in a material adverse effect on us.
For further information, see “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Credit facilities.”
The terms of our credit facilities contain some restrictive covenants that may limit our business, financing and investing activities.
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.
In addition, certain covenants also limit our flexibility in planning for, or reacting to, changes in our business and our industry. Complying with these covenants limits our tax planning abilities,cash management, our ability to pay dividends and may impair our ability to finance our future operations, acquisitions or capital needs or to engage in other favorable business activities.
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. 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 employees as well. If we cannot attract and retain additional 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. See “Item 6 Directors, Senior Management and Employees.”
We have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and management attention and have in the past and could in the future, cause further dilution to our shareholders and adversely affect our financial results.
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, Captain Growth in March 2019 and Content IQ in January 2020, and we may 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. 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 revenues 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.
WeIn 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 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.
In 2017, we recorded an impairment charge in the total amount of approximately $85.7 million. In particular, our Undertone reporting unit is at risk for goodwill impairment based on the volatility of this business and the market within which it competes. Seemillion - see Item 5A.5A “Operating and Financial Review and Prospects-Operating Results-Critical Accounting Policies and Estimates-Goodwill.” 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.
Several shareholders may be able to control us.
As a result of the ClientConnect Acquisition,March 9, 2020, we have several shareholders of Conduit became significant shareholders of Perion, including three shareholders, that each beneficially ownholds 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.shares. 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 any other large 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 them.
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 20172019 and March 2018,2020, our share price has fluctuated from a high of $2.38$9.70 to a low of $0.83,$2.51, and the daily average trading volume has been relatively low.in that period was 241,307 (and for the period of January 1, 2019 and until December 31, 2019, was 184,867). The following factors may cause significant fluctuations in the market price of our ordinary shares:
| · | fluctuations in our quarterly revenues and earnings or those of our competitors; |
negative fluctuations in our quarterly revenues and earnings or those of our competitors;
| · | 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; |
| · | shortfalls in our operating results compared to levels forecast by us or securities analysts; |
| · | changes in our senior management; |
| · | changes in regulations or in policies of search engine companies or other industry conditions; |
| · | mergers and acquisitions by us or our competitors; |
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;
| · | technological innovations; |
shortfalls in our operating results compared to levels forecast by us or securities analysts;
| · | the introduction of new products; |
changes in our senior management;
| · | the conditions of the securities markets, particularly in the Internet and Israeli sectors; and |
changes in regulations or in policies of search engine companies or other industry conditions;
| · | political, economic and other developments in Israel and worldwide. |
mergers and acquisitions by us or our competitors;
technological innovations;
the introduction of new products;
the conditions of the securities markets, particularly in the Internet and Israeli sectors; and
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 12, 2018,9, 2020, there were outstanding an aggregate of 13,352,4845,088,885 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, wheneversince the U.S. dollar declinesdeclined in value in relation to the NIS, it willhas 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$0.2 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 2017.2017, increasing by approximately 8% in 2018 and decreasing by approximately 8% in 2019. As of December 31, 2017,2019, we had a foreign currency net liability of approximately $15.8$12.7 million (which number includes approximately $16.7$8.0 million in long-term NIS denominated convertible bonds that we issuedto the Right of Use liability relates to our offices in Israel in September 2014)Israel), and our total foreign exchange gainloss was approximately $0.2$1.0 million for the year ended December 31, 2017.2019. 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.area. 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.
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 termlong-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,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 NASDAQNasdaq 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 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 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.
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.
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, as well as 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,Nasdaq, we follow certain home country corporate governance practices instead of certain NASDAQNasdaq requirements.
As a foreign private issuer, whose shares are listed on NASDAQ,Nasdaq, we are permitted to follow certain home country corporate governance practices instead of certain requirements contained in the NASDAQNasdaq listing rules. We follow the requirements of the Companies Law in Israel, rather than comply with the NASDAQNasdaq 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 for a more complete discussion of the NASDAQNasdaq Listing Rules and the home country practices we follow. As a foreign private issuer listed on NASDAQ,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’sNasdaq’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 “Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions” 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.
If we do not satisfyWe must meet the NASDAQ requirements forGlobal Select Market’s continued listing our ordinary shares could be delisted from NASDAQ.
