This, together with other advertisement-blocking technologies incorporated in or compatible with leading internet browsers and operating systems, could impact our (as well as those of our competitors) advertising business. These changes could materially impact the way we do business, and if we or our advertisers and publishers are unable to quickly and effectively adjust and provide solutions to those changes, there could be an adverse effect on our revenue and performance.
The digital advertising industry has experienced substantial evolution and consolidation in recent years and we expect this trend to continue, increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge.
We are currently able to serve, track and manage advertisements for our customers as well as for our own operations, on a variety of networks and websites. The consolidation trend could substantially harm our ability to operate if such consolidated companies decide not to permit us to serve, track or manage advertisements on their websites and/or on our properties, if they develop ad placement systems that are incompatible with our ad serving capabilities or if they use their market power to force their customers to use certain vendors on their networks or websites and/or on our properties.
Certain of our primary advertisers and publishers are owned, affiliated with or controlled by a small number of large holding companies. If any of these holding companies decide to reduce, amend or terminate their business relationship with us for any reason, and/or in case there is a rapid and/or significant decline in inventory available to us, it may lead to a material adverse impact on our business, financial conditions and results of operation.
If the demand for digital advertising does not continue to grow or customers do not embrace our solutions, this could have a material adverse effect on our business financial conditionand results of operation.
Due to our evolving business model and rapid changes in the industry in which we operate and the nature of services we provide, it is difficult to accurately predict our future performance and may be difficult to increase revenue or profitability.
We depend on supply sources to provide us with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner.
Our supply sources typically make their advertising inventory available to us on a non-exclusive basis and are not required to provide any minimum amounts of advertising inventory to us or to provide us with a consistent supply of advertising inventory, at any predetermined price or through real time bidding. Supply sources often maintain relationships with various sources of demand that compete with us, and it is easy for supply sources to quickly shift their advertising inventory among these demand sources, or to shift inventory to new demand sources, without notice or accountability. Supply sources may also seek to change the terms at which they offer inventory to us, or they may allocate their advertising inventory to our competitors who may offer more favorable economic terms, better solutions and advanced technology. Supply sources may also elect to sell all, or a portion, of their advertising inventory directly to advertisers and agencies, or they may develop their own competitive offerings, which could diminish the demand for our solutions. In addition, significant supply sources within the industry may enter into exclusivity arrangements with our competitors, which could limit our access to a meaningful supply of inventory. As a result of all of these factors, our supply sources may not supply us with sufficient amounts of high-quality digital advertising inventory in order for us to fulfill the demands of our advertising customers.
Additionally, our ability to access advertising inventory in a cost-effective manner may be constrained or affected as a result of a number of other factors, including, but not limited to:
Because of these factors, we seek to expand and diversify our supply sources; nonetheless, if our supply sources terminate or reduce our access to their advertising inventory, increase the price of inventory or place significant restrictions on the sale of their advertising inventory, or if platforms or exchanges terminate our access to them and we are unsuccessful in establishing or maintaining our relationships with supply sources on commercially reasonable terms, we may not be able to replace this with inventory from other supply sources that satisfy our requirements in a timely and cost-effective manner. If any of these happens, our revenue could decline or our cost of acquiring inventory could increase, which, in turn, could lower our operating margins and materially adversely affect our advertising business. For additional information see also the Risk Factor titled - “The consolidation among participants within the digital advertising market could have a material adverse impact on our business, financial condition and results of operations.”
Maintaining and enhancing our brands is an important aspect of our efforts to attract and expand our SSPs (Supply Side platforms) agency, advertiser, DSPs (Demand Supply Platforms) and publisher base. We have spent, and expect to continue spending considerable sums and other resources on the establishment, building and maintenance of our brands, as well as on enhancing market awareness of them. Our brands, however, may be negatively impacted by a number of factors, including but not limited to, fraudulent, inappropriate or misleading content on our own sites and those we operate, as well as on publishers’ sites on which we serve ads, service outages, product malfunctions, data protection and cybersecurity issues, and exploitation of our trademarks by others without our permission. If we are unable to maintain or enhance our brands in a cost-effective manner, our business and operating results could be materially adversely affected.
In addition to compliance with applicable laws and regulations, we voluntarily participate in industry self-regulatory bodies such as the Network Advertising Initiative, or the NAI, and the Digital Advertising Alliance, or DAA, which promulgate best practices or codes of conduct addressing, inter alia, privacy and the delivery of digital advertising. Undertone also voluntarily participates in several of such trade associations and industry self-regulatory groups, including the NAI, the DAA, the InternetInteractive Advertising Bureau (IAB) and TAG Certified Against Fraud. If we or Undertone are unable to follow and abide by the rules and principles provided by such self-regulatory bodies and/or align the conduct of our business and practices with changes to such rules and principles, we may be subject to investigations by such self-regulatory bodies or other accountability groups, our customers and partners as well as users. Handling such actions may require us to devote financial and managerial resources, require us to change our business practices, andor cause damage to our brand, which in turn could materially adversely affect our business, financial condition and results of operations. We also could be adversely affected by new or altered self-regulatory guidelines that are inconsistent with our current practices or in conflict with applicable laws and regulations in the United States, Europe, Israel and other regions where we do business. If we fail to abide by or are perceived as not operating in accordance with industry best practices or any industry guidelines or codes with regard to privacy or the delivery of digital advertising, our reputation may suffer and we could lose relationships with both buyers and sellers.sellers which may adversely affect our business and results of operations.
We may be unable to deliver advertising in a brand-safe environment, which could harm our reputation and cause our business to suffer.
It is important for advertisers that their advertisements are not placed in or near content that is unlawful or would be deemed offensive or inappropriate by their customers, or near other advertisements for competing brands or products. While we strive to have all of our online advertisements appear in a brand-safe environment, we cannot guarantee that they will be delivered in such an environment. If we are not successful in doing so, our reputation could suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek to avoid payment or demand refunds, any of which could harm our business, financial conditionscondition and results of operations.
The advertising industry is highly competitive. If we cannot compete effectively and overcome the technological gaps in this market, our revenues arerevenue is likely to decline.
We face intense competition in the marketplace. We operate in a dynamic market that is subject to rapid development and the introduction of new technologies, products and solutions, changing branding objectives, evolving customer demands rules, regulations and industry guidelines, all of which affect our ability to remain competitive. There are a large number of digital media companies and advertising technology companies that offer products or services similar to or more compelling than ours and that compete with us for finite advertising budgets and for limited inventory from publishers. Additionally, companies that do not currently compete with us in this space may change their services to be competitive if there is a revenue opportunity, and new or stronger competitors may emerge through consolidations or acquisitions. If our digital advertising platform and solutions are not perceived as competitively differentiated or we fail to develop adequately to meet market evolution, or acquire companies to help us overcome the technological gaps in a timely manner and meet the market demands, we could lose customers and market share or be compelled to reduce our prices and harm our operational results.
Our reputation is a key factor in our ability to compete successfully. There is no assurance that our ability to compete effectively in the future may not be affected by negative market perception. Because of these factors, we continuously seek to diversify our product suite to respond to the changing needs and interests of our customers to benefit from a variety of different offerings, however, we cannot guarantee that we will always be able to accommodate such needs, that such efforts would yield the expected revenue or that we will adapt quickly enough (and/or(or in a cost effective manner) to evolving changes in the industry in which we operate and related regulations, technologies, applications and devices, which could adversely impact our reputation, and, in turn, our business, financial condition and results of operations.
Our advertising business is susceptible to seasonality, unexpected changes in campaign size and prolonged cycle time, which could affect our business and results of operations.
The revenue of our advertising business is affected by a number of factors, including:
Historically, in most cases our advertising business experienced the lowest revenue levels in the first quarter and the highest revenue levels in the fourth quarter, with the second and third quarters being slightly stronger than the first quarter (except for 2020 as a result of the initial effect of COVID-19);
Product and service revenue are influenced by political advertising in the US, which generally occurs every two years;
In any single period, product and service revenue and delivery costs are subject to significant variation based on changes in the volume and mix of deliveries performed during such period;
Revenues areRevenue is subject to the changes of brand marketing trends, including when and where brands choose to spend their money in a given year;
Advertising customers generally retain the right to supplement, extend, or cancel existing advertising orders at any time prior to their completion,delivery, and we have no control over the timing or magnitude of these revenue changes; and
Relative complexity of individual advertising formats, and the length of the creative design process.
As a result, in most cases, our profit from these operations is seasonal, with the fourth quarter being the major contributor to our profits and the first quarter possibly resulting in a loss.the lowest profit.
If our campaigns are not able to reach certain performance goals or we are unable to measure certain metrics proving achievement of those goals, this could have a material adverse effect on our business.
Our advertising clients expect and often demand that our advertising campaigns achieve certain performance levels based on metrics such as user engagement, view-ability,view ability, clicks or conversions, to validate their value proposition, particularly as ourwe offer costlier premium advertising services can be costlier.to clients. We may have difficulty achieving or proving these performance levels for a variety of reasons (for example, it may be difficult to track view-abilityview ability on our proprietary high-impact ad units, either directly or through a third-party vendor), which could cause clients to cancel campaigns, not provide repeat business or request make-goods or refunds.
Increased availability of advertisement-blocking technologies could limit or block the delivery or display of advertisements by our solutions, which could undermine the viability of our business, financial condition and results of operations.
Advertisement-blocking technologies, such as mobile apps or browser extensions that limit or block the delivery or display of advertisements, are currently available for desktop, tablet and mobile users. Further, new browsers and operating systems, or updates to current browsers or operating systems, offer native advertisement-blocking technologies to their users, such as the support of Google Chrome in blocking advertisements from web sites that violate the “Better Ads Standards” established by the Coalition for Better Ads (in which Undertone is a member). Furthermore, users can employ their own ad blocking client-based technology or use a browser that block ads. As such technologies or practices become widespread, this could have a material adverse effect on our business, financial condition and results of operations.
Our advertisingAdvertising business depends on our ability to collect and use data, and any limitation on the collection and use of this data could significantly diminish the value of our solutions and cause us to lose customers, revenue and profit.
In mostmany cases, when we deliver an advertisement, we are often able to collect certain data about the content and placement of the ad, the relevancy of such ad to a user and the interaction of the user with the ad, such as whether the user viewed or clicked on the ad or watched a video. As we collect and aggregate data provided by billions of ad impressions and third-party providers, we analyze the data in order to measure and optimize the placement and delivery of our advertising inventory and provide cross-channel advertising capabilities. Our ability to access and utilize such data is crucial.
Our publishers or advertisers may decide not to allow us to collect some or all of this data or may limit our use of this data. Additional details regarding limitations on the collection and use of this data due to existing and new laws and regulations are provided below under “Risks Related to Regulatory Changes— Regulatory, legislative, or self-regulatory developments relating to e-commerce, internet advertising, privacy and data collection and protection, and uncertainties regarding the application or interpretation of existing laws and regulations, could harm our business and subject us to significant legal liability for non-compliance.”
If we do not continue to innovate and provide high-quality advertising solutions and services, we may not remain competitive, and our business and results of operations could be materially adversely affected.
Our success depends on our ability to provide customers with innovative, high-quality advertising solutions and services that foster consumer engagement. We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving industry standards, rules and regulations and consumer needs, and the frequent introduction of new products and solutions by competitors, as well as publishers themselves, that we must adapt and respond to in order to remain competitive. While developments in artificial intelligence in our industry may present significant opportunities to our business, at the same time, such developments may raise unexpected challenges, legal or technological, or may not function as expected.
Therefore, our continued success depends in part upon our ability to develop new solutions and technologies, enhance our existing solutions and expand the scope of our offerings to meet the evolving needs of the industry. As a result, we must continue to invest significant resources in research and development in order to enhance our technology and our existing solutions and services, and introduce new high-quality solutions and services.
Our operating results will also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunity or are not effectively brought to market. If we are unable to accurately forecast market demands or industry changes, if we are unable to develop or introduce our solutions and services in a timely manner, or if we fail to provide quality solutions and services that run without complication or service interruptions or do not respond properly to the ever changing technological landscape, we may damage our brand and our ability to retain or attract customers. As online advertising technologies continue to develop, our competitors may be able to offer solutions that are, or that are perceived to be, substantially similar to or better than those offered by us. Customers will not continue to do business with us if our solutions do not deliver advertisements in an appropriate and effective manner, through a variety of distribution channels and methods, or if the advertising we deliver does not generate the desired results. In addition, advertising customers may find that content made available through our properties is not suitable for their advertising requirements or that our competitors offer content which is more lucrative and relevant to their advertising needs, resulting in reduction of their advertising spend with us. If we are unable to meet these challenges, our business, financial condition and results of operations could be materially adversely affected.
Sales efforts with advertisers and ad agencies require significant time and expense and may ultimately be unsuccessful.
Contracting with new advertisers and ad agencies requires substantial time and expenses, and we may not be successful in establishing new relationships or in maintaining current relationships. It is often difficult to identify, engage, and market to potential advertising customers who are unfamiliar with our brand or services, and we may spend substantial time and resources educating customers about our unique offerings, including providing demonstrations and comparisons against other available solutions, without ultimately achieving the desired results. In addition, there has been commoditization of services provided in digital advertising, resulting in margin pressure. Furthermore, many of our advertising clients’ purchasing and design decisions generally require input from multiple internal and external parties of these clients, requiring that we identify those involved in the purchasing decision and devote a sufficient amount of time to present our services to each of those decision-making individuals. We may not be able to reduce our sales and marketing expenses to correspond proportionately to periods of reduced revenue. If we are not successful in streamlining our sales processes with potential clients in a cost-effective manner, or if our efforts are unsuccessful, our ability to grow our business may be adversely affected.
Our growth depends in part on the success of our relationships with advertising agencies.agencies, DSPs and SSPs.
While we work with some brand advertisers directly, our primary advertising customers are advertising agencies, DSPs and SSPs who are paid by their brand or other advertiser customers to develop their media plans. The agencies, DSPs and SSPs 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.agencies, DSPs and SSPs.
Identifying agencies, DSPs and SSPs, engaging in sales efforts, and negotiating and documenting our agreements with agencies, DSPs and SSPs require significant time and resources. These relationships may not result in additional brand or other advertiser customers or campaigns for our business, and may not ultimately enable us to generate significant revenue. Our contracts with advertising agencies, DSPs and SSPs are typically non-exclusive and the agenciesthey often work with our competitors or offer competing services or solutions.
When working with agencies, DSPs and SSPs to deliver campaigns on behalf of their brand and other advertiser customers, we generally bill the agency, DSP and SSP for our products and services, and in most cases, the brand has no direct contractual commitment to us to make any payments. Furthermore, someWhile we have benefited from our relationships with the agencies, contractually limit their payment obligations to us through sequential liability provisions, whereby the agencyDSPs and SSPs we work with, there is liable for payment if, and only to the extent,no assurance that the agency collects a corresponding payment from the brand on whose behalf our services were rendered. Thesethese circumstances maydo not result in the future in longer collectionscollection 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, DSPs and SSPs on commercially reasonable terms or if the agencies are unable to effectively collect corresponding payments from the brands, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer.
If the demand for social advertising management platforms does not grow as expected, or if our solution for advertising through those channels is not competitive, the revenue related to our actionable performance monitoring platform could decline.
We leverage the capabilities of our actionable performance monitoring SaaS platform to offer our customers the ability to deliver ads on social networks. The future growth of our revenue in this marketcategory could be negatively impacted if consumers decreaseour software and service do not meet the time they spend engaging on social media sites or mobile applications. In addition, the demand for advertising in these channels, and the successexpectations of our social solutionsexisting and new customers. It is likely to happen in particular, may be constrained by the limited flexibility,event that our software is not continuously developed in order to address the increased requirements that are associated with advertising in these channels, and the social networks working through independent service providers. As a result, it is difficult to predict the future customer demand for our solution, and there is no guarantee that we will be able to generate significant revenue from our actionable performance monitoring platform.channels. In addition to the foregoing, our actionable performance monitoringpaid social advertising platform is dependent on our ability to create, optimize, and manage our customers’ advertising campaigns as well as retrieve and push advertising campaign data to myriad of networks and tools in real time, such as Facebook, Instagram, Messenger, Google, TikTok, LinkedIn, Snapchat, Pinterest and Twitter. We are subject to each social network’s respective terms and conditions governing our ability to access and utilize its platform. Our actionable performance monitoringpaid social advertising platform would be harmed if any of these social networks discontinues our partnership, makes changes to its platform, or modifies the terms and standards applicable to its marketing partners or to advertising on its platform in general. Moreover, these social networks may develop offerings or features that compete with or substitute our solution or may otherwise make changes to their platforms that would render our social advertising solution obsolete. Further, consumers may migrate away to other social networking platforms with which we are not affiliated, which would in turn decrease the demand for our solutions. Any of these outcomes could cause demand for our paid social marketingadvertising platform to decrease, our development costs to increase, and our results of operations and financial condition to be materially adversely affected.
Our searchproducts are dependent on the platform terms of use and policies that are subject to changes out of our control.
Most of our Products depend upon the platforms’ terms of use and policies (i.e., Google Chrome, Edge, Mozilla, Apple, and Microsoft) which could also affect the terms of use of other platforms in the industry. We do not control these platforms and cannot anticipate changes made to their policies, and as a result, we are subject to risks and uncertainties. These policies, guidelines and terms of service govern the promotion, distribution, content and operation generally of applications and content available through such platforms. Each platform has broad discretion to revise its terms of service, guidelines and policies, and those changes may have an adverse effect on us or our customers’ ability to use distribute the Products.
A platform may also limit the use of personal information and other data for advertising solution depends heavily upon revenue generatedpurposes or restrict how users can share information on their platform or across other platforms. If we or our customers were to violate the terms of service, guidelines, certifications or policies, or if a platform believes that we or our customers have violated, its terms of service, guidelines, certifications or policies, then that platform could limit or discontinue our or our customers’ access. In some cases, these requirements may not be clear and our interpretation of the requirements may not align with the interpretation of the platform, which could lead to inconsistent enforcement of these terms of service or policies against us or our customers and could also result in limiting or discontinuing access to its platform.
These platforms further frequently introduce new technology. Our reliance on their technology reduces our control over quality of service and exposes us to potential service outages.
Global economic and market conditions and actions taken by our customers, suppliers and other business partners in markets in which we operate might materially adversely impact us.
Negative conditions in the general economy, including conditions resulting from our agreement with Microsoft Bing,changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and any adverse changecredit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, warfare and terrorist attacks, could cause a decrease in that agreementbusiness investments, including spending on advertising, disrupt the timing and cadence of key industry events and otherwise could materially and adversely affect the growth of our business.
Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business financial condition and results of operations.
We are highly dependent on our search services agreement with Microsoft Irelands Operations Limited. In November 2020, we entered into a renewed agreement with Microsoft Ireland Operations Limited effective as of January 1, 2021 until December 31, 2024 (the “Microsoft Agreement”). In 2021, the Microsoft Agreement accounted for 37% of our revenue. In this annual report on Form 20-F we refer to Microsoft Corporation and its affiliates as Microsoft.
If our Microsoft Agreement is terminated or substantially amended (not on favorable terms), we would experience a material decrease in our search advertising revenue or the profits it generates and would be forced to seek alternative search providers, at less competitive terms or accelerate the business we have with such search providers. There are few companies in the market that provide internet search and search advertising services similar to those provided by Microsoft such as Google and Verizon Media. Such companies are substantially the only participants in western markets, and competitors do not offer as much coverage through sponsored links or searches. If we fail to quickly locate, negotiate and finalize alternative arrangements or otherwise expediate current operations we have with such alternative search providers, or if we do, but the alternatives do not provide for terms that are as favorable as those currently provided and utilized, we would experience a material reduction in our revenue and, in turn, our business, financial condition and results of operations would be adversely affected.
Our search advertising revenue business is highly reliant uponAdditionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions, and may continue to experience such disruptions in the future, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a small numberresult of publishers, who account for the substantial majority of pay-outs to publishers and generate most of our revenue. If we were to lose all or a significant portion of those publishers,these factors, our revenue may be affected by both decreased customer acquisition and results of operations would be materially adversely affected.
In 2020lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and 2021,extreme volatility. Similarly, the top five publishers distributing our search services accounted for approximately 22%ongoing military conflict between Russia and 19%, respectively, of our revenue. There can be no assurance that these existing publishers will continue utilizing the revenue-generating monetization services at the levels they didUkraine has created extreme volatility in the past or at all. The lossglobal capital markets and has caused and could continue to cause disruptions 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 revenuethe global supply chain and profitability.
The generation of search advertising revenue through large publishers is subject to competition. If we cannot compete effectively in this market, our revenues are likely to decline.
We obtain a significantenergy markets. While the portion of our revenue throughdirectly associated with Russia and Ukraine is not material to our consolidated financial results, our business may be affected by broader economic factors caused or intensified due to the configuration of our search service as the default search provider during the downloadinvasion.
Any such volatility and installation of our publishers’ products and/or use by their services of our search offering and the subsequent searches performed by the users thereof. To achieve these goals, we heavily rely on third-party publishers to distribute and/or implement our search offering as a value-added component of their own offerings. We are therefore constantly looking for more ways to distribute our search offering through various channels, including through independent distribution efforts of our owned and operated products and services. There are other companies that generate revenue from searches, some of themdisruptions may have other monetization solutions. The large search engine companies, including Google, Microsoft, Verizon Mediamaterial and others, have become increasingly aggressive in their own search service offerings. In addition, we need to continually maintain the technological advantage of our platform, products and other services in order to attract publishers to our offerings. If the search engine companies engage more direct relationships with publishers or we are unable to maintain the technological advantage to service our publishers, we may lose both existing and potential new publishersadverse consequences on us and our ability to generate revenue will be negatively impacted.
In order to receive advertising-generated revenue fromcustomers. Increased inflation and/or interest rates can adversely affect us by increasing our search providers, we depend,costs, including labor and employee benefit costs. Any significant increases in part, on factors outside of our control.
The amount of revenue we receive from search providers depends upon a number of factors outside of our control, including the amount such search providers charge for advertisements, the efficiency of the search provider’s systeminflation and related increase in attracting advertisers and syndicating paid listings in response to search queries and parameters established by it regarding the number and placement of paid listings displayed in response to search queries. In addition, search providers make analysis about the relative attractiveness (to their advertiser) of clicks on paid listings from searches performed on or through our search assets, and these judgments factor into the amount of revenue we receive. Changes in the efficiency of a search providers’ paid listings network, in its judgment about the relative attractiveness of clicks on paid listings or in the parameters applicable to the display of paid listings, which could come about for a number of reasons, including general market conditions, competition, inventory availability or policy and operating decisions made by Microsoft or other search providers,interest rates could have ana material and adverse effect on our business or our, financial condition and ouror results of operations.
ShouldFurther, to the methods usedextent there is a sustained general economic downturn and if there is a reduction in general demand and spending for digital advertising, our revenue may be disproportionately affected. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. We cannot predict the distributiontiming, strength or duration of our search solution, be blocked, constrained, limited, materially changed, based on a change of guidelines, technologyany economic slowdown, instability or otherwise (as has happened inrecovery, generally or within any particular industry. If the past), or made redundant by any of our search engine providers, our ability to generate revenue from our users’ search activity could be significantly reduced.
Agreements with search providers, such as our agreement with Microsoft, require compliance with certain guidelines promulgated by them for the useeconomic conditions of the respective brands and services, including the mannergeneral economy or markets in which paid listings are displayed within search results, and the establishment of guidelines to govern certain activities of third parties to whom the search services are syndicated, including the manner in which those parties can acquire new users and drive search traffic. Subject to certain limitations, search partners may unilaterally update their policies and guidelines, which could, in turn, require modifications to, or prohibit and/or render obsolete certain of our search solutions, products, services and practices, which could be costly to address or otherwise have an adverse effect on our business, our financial condition and results of operations. Noncompliance with the search partners’ guidelines, whether by us or by third parties to which we syndicate paid listings or by the publishers through whom we secure distribution arrangements could, if not cured, result in such companies’ suspension of some or all of their services to us, or to the websites of our third party publishers, or the reimbursement of funds paid to us, or the imposition of additional restrictions on our ability to syndicate paid listings or distribute our search solution or the termination of the search distribution agreement by our search partners.
These guidelines, with respect to method of distribution, homepage resets and default search resets to search engine services, were changed by both Microsoft and Google numerous times in the past, having negative revenue implications. Since then, both companies have continued instituting other changes to the policies governing their relationship with search partners. Should any of our large partnerships be deemed non-compliant, blocked or partner with another provider, it could be difficult to replace the revenue generated by that partnership and we would experience a material reduction in our revenue and, in turn, our business, financial condition and results of operations would be adversely affected.
Should the providers of platforms, particularly browsers, further block, constrain or limit our ability to offer or change search properties, or materially change their guidelines, technology or the way they operate our ability to generate revenueworsen from our users’ search activity could be significantly reduced.
As we provide our services through the internet, we are reliant on our ability to work with the different internet browsers. The internet browser market is extremely concentrated with Google’s Chrome, Microsoft Edge and Mozilla’s Firefox, accounting for over 83% of the desktop browser market in 2021, and Google’s Chrome alone accounting for over 67%, based on StatCounter reports. In the past years, internet browser providers such as Google and Microsoft made changes and updated their policies and technology in general, and specifically those relating to change of search settings. Each such change limits and constrains our ability to offer or change search properties. In addition, the desktop operating system market is very concentrated as well, with Microsoft Windows dominating over 74% of the market in 2021, and Apple operating systems accounting for 16% of that market, based on StatCounter reports. During 2015, Microsoft announced changes to its browser modifier detection criteria and issued a new operating system (Windows 10), which included a new default internet browser (Edge). In addition, in June 2018 Google limited the ability to install Chrome browser extensions only from within the Chrome Web Store. Some of these changes limited our ability to maintain our users’ browser settings. If Microsoft, Google, Apple or other companies that provide internet browsers, operating systems or other platforms, effectively further restrict, discourage or otherwise hamper companies, like us, from offering or changing search services, this would continue to cause a material adverse effect on our revenue and our financial results.
Currently most individuals are using mobile devices to access the internet, while substantial part of our search revenue generation and services are currently not widely spread on mobile platforms. Also, web-based software and similar solutions are impacting the attractiveness of downloadable software products.
Historically, the market related to desktop computers has accounted for substantial part of our search revenue. In recent years, there has been a trend towards shifting internet usage from desktop computers to mobile devices such as mobile phones, tablets, etc. While in 2016 desktop worldwide market share was 54.09% it declined to 45.91% in 2017 and stabilizing at 43.47% in 2021, based on StatCounter reports; on the other hand, mobile worldwide market share in 2016 was 45.91% rising to 54.09% in 2017 and stabilizing at 56.53% in 2021, based on StatCounter reports. If this trend towards using non-desktop devices accelerates and desktop usage will decline, our search offerings will become less relevant and may fail to attract publishers and web traffic. In addition, even if consumers do use our services, our revenue growth will still be adversely affected if we do not rapidly and successfully implement adequate revenue-generating models for mobile platforms to respond such decline in desktop.
Web (or “cloud”) based software and similar solutions do not require the user to download software and thus provide a very portable and accessible alternative for desktop computers, as compared to downloadable software. While there are advantages and disadvantages to each method and system and the markets for each of them remain large, the market for web-based systems is growing at the expense of downloadable software. Should this trend accelerate faster than our partners’ ability to provide differentiating advantages in their downloadable solutions, this could result in fewer downloads of their products and lower search revenue generated through the download of these products. See Item 4.B. “Business Overview—Competition” for additional discussion of our competitive market.
Our software or provision of search services or advertising is occasionally blocked by software or utilities designed to protect users’ computers, thereby causing our business to suffer.
Some of our products and offerings are viewed by some third parties, such as anti-virus software providers, as promoting or constituting “malware” or “spamming,” or unjustly changing the user’s computer settings. As a result, our software, the software of our publishers, provision of search services or advertising is occasionally blocked by software or utilities designed to detect such practices. If this phenomenon increases or if we are unable to detect and effectively deal with such categorization of our products, we may lose both existing and potential new users and our ability to generate revenue will be negatively impacted.
The global COVID-19 health pandemic has had and still has an ongoing adverse effect and could potentially severely affect,present levels, our business, results of operations and financial condition due to impacts on our industry, as well as impacts from remote work arrangements, actions taken to contain the virus or treat its impact,could be materially and the speed and extent of the recovery.adversely affected.
Health pandemics, such as COVID-19, have been, and could in the future adversely affect our business and operations. The COVID-19 pandemic and efforts to control its spread have imposed restrictions on the movement of people, goods and services worldwide, including in the regions in which we and our clients and partners operate, and have significantly impacted economic activity and financial markets. Many advertisers have decreased or paused their advertising spending as a response to the economic uncertainty, decline in business activity and other COVID-19-related impacts, which have negatively impacted, and may continue to negatively impact, our revenue and results of operations, the extent and duration of which we may not be able to accurately predict.
As a result of the COVID-19 pandemic, we have transitioned many of our employees into a hybrid model, where employees are working remotely for part of the week. The transition has had little impact on our employee productivity and has not caused any interruption to our business. Due to the uncertainty of COVID-19, we will continue to assess the situation, including abiding by any government-imposed restrictions, market by market.
It is possible that the hybrid working model could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in concerns related to privacy and fraud, heighten the risk of cyber incidents. Recently, organizations worldwide, including governments and commercial enterprises, have seen an increase in cyber-attacks, such as phishing and ransomware attacks, by bad actors taking advantage of the pandemic and remote workforces. Our own systems and those of third parties with which we work are also subject to such increased threats.
There are additional variables that impair our ability to accurately predict the impact that COVID-19 will have on our future operations. Despite the recent development and introduction of different vaccines to COVID-19, there is still much uncertainty as to the length of time that the pandemic and related disruptions will continue, the impact of governmental regulations or easement of regulations in response to the strengthening or weakening of the pandemic, and the degree of overall changes in consumer behavior. Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. For example, Israel, federal and state governments in the United States, France and Ukraine, the locations in which our primary offices are located, have imposed limitations on gatherings, social distancing measures and restrictions on movement, only allowing essential businesses to remain open. Such orders or restrictions have resulted in temporary store closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, any of which may negatively impact workforces, customers, consumer sentiment and the economies in many of our markets, and as a result, may further adversely affect our operations.
The COVID-19 pandemic may furthermore even lead to a global economic downturn that is more than temporary and could adversely affect the need for our services generally. A downturn could also have a material adverse impact on our business partners’ stability and financial strength. Given the uncertainties associated with COVID-19, it is difficult to fully predict the magnitude of potential effects on our and our business partners’ business, financial condition and results of operations as well as the effect on the other risk factors described herein. While we have a strong cash position and generate positive cash flow from our operations, we cannot guarantee that our financial condition will not be adversely affected in a material manner.
Risks related to our Financial and Corporate Structure
A loss of the services of our senior management and other key personnel could adversely affect execution of our business strategy.
We depend on the capabilities and experience, and the continued services, of our senior management. The loss of the services of members of our senior management could create a gap in management and could result in the loss of expertise necessary for us to execute our business strategy and thereby adversely affect our business. We do notrecently announced entering a CEO transition period, as Tal Jacobson, currently have “key person” life insurance with respectGeneral Manager of CodeFuel, our search advertising business, will be promoted to anyChief Executive Officer on August 1, 2023. Following Jacobson’s promotion, our current Chief Executive Officer, Doron Gerstel, will step down from the executive team and remain on our Board of our senior management.Directors.
Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled technical and creative personnel and skilled management, marketing and sales personnel, as well as third party technology vendors and other consultants and contractors. We operate out of different locations around the globe and competition for well-qualified employees in our industry is intense and our continued ability to compete effectively depends, in part, upon our ability to retain existing key employees and to attract new skilled and qualified employees as well, which can be difficult, expensive and time-consuming. If we cannot attract and retain additional experienced key employees or if we lose one or more of our current key employees, our ability to develop or market our products and attract or acquire new users could be adversely affected. Although we have established programs to attract new employees and provide incentives to retain existing employees, particularly senior management, we cannot be assured that we will be able to retain the services of senior management or other key employees as we continue to integrate and develop our solutions or that we will be able to attract new employees in the future who are capable of making significant contributions and we may face challenges in adequately or appropriately integrating them into our workforce and organizational culture. See Item 6. “Directors, Senior Management and Employees.”
Competition for highly skilled technical and other personnel mainly in Israel and in the United States is intense, and as a result we may fail to attract, recruit, retain and develop qualified employees, which could materially and adversely impact our business, financial condition and results of operations.
We compete in a market marked by rapidly changing technologies and an evolving competitive landscape. In order for us to successfully compete and grow, we must attract, recruit, retain and develop personnel with requisite qualifications to provide expertise across the entire spectrum of our intellectual capital and business needs.
Our principal research and development, certain sales and marketing as well as significant elements of our general and administrative activities are conducted at our headquarters in Israel and in the United States, and we face significant competition for suitably skilled employees in Israel. While thereIsrael and the United States. There has been intense competition for qualified human resources in the Israeli high-tech industry, historically,which may intensify at times of sharp growth of the industry, experienced record growth and activityas was the case in 2021, both at the earlier stages of venture capital, growth equity financings, exit stage of initial public offerings and mergers and acquisitions. This flurry of growth and activity has caused a sharp increase2021-2022, which resulted in job openings in both Israeli high-techhigh employee attrition. While recent layoffs carried out by large companies and Israeli research and development centers of foreign companies, and intensification ofpresent good recruitment opportunities to our company, our industry is still characterized by high competition between these employers to attract qualified employees in Israel. As a result, the high-tech industry in Israel has experienced significant levels of employee attrition and is currently facing a severe shortage of skilled human capital, including engineering, research and development, sales and customer support personnel.employers. Many of the companies with which we compete for qualified personnel have greater resources than we do, and we may not succeed in recruiting additional experienced or professional personnel, retaining personnel or effectively replacing current personnel who may depart with qualified or effective successors.
In addition, as a result of the intense competition for qualified human resources, the Israeli and U.S. high-tech market has also experienced and may continue to experience significant wage inflation. Accordingly, our efforts to attract, retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. Furthermore, in making employment decisions, particularly in the high-technology industry, job candidates often consider the value of the equity they are to receive in connection with their employment. Employees may be more likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly appreciated or significantly decreased in value. Many of our employees may receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us and could heighten the risk of employee attrition.
While we offer competitive equity and compensation terms as week as utilize non-competition agreements with our employees as a means of improving our employee retention, those terms and agreements may not be effective towards that goal. These non-competition agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. We may be unable to enforce these agreements under Israeli law, and it may be difficult for us to restrict our competitors from benefiting from the expertise our former employees developed while working for us.