Our listing on the NASDAQ Stock Market is contingent on our compliancerequirements and comply with the NASDAQ’s conditions for continued listing. One of such conditions is maintaining a bid price for our ordinary shares of least $1.00 per share. Recentlyother Nasdaq rules, or we may risk delisting. Delisting could negatively affect the price of our ordinary shares, dropped below $1.00 perwhich 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.If 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 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send us a deficiency notice giving us 180 calendar days to regain compliance, such as by effecting a reverse share split.our securities. There iscan be no assurance that our share price will not continueordinary 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 be below $1.00 per share for a periodraise additional capital, adversely affect the market liquidity of 30 consecutive business days or, if it does, that we will be able to regain compliance in a timely manner. If our ordinary shares, are delisted from NASDAQ, their liquidityreduce security analysts’ coverage of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our share price may decline.
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 NASDAQNasdaq Global Select Market and on TASE. Trading in our ordinary shares on these markets is effected in different currencies (U.S. dollars on NASDAQNasdaq 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 financial performance may be materially adversely affected by information technology, insufficient cyber security and other business disruptions.
Our business is constantly challenged and may be impacted by disruptions, including information technology attacks or failures. Cybersecurity attacks, in particular, are growing and evolving risk, and often are difficult or impossible to detect for long periods of time or to successfully defend against. Such attacks 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, 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. In addition, if we suffer a highly publicized security breach, even if our platform and solutions perform effectively, such a breach could cause us to suffer reputational harm, lose existing commercial relationships and customers or deter customers from purchasing additional solutions and prevent new customers from purchasing our solutions.
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.
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 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 mobile marketing 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 revenues 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. 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, 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 telecommunicationhosting providers to operate our websites and web-based services. Temporary failure of these services, including catastrophic or technological interruptions, would materially reduce our revenues and damage our reputation, and securing alternate sources for these services could significantly increase our expenses and be difficult to obtain.
Our third-party Internet and telecommunication providers may experience disruptions, which would reduce our revenues and increase our costs. We own servers located in Israel, Europe and the United States and we also rent the services of approximately 400750 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 revenues.revenues, in addition, the services of such providers could be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security 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 backup 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.
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 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.
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.
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 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 established in the European Union. The General Data Protection Regulation (which will go into effectbecame effective in May 2018) will likelypresumably have an even wider territorial scope, broadenbroadened the definition of personal data to include location data and online identifiers, and imposeimposes more stringent user consent requirements. Further, it will includeincludes 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. Similarly, there have been laws and regulations adopted in Israel and throughout the United States (including the California Consumer Privacy Act (2018) which became effective on January 1, 2020) that wouldmay 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 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, 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. 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 industry self-regulatory groups that promulgate best practices or codes of conduct relating to digital advertising, including the Internet Advertising Bureau, the Network Advertising Initiative and the Digital Advertising Alliance.Alliance as well as us TAG Certified Against Fraud. We 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 provision of Internet advertising, our reputation may suffer and we could lose relationships with both buyers and sellers.
For more information regarding government regulations to which we are subject, see “Item 4.B Business Overview — Government Regulation” for additional discussion of applicable regulations affecting our business.
If we are deemed to be non-compliant with applicable data protection laws, or are even thought to be so, our operating results could be materially affected.
We collect, use, and maintain certain data about our customers (including, without limitation, customers' clients or users), partners, employees, leads and consumers. Such collection and maintenance of information is subject to data protection laws and regulations. A failure to comply with applicable regulations could result in class actions, governmental investigations and orders, administrative fines 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 operating 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 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 and preservation practices or that it may be argued that our practices do not comply with other countries'countries’ privacy and data protection laws and regulations. In addition to the possibility of fines, such a situation could result in the issuance of an order requiring that we change our data collection or retention practices, which in turn could have a material adverse effect on our business. See “Item 4.B Business Overview — Government Regulation” for additional discussion of applicable regulations.
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.
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 result in a material adverse effect on our revenue.
23Certain countries in the European Union and elsewhere have recently adopted taxation on digital services including digital advertising, in various forms, such proposed taxes may have an impact on us.
Under current Israeli, U.S., U.K., French and German 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., 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 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 byor 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 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. 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. Recent caseCase 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 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.
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 revenues have been concentrated within the North American market, accounting for approximately 78%75% of our revenues for 2017.2019. A significant reduction in the revenues 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 revenues, 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 OECDOECD’s Inclusive Framework (“BEPS”)).
More specifically, the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) was approved by CongressThe OECD’s Inclusive Framework on December 20, 2017, and signed into law by President Donald J. Trump on December 22, 2017. This legislation makes significant changesBEPS has recently made certain recommendations, informally known as BEPS 2.0, which aim to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Such changes include a reduction in the corporate tax rate, changes inmodify international taxation norms with respect to allocation of taxing rights and limitationsintroduction of minimum taxation, focusing mostly on certain corporate deductionsthe digital economy. Currently, there is uncertainty as to what modifications will be made in these recommendations and credits, among other changes.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. Prospective investors 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 revenues from users outside the United States. Our international operations and sales are subject to a number of inherent risks, including risks with respect to:
| · | 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; |
| · | costs and delays associated with translating and supporting our products in multiple languages; |
| · | foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products more expensive in those countries; |
26potential 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;
| · | costs of compliance with a variety of laws and regulations; |
costs and delays associated with translating and supporting our products in multiple languages;
| · | restrictive governmental actions such as trade restrictions and potential trade wars; |
foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products more expensive in those countries;
| · | limitations on the transfer and repatriation of funds and foreign currency exchange restrictions; |
costs of compliance with a variety of laws and regulations;
| · | compliance with different consumer and data protection laws and restrictions on pricing or discounts; |
restrictive governmental actions such as trade restrictions and potential trade wars;
| · | 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; |
limitations on the transfer and repatriation of funds and foreign currency exchange restrictions;
| · | 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; |
compliance with different consumer and data protection laws and restrictions on pricing or discounts;
| · | lower levels of credit card usage and increased payment risk; |
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;
| · | changes in domestic and international tax regulations; and |
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;
| · | geopolitical events, including war and terrorism. |
lower levels of credit card usage and increased payment risk;
changes in domestic and international tax regulations; and
geopolitical events, including war and terrorism.
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 Middle Eastsurrounding region may directly affect our business directly.and operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurredtaken place between Israel and its Arab neighbors,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, (an Islamist militiathe Palestinian Authority and political groupother 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 Gaza Strip)region. Foreign actors have and Hezbollah (an Islamist militiacontinue to intervene in Syria. This instability 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 instabilityany intervention may lead to deterioration of the political and economic relationships that exist between the State of Israel and thesesome of the countries and have raised concerns regarding security in the region, and may have the potential for armed conflict.additional conflicts in the region. In addition, Iran has threatened to attack Israel and is believed tomay be developing nuclear weapons. Iran is also believed to havehas a strong influence among extremist groups in the Syrian government,region, including Hamas in Gaza, Hezbollah in Lebanon and Hezbollah.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 potentially escalate in the future to more violent events, which may affect Israel and us. These situations, includingAny armed conflicts, which involved missile strikes against civilian targets in various parts of Israel, such as the Gaza conflictterrorist activities or political instability in the summer of 2014, have in the past negatively affectedregion 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 Israel. Any hostilities involving Israel could have a material adverse effect onorder to meet our business operating results and financial condition. Although such hostilities did not inpartners face to face. In addition, 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 contractsagreements involving performance in Israel 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 locatedprovisions in Israel, we could experience serious disruptions if acts associated with any and all of the above mentioned conflicts result in any serious damage to our facilities. such agreements.
Our business interruptioncommercial insurance maydoes not adequately compensate us forcover losses that may occur and anyas 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 future armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations and make it more difficult for us to raise capital.operations.
Several countries, principallyFurther, in the Middle East, restrict doing business withpast, the State of Israel and Israeli companies and additionalhave been subjected to economic boycotts. Several countries may impose restrictions on doingstill restrict business with the State of Israel and with Israeli companies whether as a resultcompanies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of hostilitiesour 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 region or otherwise.event of a military conflict, may be called to active duty. In addition,response to increases in terrorist activity, there have been increased effortsperiods 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 activists to cause companies and consumers to boycott Israeli companies based on Israeli government policies.such call-ups, which may include the call-up of members of our management. Such actions, particularly if they become more widespread, maydisruption could materially adversely impactaffect our business, prospects, financial condition and results of operations.
On Israel’s domestic front there is currently a level of unprecedented political instability. The Israeli government has been in a transitionary phase since December of 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel held general elections twice – in April and September – and a third general election was held in March of 2020. The Knesset, for reasons related to this extended political transition, has failed to pass a budget for the year 2020, and certain government ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient funding moving forward. Given the likelihood that the current political stalemate might not be resolved during the next calendar year, our ability to conduct our business effectively may 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, 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:
| · | subject to limited exceptions, the judgment is final and non-appealable; |
subject to limited exceptions, the judgment is final and non-appealable;
| · | the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state; |
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
| · | the judgment was rendered by a court competent under the rules of private international law applicable in Israel; |
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
| · | the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts; |
the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;
| · | adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; |
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
| · | the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; |
26
| · | 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 |
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
| · | 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 judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and
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. Any of the following could have a material effect on our overall effective tax rate:
| · | we may be unable to meet the requirements for continuing to qualify for some programs; |
we may be unable to meet the requirements for continuing to qualify for some programs;
| · | these programs and tax benefits may be unavailable at their current levels; or |
these programs and tax benefits may be unavailable at their current levels; or
| · | we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions. |
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 – Operating and Financial Review and Products” under the caption “Taxes on income,” in “Item 10 – Additional Information” under the caption “Israeli taxation, foreign exchange regulation and investment programs” and in Note 1415 to our Financial Statements.