In light of the foregoing, there can be no assurance that qualified employees will remain in our employ or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
We have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future, adversely affect our financial results.results
We acquired Make Me Reach (currently, Paragone) in February 2015 and Undertone in November 2015, Captain Growth in March 2019, Content IQ in January 2020, Pub Ocean Limited, or Pub Ocean in July 2020 and Vidazoo Ltd., or Vidazoo in October 2021 and we may continue to acquire complementary products, technologies or businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future, adversely affect our financial results. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business concerns and is expensive and time-consuming. Acquisitions expose us and our business to unforeseen liabilities or risks associated with the business or assets acquired or with entering new markets. In addition, we lost and might continue to lose key employees and vendors while integrating new organizations and may not effectively integrate the acquired products, technologies or businesses or achieve the anticipated revenue or cost benefits, and we might harm our relationships with our future or current technology suppliers. Future acquisitions could result in customer dissatisfaction or vendor dissatisfaction or performance problems with an acquired product, technology or company. Paying the purchase price for acquisitions in the form of cash, debt or equity securities may weaken our cash position, increase our leverage or dilute our existing shareholders, as applicable. Furthermore, a substantial portion of the price paid for these acquisitions is typically for intangible assets. We may be required to pay additional funds for earn-outs based on achievement of milestones, or may incur contingent liabilities, amortization expenses related to intangible assets or possible impairment charges related to goodwill or other intangible assets (which has occurred in the past) or become subject to litigation or other unanticipated events or circumstances relating to the acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, acquisitions may end upresult in losses, in unwanted results and waste ofwasting valuable resources, time and money.
In past years, we have recognized impairments in the carrying value of goodwill and purchased intangible assets. Additional such charges in the future could negatively affect our results of operations and shareholders’ equity.
We continue to have a substantial amount of goodwill and purchased intangible assets on our consolidated balance sheet as a result of historical acquisitions. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of intangible assets with identifiable useful lives represents the fair value of customer relationships, content, domain names and acquired technology, among other things, as of the acquisition date, and are amortized based on their economic or useful lives. Goodwill that is expected to contribute indefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually. If the carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse changes in the regulatory environment, a reduced market capitalization or other factors leading to reduction in expected long-term growth or profitability. Goodwill impairment analysis and measurement is a process that requires significant judgment. Our stock price and any control premium are factors affecting the assessment of the fair value of our underlying reporting units for purposes of performing any goodwill impairment assessment.
We will continue to conduct impairment analyses of our goodwill as required. Further impairment charges with respect to our goodwill would have a material adverse effect on our results of operations and shareholders’ equity in future periods.
Shareholders may be able to control us.
As of March 5, 2022,6, 2023, we have one shareholder that beneficially holds more than 5% of our outstanding shares. See Item 7.A. “Major Shareholders and Related Party Transactions—Major Shareholders” for more information. To our knowledge, this shareholder is not party to a voting agreement with respect to our shares. However, should this shareholder or any other shareholders decide to act together, they may have the power to control the outcome of matters submitted for the vote of shareholders. In addition, such share ownership may make certain transactions more difficult and result in delaying or preventing a change in control of the Company, unless approved by such shareholder.
Our share price has fluctuated significantly and could continue to fluctuate significantly.
The market price for our ordinary shares, as well as the prices of shares of other internet companies, has been volatile. Between January 20211, 2022, and March 2022,6, 2023, our share price on Nasdaq has fluctuated from a low of $12.24$17.15 to a high of $30.00,$35.76, and the daily average trading volume in that period was 856,284464,001 shares (and for the period of January 1, 20212022, and until December 31, 2021,2022, was 905,095)410,139 shares). The following factors may cause significant fluctuations in the market price of our ordinary shares:
negative fluctuations in our quarterly revenue 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;
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��smanagement’s attention and resources.
Historically, public companies that experience periods of volatility in the market price of their securities and/or engage in substantial transactions are sometimes the target of class action litigation. Companies in the internet and software industry, such as ours, are particularly vulnerable to this kind of litigation as a result of the volatility of their stock prices and their regular involvement in transactional activities. In the past, we were named as a defendant in this type of litigation in connection with our acquisition of ClientConnect, and although this lawsuit was dismissed, in the future litigation of this sort could result in considerable costs and a diversion of management’s attention and resources.
Future sales of our ordinary shares could reduce our stock price.
As of March 5, 2022,6, 2023, there were outstandingwas an aggregate of 3,977,5543,572,969 outstanding options to purchase our ordinary shares.shares and restricted share units (“RSUs”). 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, sincewhenever the U.S. dollar declineddeclines in value in relation to the NIS, it haswill become more expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS as compared to the U.S. dollar could impact our income before taxes by approximately $0.4$0.5 million. The exchange rate of the U.S. dollar to the NIS has been volatile in the past, decreasing by approximately 8%, 7% and 3% in 2019, 2020 and 2021, respectively.respectively and increased by 13% in 2022. As of December 31, 2021,2022, we had a foreign currency net liability of approximately $6.6$7.8 million (which number includes approximately $6.4$3.9 million in NIS denominated to the Right of Use liability relates to our offices in Israel), and our total foreign exchange loss was approximately $0.6$0.3 million for the year ended December 31, 2021.2022. To assist us in assessing whether or not, and how to, hedge risks associated with fluctuations in currency exchange rates, we have contracted a consulting firm proficient in this area. We may incur losses from unfavorable fluctuations in foreign currency exchange rates.
We do not intend to pay cash dividends.dividends in the foreseeable future.
Although we have paid cash dividends in the past, ourwe have not adopted a policy regarding the distribution of dividends a in the foreseeable future. Our current policy is to retain future earnings, if any, for funding growth and reducing our debt. If we do not pay dividends, long-term holders of our shares will generate a return on their investment only if the market price of our shares appreciates between the date of purchase and the date of sale of our shares.
Any future dividend distributions are subject to the discretion of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements, financial condition, and tax implications of dividend distributions on our income, future prospects and any other factors deemed relevant by our board of directors. The distribution of dividends is also limited by Israeli law, which permits the distribution of dividends by an Israeli corporation only out of its retained earnings as defined in Israel’s Companies Law, 5759-1999, or the Companies Law, provided that there is no reasonable concern that such payment will cause us to fail to meet our current and expected liabilities as they become due, or otherwise with the court’s approval. See Item 8.A “Consolidated Statements and Other Financial Information—Policy on Dividend Distribution” for additional information regarding the payment of dividends.
We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As an Israeli public company, traded on Nasdaq, we incur significant legal, accounting and other expenses. We incur costs associated with our public company reporting requirements as well as costs associated with corporate governance and public disclosure requirements, including requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the Nasdaq Stock Market, regulations of the SEC, the provisions of the Israeli Securities Law that apply to dual listed companies (companies that are listed on the Tel Aviv Stock Exchange Ltd. (“TASE”) and another recognized stock exchange located outside of Israel) and the provisions of the Israeli Companies Law 5759-1999 (the “Companies Law”) that apply to us. We have also contracted an internal auditor and a consultant for implementation of and compliance with the requirements under the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires an annual assessment by our management of our internal control over financial reporting of the effectiveness of these controls as of year-end. In connection with our efforts to comply with Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time, and we have hired, and may need to hire, additional accounting and financial staff to assure that we comply with these requirements. We are also required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. The additional management attention and costs relating to compliance with the foregoing requirements could adversely affect our financial results. See Item 5.A “Operating and Financial Review and Prospects—Operating Results—General and Administrative Expenses” for a discussion of our increased expenses as a result of being a public company.
If we lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with compliance with the U.S. securities laws applicable to U.S. domestic issuers.
We are a foreign private issuer, as such term is defined under U.S. federal securities laws, and, therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements applicable to U.S. domestic issuers. If we lost our foreign private issuer status, we would be required to comply with the reporting and other requirements applicable to U.S. domestic issuers, which are more extensive than the requirements for foreign private issuers and more expensive to comply with.
There can be no assurance that we will not be a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for any taxable year.
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the value of its assets (generally determined on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly, at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes. Goodwill is generally characterized as a non-passive or passive asset based on the nature of the income produced in the activity to which the goodwill relates.
We believe that we were not a PFIC for our 20212022 taxable year. However, there can be no assurance that we will not be a PFIC for the current or any future taxable year because our PFIC status is an annual determination that can be made only after the end of the relevant taxable year and will depend on the composition of our income and assets and the value of our assets from time to time (including the value of our goodwill, which may be determined, in large part, by reference to the market price of our ordinary shares, which has been, and may continue to be, volatile). Because the value of our goodwill may be determined by reference to our market capitalization from time to time, and because we hold and may continue to hold significant amounts of cash and cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase if our market capitalization declines.
If we are a PFIC for any taxable year during which a U.S. investor owns our ordinary shares, the U.S. investor could be subject to adverse U.S. federal income tax consequences. See “Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States exchanges, including our Company, have been faced with governance-related demands from activist shareholders, as well as unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders also could affect the market price and volatility of our securities.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require shareholders’ approval. There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
As a foreign private issuer, whose shares are listed on Nasdaq, we follow certain home country corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer (as such term is defined in Rule 3b-4 under the Exchange Act), whose shares are listed on Nasdaq, we are permitted to follow certain home country corporate governance practices instead of certain requirements contained in the Nasdaq listing rules. We follow the requirements of the Companies Law in Israel, rather than comply with the Nasdaq requirements, in certain matters, including with respect to the quorum for shareholder meetings, sending annual reports to shareholders, and shareholder approval with respect to certain issuances of securities. See Item 16.G. “Corporate Governance” in this Annual Report on Form 20-F for a more complete discussion of the Nasdaq Listing Rules and the home country practices we follow. As a foreign private issuer listed on Nasdaq, we may also elect in the future to follow home country practice with regard to other matters as well. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules to shareholders of U.S. domestic companies.
Provisions of our articles of association and Israeli law may delay, prevent or make an acquisition of our Company difficult, which could prevent a change of control and, therefore, depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a staggered board. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this annual report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, and Item 10.E. “Taxation—Israeli Taxation” for additional discussion about some anti-takeover effects of Israeli law.
These provisions of Israeli law may delay, prevent or make difficult an acquisition of our Company, which could prevent a change of control and therefore depress the price of our shares.
We must meet the Nasdaq Global Select Market’s continued listing requirements and comply with the other Nasdaq rules, or we may risk delisting. Delisting could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell securities in a financing and for you to sell your ordinary shares.
We are required to meet the continued listing requirements of the Nasdaq Global Select and comply with the other Nasdaq rules, including those regarding minimum shareholders’ equity, minimum share price and certain other corporate governance requirements. Delisting of our ordinary shares from the Nasdaq Global Select would cause us to pursue eligibility for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’ ability to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. There can be no assurance that our ordinary shares, if delisted from the Nasdaq Global Select in the future, would be listed on a national securities exchange or quoted on a national quotation service, the OTCQB or OTC Pink. Delisting from the Nasdaq Global Select Market, or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult for us to raise additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’ coverage of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our share price could be negatively affected and our shareholders would likely find it more difficult to sell, or to obtain accurate quotations as to the prices of, our ordinary shares.
Our ordinary shares are traded on more than one market and this may result in price variations.
Our ordinary shares are traded on both the Nasdaq Global Select Market and on TASE. Trading in our ordinary shares on these markets is effectedaffected in different currencies (U.S. dollars on Nasdaq and NIS on TASE) and at different times (resulting from different time zones, different trading days per week and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ, resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States and Israel. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.
22Increasing scrutiny from investors, customers and other market participants with respect to our Environmental, Social and Governance (“ESG”), policies could negatively affect the price of our shares or impose additional costs on us.
In recent years, increasing attention has been given to ESG policies of corporations across all industries, including with respect to climate change and diversity, equity and inclusion matters. We could fail to achieve, or be perceived to fail to achieve expectations, standards, and regulations on ESG matters as they continue to evolve, or may be perceived by investors, customers and other market participants to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so. As a result, we may experience reputational damage and the business, financial condition and price our company’s shares could be materially and adversely affected.
Our cash, cash equivalents and short-term deposits are subject to risks that may cause losses and affect the liquidity of these investments.
As of December 31, 2022, we had $429.6 million in cash, cash equivalents and short-term deposits. We regularly maintain cash, cash equivalent and short-term deposits at third-party financial institutions. We maintain and invest our cash and cash equivalents based on an investment policy approved by our investment committee of the board and by our board of directors. Our investment policy set various principles for managing our cash, including the rating level of third-party financial institutions in which we keep our cash, diversified portfolio and diversified countries of incorporation of the relevant financial institutions. These deposits and investments are subject to general credit, liquidity, market and interest rate risks. Further, we may be adversely affected by a crisis in the banking industry. For example, on March 10, 2023, the Federal Deposit Insurance Corporation, took control and was appointed receiver of Silicon Valley Bank, or SVB. We have not held funds at SVB other than a negligible amount. If banks and financial institutions enter receivership or become insolvent in the future and a portion of our cash, cash equivalents or short-term deposits is held in such banks and financial institutions, our ability to access our existing cash, cash equivalents and investments may be impacted and could have a material adverse effect on our business and financial condition.
Risks Related to Our Technological Environment
Our business and financial performance may be materially adversely affected by information technology issues, data breaches, cyber-attacks and other similar incidents, insufficient cyber security and other business disruptions.
Our business is constantly challenged and may be impacted by information technology issues, data breaches, cyber-attacks and other similar incidents, and other business disruptions experienced by us or our service providers. Data breaches, cyber-attacks, and other similar incidents, in particular, are a growing and evolving risk, and often are difficult or impossible to detect for long periods of time or to successfully defend against. Such attacks may include, but are not limited to, malicious software, computer viruses, ransomware attacks, denial-of-service attacks, social engineering, phishing attacks, worms, insider threats, human error or malfeasance, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, denial of services, unauthorized release of confidential or otherwise protected information, including personal data, corruption of data and overloading our servers and systems with communications and data. Data breaches, cyber-attacks and other similar incidents are increasing in frequency, levels of persistence, sophistication and intensity, are evolving in nature, and are conducted by organized groups and individuals with a wide range of motives and expertise, including organized criminal groups, “hacktivists,” terrorists, nation states, nation state-supported actors, and others. Unidentified groups have hacked numerous internet websites and servers, including our own, for various reasons, political, commercial and other. Any such incident, or any failure to make adequate or timely disclosures to the public, regulators, or law enforcement agencies following any such incident, could subject us or our service providers to substantial system downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, including personal data, the destruction or corruption of data, other manipulation or improper use of our systems and networks, violations of applicable privacy, data collection and protection and cybersecurity laws and regulations or notification obligations, legal claims, regulatory scrutiny or enforcement actions, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our cash flows, competitive position, financial condition and results of operations.
Although thesesuch attacks have caused certain difficulties, they have not had, to date, a material adverse effect on our business, financial condition or results of operations. However, given the unpredictability of the timing, nature and scope of such incidents, and because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, there can be no assurance that such attacks can be prevented, that such an incident is not occurring currently without our knowledge, or that any such incidents will not have a material adverse effect on us in the future. We may not be able to anticipate data breaches, cyber-attacks or other similar incidents, detect or react to such incidents in a timely manner, implement effective preventive measures against such incidents, or adequately remediate any such incident.
As cybersecurity threats continue to evolve, we may be requiredexpect to continue to expend significant additional resources to continue to maintain, modify or enhance our protective measures or to investigate or remediate any information security vulnerabilities, data breaches, cyber-attacks or other similar incidents. However, such measures as well as our response process, may not be adequate, may fail to identify or accurately assess the severity of an incident, may not respond quickly enough, or may fail to sufficiently remediate an incident. As a result, we may suffer significant legal, reputational, or financial exposure, which could harm our business, financial condition, and operating results.
While we generally perform cybersecurity diligence on our key service providers, because we do not control our service providers and our ability to monitor their cybersecurity is limited, we cannot ensure the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws and regulations or contractual obligations, we may be held responsible for data breaches, cyber-attacks or other similar incidents attributed to our service providers as they relate to the informationdata we share with them. In addition, if we suffer a highly publicized data breach, cyber-attack or other similar incident, even if our platforms and solutions perform effectively, such an incident could have an adverse effect and cause us to suffer reputational harm, lose existing commercial relationships and customers or deter existing customers from purchasing additional solutions and prevent new customers from purchasing our solutions.
We cannot ensure that any limitations of liability provisions in our agreements with customers, service providers and other third parties with which we do business would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim in connection with a data breach, cyber-attack or other similar incident. Additionally, we cannot be certain that our insurance coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
We have contractual and legal obligations to notify relevant stakeholders of security breaches. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving certain types of data. In addition, our agreements with certain customers and third-party partners may require us to notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity and may cause our customers to lose confidence in the effectiveness of our security measures. If we fail to make such notification within the mandatory time frames, we may be subject to penalties and legal actions.
A security breach could lead to claims by our customers, their users or other relevant parties that we have failed to comply with contractual obligations to implement specified security measures. As a result, we could be subject to legal action or our customers could end their relationships with us. Pursuant to the California Consumer Privacy Act, or the “CCPA” and the California Privacy Rights Act, or the “CPRA”, if we experience a security breach, California consumers could bring a private right of action claiming the breach was the result of our violation of the duty to implement and maintain reasonable security procedures and practices, which could be costly and cause reputational harm. Similarly, there is an increasing risk of class actions in the United Kingdom and Europe. Security breaches could also result in enforcement actions by government or regulatory authorities alleging that we have violated laws that require us to maintain reasonable security measures and comply with mandatory disclosure requirements.