If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
Non-U.S. corporations generally may be characterized as a passive foreign investment company (“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 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 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 for our current taxable year or any future taxable year. 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. However, if the IRS successfully challenged our valuation of our assets, or if the market price of our ordinary shares were to fluctuate, 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, we cannot give any assurances that we will not be considered a PFIC for any future taxable year.
See a discussion of our PFIC status in Item 10.E under “U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Considerations.”
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 972-73-3981000.972-73-398-1000. 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 340 Madison Avenue, 8thOne World Trade Center, 77th Floor, Suite A, New York, NY 10173-0899.10007.
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.
Since 2011,In the recent years, we completed several acquisitions, including the acquisition of ClientConnect Ltd. in 2014, and the acquisition of Interactive Holding Corp. in 2015, which we refer to, together with its subsidiaries, as “Undertone”.“Undertone,” the acquisition of Septa Communications LLC, also known as “Captain Growth”, in March 2019 and the acquisition of Content IQ LLC in January 2020.
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 and is not incorporated by reference herein.
Principal Capital Expenditures
In 2015,2017, 2018 and 2019, capital expenditures consisted of $1.6 million, $2.0 million mainly from investments in computer hardware and software. In 2016 and 2017, capital expenditures consisted of $1.5 million and $1.6$1.2 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 and equity financings.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 or debt securities.equity.
B. BUSINESS OVERVIEW
General
Perion is a global technology company that deliversis bringing innovation to the ad-tech market by providing agencies, brands and publishers with advanced solutions that enable them to establish deeper, more meaningful and profitable relationships with their consumers and users. Perion created an AI-based advertising solution that aligns with the consumers’ journey in multiple touchpoints across funnels/platforms/channels. Perion is poised to benefit from macro trends, as the dominance of the triopoly – with Google, Facebook and Amazon controlling 85% percent of ad spend – means that brands, advertisers and publishers are seeking friendlier and more flexible options that respect their brands, users, and need for monetization.
Perion’s solutions cover the three main pillars of digital advertising, positioning us to benefit from rapid shifts in media strategy, spending and allocation by offering our data-driven, Synchronized Digital Branding platform and high-impact ad display formats; our powerful advertising cloud platform and our branded search network. In addition, each of these pillars is being enhanced by Content IQ, a company we acquired in January 2020. Content IQ brings advanced personalization benefits to brands and publishers. Perionadvertisers by customizing content at the landing page level; this platform is committedequally meaningful to providing outstanding execution, from high-impact ad formatspublishers who need to brandedgenerate and monetize increased traffic.
Because search is one of our pillars, and as part of our deep partnership with Microsoft Bing, we launched, in early 2020, Privado – a unified social and mobile programmatic platform. private search engine, enabling us to capitalize on the growing consumer trend for online privacy; more than 70% of consumers are privacy conscious based on recent research.
OverviewOverview: Advertising
Our advertising solution specializesis driven by our Synchronized Digital Branding platform which sits at the center of our strategic triangle as illustrated below.
Our ability to solve the ad-tech fragmentation is gaining traction in providing digital advertisingthree parallel vectors: Undertone is delivering synchronization to Agencies; MakeMeReach, our Advertising Cloud Platform, is delivering it to Brands; and Content IQ is bringing it home to Publishers.
Undertone:
Over its 18-year history, Undertone has provided cutting-edge technology and multichannel, multiplatform solutions for some of the world’s leading brands, agencies and publishers. We providepublishers - with whom we have longstanding and meaningful relationships.
Undertone is also known for our customers high-quality, cross-screen digitalhigh-impact, brand-building ad and video units, which are capable of breaking through the clutter, as well as building and enhancing reputations. By combining data, distribution and creative, we are able to deliver cohesive stories across all critical touchpoints: screens, platforms and a transparent, customizable list of elite publishers.
Our AI-driven cloud platform, which powers our strategic triangle, delivers advertising across desktop, mobile (websolutions that eliminate fragmentation, assist publishers in generating much-needed revenue and, app) and social channels. Our ad formats, coupledmost importantly, ensure that brand messaging is synchronized for contextual relevance with award-winning creative, are designed to attract and engage audiences, helping brands connect to consumers and drive business results. We leverage our proprietary technology platform and programmatic capabilities to give our customers the ability to serve the right creative to the right audience at the right time. message and optimized ad spend.
Our customers receive dedicated support throughout the full campaign cycle, including planning, creative services, client solutions, campaign management, performance and insights. We have long-standingdo all this while maintaining brand safety and meaningful relationships with majorapplying quality standard as our customer demanding.
Advertising Cloud Platform:
This platform is specifically suited for brands and advertising agencies, across the United Statessmall and Europe.large, who need to accomplish three critical and related objectives:
Our proprietary social marketing platform offers a dashboard for marketers that makes media buying more efficient• Attract audiences on diverse channels, such as Facebook, Instagram, TwitterGoogle, Amazon, LinkedIn, Snapchat, Pinterest and other social networksTwitter;
• Distribute the execution of these campaigns across a range of stakeholders, including agencies, franchises and platforms.branches; and
With our social marketing platform, customers can acquire users from the industry’s top-performing social traffic sources including Facebook, Twitter, Snapchat and Instagram, and can access their performance data and revenue information• Measure results in one place, enabling themunified, actionable and intuitive dashboard that is made possible by our AI capabilities and simplified nature of our user experience.
We accomplish all this, and generate peak performance, while protecting brand equity from being adversely impacted by multiple contributors to make better, quicker and more intelligent decisions and helping mobile application advertisers improve user acquisition, maximize their return on investment and ultimately meet their business goals. The platform allows advertisers to control their marketing expenditures, planning and strategy in-house and utilizecampaign execution along the technical tool to create better operational marketing efficiencies. value chain.
Content IQ:
We offer our customersacquired Content IQ in January 2020 as we saw the opportunity to easilycomplement their capabilities with our strategic advertising triangle solution. They bring significant value to publishers whose revenues are being squeezed by the triopoly, and efficientlywho lack the ability to customize their landing pages in a way that “synchronizes” their content with ever-changing user states, needs and intents.
Content IQ operates in the digital publishing space, utilizing data and analytic tools to deconstruct content, revenue and distribution in order to solve digital publishing challenges and drive traffic to owned and operated properties as well as those of our network of publishers. These tools understand and dynamically react to the performance of digital content across millions of engagement moments and optimize every element along the way, at scale. Content IQ’s page-level engagement solutions offer innovative tools for extracting value from content, enabling publishers and brands to monetize their properties through real-time optimization.
CodeFuel:
CodeFuel is a search platform that competes in an estimated market of $64 billion search ad spending category for 2020 according to eMarketer reports, which represents 42% of all digital ad spending. Microsoft Bing has been our partner for a decade; according to Microsoft, they have 556 million unique global PC users, deliver 140 billion annual searchers; generates $7.6 billion in revenue in the 2019 fiscal year and has garnered an 11.3% worldwide PC market share. CodeFuel, through its publisher network, delivered 12 million daily searches in 2019 compared to 9 million daily searches in 2018, which represents an increase their expenditures, reduce churn and improve retention through engagement campaigns. Customers also receive ongoing analysis and optimization of their campaigns for increased return on investment and scaling of their key performance indicator goals.33% YOY.
While we focus on the advertising market, we continue to generate significant revenues and profits by providing search-basedCodeFuel’s search based monetization solutions for our publishers withare leveraged by enhanced analytics platform and capabilities to track and monitor their business performance. From the end user perspective, we enable
Publishers integrate our solutions into their products and services such as content websites, browser extensions and mobile launcher applications and monetize their solutions at scale across their digital properties, by delivering Microsoft Bing’s high quality search results to validated traffic, thus satisfying and engaging users. End users tocan configure their browser settings through the search setting dialogue so they are powered by ourproviding them convenient access to search-engine partners. Publishers can chooseproviders and the ability to implement our solution into or with their products and services (mobile and desktop) and to monetize their users’ search assets.
Our search related products enable end users to, among other things, replace their search assets with ours, where users may conduct searches or follow links to advertisements that advertisers may display. They also allow publishersrelevant advertisements.
The revenue generated depends on factors such as the quality of users conducting search queries, rates search providers are charging for advertisements; the ability of the search provider’s system to set up syndicated searches on their individual websitesattract advertisers and efficiently serve sponsored ads, the engagement of end users with the advertisements and the value of the algorithmic results provided in response to monetize their users’ other search assets. queries.
In addition, we are still generatingcontinue to generate a small portion of our revenues through our toolbar platform,consumer product - Smilebox, a product that enables people to tell the stories of their lives - big and small - in fun, simple and creative ways with fully customizable eCards, slideshows, invitations, collages and more.