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.consumers. We are exposed to the risk of fraudulent or suspicious impressions, clicks or conversions that advertisers may perceive as undesirable. Such fraudulent activities may occur when a software program, known as a bot, spider or crawler, intentionally simulates user activity causing impressions, ad engagements or clicks to be counted as real users. Such malicious software programs can run on single machines or on tens of thousands of machines, making them difficult to detect and filter.
We implement and use proprietary and third partythird-party technologies to identify fraudulent or suspicious impressions, clicks or conversions. Despite our efforts, it can be difficult to detect fraudulent suspicious activity for different reasons. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid or fraudulent activity could lead to dissatisfaction with our advertising services, refusals to pay, refund or make-good demands or withdrawal of future business. Any of these occurrences could damage our brand and lead to a loss of our revenue.
A loss of our technology systems or of the services of our technology vendors could adversely affect execution of our business strategy.
ShouldThe availability of our products and services and fulfillment of our customer contracts depend on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage, interference, or interruption from modifications or upgrades, terrorist attacks, natural disasters or pandemics (including COVID-19), the effects of climate change (such as sea level rise, drought, flooding, wildfires, and increased storm severity), power loss, telecommunications failures, computer viruses, ransomware attacks, computer denial of service attacks, phishing schemes, or other attempts to harm or access our systems. Some of our systems are not fully redundant, and disaster recovery planning cannot account for all eventualities.
Additionally, 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 platformplatforms and Solutions to keep pace with technological and market developments in our evolving industry.
To keep pace with technological developments, satisfy increasing developer requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving industry standards, we will need to regularly enhance our platform and solutions as well as develop and introduce new services on a timely basis. We also must update our software to reflect changes in advertising networks’ application programming interfaces (“APIs”), technological integration, data security and terms of use. The success of any enhancement or new solution depends on several factors, including timely completion, adequate quality testing, appropriate introduction and market acceptance. Our inability, for technological, business or other reasons, to timely enhance, develop, introduce and deliver compelling advertising services in response to changing market conditions and technologies or evolving expectations of advertisers or consumers could hurt our ability to grow our advertising business.
Our products operate in a variety of computer and device configurations and could contain undetected errors or defects that could result in product failures, lost revenue and loss of market share.
Our software and advertising products may contain undetected errors, failures or defects, especially when the products are first introduced or when new versions are released. Our customers’ computer and other device environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. As a result, there could be errors or failures in our products. In addition, despite testing by us and beta testing by some of our users, errors, failures or bugs may not be found in new products or releases until after commencement of commercial sales and distribution. In the past, we have discovered software errors, failures and defects in certain of our product offerings after their full introduction and have experienced delayed or lost revenue during the period required to correct these errors.
Errors, failures or defects in products released by us could result in negative publicity, product returns, make-goods, refunds, loss of or delay in market acceptance of our products, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expense and resources and could cause interruptions to our products.
We depend on third party internet, telecommunication and hosting providers to operate our platforms, websites and services. Temporary failure of these services, including catastrophic or technological interruptions, would materially reduce our revenue and damage our reputation, and securing alternate sources for these services could significantly increase our expenses and be difficult to obtain.
Our products operation as well as our internal conduct and daily management are supported by third-party internet, hosting, SaaS services, and telecommunication providers. Such providers may experience disruptions, which would reduce our revenue and increase our costs. We own servers located in Israel, Europe and the United States and we also rent the services of approximately 1,000thousands of servers located around the world, mainly through Amazon Web Services.world. Our servers include mainly web servers, application servers, data collection servers, data storage servers, data processing servers, mail servers and database servers. While we believe that there are many alternative providers of hosting and other communication services available to us, the costs associated with any transition to a new service provider could be substantial. Furthermore, although we maintain back-up systems for most aspects of our operations, we could still experience deterioration in performance or interruption in our systems, delays, and loss of critical data and registered users and revenue, in addition, the services of such providers could be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, power losses, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, a decision to close such providers facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions to our services. The facilities of such providers also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct.
Our systems are also not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage to compensate us for losses from a major interruption. Furthermore, interruptions in the services of our providers or their inability to meet the service capacity we require, could result in interruptions in the availability or functionality of our solutions or materially impede our ability to attract and onboard new customers to services and to maintain relationships with current customers. Difficulties of this kind could damage our reputation, be expensive to remedy and curtail our growth.
The introduction of new browsers and other popular software products may materially adversely affect user engagement with our search services.
Users typically install new software and update their existing software as new or updated software is introduced online by third-party developers. In addition, when a user purchases a new computing device or installs a new internet browser, it generally uses the internet search services that are typically pre-installed on the new device or internet browser. Our products are distributed online and are usually not pre-installed on computing devices. Further, as many software vendors that distribute their solutions online also offer search services alongside their primary software product, users often replace our search services with those provided by these vendors in the course ofwhile installing new software or updating existing software. After users have installed search solutions offered by us, any event that results in a significant number of our users changing or upgrading their internet browsers could result in the failure to generate the revenue that we anticipate from our users and result in a decline in our user base. Should we not be able to timely respond to such changes or in the event that the search solutions offered by vendors would offer better user experience than the one offered by us, this could have an adverse effect on our business, financial condition and our results of operations. Finally, although we constantly monitor the compatibility of our internet search services and related solutions with such new versions and upgrades, we may not be able to make the required adjustments to ensure constant availability and compatibility of such solutions.
Risks Related to Regulatory ChangesData Protection Regulations
Regulatory, legislative,Regulations, legislation or self-regulatory developmentsself-regulation relating to e-commerce, internet advertising, privacy, and data collection and protection, e-commerce and internet advertising and uncertainties regarding the application or interpretation of existing or newly adopted laws and regulations could harm our business and subject us to significant legal liability for non-compliance.
Our business is conducted through the internet and therefore, among other things, we are subject to the laws and regulations that apply to e-commerce and online businesses around the world. These laws and regulations are becoming more prevalent in the United States, Europe, Israel, Canada and elsewhere and may impede the growth of the internet and consequently our services. These regulations and laws may cover privacy, data collection and protection, location of data storage and processing, cybersecurity, e-commerce, content, use of “cookies,” access changes, “net neutrality,” pricing, advertising, distribution of “spam,”“spam” copyright and other intellectual property, libel, marketing, distribution of products, protection of minors, consumer protection, taxation and online payment services.
Many areas of the law affecting the internet remain largely unsettled, even in areas where there has been some legislative action.
For example, we collect, use, maintain and otherwise process certain data about our customers (including, without limitation, customers’ clients or users), partners, candidates and employees, consultants, leads and consumers. Our ability to collect, use, maintain or otherwise process personal data has been, and could be further, restricted by existing and new laws and regulations relating to privacy and data collection and protection, including the EU General Data Protection Regulation 2016/679 (the “GDPR”)., the CCPA as revised by the CPRA, the Israeli Privacy Protection Law, 1981 and the regulations thereunder (“Israeli Privacy Law”), as well as other laws. These laws and regulations generally define personal data to include location data and online identifiers, which are commonly used and collected parameters in digital advertising and, among other things, impose stringent user consent requirements and permit data subjects to request we discontinue using certain data. In addition, some countries are considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our services.
Additionally, the uncertainty created by these laws and regulations can be compounded when services hosted in one jurisdiction are directed at users in another jurisdiction. For instance, European data protection rules may apply to companies which are not established in the European Union (“EU”). The GDPR has an even widera wide territorial scope and contains significant penalties for non-compliance. The GDPR, among other things, imposes requirements to provide detailed and transparent disclosures about how personal data is collected and processed, grants rights for data subjects to access, delete or object to the processing of their personal data, provides for a mandatory breach notification to supervisory authorities (and in certain cases, affected individuals) of certain data breaches, sets limitations on the retention of personal data and outlines significant documentary requirements to demonstrate compliance through policies, procedures, training and audits. To further complicate matters in Europe, to date,Additionally, supervisory authorities in the member states have some flexibility when implementing European Directives and certain aspects of the GDPR, which can lead to diverging national rules. European supervisory authorities have been very active in terms of enforcing data protection rules, including with respect to cookie-related matters.
In the U.S., regulation of cookies and similar technologies, and any decline of cookies or similar online tracking technologies as a means to identify and potentially target individuals, may lead to broader restrictions and impairments on our business activities and negatively impact our efforts to understand users. While we are taking measures to shift away from third-party cookies based solutions, by using our proprietary cookieless solution, SORT® which enables advertisers to reach their audience in real time without storing any personally identifiable data, we still rely on cookies based solutions.
Most of our products and services are provided without a direct relationships with users, therefore, we rely on our customers or publishers to establish a legal basis (for example, to obtain the consent from the user) on our behalf to process their data, and to implement any notice or choice mechanisms required under applicable privacy laws, but if our customers do not follow this process (and in any event, as the legal requirements in this area continue to evolve and develop), we could be subject to liability.
The withdrawalRecent decisions by the Court of Justice of the United Kingdom (“U.K.”)European Union and recent guidance from the EU (“Brexit”) also has created uncertainty with regard to the regulation ofEuropean data protection inauthorities may further restrict our use of the United Kingdom. Since January 1 2021, when the transitional period following Brexit expired, we have been required to comply with the GDPRIAB Transparency Platform which our solutions rely on as well as limit the use of online tracking technologies which we rely on for protecting against fraud and personalization of the feeds and ads. In addition, the U.K.’s General Data Protection Regulation (“U.K. GDPR”) (combining, impose robust obligations for the GDPRcollection, control, use, sharing, disclosure and the UK’s Data Protection Actother processing of 2018), whichpersonal data and contains documentation and accountability requirements for data protection compliance. The U.K. GDPR exposes us to two parallel regimes (GDPR and U.K. GDPR), each of which authorizes similar fines and may subject us to increased compliance risk based on differing, and potentially inconsistent or conflicting, interpretation and enforcement by regulators and authorities (particularly, if the laws are amended in the future in divergent ways). Failure to comply with these obligations can result in significant fines and other liability under applicable law. In particular, under the GDPR, fines of up to EUR 20 million (or GBP 17.5 million under the U.K. GDPR) or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of the GDPR’s requirements. The GDPR requirements apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.
With respect to transfers of personal data from the European Economic Area (“EEA”), on June 28, 2021, the European Commission issued an adequacy decision in respect of the U.K.’s data protection framework, enabling data transfers from EU member states to the U.K. to continue without requiring organizations to put in place contractual or other measures in order to lawfully transfer personal data between the territories. While it is intended to last for at least four years, the European Commission may unilaterally revoke the adequacy decision at any point, and if this occurs, it could lead to additional costs and increase our overall risk exposure. Additionally, the European Commission is currently re-examining its Decision 2011/61/EU regarding the adequacy of Israeli law,Israel, in light of the GDPR and developments in Israeli privacy legislation, which could result in revoking Israel’s adequacy status for purposes of transfers of personal data from the EEA to Israel. The outcome of this examination may also affect the U.K.’s approach on the adequacy of Israeli law with respect to the U.K. GDPR, which could require us to further review and amend the lawful mechanisms by which we make and/or receive personal data transfers from the U.K. It is unclear how U.K. data protection laws or regulations will develop in the medium to longer term.
Additionally, recent legal developments in Europe have created complexityData privacy legislation restricts the cross-border transfer of personal data. Specifically, the GDPR and uncertainty regarding transfersother EEA and U.K. GDPR generally prohibit the transfer of personal data from the EEAEurope and U.K., to the United States. Most recently, on July 16, 2020,States and most other countries unless the transfer is to an entity established in a case knowncountry deemed to provide adequate protection (such as Schrems II,Israel or the Court of Justice ofU.K.) or the European Union (“CJEU”) invalidatedparties to the EU-US Privacy Shield Framework (“Privacy Shield”), under whichtransfer have implemented specific safeguards to protect the transferred personal data. Where we transfer personal data could be transferred fromoutside the EEA to U.S. entities which had self-certified undera country that is not deemed to be “adequate”, we take steps to comply with applicable laws, such as through implementing the Privacy Shield scheme. While the CJEU upheld the adequacy of theEuropean Commission’s standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield) (“SCCs”), it made clear that reliancehave been updated on SCCs alone may not necessarily be sufficient in all circumstances. The CJEU's decision also cast doubt overJune 4 2021, and the effectiveness of the SCCs.shift was completed by December 27, 2022. The European Data Protection Board which subsequently issued(“EDPB”) released a revised set of SCCs for organizations to utilize, released their commentscomment on the supplementary measures that can be usedcompanies may use to ensure a sufficient levelan 'EU level' of data protection when transferring personal data. The comments indicated that organizations need to perform a data transfer- such as conducting impact assessment to evaluatefor data transfers, and assess the use of SCCs on a case-by-case basis, taking into account the legal regime applicable in the destination country, and in particular applicable surveillance laws and rights of individuals as well as consider additional technical and that additionalorganizational measures and/or contractual provisions that may needbe needed to be put in place. However,On June 4, 2021, the natureEuropean Commission issued a new set of SCCs under the GDPR for data transfers. These modernized SCCs replace the three sets of SCCs that were adopted under the previous Data Protection Directive 95/46. Since September 27, 2021, it is no longer possible to conclude contracts incorporating these additional measuresearlier sets of SCCs. Until December 27, 2022, companies continued to rely on those earlier SCCs for contracts that were concluded before September 27, 2021. In addition, on February 2, 2022, the Secretary of State of the U.K. laid before the Parliament the international data transfer agreement (IDTA) and the international data transfer addendum to the European Commission’s standard contractual clauses for international data transfers (Addendum), which came into force on March 21, 2022, following Parliamentary approval. Contracts involving data processing which are based on the old EU SCCs and concluded on or before September 21, 2022, will continue to provide appropriate safeguards under the U.K. GDPR until March 21, 2024. In some jurisdictions like the EU, UK and Israel, the law and guidance on data transfers is currently uncertain. Comparable risksrapidly developing and considerations apply with respectrecent developments will require us to transfers ofreview and may require us to amend or supplement the legal mechanisms by which we make and/or receive personal data from the U.K. to the United States.transfers.
Similarly, there have been laws and regulations adopted throughout the United States and in Israel that impose new obligations in areas such as privacy, in particular protection of personal information and implementing adequate cybersecurity measures to protect such information. In the United States, bothprivacy and data security laws are also complex and changing rapidly, these laws are not consistent, and compliance with them in the event of a widespread data breach is complex and costly. Both federal and state legislation also govern the collection, use and other processing of personal data, and the advertising industry has been subject to review by the Federal Trade Commission (the “FTC”), U.S. Congress, and individual states. For example, the California Consumer Privacy Act (“CCPA”),CCPA provides data privacy rights for California residents and operational requirements for covered companies. Among other things, companies covered by the CCPA must provide new disclosures to California residents and afford such residents the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. In addition, to the CCPA, the California Privacy Rights Act (“CPRA”),CPRA, which passed in November 2020 and will taketook effect in January 2023, will expandhas expanded the rights granted under the CCPA and impose additional notice and opt out-obligations, including an obligation to provide California residents with the ability to opt-out to the processing of personal information for purposes of behavioral advertising.advertising, adds restrictions on the “sale” or “share” of personal information (which it defines broadly under the CCPA), and creates new data privacy rights for California residents and carries significant enforcement penalties for non-compliance. Additional U.S. states have implemented, or are in the process of implementing, similar new laws or regulation (for example, the Virginia Consumer Data Protection Act (“VCDPA”) that will gohas entered into effect on January 1, 2023 and the Colorado Privacy Act (“CPA”) which will go into effect on July 1, 2023) that impose new privacy rights and obligations.obligations which resembles the CCPA and CPRA. Further, laws in all 50 states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. More generally, some observers have noted that the CCPA, CPRA, VCDPA, and CPA could mark the beginning of a trend toward more stringent United States federal privacy legislation, which could increase our potential liability and adversely affect our business.
The CCPA, and eventually the CPRA, VCDPA, CPA, and other legal and regulatory changes, are making it easier for certain individuals to opt-out of having their personal data processed and disclosed to third parties through various opt-out mechanisms, which could result in an increase to our operational costs to ensure compliance with such legal and regulatory changes. In recent years, there has also been an increase in attention to and regulation of privacy and data collection and protection across the globe, including in the United States with the increasingly active approach of the FTC to enforcing data privacy under the Section 5 of the FTC Act pursuant to the “Unfair and Deceptive Acts and Practices” framework. Similar to the GDPR, the CCPA, and eventually the CPRA, VCDPA, CPA, and other legal and regulatory changes, will require us to devote resources and incur additional costs associated with compliance, as well as impose additional restrictions on our and our partners’ operations.
In addition, failure to comply with the Israeli Privacy Protection Law, 1981 and its regulations, as well as the guidelines of the Israeli Privacy Protection Authority, may expose us to administrative fines, civil claims (including class actions) and, in certain cases, criminal liability. Current pending legislation may result in a changeamendment to the currentIsraeli Privacy Protection Law, 1981 is expected to enhance fines and sanctions for breaching the Israeli Privacy Law and to strengthen the enforcement measures and sanctions.capacity of the Israeli Privacy Protection Authority. There have also been privacy bills enacted in other countries around the world, such as Brazil, which have introduced new or expanded privacy requirements and we expect that privacy legislation will continue to evolve in the coming years. Therefore, it is difficult to determine whether and how such existing and laws and regulations will apply to and impact the internet and our business.