Industry Overview: Advertising
Our search, advertising and content solutions - which are largely driven 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 50% of total worldwide media advertising during 2019, reaching $330 billion and expected to increase to $500 billion and approximately 60% of worldwide advertising spend by 2023. In 2019, US display advertising spend, including banners, rich media, video and social, was approximately $105 billion and expected to increase by 36% and reach $143 billion in 2021, 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 internet-connected TV. Furthermore, cross-channel technologies such as automatic content recognition (ACR), which allows publishersadvertisers to create, implementconnect brand messaging across television and distribute web browser toolbars, as well as through our consumer products; Smilebox, a photo sharingdigital channels, will further enable the convergence of ad spend. Our proprietary Synchronized Digital Branding platform positions us in the sweet spot of these trends.
Advertisers, including major brands, are increasingly allocating media advertising budgets to digital channels and social expression product, and IncrediMail, a unified messaging application that enables consumers to manage multiple email accounts in one place with an easy-to-use interface and extensive personalization features. Currently these products account for only 5% of our revenues and are profitable. Our consumer products are currently available in seven languages in addition to English.
Markets
In general, we work with advertising agencies, advertisers, publishers and other inventory suppliers, and search partners.formats. While we work with some advertisers directly, our primary advertising customers are advertising and media agencies, who are paidengaged by brand advertisers to develop and implement their media plans. We work with these advertisers and agenciesboth sides of the market to plan, design, deliver, manage, and measure their digital advertising campaigns.
investments. We generally do not enter into long term contracts with our advertising customers. We charge customers, variable ratesbut respond to requests for specific campaigns, and are compensated based on ad formats, campaign complexity, impressions, and creative requirements. We then engage in a consultative
Undertone addresses the display advertising market through direct and programmatic media sales process to determine the best offering 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 foras well as managed service or self-service.and self-service advertising campaign management tools. Programmatic customers benefit from increased automation, transparency and efficiency of their campaigns All our advertising customersresulting efficiency. Clients receive support throughout the campaign cycle, which starts with service and support teams including planning, client solutions, campaign management, performance, and insights.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. 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 $39.84 billion of US digital display ad spend in 2019 and is expected to increase by 65%, reaching $65.6 billion in 2023, 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 2019, topping $34.57 billion, and is expected to reach $59.45 billion by 2023, representing an increase of 72%, according to eMarketer. Additionally, US spending on digital sponsorships, which include branded content pages and full-page sponsorships, will reach over $3 billion in 2020, 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 2019, social networks accounted for $36.14 billion representing 28% of the US digital ad spending, which is expected to increase by 41% and reach $50.86 billion of US digital ad spending by 2021,which would represent 29.6% of the US digital ad spending.
Users are devoting more and more time to social networks, estimated to reach more than 55.3 minutes per day on social networks in 2021 in the US, representing 13.3% of time spent on digital media in 2021. Furthermore, emerging and new social networks, such as Instagram, Snapchat and TikTok, are further expanding the audiences and demographic reach of social networks.
It is estimated that 86.5% of digital display ads will be transacted through programmatic channels by 2021, 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 recent regulatory developments, including GDPR and CCPA, as well as existing and planned limitations to be enacted by major web browser publishers, including Google, 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. These include:
Development of audience and content targeting;
Leveraging first-party data from social networks via integrations with Facebook and other major social networks,
Content IQ’s ability to create page level engagement without the new privacy parameters;
Undertone’s contextual targeting;
CodeFuel’s search and intent-based targeting through our partnership with Microsoft Bing.
Search
In 2019, US search advertising spend reached $55.17 billion and expected to increase by 56% reaching $73 billion in 2021, representing 42.5% of US digital ad spending, according to eMarketer.
Search is the past, we generatedmost intent-based form of advertising, as advertisements are served in direct response to the majority of our revenues from services agreementssearch queries, resulting in relevant advertisements yielding significant revenue to the search engine companies. Our search-related products address the market by engaging with ourpremium search partners. Search-generated revenues accounted for 78% in 2015, however as we shifted our focus to advertising outside of search, search generated revenues accounted for 50% of our revenues in 2016. In 2017, search generated revenues accounted for 46% of our revenues. Through our search technology, including syndication, we offerproviders like Microsoft, and offers end users the ability to search the Internet via easily embedded search boxes powered by premiumfunctionality in different search companies, includingassets.
The search engine market is highly competitive as providers such as Google, Microsoft, GoogleVerizon Media and Yahoo, and depending onother smaller players, seek to gain more market share. We believe such competition will increase utilization of our search solution, which enables search providers to increase their market share.
The factors that drive the ability of our search partner poweringengine partners to increase their revenue per search, include the search and the location in which the search was initiated, we receive portion of the revenues generated by these companies through the search process.