Further, any failure or perceived failure to comply with our public privacy policies and other public statements about privacy and cybersecurity could potentially subject us to regulatory investigations, enforcement or legal actions, and harm to our reputation and, if such policies or statements are found to be deceptive, unfair or misrepresentative of our actual practices, fines, monetary or other penalties, and other damage to our business and results and results of operations.
Although we strive to comply with applicable laws and regulations the evolving global standards regarding privacy and to inform our customers of our business practices prior to any installations of our product and use of our services, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data collection, use, preservation and other processing practices or that it may be argued that our practices do not comply with certain countries’ privacy and data collection and protection laws and regulations. Due to rapid changes in technology and the inconsistent interpretations of privacy and data collection and protection laws and regulations, we may be required to materially change the way we do business. The challenges imposed by the ongoing need to remain compliant with such laws and regulations, as well the need to implement any changes required based on newly introduced laws and regulations, may slow our growth, and if we are not able to cope with these challenges as effectively as other companies, we will be competitively disadvantaged. Any limitation on our ability to collect and utilize data, including personal data, would make it more difficult for us to be able to optimize ad placement for the benefit of our advertisers and publishers, which could render our solutions less valuable and potentially result in loss of clients and a decline in revenue. For example, we may need to adapt our advertising solution to a “cookie-less” environment and introduce alternative solutions which may not provide the targeting capabilities provided by cookies. In addition, we may be required to implement physical, administrative and technological security measures that differ from those we have now, such as different data access controls or encryption technology. Further, we use cloud-based computing, which is not without substantial risk, particularly at a time when businesses of almost every kind are finding themselves subject to an ever-expanding range of privacy, data collection and processing and cybersecurity laws and regulations, document retention requirements, and other standards of accountability. Compliance with such existing and new laws and regulations can be costly and can delay, or impede the development of new products, any and failure or perceived failure to comply with such laws and regulations could result in negative publicity, increase our operating costs, require significant management time and attention and subject us to inquiries or investigations, litigation (including class actions), claims, or other remedies, including penalties, fines, sanctions and criminal and civil liabilities, or demands or orders that we modify or cease existing business practices, each of which could materially affect our operating results and our business. Moreover, concerns about our collection, use, sharing, handling and other processing of data or other privacy related matters, even if unfounded, could harm our reputation and operating results. For more information regarding government regulations to which we are subject, see Item 4.B. “Business Overview— Government Regulation.”
If one or more states or countries determine that we are required to collect sales, use, or other taxes on the services that we sell, this may result in liability to pay sales, use, and other taxes (plus interest and penalties) on prior sales and a decrease in our future sales revenue.
While in some states we are subject to sales tax, in general, the digital advertising business has not traditionally paid sales tax. However, a successful assertion by one or more cities, states or countries that digital advertising services should be subject to such taxes or that we are not providing digital advertising services, but other services and should collect sales, use, or other taxes on the sale of our services, or that we have failed to do so where required in the past, could result in a decrease in future sales and/or substantial tax liabilities for past sales. Each state and country has different rules and regulations governing sales, use, and other taxes, and these rules and regulations are subject to varying interpretations that may change over time.
Following a US Supreme Court decision regarding the rights of individual states to tax out of state suppliers, certain states have adapted their statutes to expand taxation on out-of-state suppliers of goods and services. Some states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the future which could impact our future sales, and therefore could result in a material adverse effect on our revenue.
For example, in February 2021, the State of Maryland’s House of Delegates and Senate approved legislation to tax digital advertising revenue.revenue, which is currently under review by the relevant courts. Similar bills have been introduced in several other states.
Certain countries in the European Union and elsewhere have recently adopted taxation on digital services including digital advertising, in various forms, such enacted and proposed taxes may have an impact on us.
Under current Israeli, U.S., U.K., and Ukrainian and French law, we may not be able to enforce non-competition and non-solicitation covenants and, therefore, we may be unable to prevent our competitors from benefiting from the expertise of some of our former employees and/or vendors, whether current or former.
We have entered into non-competition and non-solicitation agreements with many of our employees and vendors. These agreements prohibit our employees and vendors, if they terminate their relationship with us, from competing directly with us, working for our competitors, or soliciting current employees away from us for a limited period. Under current Israeli, U.S., U.K. Ukrainian and FrenchUkrainian law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Risks Related to our Intellectual Property
Our proprietary information and intellectual property may not be adequately protected and thus our technology may be unlawfully copied by or disclosed to other third parties.
We regard the protection of our proprietary information and technology and other intellectual property as critical to our success. We strive to protect our intellectual property rights by relying on contractual restrictions, trade secret law and other common law rights, as well as federal and international intellectual property registrations and the laws on which these registrations are based. However, the technology we use and incorporate into our offerings may not be adequately protected by these means.
We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business, in order to limit access to, and the disclosure and use of, our proprietary information. However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our intellectual property. In addition, those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. Further, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our intellectual property and/or trade secrets, or deter independent development of similar intellectual property by others.
In addition, there is no assurance that any existing or future patents or trademarks will afford adequate protection against competitors and similar technologies. Our intellectual property rights may be challenged, invalidated, or circumvented by others or invalidated through administrative process or litigation. Effective trademark and patent protections are expensive to develop and maintain, as are the costs of defending our rights. Further, we cannot assure you that competitors will not infringe our patents or trademarks, or that we will have adequate resources to enforce our rights.
Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in costly intellectual property litigation, which could adversely affect our financial position and our ability to execute our business strategy.
Given the competitive and technology-driven nature of the digital advertising industry, companies within our industry often design and use similar products and services, which may lead to claims of intellectual property infringement and potentially litigation. We have been, and in the future may be, the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others. Regardless of whether such claims have any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Our business may suffer if we are unable to resolve infringement or misappropriation claims without major financial expenditures or adverse consequences.
If it appears necessary or desirable, we may seek to obtain licenses to use intellectual property rights that we are allegedly infringing, may infringe or desire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights such as these from a third party for technology or content, sound, or graphic used by us could cause us to incur substantial liabilities and to suspend the development and sale of our products. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing technology. If we are unable to re-design our products or develop non-infringing technology, our revenue could decrease and we may not be able to execute our business strategy.
On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against Perion and Undertone alleging, inter alia, that Undertone’s UMotion advertising format, “hand phone” image, and use of the full tilt library infringes on its intellectual property. On February 3, 2016, Adtile Technologies Inc. filed a motion for preliminary injunction to, inter alia, prevent Undertone from creating or selling motion-activated advertisements. On June 23, 2016, the court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Undertone’s motion to stay the action and compel arbitration. As of the date of this report, Adtile had not commenced an arbitration proceeding and the court dismissed the case for administrative reasons. We believe that we have strong defenses against this lawsuit and we intend to defend against it vigorously if the case is ever resubmitted. However, if we do not prevail in this case, we may incur monetary damages and/or be prohibited from using certain intellectual property.
We may also become involved in litigation in connection with the brand name rights associated with our Company name or the names of our products. We do not know whether others will assert that our Company name or any of our brands name infringe(s) their trademark rights. In addition, names we choose for our products may be alleged to infringe names held by others. If we have to change the name of our Company or products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be time-consuming, expensive to resolve, and require additional management time and attention.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his inventions. Case law clarifies that the right to receive consideration for “service inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration (but rather uses the criteria specified in the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with us, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
We use certain “open source” software tools that may be subject to intellectual property infringement claims or that may subject our derivative works or products to unintended consequences, possibly impairing our product development plans, interfering with our ability to support our clients or requiring us to allow access to the source code of our products or necessitating that we pay licensing fees.
Certain of our products contain open source code and we may use more open source code in the future. In addition, certain third party software that we embed in our products contains open source code. Open source code is code that is covered by a license agreement that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
As a result of the use of open source software, we could be subject to suits by parties claiming ownership of what they believe to be their proprietary code or we may incur expenses in defending claims alleging non-compliance with certain open source code license terms. In addition, third party licensors do not provide intellectual property protection with respect to the open source components of their products, and we may be unable to be indemnified by such third-party licensors in the event that we or our customers are held liable in respect of the open source software contained in such third party software. If we are not successful in defending against any such claims that may arise, we may be subject to injunctions and/or monetary damages or be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenue and cash flow.
Moreover, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use an open source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our competitors may have access to our products without cost to them which could harm our business. Certain open source licenses require as a condition to use, modification and/or distribution of such open source that proprietary software incorporated into, derived from or distributed with such open source be disclosed or distributed in source code form, be licensed for the purpose of making derivative works, or be redistributable at no charge. The foregoing may under certain conditions be interpreted to apply to our software, depending upon the use of the open source and the interpretation of the applicable open source licenses.
We monitor our use of open source code to avoid subjecting our products to conditions we do not intend. The use of open source code however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts.
Risks Related to the Geographical Location of our Operations
Our business is significantly reliant on the North American market. Any material adverse change in that market could have a material adverse effect on our results of operations.
Our revenue have been concentrated within the North American market, accounting for approximately 89%88% of our revenue for 2021.2022. A significant reduction in the revenue generated in such market, whether as a result of a recession that causes a reduction in advertising expenditures generally or otherwise, which causes a decrease in our North American revenue, could have a material adverse effect on our results of operations.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
We operate in a global market and are subject to tax in Israel and other jurisdictions. Our tax expenses may be affected by changes in tax laws, international tax treaties, international tax guidelines (such as the Base Erosion and Profit Shifting project of the OECD’s Inclusive Framework (“BEPS”)).
The members of the OECD’s Inclusive Framework on BEPS has recently madehave agreed in October 2021 on certain recommendations, informally known as BEPS 2.0 or Pillar Two, which aim to modify international taxation norms with respectthe introduction of a 15% minimum tax applicable to in-scope multinational enterprises (with revenue in excess of Euro 750 million). Certain countries and the EU have already published proposed legislation to implement the recommendations which are expected to come into effect starting on 1.1.2024. Israel is one of the 136 jurisdictions that has agreed in principle to the adoption of the global minimum tax rate. Further, the OECD’s Inclusive Framework on BEPS is continuing to make progress with the international taxation reform known as Pillar One dealing with the allocation of taxing rights, and introduction of minimum taxation, focusing mostly on the digital economy. Currently, thereeconomy, as multilateral convention is uncertainty asexpected to what modifications will be madedelivered in these recommendations and how they will be implemented.the second half of 2023.
Certain of these changes could have a negative impact on our results of operations and business. The impact of these changes is uncertain, and may not become evident for some period of time. The uncertainty surrounding the effect of the reforms on our financial results and business could also weaken confidence among investors in our financial condition. This could, in turn, have a materially adverse effect on the price of our ordinary shares. Shareholders are urged to consult their tax advisors regarding the effect of these changes to the U.S. federal tax laws on an investment in our shares.
Our international operations involve special risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.
A large portion of our operations are performed from outside the United States. In addition, we derive and expect to continue to derive a portion of our revenue from users outside the United States. Our international operations and sales are subject to a number of inherent risks, including risks with respect to:
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;
costs of compliance with a variety of laws and regulations;
restrictive governmental actions such as trade restrictions and potential trade wars;
limitations on the transfer and repatriation of funds and foreign currency exchange restrictions;
compliance with different consumer, privacy and data collection and protection laws and regulations, and restrictions on pricing or discounts;
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;
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;
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 and specifically in Israel may impede our ability to operate and harm our financial results.
Our principal executive officesWe are incorporated under the laws of the State of Israel, where we also maintain our headquarters. Most of our research and development activities and other significant operations are located in Israel. In addition, a numberIsrael, and most of our officers and directors are residents of Israel. Accordingly,As a result, political, economic and military conditions inaffecting Israel directly influence us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade or air traffic between Israel and its trading partners, or a significant downturn in the surrounding region may directlyeconomic or financial condition of Israel could adversely affect our business, financial condition and results of operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as terrorist acts committed within Israel by hostile elements. Any hostilities involving Israelgroups 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 escalationindividuals. Escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip whichhave 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. SinceAdditionally, since April 2011, internal conflict in Syria has escalated, and chemical weapons have been used in the region. Foreign actorsConflicts in the Middle East, including in Egypt and Syria which countries border Israel, have resulted in continued political uncertainty and continue to interveneviolence in Syria.the region. This instability and any intervention may lead to deterioration of the political and economic relationships that exist between the State of Israel and some of the countries in the region, and may have the potential for additional conflicts in the region. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran also has a strong influence among extremist groups in the region, including Hamas in Gaza, Hezbollah in Lebanon and various rebel militia groups in Syria. Furthermore, in early January 2020, certain events contributed to an increase in hostilitiesamid the increased hostility between the United States and Iran, and as a result Iran issued multiple public statements threatening to attack Israel and the United States. These situations have escalated at various points in recent years and may escalate in the future to more violent events, which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any lossesLosses or damages incurred by us could have a material adverse effect on our business. Any armedArmed conflicts or political instability in the region would likelymay negatively affect business conditions and could harm our results of operations.
Further, in the past, the State ofSeveral countries restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have been subjectedincreased efforts by activists to economic boycotts. Several countries still restrictcause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, if accelerated, could adversely affect our business, with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansionand results of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact our business.
operations. In addition, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.
The Israeli government is currently pursuing extensive changes to Israel’s judicial system. In response to the foregoing developments, many individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel due to the reluctance of foreign investors to invest or transact business in Israel, increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets, and other changes in macroeconomic conditions. We cannot be certain whether the planned judicial overhaul will occur or in what form. To the extent that any of the negative developments stated above do occur, we cannot be certain on how investors will assess these matters and whether their assessment will adversely impact the perception of our business and our share price, or how these developments impact our business operations in Israel.
We are exposed to the risk of natural disasters, political events, war, terrorism and pandemics, each of which could disrupt our business and adversely affect our results of operations.
Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers or our directors or asserting U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service of process on us, our Israeli subsidiaries, our directors and officers and the Israeli experts, if any, named in this annual report on Form 20-F, substantially all of whom reside outside of the United States, may be difficult to obtain within the United States.
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:
The tax benefits available to us for activities in Israel require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.
We have benefited and currently benefit from a variety of Israeli government programs and tax benefits with regards to our operations in Israel, that generally carry conditions that we must meet in order to be eligible to obtain any benefit. Our tax expenses and the resulting effective tax rate reflected in our financial statements may increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in which we operate, non-deductible expenses, loss and timing differences, or changes in the mix of countries, where we generate profit.
If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received including interest and linkage to the Israeli consumer price index. Any of the following could have a material effect on our overall effective tax rate:
Additional details are provided in Item 5.A “Operating Results” under the caption “Taxes on Income,” in Item 10.E. “Taxation” under the caption “Israeli Taxation” and in Note 15 to our Financial Statements.
We were incorporated in the State of Israel in November 1999 under the name Verticon Ltd., changed our name to IncrediMail Ltd. in November 2000 and in November 2011 changed our name to Perion Network Ltd. We operate under the laws of the State of Israel. Our headquarters are located at 26 HaRokmim Street, Holon 5885849, Israel. Our phone number is 972-73-398-1000. Our website address is www.perion.com. The information on our website does not constitute a part of this annual report. Our agent for service in the United States is Intercept Interactive Inc. d/b/a Undertone, which is located at One World Trade Center, 77th71st Floor, Suite A,J, New York, NY 10007.
We completed the initial public offering of our ordinary shares in the United States on February 3, 2006. Since November 20, 2007, our ordinary shares are also traded on the TASE.
In the recent years, we completed several acquisitions, including the acquisition of ClientConnect Ltd. in 2014, the acquisition of Interactive Holding Corp. in 2015, which we refer to, together with its subsidiaries, as “Undertone”, the acquisition of Septa Communications LLC, also known as “Captain Growth”, in March 2019, the acquisition of Content IQ LLC in January 2020, the acquisition of Pub Ocean in July 2020 and the acquisition of Vidazoo in October 2021.
Our SEC filings are available to you on the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F and is not incorporated by reference herein.
In 2019, 2020, 2021 and 2021,2022, capital expenditures consisted of $1.2 million, $0.5 million, $0.6 million and $0.6$1.1 million, respectively, mainly from investments in computer hardware and software.
To date, we have financed our general capital expenditures with cash generated from operations and debt. To the extent we acquire new products and businesses, these acquisitions may be financed by any of, or a combination of, cash generated from operations, or issuances of equity.
B.BUSINESS OVERVIEW
General
Perion is a global technology innovator in the digital advertising ecosystem, providing brands, agencies and publishers with athe holistic ability to identify and measurably reach their most valuable customers – across all numerous digital channels, including retail media – with high-impacthigh impact creative units that are orchestrated by its proprietary Intelligent Hub (iHUB),. The iHUB which we believe, offers untapped cross-sell opportunities that we are just starting to realize.connects the supply and demand sides of the marketplace, and as a result is capable of bringing Perion and its client’s significant efficiencies.
Perion’s technology leadership leverages the Company’s scale, operating across the three main pillars of digital advertising: ad search, social media, and display/video/CTV, operate inCTV; which represents an addressable market of more than $571$567 billion in 2022, that iswith an expected to grow to $785growth of $836 billion in 2025,by 2026, according to eMarketer. The presence across the three pillars provides diversification of our revenue streams, a proprietary market agility that allows the Company to rapidly capitalize on shifts in spending and budget allocation in a timely and efficient manner. The three pillars are represented by our search ad monetization, which is a direct-response platform that works with a range of different publishers; cross-channel high impact advertising through the open web, including video and CTV; social advertising through our actionable performance monitoring platform; and our content monetization system.
The advanced technological solutions offered by Perion, which apply to the entiremajority of consumer journey and marketing funnel, are poisedincluding these capabilities, which enable the Company to benefit fromcontinuously expand its margin, demonstrating the macro trends in the digital advertising ecosystem,effectiveness of its iHUB, which include:is further detailed below;
The growth in search driven by the growing shift to ecommerce;
The growth in video which is outpacing other forms of digital marketing;1. | The ability to monetize search traffic through our partnership with Microsoft Advertising (Bing), the effectiveness of which is reflected in the consistent growth of our publisher network. This is particularly important given the growing shift to Direct Response units marketing, as search represents the highest intent customers; |
2. | The ability to meet advertiser demand for higher sustained user engagement with our high-impact Ad suite; |
3. | The ability to monetize the fast-growing retail media segment; |
4. | The ability to innovate in sectors that matter most to brands; this is manifest in SORT® which is an effective and successful response to advertiser recognition of privacy matters and the upcoming deprecation of cookies by Google; |
5. | The ability to acquire and execute with strategic and operational discipline; and |
6. | SORT®, Perion’s alternative to third party cookies, is first and foremost the result of our ability to analyze the complex data signals that are derived from our assets that flow through our iHUB. |
The transition from linear TV to Digital TV;
The inevitable disappearance of the cookie in an increasing privacy-centric world and the corresponding imperative of first-party data;
The need for high-engagement creative in what is called the “Attention Economy.”; and
The importance brands provide to advertising creativity vs. standard formats.
In addition, brands are seeking new solutions that enable them to transcend the dominance of the triopoly—Google, Facebook and Amazon, which now control 86% of digital ad spend in the United States, according to eMarketer—to enable more flexible options that respect their brands, users, and need for monetization.
Another aspect of Perion’s technological solutions, which reflects Perion’s innovative future-forward approach, is Perion’s SORT™ technology. SORT Perion’s alternative to 3rd party cookies is first and foremost a result of our ability to analyze all data signal from our assets to a single central place – intelligent HUB.
SORTSORT® - which stands for “Strategic Optimization of Relevant Traits” – and which is covered by a provisional patent, technology that not only eliminates the need for cookies, but is being demonstrated by actual, real-time comparison tests made by Neutronian, a respected third-party research firm, to outperform first-party cookies. This technology is
Further, SORT® does not collect or store any user data, the way other cookie-less solutions do. Giving SORT® a unique position as a superior, competitively advantaged replacement for third-party cookies. While cookies which are currently an essential part of the targeting infrastructure of the digital advertising market, butthey are under increasing pressure for the manner in which they are perceived to violate user privacy. SORTIn fact, the U.S. Congress is looking into cookies and considering further restrictions. Thus, SORT® provides a competitive advantagesolution that positionsshould enable Perion to capture additional revenue as brands and advertisers move away from traditional methods such as cookies on the one hand, and other platforms, such asi.e., Google – who announcedthat postponed its elimination of cookies until the cessationend of Cookies late last year, on the other hand.2024 presumably because they were unable to develop a satisfactory replacement solution.
On top ofIn addition, consumers are made aware that Perion also develops a brand campaign is running through SORT®, and hence the ads are safe to click, thanks to a proprietary “Privacy Shield” graphic logo that is incorporated into every ad unit running through SORT®. SORT® is a solution that provides consumers with visible confidence they won’t be followed around the web as their behavior is being tracked.
To provide further details on our iHUB, this centralized and intelligent hub, referred to as the iHUB, which connects the supply side and demand side assets of Perion, and processesprocessing billions of signals.signals from across out network and properties. This provides five levels of value: operational savings in the form of – shared resources; Traffic Acquisition Costsreduced traffic acquisition costs and media buying optimization; increased customer value; market agility and creative firepower, as further described below.
| 1. | Operational Savings – Shared Resources |
The iHUB serves asplays a central function to all ofrole in Perion’s activities, acting as a shared infrastructure resource consisting of an ad-server, as well as a central real-time bidding engine, a smart data layer, and a sophisticated reporting.reporting mechanism. This efficiency eliminates excessive expenses that would otherwise be incurred byif business units when developinghad to develop separate infrastructures.
| 2. | Traffic Acquisition Costs (TAC) Optimization |
The iHUB allows our business units to quickly balance and harmonize demand and supply, providing optimum utilization of our owned & operated supply, as well as what is available on the open web. This enables us to serve direct demand in a closed loop, generating superior efficiency and hence performance.
Further, weThis optimization is enhanced by our ability to offer publishers and advertisers multiple ad products within our offering model. Thisto support their marketing efforts which enables us to capture moreincrease market share optimizing the return on our go-to-market efforts.with current and new clients.
| 3. | Increased Customer Value |
Our advertisers benefit from both highthe large scale and broad reach as well as betterPerion offers, with enhanced matching based on a segment basis.segment-by-segment method. This is made possible by our cross-company data layer. This same technology offers customerlayer, which provides significant value to our publishers, delivering more opportunities to monetize their inventory and generate incremental revenue - as we makerevenue. Our unified platform multiple ad products, from different business units, available through our unified platform.for ongoing, real-time dynamic creative optimization.
The investments we have made in the scale and reach of our iHUB have enabled us to develop our pioneering SORT technology. In fact, third-party research has shown that SORT can outperform cookies. As the industry moves to a post-cookie, privacy-first world, this technology is expected to provide strong competitive differentiation to the Company.
| 4. | Market Agility and Creative Firepower |
The COVID-19 pandemic, hasand the volatility of the post-pandemic marketplace, have highlighted the importance of being able to respond to strategic shifts in advertising dollars allocated between video/CTV, display and search media. Through ourAdvertisers are more focused than before on executing flexible media spent strategies. This is where Perion’s thrives, by providing diversified solutions portfolio, andincluding our well-known high-impact ad formats, which provide advertising performance and brand engagement across multiple platforms and channels, we believe that Perion isare well positioned to capitalize on the inevitable changes in digital advertising spending and quickly respond to the ever changingever-changing needs of the digital advertising market.
Strength Through Diversification
Perion is positioned to benefit from the overall growth of the digital marketplace, through our diversified business solutions that cover the three main pillars of digital advertising—our search ad monetization; cross-channel high impacthigh-impact advertising, including through video and connected television, or CTV; social advertising through our actionable performance monitoring platform; and our content monetization system. We believe that Perion’s solutions will be able to attract advertisers from less-effective competitors.
1. | Intelligent High-Impact Solutions that Win the War for Attention |
Intelligent High Impact Solutions that Win the War for Attention
Brands and advertisers are in a war for attention, and it is getting more intense. Without delivering impactful creative through the proper channels, brands cannot express a cohesive, creative campaign throughout the purchase funnel, nor can they achieve successful ROI (Return on Investment). Perion’s High Impact Advertising, (HIA), which includes rich media and engaging iCTV, is the breakthrough answer to effective creative expression. It breaks through the clutter and ad blindness that conventional ad units cannotstruggle to overcome, enabling the upper-upper and mid-funnel brand objectives that allrequired by brands and agencies require, turningtransforming awareness into performance. Some of our customers are world-class brands such as Mercedes-Benz, IBM, Disney, Walmart, Albertson’s and Verizon.
We operationalize our proprietary, creatively-led solutions based onbillions of data points delivered from years of user engagement and interactions with different kinds of advertising units. These units are informed bydeveloped based on the requirements of our advertisers and our cultural insights. Because our mission is toTo assure that our HIAHigh Impact Advertising creative can be distributed to the right audiences, we have built and grown our curated network of publishers where our HIAHigh Impact Advertising are served. Our curated network is also important because advertisers are increasingly concerned about “brand safety” - they don’t want their ads to appear alongside of questionable or controversial ads, which could have a negative impact on their brand name and reputation.
As described above, our proprietary cookie-less targeting solution, SORT®, enables superior performance is enabled by our proprietary cookieless targeting solution, Smart Optimization of Responsive Traits (SORT) that allows brands to reach optimal performance by predicting how consumer groups will respond to our HIA,High Impact Advertising, at scale, without the limitations in scaleprivacy-invasive practices of legacy 3rd partythird-party cookie-based targeting. Our technology utilizes real-time, cookielesscookie-less data signals to identify users with shared traits & classifyand behaviors, then classifying them into addressable and fully anonymous SmartGroups.
Perion’s technology is designed to continually balance the right mix of channels – from display to video/CTV – to improve ROAS (Returnthe Return on Ad Spend)Spend (“ROAS”). This complete technological moat delivers robustly optimized campaigns that combine creativity, reach, and our proprietary targeting capabilities. This moat also includes Perion’s white-glove client service and the turnkey provision of comprehensive, full-funnel solutions to all brands and agencies.
Video Monetization & Revenue Management
2. | Search monetization solution - Transforming Search into Revenue |
Online Video is by far the most growing category in ad spends over the last 5 years. Budgets continue shifting from traditional TV to online video and online TV. Audiences shrink and marketers pour their advertising dollars into digital video.
As budgets continue rising, digital publishers recognize the incremental revenue opportunity entailed in video advertising, but they require the best video technology that can manage their video content delivery, ad serving and optimization. Vidazoo, our video optimization platform, is helping publishers with the best in class video technology and monetization. Through Vidazoo’s proprietary platform, we offer a wide range of video products, through which publishers can deliver a better user experience, increase video content consumption, and explore new monetization opportunities. Vidazoo’s most common tech products that are used by their publishers are: Video player and CMS, AdServer & Yield Management Engine.
In addition, Vidazoo also provides monetization services (Ad Marketplace) that connect more than 25 programmatic advertisers with exclusive high quality and brand safe opportunities for video inventory across 180 publishers worldwide.
Content optimization Solution – Creating Opportunities for Publishers Under Pressure
The nature of today’s digital ecosystem makes audience growth challenging for publishers. This leaves them with fewer levers for growing their audiences and achieving profitable results, in a predictable and an efficient manner.
Perion’s Content Monetization Platform (branded as Wildfire) provides publishers with a strategic path to the future. In the face of declining revenues, Wildefire drives incremental growth with traffic that comes from Facebook, Taboola, Yahoo and others leading sources. Wildfire customers include Entrepreneur, Newsweek and Bonnier.
Wildefire platform uses intent signals to keep users engaged – moment-after-moment – by continually optimizing content, advertising and layout within mini-sites operated by the Wildefire platform. Our machine learning employs AI analysis and deploy tens of thousands of combinations of content and advertising. In addition, the Wildfire capabilities allow us to optimize revenue-per-session as well as refine and inform our decision-making by identifying pockets of profitability and loss.
Search monetization solution - Transforming Search into Revenue
Capturing consumers at thetheir moment of highest intent simply works - sohas been well-established as the most ROI (Return on Investment) positive advertising channel, thus, it’s no wondernot surprising that brands and publishesadvertisers are increasingly allocating more and more dollarsfunds to search advertising.
Perion, through its publisher network, delivered approximately 16.718.5 million average daily searches in 20212022 compared to 13.416.7 million daily searches in 2020,2021, which represents an increase of 24% Year-over-Year.11% year-over-year.
Searching is a fundamental digital habitbehavior that we expect will continue to grow, and hence we are continuously innovating and advancing our solutions to provide more value to our publishers. We deploy advanced AI, neural networks, and machine learning to optimize yield for our publishers and transform search into revenue.
At Perion we are poised to seize this shift, thanks to our longstanding relationship with Microsoft Bing and other leading search and content partners, across 3462 countries.
According to eMarketer reports, U.S. search advertising market reached $101 billion in 2022, and is estimated at $97to reach over $108 billion for 2022 according to eMarketer reports,in 2023, which represents 40%39% of USU.S. digital ad spending.
Microsoft Advertising has been our partner for over a decade, andsince 2010, in lateNovember 2020 we extended our partnership for four additional years.
In February 2022 we were named Microsoft Advertising’s 2021 Global Supply Partner of the Year EMEA.Year. This prestigious award goes to the business that has shown excellence in partnership with Microsoft Advertising across all areas of collaboration. This recognition is based on key partnership results that include engagement, revenue growth, feature adoption in Search and Native, and the scale of joint activities.
According to Statista as of April 2021,and comScore, Microsoft BING had 1.081.2 billion of unique monthly global visitors as of May 2022, and delivered 1214.7 billion monthly searches over PC. According to Statista,PC as of JanuaryJune 2022. As of December 2022, Microsoft BING had 7.61%8.95% worldwide PC market share. In addition, it generated approximately $8.5$11.5 billion in revenue in the 20212022 fiscal year.
Our Search monetization solution is comprised of the following 3 offerings:
Website Monetization
Leveraging - leveraging intent signals to deliver text ads, shopping offers, and premium news that enable site owners to gain higher revenuesrevenue and enhanced user engagement.
Search Mediation
Enables - enables media traders to monetize search demand and achieve higher yields by leveraging the machine learning that drives our mediation platform.
App Monetization
Using - using intent-based search signals to monetize publishers' desktop and mobile apps, white-label search engines and more.
3. | Video Monetization & Revenue Management |
Online Video is by far the fastest-growing category in ad spending over the last 5 years, as budgets continue to shift from traditional TV to online video and online TV. As linear TV audiences shrink, marketers are investing more and more of their budgets in digital value. As budgets continue rising, digital publishers recognize the incremental revenue opportunity they can capture, but that requires sophisticated video technology that is capable of end-to-end management of their content delivery, ad serving and optimization.
Vidazoo, our video monetization platform, meets those needs by supporting publishers with best-in-class video technology and monetization. Through Vidazoo’s proprietary video platform we offer a wide range of products, through which publishers can deliver an enhanced user experience, increase video content consumption, and identify new monetization opportunities.
Paragone’s Vidazoo’s most commonly distributed technology products are: Online Video Player, Content Monetization System, AdServer and Yield Ad Management Platform.
In addition, Vidazoo also provides monetization services and generates revenue via an ad marketplace that connects 28 programmatic advertisers with exclusive high-quality and brand-safe opportunities for video inventory across 99 publishers worldwide.
4. | Content optimization Solution – Creating Opportunities for Publishers Seeking Growth |
The Cross-Channel Digital Advertising SaaS platform: Maximize Reach, Optimize Revenue,nature of today’s digital ecosystem, including the power of Google and Improve EfficiencyFacebook, makes audience growth challenging for publishers. This leaves them with fewer levers for increasing their audiences and achieving profitable results, in a predictable and efficient manner.
Perion’s Content Monetization Platform (branded as Wildfire) provides publishers with a profitable and strategic path to the future. In the face of declining revenue, Wildefire drives incremental growth. The Wildfire platform uses intent signals to keep users continuously engaged, as it repeatedly optimizes content, advertising and layout within owned and operated mini-sites. Our machine learning employs AI analysis and deploys tens of thousands of combinations of content and advertising to achieve maximum user engagement and publisher profitability. Wildfire capabilities allow us to optimize revenue-per-session as well as refine and inform our decision-making by identifying pockets of profitability and loss.
5. | Paragone’s The Cross-Channel Digital Advertising SaaS platform: Maximize Reach, Optimize Revenue and Improve Efficiency |
Paragone allows youadvertisers to observe, in real time,real-time, their cross-channel paid digital advertising activities, -execute campaigns with one unified UI, and optimize budgets across social networkschannels using the platform AI and google - allowing performance marketers to easily identify opportunities for improvement, use AI to predict campaign success, and take action to maximize performance.
Paragone’s, through its Cross-Channel Digital Advertising SaaS platform, transferred approximately $380 million social budget in 2021 compared to $278 million social budget in 2020, which represents an increase of 37% Year-over-Year.rule-based techniques.
The steady growth of digital advertising has been accelerated by COVID-19Under the hood, Paragone collects and the boom in e-commerce. This dramatic shift creates the existential challenge of running scaled campaigns across multiple networks and optimizing them for engagement in real-time. This requires the connection of massive amounts of cross-network data.
We collect and centralizecentralizes previously siloed advertising data, enablingcleanse, normalizes and visualizes it, so that agencies and brands tocould manage cross-platform campaigns. We identify performance bottlenecks, improve productivity, customize metrics, predict results, and test new networks.
Ourcampaigns with ease. The platform works with allsome of the largest networks: Facebook, Instagram, Messenger,social networks such as Meta’s networks, LinkedIn, Snapchat, Pinterest, Twitter, TikTok, and Google, and synthesizes data from attribution vendorvendors including AppsFlyer, At Internet (Microsoft), Adjust, MoatGoogle Analytics and Google Analytics. The result is improved productivityAT Internet. Marketers can also upload offline data to the platform and improvedcross-reference it with top of the funnel data so that marketers can get a full-funnel view of their ROAS.
Industry Overview
Advertising
Our search advertising and display advertising are driven mainlybusiness, which addresses the majority of digital ad spend, is supported by the integration of AI-based ad-tech, video, display, search, and social ad units - address the majority of digital ad spend.units.
Based on eMarketer reports, digital advertising spend accounted for approximately 55%65% of total worldwide media advertising during 2021,in 2022, reaching $492$567 billion and expected to increase to $785$836 billion and approximately 57%73% of worldwide advertising spend by 2025.2026. In 2021, US2022, U.S. display advertising spend, including banners, rich media, video and social, was approximately $119$141 billion and is expected to increase by 57%64% and reach $186$232 billion in 2025,2026, according to eMarketer.