We are currently one of the largest redistributorsavailability of search monetization in the United States and we generate substantially all our search revenues through our relationship with Microsoft Bing. The fees payable by Microsoft under the Renewed Microsoft Agreement (as the case was with the Microsoft Agreement), 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.
Strategy
Our goal through our advertising offering isinventory relative 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 and engaging ad units. To address all of our customers’ digital advertising needs with a comprehensive solution, we offer “high impact” ad unitsdemand, as well as standardinternal pricing dynamics. As search market continues to grow and non-standard ad formats in desktop, mobile (webwe continue to expand our search solution, the revenue earned by us and app), and social channels. We define “high impact”our partners is expected to grow as advertising that captures the attention of consumers, including video and non-standard rich media features and functionalities.well.
The key components to our advertising solutions are:
Creative Ad Units
We 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 that works with clients to design, build and execute custom ad campaigns.
Our formats, each with a suite of interactive features, can be deployed across desktop, mobile and tablet (“cross-screen”) 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 leverage mobile-native functionality such as tap, swipe, shake and tilt in order to deliver an engaging consumer experience.
Quality Media
In order to be effective, advertisements must be delivered in media environments that reach the right audiences. We hand-pick a broad portfolio of premium media properties that are rigorously vetted using quantitative and qualitative criteria. Qualified publishers are then put through a certification process to ensure proper delivery of our formats. Approved publishers are placed on Undertone’s “Green List” and are subsequently continuously monitored for inappropriate content and suspicious traffic.
Proprietary Technology Platform
Our proprietary technology platform supports our mission of delivering high-quality digital experiences for our clients. Key features of our platform include:
| · | HTML5-based ad creation platform and production tools that allow for the rapid creation of high impact creative ads and the development of new ad formats. |
| · | Programmatically enabled buying and selling, allowing our clients to increase efficiency and campaign flexibility. |
| · | Brand safety and quality filters to help ensure our clients’ messages are placed in the safe, appropriate and on-brand environments. |
| · | The Undertone Data Management System (UDMS), which enables us to capture, process and analyze data associated with ad campaigns in order to deliver better results to our clients. |
| · | An ad delivery and decision-making engine that enables us to deliver sophisticated pacing and performance monitoring as we execute campaigns. |
Service and SupportGrowth Strategy
Our strategy is to grow our business by offering advertising, search, awareness and performance solutions to the world’s leading brands, agencies and publishers. These solutions 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 advertising.
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. To accelerate this process, we completed several acquisitions, including the most recent acquisitions of Septa Communication LLC in March 2019 (known as “Captain Growth”) and the acquisition of Content IQ LLC in January 2020, to allow us to expand our capabilities and maximize our existing businesses.
We are able to execute on our growth strategy objectives through the following elements:
Our advertising offering targets brands that are focused on their relationship with serviceconsumers. They recognize that their reputation and support before, duringability to compete are determined by meaningful connections that are sequentially delivered by relevant, high-quality creative, across all platforms in brand-safe environments. Our Synchronized Digital Branding platform is differentiated by our award-winning ad units that deliver impactful and afterengaging messages, based on data-driven capabilities that reach consumers at the campaign cycle. right time, with the right messages across all screens and platforms, through a transparent and customizable list of elite publishers through both direct and programmatic channels as we expect that spending on programmatic ad buying will continue to grow as both advertisers and publishers continue to adopt programmatic advertising.
Growth through high-speed opportunities
Our growth strategy also contemplates the migration to 5G networks and the growing access to high-speed Internet. Video content that takes advantage of faster delivery, as well as the growth of connected TVs, 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 clientthat offer our advertising clients enhanced features and functionalities to reach their consumers, including through the utilization of analytic tools such as ACR (Automated Content Recognition) TV viewership data.
Growth Through the Content Publisher Side
Through our content publisher solution, provided through the recently acquired Content IQ, we provide advertisers the ability to serve advertisements which are relevant to the end-user’s interests, beside relevant optimized content and page-level reader engagement. We connect our Synchronized Digital Branding platform to a digital publishing optimization platform, using proprietary data algorithms and analytic tools that dynamically link publisher content and audience interest to maximize return on ad spend.
Growth Through Search
Our search solution, operated through CodeFuel, leverages our relationship with Microsoft Bing 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 planning teams utilizemonetization tools to diversified publishers around the globe. We do this through a consultative, solutions-driven approachvariety of digital properties, including websites, apps, extensions, and search engines.
In addition, to strategically diversify our revenue sources and extend our products suite and partners we are embedding our search functionality in our new products, thus increasing our monetization potential; for example, we are introducing new products such as Privado - our privacy-enabled search engine - that get distributed through a variety of partners including not just our traditional publishers, but also brand and enterprise opportunities.