We believe the continued growth of digital ad spend will, in part, be driven by the convergence of television advertising and digital mediums, including instream and outstream digital video and CTV. Furthermore, cross-channel technologies, such as automatic content recognition (ACR), which allows advertisers to connect brand messaging across television and digital channels, will further enable the convergence of ad spend. Our solution positions us in the sweet spot of these trends by providing a connective technology layer, which eliminates fragmentation and tracks the entire consumer journey and marketing funnel.
Advertisers, including major brands,43
All advertisers are increasingly allocating media advertising budgets to digital channels and formats. While weWe work with some advertisers directly, but our primary customers are advertising and media agencies – including the major holding companies - who are engaged by brand advertisersbrands to develop and implement their creative and media plans. We work with both sides of the market to plan, design, deliver, manage, and measure their digital advertising investments. We generally do not enter into long termlong-term contracts with our advertising customers, but respond to specific campaign requests, and are compensated based on ad formats, campaign complexity, impressions, and creative requirements. We have a high revenue retention rate when serving our large holding company clients, although the brand composition changes, depending on agency wins/losses and as specific brand campaign tactics change along the purchasing funnel cycle.
We address the display advertising market through direct and programmatic media sales as well as managed and self-service advertising campaign management tools. Programmatic customers benefit from increasedadvanced automation, full transparency, and the resulting efficiency. Clients receive support throughout the campaign cycle, which starts with a consultative sales process to shape the best offering for that customer.
Beyond ad-tech automation, advertisers are also increasingly looking for unique ad formats and inventory that are able tocan tell impactful stories on digital, by utilizing content, rich media, and digital video/CTV. “Banner fatigue”, which describes the fact that consumers are so overwhelmed by digital advertising that they stop paying attention – is a well-known reality that Perion’s high-impact units overcome.
We believe the shift beyond standard banner ad formats is unstoppable. Richinevitable. eMarketer reports that rich media, including our high-impact ad formats, as well as outstream and instream video accounted for $70$88 billion of USU.S. digital display ad spend in 20212022 and is expected to increase by 67%81%, reaching approximately $117$159 billion in 2025,2026, according to eMarketer.
U.S. Digital video, including instream formats such as “pre-roll” and outstream formats such as “inline”, represented the vast majority of rich media ad spend in 2021,2022, topping $60$76 billion, and is expected to reach $105$143 billion by 2025,2026, representing an increase of 75%, according to eMarketer. US87%.
U.S. Connected TV ad spending accounted for $10$21 billion in 2022 and is expected to reach $19$44 billion by 2023,2026, representing an increase of 90%, according106%.
Retail Media is another important sector for advertising, as retailer data is highly leveraged to eMarketer.
Social networkscreate advertising opportunities both on the retailer site and into the open web. Retail Media Networks are expected to continuethought to be a major platform forthe “third wave” of digital advertising, and with a lot of innovation in the sector, advertisers will look for emerging platforms to reach existing and new audiences.advertising. According to eMarketer, in 2021, social networks2022, Retail Media accounted for $62$37 billion representing 29%15.0% of the USU.S. digital ad spending, which is expected to increase by 32%48% and reach $82$55 billion by 2024, which would represent 17.8% of the U.S. digital ad spending. Perion’s Retail Media solutions provide a unique solution through advertising “Ads-as-a-platform” that enable personalized, dynamic solutions in Perion’s signature high-impact approach, which are highly sought as grocers as other retailers shift from print advertising to digital solutions.
Social networks are expected to continue playing a major platform for digital advertising, and advertisers will look for emerging platforms such as TikTok to reach both existing and new audiences. According to eMarketer, in 2022, social networks accounted for $65 billion representing 26.3% of the U.S. digital ad spending, which is expected to increase by 21% and reach $79 billion of USU.S. digital ad spending by 2023,2024, which would represent 30%25.5% of the USU.S. digital ad spending.
UsersAccording to eMarketer, users in the U.S. are devoting more and morea significant amount of time to social networks, estimated to reachsince 2021 approximately 7175 minutes per day on social networks in 2022 innetwork, which is expected to remain at the US,same level by 2024, representing approximately 15% of time spent on digital media in 2022. Furthermore, emerging and new social networks, such as Instagram, Snapchat and TikTok, are further expanding social networks’ audiences and demographic reach.during those years.
It is estimated that 91%92% of digital display ads will be transacted through programmatic channels by 2023,2024, including programmatic direct and real timereal-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.campaigns.
In light of regulatory developments, including GDPR, CCPA and CCPA,CPRA, as well as existing and planned limitations to be enacted by major web browser publishers, including Google, (who announced, in March 2021 the phase-out the support for third-party cookies in Chrome), Apple, and Mozilla, we expect advertisers to increasingly seek alternatives to third-party “cookie”-based- based targeting. We are focusing investments and R&D on opportunities in alternative targeting technologies.expanding our SORT® product.
Search
In 2021, US2022, U.S. search advertising spend reached $86$101 billion and is expected to increase by 42%45% reaching $122$147 billion in 2025,2026, representing 41%38% of USU.S. digital ad spending, according to eMarketer.
Search is the most intent-based form of advertising, as advertisements are served in direct response to the search queries, resulting in relevant advertisements yielding significant revenue to the search engine companies. Our search-related products address the market by engaging with premium search providers like Microsoft, and offer end users the ability to search the internet via easily embedded search functionality in different search assets.a wide variety of publisher sites.
The search engine market is highly competitive as providers such as Google, Microsoft, Verizon MediaYahoo and other smaller players, seek to gain more market share. We believe such competition will increase the utilization of our search solution, which enables search providers to increase their market share.share and monetization.
The factors that drive the ability of our search engine partners to increase their revenue per search, includeis driven by the availabilitysupply of search advertising inventory relative to demand, as well as internal pricing dynamics. As the search market continues to grow and we continue to expand our search solution, thesolutions, revenue earned by us and our partners is expected to grow as well. An example of such is the launch of our click-to-buy functionality – within user search activity –which positions the Companyus for future growth and revenue.
Growth Strategy
High level Growth Plan
Our strategy is to grow our business by offering innovative and diversified advertising, search, awareness and performance solutions to the world’s leading brands, agencies and publishers. These solutions, driven by advanced technology, will make each component of the funnel – awareness, consideration, intent and purchase – operate more effectively.
We will achieve this by offering compelling data-driven, digital advertising solutions and search monetization through holistic customer experiences and innovative platforms that cover the three main pillars of digital advertising - ad search, social media and display / video / CTV.
Growth throughThrough 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. Our iHub is central to that efficiency. The investments we have made in the scale and reach of our business have enabled us to develop aour pioneering technology, called SORT – Smart Optimization of Relevant Traits – which enables advertisers to identify consumers most likely to respond to their message without resorting to cookies. In fact, third-party research has shown that SORT can outperform cookies. As the industry moves to a post-cookie, privacy-first world, this technology is expected to provide strong competitive differentiation to the Company.SORT®.
To accelerate this process, we completed several acquisitions, including the most recent acquisitions of Septa Communication LLC in March 2019 (known as “Captain Growth”), the acquisition of Content IQ LLC in January 2020, the acquisition of Pub Ocean in July 2020 and the acquisition of Vidazoo in October 2021, to allow us to expand our capabilities and maximize our existing businesses.
Growth throughThrough ChatGPT
Recently, Microsoft Bing announced the addition of ChatGPT to their search offering. This AI-based conversational agent has the potential to significantly enhance the overall user search experience and engagement. With ChatGPT, users can receive personalized responses to their queries, resulting in higher-quality and more relevant search results. This can lead to increased user satisfaction and retention and potentially lead to an increase in the number of end users.
Moreover, ChatGPT can open new monetization opportunities for our search offering. By integrating relevant ads into the conversation, we can provide a more targeted and effective advertising experience for our advertisers, leading to higher click-through rates and conversions.
Growth Through Connected Devices
Our advertising offering targetsofferings target brands that are highly focused on their relationship with consumers. They recognize that their reputation and ability to compete are determined by meaningful connections that are sequentially delivered by relevant, high-quality creative and advertising contexts, across all platforms, including video, CTV and iCTV, in brand-safe environments.
Our growth strategy also contemplatesrecognizes the migration to 5G networks and the growing access to high-speed internet. Streaming of video content that takes advantage of faster delivery, as well as the growth of CTV and internet-connected devices, is something we are investing in so we will be able to take advantage of upgraded user experiences.
We also intend to continue to investinvesting in technology, partnerships and sales that offer our advertising clients enhanced features and functionalities to reach their consumers,consumers.
Growth Through Retail Media
Media Network investment is growing dramatically, for retailers this represents a new, high-growth, high-margin revenue stream. Commerce media networks will grow to be far larger than just the retailer site because commerce media finds new customers beyond the retailer’s existing customers with CPG offers, it will reach all screens, including through using analytic tools suchDOOH.
Amazon made $31 Billion in revenue from advertising last year, that pace puts advertising at 8% of their total annual revenue.
Retailers cannot and are unwilling to use “shelf” solutions, they have much data about their customers and are not easily willing to share. For this reason, retailers are looking for innovative partners and Perion is well-positioned to play an important role here, as ACR (Automated Content Recognition) TV viewership data.we have the technological capability to assist retailers in leveraging their data and capitalizing on it.
Growth Through iHUB
Our iHUB, connects the supply and demand side assets, and processesprocessing billions of signals. Our advertisers benefit from both high scale and reach, as well as better matching on a segment basis. This is made possible by our cross-company data layer. This same technology offers customer value to our publishers, delivering more opportunities to monetize their inventory and generate incremental revenue - as we make multiple ad products from different business units available through our unified platform.
Growth Through Search Monetization
Our search monetization solution leverages our relationship with Microsoft Bing and other leading search and content partners, to drive innovation and revenue based on AI and analytic tools as part of our ongoing effort to provide comprehensive and compelling search solutions and monetization tools to diversified publishers around the globe. We do this through a variety of digital properties, including websites, apps, extensions and search engines.
In addition to strategically diversifying our revenue sources and extending our products suite and partners, we are embedding our search functionality in our new products, thus increasing our monetization potential.
Technology
The Design principles of our technologies and research and development efforts consist of the following elements:
Supply and publisher integration;
Detailed Background on Our Advertising Solutions
The technology backbone behind our advertisingDisplay Advertising solutions is designed to connect brands with consumers via meaningful digital interactions and experiences. This is done through 8 key components:
1. Supply Management Platform; 2. Demand Management Platform; 3. Analytics Platform; 4. Creative Platform; 5. AI Platform; 6. Actionable Performance Monitoring; 7. Online video player; and 8. Content monetization system.
| 1. | Supply Management Platform;
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| 2. | Demand Management Platform;
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| 6. | Actionable Performance Monitoring;
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| 7. | Online video player; and
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| 8. | Content monetization system.
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Supply Management Platform
The Supply management platform operationalizes relationships with our publishers by treating every impression in an optimal manner. According toOur platform is driven by the business requirements and monetary expectations, that derive fromwhich in turn determines 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 Platform
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 specific goals of the advertisers.any advertiser. It will recommendrecommends advertising channels, audience targeting strategy and ad product mix which are all based on benchmarks and past experiences of the advertiser. Once the plan is created, the data-driven platform pushes instructions to the campaign management system for execution, based on parameters like dates, volume level, list of supply sources and campaign goal.
Analytics Platform
Our Analytics platform provides information and performance insights on the results of campaign investmentmetrics and other campaign metrics -insights, demonstrating the value of our solutions for our customers. This is a flexible system that reports all the required data, based onincluding total budget; the delivery of reach and impressions, budgetimpressions; invested engagement metrics, etc. The analytics platform supports our data driven culture – providing business stakeholders full visibility of KPI’s on key processes while facilitating data and reporting in a self-service manner, with pre-build dashboards and reports.
Creative Platform
ThePerion’s creative platform is a key component of our solution and allows us to innovate quickly on end user experiences. Our full-blownsolution. It’s a robust rich media platform which 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. We learn, we adjust, we continually iterate - allowing us to create engaging high-performing user experiences that perform top-mid and bottom-funnel.
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 complex heuristics, the platform generates better performance for our customers and improved efficiency by providing rules-based and budget optimizations.
Actionable Performance Monitoring
The Actionable Performance Monitoring platform supports the various phases of campaign management across different channels. The platform manages each of the planning, execution, optimization and measurement phases and simplifies the complexity of cross channel advertising for brands and agencies while optimizing performance through AI in one unified, actionable holistic and intuitive dashboard.
Online video player (OVP)
AOur proprietary online video player and integrated ad server which allows publishers and brands to upload, manage and stream video content. Vidazoo’s OVP is certified with the major advertising platforms and compatible with all devices and video formats. The Vidazoo OVP is integrated with a proprietary ad server, ensuring a consistent user experience by reducing latency and errors, adding to its inherent power and efficiency. Latency is recurring issue in video; consumers are impatient and significant amounts of revenue is lost when users abandon a site.
Content Monetization System
The content monetization system provides publishers the tools to maximize ad revenuesrevenue from reader sessions.sessions, optimizing traffic that Perion can efficiently drive to a publisher site. The system integrates ads within the content layouts, at the page level, constantly a/b testing for the most enhanced performance, while maintaining a user-friendly experience while driving monetization from a variety of programmatic sources.experience. This system is powered by a highly customized header bidding technology which controls ad delivery with optimal view ability measures.measures as it leverages a variety of programmed sources.
Search Advertising Solution
The technology of our search solution is composed of the following systems:
1. Publisher management system; 2. Search demand management system; 3. Monetization products; and 4. AI system.
| 1. | Publishers management system;
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| 2. | Search demand management system;
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| 3. | Monetization products; and
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Publisher Management System
The publisher management system provides publishers access to an online dashboard providing them analytics and performance optimization tools, as well as reports that enable them to maximize their distribution and monetization.
Search Demand Management System
The search demand management system integrates and onboards demand vendors to our monetization products. The integration supports multiple vendors according to predefined configurations and rules, enabling various business models and offerings.offerings, and making it possible for Perion’s R&D team to innovate on the “search stack.”
Monetization Products
Our monetization products are designed to deliver algorithmic search results concurrently with sponsored listings, both of which are served for the same search queries. They can be operationalized in different ways, including the transmission of search queries to search engines such as Bing, search Feed APIs operated on the publisher’s domainpublishers’ domains and an enriched and optimized hosted search results page which offers an enhanced user experience.
AI System
The AI technology behind our search solutions optimizes the various phases of the funnel including intent detection and demand optimization to yield performance optimization and maximized consumer experience.
Products Under Development
Innovation is a core driver of our culture and operations and essential for our growth. Hence, we invest substantial resources in research and development to develop new solutions, offerings, applications and services, improve our core technologies and enhance our technology facilities and infrastructure and capabilities.
Our research and development activities are primarily conducted internally in Israel and Europe, focusing on the development of new services platforms and SaaS basedplatforms solutions that will offer our customers (i) standout brand experienceexperiences, building on our high-impact units and recognizing the move to video; (ii) effective distribution tools, (iii) increased monetization capabilities through content features and applications, and (iv) enhanced optimization via powerful and reliable data analytics driven by AI. Additionally,In addition, we focus our research and development efforts on developing new products andare continuously improving existing products through software updates and upgraded features. Our research and development department is divided into groups based on scientific disciplines and types of applications and products.
Breakdown of Revenues
Our search monetization solutions, advertising and other, are distributed and sold throughout the world (mainly in North America and Europe). The following table shows the revenues, presented in our statement of operations, generated by territory in the years ended December 31, 2019, 2020 and 2021.
| | 2019 | | | 2020 | | | 2021 | |
| | Search Advertising Revenues | | | Display Advertising Revenues | | | Search Advertising Revenues | | | Display Advertising Revenues | | | Search Advertising Revenues | | | Display Advertising Revenues | |
North America (Mainly U.S.) | | | 67 | % | | | 91 | % | | | 73 | % | | | 95 | % | | | 80 | % | | | 95 | % |
Europe | | | 25 | % | | | 9 | % | | | 24 | % | | | 5 | % | | | 18 | % | | | 4 | % |
Other | | | 8 | % | | | 0 | % | | | 3 | % | | | 0 | % | | | 2 | % | | | 1 | % |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Intellectual Property
Our research and development efforts and thetheir underlying proprietary technologies, solutions and products we develop, are meaningful to our operations and competitive advantage, and we rely upon trade secret, trademark, copyright, and patent laws in the United States and abroad to establish and protect our intellectual property.
Although we have a number of patents, copyrights, trademarks and trade secrets and confidentiality and invention assignment agreements to protect our intellectual property rights, we believe that our competitive advantage depends primarily on our brand awareness, client relationships, 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.
Our employees and consultants are required to execute confidentiality covenants in connection with their employment and consulting relationships with us. These agreements (excluding those with our former German and U.K. employees) also contain assignment and waiver provisions relating to the employee’s or consultant’s rights in respect of inventions.
Competition
The markets in which we are activeengage in 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.other.
The advertising technology industry is highly competitive. There areis 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 areis 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). provide.
Some of these companiesthe competitors are larger and have more financial resources than we have, including, Google, Facebook, Amazone and Microsoft. New entrantsMicrosoft – the latter is both a strategic partner and companiescompetitor in that do not currently compete with our advertising solution such as Amazon may compete in the future given the relatively low barriers to entry in the industry.
As a major partBing generates organic traffic independent of our revenues stem from our offering of search properties, we compete with search engine providers themselves such as Google, Microsoft, Verizon Media, IAC and others.publisher network. We also compete with many other companies offering consumer software, albeit totally different software, utilizingthat offer consumers the same strategy,ability to offer their search properties,outside of search engines themselves, such as Interactive Corporation, Oath, System1 andIAC, System1and others.