Growth Through Pricing
We are offering and exploring new pricing models such as Software as a Services (“SaaS”) and other models in order to developexecute on our strategy to have a more predictable and sustainable revenue streams. We are productizing our technology to enable agencies and other customers to directly offer their consumers and brands with our platforms’ capabilities through SaaS based plans.
Technology
The Design principles of our technologies and research and development efforts consist of the appropriatefollowing elements:
Supply and publisher integration;
Demand generation (direct and indirect);
Executional channels (Programmatic and Direct).
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 9 key components:
Supply Management Platform;
Demand Management Platform;
High Impact Programmatic Market Place;
Data Management Platform;
Advertising Cloud platform.
Supply Management Platform
The Supply management platform operationalizes relationships with our publishers by treating every impression in an optimal manner, and 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 for each individual client. Ourand 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 teams overseeinsights 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 aspectsthe required data based on reach and impressions delivered, budget invested engagement metrics, etc. The analytics platform supports our data driven culture – providing business stakeholders full visibility of clientKPI’s on key processes while facilitating data and reporting in a self-service manner, with pre-build dashboards and reports.
High Impact Programmatic Marketplace
Our High Impact Programmatic Marketplace is a platform that allows our advertisers to buy from us in an automated fashion. This marketplace is built on the standard programmatic infrastructure so advertisers have the flexibility of using different systems and platforms to buy from us. Our advertisers maintain full control and have transparency into our inventory, bidding in real time to purchase available supply.
Creative Rich Media Platform
The creative platform is a key component of our Synchronized Advertising Branding 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.
Data Management Platform
Our data management platform (DMP) is at the heart of our Synchronized Digital Branding platform. Its main functionality is to manage available data on a user level, what messages an individual user was exposed to, how that user responded, what third party information can make that data richer, and so on. The DMP is connected to all key systems to inform campaign planning, delivery, optimization, creative optimization and analytics. In addition to user level data, the DMP manages various data assets and the data is collected at scale with well-defined schemas. Data assets managed in the DMP are used to support data driven objectives and services like analytic and AI processes.
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.
Advertising cloud platform
The advertising cloud 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 complexity of cross channel advertising for brands and agencies while optimizing performance through AI.
Content Management Platform
Our content publisher platform, was acquired with our purchase of ContentIQ; the tech is composed of the following systems that can power both Content IQ owned and operated websites, and those of third-party publishers
Content management platform;
Content web sites management system;
Content monetization system; and
Content Management Platform
The content management platform supports the process of planning, creation, testing and measurement of content articles. The platform provides tools for content creators to structure their content in a variety of formats to optimize performance for unique audience segments. Once content articles are deployed, the management backend serves the content at scale and with the supporting analysis tools that enable continuous optimization at scale.
Content Web Site Management System
The content web site management system supports the process of website creation, testing, optimization and analysis. The platform provides tools for publishers to build dynamic sites driven by a powerful configuration system, which can be optimized to deliver elastic content in a dynamic page layout. The content articles are sourced from the content management system and served at scale.
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 viewability measures.
Distribution System
The distribution system provides publishers with AI-powered tools to distribute content articles to optimized audience segments, at scale, on a variety of platforms. Its campaign management components automatically manage, through machine learning capabilities, thousands of campaigns - adjusting the bids and budgets in real time. The distribution system optimizes campaigns based on revenue attribution technology which ties the content management, content web sites and content monetization systems together, In order to ensureoptimize margins and revenues.
Search Solution:
The technology of our search solution is composed of the following systems:
Publishers management system;
Search demand management system;
Privado – a privacy-focused search engine
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 they meetenable 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 clients’ objectives. Finally,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 researchsearch solutions optimizes the various phases of the funnel including intent detection and insights team provides clients with campaign results, keydemand optimization to yield performance metricsoptimization and critical analysis in order to provide useful feedback to clients.maximized consumer experience.
InnovationPrivado - a privacy-enabled search engine
Privado delivers private search results, leverages proprietary technology, to let users freely search online without being tracked. Privado does not store personal user data, and all search terms are encrypted so that they are not visible in the browser’s history.
To maintain
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, 2015, 20162017, 2018 and 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, 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'semployee’s or consultant’s rights in respect of inventions.
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, Oath,Verizon Media, Google, and Facebook. New entrants and companies that do not currently compete with our advertising 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, AskVerizon 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, InfoSpaceSystem1 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.
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 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. The California Consumer Privacy Act (2018) became effective on January 1, 2020 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.