Our ability to attract developers is largely dependent on our ability to pay higher rates to our publishers and developers, our success in creating strong commercial relationships with developers that have successful software, websites or distribution channels, and our ability to differentiate our distribution, monetization, and optimization tools from those of our competitors.
As we innovate evolve and introduce new solutions, and as our competitors as well as other companies introduce new products and services,do the same, we may be subject to additional competition. Many of our current and potential competitors may have significantly greater financial, research and development, back-end analytical systems, manufacturing, and sales and marketing resources than we have. These competitors could potentially use their greater financial resources to acquire other companies to gain even further enhanced name recognition and market share, as well as to develop new technologies, enhanced systems and analytical capabilities, products or features that could effectively compete with our existing solutions, products and search services. Demand for our solutions, products and search services could be diminished by solutions, products, services and technologies offered by competitors, whether or not their solutions, products, services and technologies are equivalent or superior.
On the operational side, our ability to attract developers is largely dependent on our ability to pay higher rates to our publishers and developers, our success in creating strong commercial relationships with developers that have successful software, websites or distribution channels, and our ability to differentiate our distribution, monetization, and optimization tools from those of our competitors.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. The manner in which existing laws and regulations will be applied to the Internet in general, and how they will relate to our business in particular is unclear. Accordingly, we cannot be certain how existing laws will be interpreted or how they will evolve in areas such as user privacy, data protection, content, use of “cookies,” access changes, “net neutrality,” pricing, advertising, distribution of “spam,” intellectual property, distribution, protection of minors, consumer protection, taxation and online payment services.
For example, we are subject to U.S. federal and state laws regarding copyright infringement, privacy and protection of user data, many of which are subject to regulation by the Federal Trade Commission. These laws include the California Consumer Privacy Act,CCPA, which provides data privacy rights for consumers and operational requirements for companies and amended by the CPRA which imposes additional notice and opt out obligations, including an obligation to provide an opt-out for behavioral advertising. The Digital Millennium Copyright Act, which aims to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or the rights of others, and other federal laws that restrict online service providers’ collection of user information on minors as well as distribution of materials deemed harmful to minors. In addition to the CCPA, the California Privacy Rights Act (“CPRA”) which passed in November 2020 will take effect in January 2023, will expand the rights granted under the CCPA and impose additional notice and opt out obligations, including an obligation to provide an opt-out for behavioral advertising and may affect us. Many U.S. states, such as California, have adopted or are adoptingplanning to adopt 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 in certain cases unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways and in a manner that is not consistent with our current data protection practices.
Foreign data protection, privacy and other laws and regulations may affect our business, and such laws can be more restrictive than those in the United States. For example, in Israel, privacy laws require that any request for personal information for use or retention in a database be accompanied by a notice that indicates: whether a person is legally required to disclose such information or that such disclosure is made at such person’s free will and consent; the purpose for which the information is requested; and to whom the information is to be delivered and for which purposes. A breach of privacy under such laws is considered a civil wrong and subject to administrative fines as well as civil damages. Certain violations of the law are considered criminal offences punishable by imprisonment. In the European Union, similar data protection rules exist as well was privacy legislation restricting the use of cookies and similar technologies. Subject to some limited exceptions, the storing of information, or the gaining of access to information already stored, in the terminal equipment of a subscriber or user is only allowed on condition that the subscriber or user concerned has given his or her informed consent. Moreover, the General Data Protection Regulation (which became effective in May 2018) presumably haveGDPR has an even wider territorialextraterritorial scope broadenedand the definition of personal data to includein broad and includes location data and online identifiers, and imposes more stringent user consent requirements. Further, it includes stringent operational requirements for companies that process personal data and will containcontains significant penalties for non-compliance. Also in other relevant subject matters, such as cyber security, data, e-commerce, copyright and cookies, new European initiatives have been announced by the European regulators. To further complicate matters in Europe,regulators and the European Commission and legislators. Further, 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 and stricter national rules.
Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees or infrastructure.
These regulations result in significant compliance costs and could result in restricting the growth and profitability of our business.
Recent Acquisitions
Acquisition of Vidazoo
On October 4, 2021, we entered into and consummated a Share Purchase Agreement, for the acquisition of all the shares of Vidazoo, an Israeli privately held company founded in 2014. Vidazoo is a leading video technology company that enables both advertisers and publishers to deliver high impact content and advertising to consumers. The acquisition was made for a total consideration of $93.5 million, consisting of $35.0 million in cash upon closing with an additional maximum of $58.5 million structured as a performance earn-out, if certain EBITDA-based targets are achieved.
Acquisition of Content IQ
On January 14, 2020, we entered into and consummated a Membership Interest Purchase Agreement, or MIPA, with Asaf Katzir and Ziv Yirmiyahu, or the Sellers, and Content IQ and Perion for the acquisition of all the shares of Content IQ, a privately held company founded in 2014, based in New York City with offices in Tel Aviv. Content IQ has created data algorithm and analytics tools that deconstruct content, revenue and distribution to solve digital publishing challenges. The acquisition was made for a total consideration of $73.05 million, of which $15 million in cash was paid upon closing, with an additional maximum $11 million will be paid as a retention incentive. As part of theThe total consideration there is aalso includes maximum of $47.05 million in earn-outs over a period of two years. The earn-outs areyears tied to revenue and EBITDA-based metrics that would be paid in full if Content IQ generates $158 million in revenue and more than $17 million of EBITDA in aggregate, over the next two years.metrics. The agreement also contains customary representations, warranties, covenants and indemnification provisions. As of the date of this report, the parties conduct a mediation with respect to the amount of earnout to be ultimately paid to the sellers.
On July 22, 2020, in connection with the acquisition of Pub Ocean, as stated below, we amended the MIPA. Under the terms of the amended MIPA, it was agreed with the Sellers, that (i) revenue and EBITDA of Pub Ocean will be attributed towards Sellers’ revenue and EBITDA targets under the MIPA with Perion; and (ii) Sellers will bear 40% of the cost of milestone payments that are ultimately payable to Pub Ocean under the Asset Purchase Agreement (as defined below), which will be paid solely by deductions from their own earn-out payments and certain escrowed amounts.
Acquisition of Pub Ocean
On July 22, 2020, we entered into an agreement, or the Asset Purchase Agreement, to acquire the assets of Pub Ocean, or the Asset Purchase Agreement a rapidly-growing digital publisher-focused technology company with scalable content distribution and real-time revenue analytics technology. Pub Ocean offers significant and immediate synergies to Content IQ, driving incremental revenue opportunities and enhanced profitability. The acquisition was for an aggregate cash consideration of up to $22 million, of which (i) $4 million was paid upon signing, (ii) $17 million of earn-out payments tied to financial targets to be paid over a two-year period, and (iii) an additional amount of $1 million in retention incentives to be paid over a two-year period. The agreement also contains customary representations, warranties, covenants and indemnification provisions.
Search Services Agreement with Microsoft
In November 2020, we entered into a renewed agreement with Microsoft Ireland Operations Limited effective as offrom January 1, 2021, until December 31, 2024, which includes desktop and mobile distribution with limited exclusivity in the United States and an extended geography distribution.
Diversity, Equity & Inclusion
As a global company, with employees, customers, suppliers and shareholders across the globe, we believe that a diverse and inclusive culture is the cornerstone for driving a successful company that creates value to our employees and the communities in which we operate. We are committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination. As of December 31, 2022, 44% of our global employee base were women.
| • | Compensation Framework: we have implemented a comprehensive framework which guides our pay decisions. We use an objective job and compensation evaluation methodology to reduce subjectivity and bias in pay decisions, leading to greater equity and alignment with the market in employee compensation. |
| • | Community Outreach: We believe that improving life quality of our employees as well as the communities in which they live, is of great value. We encourage our employees to participate in volunteering programs. We allow our employees to volunteer for 40 hours per year during working hours. We make donations to nonprofit organization such as Black Girls Code, “Cracking the glass ceiling”, holocaust survivors, youth organizations and many more around our communities. |
C.ORGANIZATIONAL STRUCTURE
The legal name of our Company is Perion Network Ltd. and we are organized under the laws of the State of Israel.
The following table sets forth all of our subsidiaries, which are 100% owned directly or indirectly by Perion Network Ltd.:
Name of Subsidiary | Place of Incorporation |
Codefuel Ltd. | Israel |
IncrediMail, Inc. | Delaware |
Intercept Interactive, Inc. | Delaware |
Vidazoo Ltd. | Israel |
Content IQ LLC | New York |
Pub Ocean Media UK Limited | England and Wales |
Pub Ocean Inc. | Delaware |
BT Media LLC | Nevada |
Make Me Reach SAS, dba Paragone | France |
Smilebox Inc. | Washington |
C. ORGANIZATIONAL STRUCTURE
Our subsidiaries and the countries of their incorporation are as follows:
Codefuel Ltd., our wholly-owned Israeli subsidiary, incorporated on November 6, 2019.
IncrediMail, Inc., our wholly-owned Delaware subsidiary, owns all of the outstanding shares of common stock of Smilebox Inc., a Washington corporation and all of the outstanding shares of common stock of IncrediTone Inc. and Pub Ocean Inc., our wholly-owned Delaware subsidiaries. IncrediTone Inc. owns all of the outstanding shares of common stock of Interactive Holding Corp., a Delaware corporation, which was acquired, together with its subsidiaries, in November 2015.
Content IQ LLC, our wholly-owned New York subsidiary, was acquired in January 2020, owns all of the membership interest of BT Media LLC, a Nevada limited liability company.
Pub Ocean Media UK Limited, our wholly-owned England and Wales subsidiary, was incorporated in July 2020.
Make Me Reach SAS, dba Paragone, our wholly owned French subsidiary, was acquired in February 2015.
Portilev Ltd., our wholly-owned Israeli subsidiary, incorporated on September 22, 2019 and was merged into the Company on October 25, 2021.
Vidazoo Ltd., our wholly-owned Israeli subsidiary, was acquired on October 4, 2021.
D. PROPERTY, PLANTS AND EQUIPMENT
Our headquarters are located in Holon, Israel. As of December 31, 2021,2022, we lease approximately 36,113 square feet, excluding office space which we currently sublease. The lease expires in 2025, with an option to extend for two additional two-year periods at itsour sole discretion and upon 180-day prior written notice. Annual net cost is approximately $0.8 million.
As of December 31, 2021, we lease office spaces in various locations in the United States, excluding office spaces we currently sublease. Our primary locations, and their principal terms, are as follows:
| | Square feet (net) | | | Annual Rent for 2021 in US$ in thousands (net) | | | Lease expires on (not including options) | |
New York, New York | | | 25,550 | | | $ | 1,737 | | | | 2026 | |
Chicago, Illinois | | | 3,984 | | | $ | 89 | | | | 2023 | |
Undertone’s offices are located at the World Trade Center (WTC) in New York and Chicago, pursuant to aYork. As of December 31, 2022, we lease agreement thatapproximately 9,500 square feet, excluding office space which we currently sublease. The lease expires in May 20262025 and September 2023, respectively. Under the lease agreement, we are entitled to terminate the lease of our offices in New York in 2024, at our sole discretion.annual net cost is approximately $0.7 million.
This excludes office spaces we currently sublease or short-term rent in co-working spaces.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5ITEM 5.. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated Financial Statements. In addition to historical financial information, the following discussion and analysis contains forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions, or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes,” or similar language. These forward looking statements involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed under Item 3.D. “Risk Factors” and elsewhere in this annual report.
Certain information called for by this Item 5, including a discussion of the year ended December 31, 2020 compared to the year ended December 31, 20192021 has been reported previously in our annual report on March 25, 202116, 2022 under Item 5 “Operating and Financial Review and Prospects”.
A. OPERATING RESULTSCompany Overview
General
Perion is a global advertising technology company that delivers holistic strategicwhose synergistic solutions are delivered across the three primary channels of digital advertising – ad search, social media and display, including video and CTV (connected TV) advertising. These channels are brought together by Perion’s iHUB, which integrates Perion’s business solutions that enableassets from both sides of the open web, providing significant benefits to brands and advertisers to efficiently “Capture and Convince” users across multiple platforms and channels, including interactive connected television – or iCTV. Perion achieves this through its Synchronized Digital Branding capabilities, which are focused on high impact creative; content monetization; its branded search network, in partnership with Microsoft Bing; and social media management that orchestrates and optimizes paid advertising. This diversification positions Perion for growth as budgets shift across categories.publishers.
Our headquarters and primary research and development facilities are located in Israel, and Kiev, we have our primary sales office in the United States and several other offices located in Europe.
A.OPERATING RESULTS
Components of Statements of Operations
The following describes the nature of our principal items of income and expense:
Revenue
We generate our revenue primarily from two major sources: (i)sources, Display Advertising;Advertising and (ii) Search Advertising.
Display Advertising - the Company generates Display Advertising revenue from delivering high impact ad formats through different channels – display, social and video/CTV, creatively designed to capture consumer attention and drive engagement, across a hand-picked portfolio of websites and mobile applications. The Company also generates Display Advertising revenue from content optimization solutions and services, which are being recognizes once the advertisement partners serve their advertisement across owned and operated properties as well as those of our publishers. In addition, the Company generates Display Advertising revenue from the use of its platform in online media channels which connects video and display advertisements derived from advertising partners to advertising inventory available within its publisher’s network.
Search Advertising - the Company obtains its Search Advertising revenue from service agreements with its search partners. Search Advertising revenue is generated primarily from monthly transaction volume-based fees earned by the Company for making its applications available to online publishers and app developers on a revenue share basis relative to the revenue generated by the search partners.
Geographic Breakdown of Revenue
Our Search Advertising and Display Advertising revenue are distributed and sold throughout the world (mainly in North America and Europe). The following table shows the revenue, presented in our revenuestatement of operations, generated by category (in thousands of U.S. dollars):territory in the years ended December 31, 2021 and 2022.
| | Year Ended December 31, | |
| | 2020 | | | 2021 | |
Display Advertising | | $ | 148,698 | | | $ | 265,323 | |
Search Advertising | | | 179,365 | | | | 213,175 | |
Total Revenue | | $ | 328,063 | | | $ | 478,498 | |
In 2021, revenue increased by 46% compared to 2020, primarily due to 78% growth in Display Advertising resulting from growth in video and CTV. Search Advertising revenue increased by 19% as a result of higher numbers of daily monetizable searches that were delivered to Microsoft Bing and others as well as increased numbers of publishers.
| | 2021 | | | 2022 | |
| | Search Advertising Revenue | | | Display Advertising Revenue | | | Search Advertising Revenue | | | Display Advertising Revenue | |
North America (Mainly U.S.) | | | 80 | % | | | 95 | % | | | 86 | % | | | 89 | % |
Europe | | | 18 | % | | | 4 | % | | | 13 | % | | | 10 | % |
Other | | | 2 | % | | | 1 | % | | | 1 | % | | | 1 | % |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of Revenue
Cost of revenue consists primarily of salariesexpenses associated with the operation of the Company’s server hosting, data verification and related expenses, license feestargeting, campaign creative, labor, as well as content acquisition costs and payments for content and server maintenance. Cost of revenue were $22.5 million or 7% of revenue in 2020 and $25.2 million or 5% of revenue in 2021. The decrease as a percentage of revenue results from our efforts to enhance process automation, the iHUB that acts as a shared infrastructure resource and offshoring our operations.
The number of employees included in cost of revenue as of December 31, 2020 and 2021 were 73 and 83, respectively.customer support.
Traffic Acquisition Costs and Media Buy
Our traffic acquisition costs and media buy consist primarily of payments to publishers and developers who distribute our search properties together with their products, as well as the cost of distributing our own products. In addition, media buy costs consist of the costs of advertising inventory incurred to deliver ads. Traffic acquisition costs are primarily based on revenue share agreements with our traffic sources and the media buy cost are primarily based on CPCCost Per Click (“CPC”) and CPM. Customer acquisition and media buy costs were $197.6 million or 60% of revenue and $288.0 million or 60% of revenue in 2020 and 2021, respectively. The stabilization of traffic acquisition costs and media buy level results from the continuous iHUB efforts to serve direct demand and supply in a closed loop and the product mix.Cost Per Mille (“CPM”).
Research and Development Expenses (“R&D”)
Our research and development expenses consist primarily of salaries and other personnel-related expenses, allocated facilities costs, subcontractors and consulting fees. Research and development expenses were $30.9 million or 9% of revenue in 2020 and $35.3 million or 8% of revenue in 2021. Our research and development expenses in 2021 increased comparedcosts are charged to the prior year, primarilystatement of income as a result of full year of payroll and subcontractors expenses related to the acquisition of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) and our continued investment in technology to strengthen our technology moat.
The number of employees in research and development were 135 and 115 as of December 31, 2020 and 2021, respectively.incurred.
Selling and Marketing Expenses (“S&M”)
Our selling and marketing expenses consist primarily of salaries and other personnel-related expenses, allocated facilities costs, as well as other outsourced marketing activities. Selling and marketing expenses were $39.1 million or 12% of revenue in 2020 and $53.2 million or 11% of revenue in 2021. The increase was primarily as a result of full year of payroll and related expenses related to the acquisitions of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) as well as headcount increase, overachievement commissions, retention plans related to acquisitions and increased stock-based compensation expenses.
The number of employees in sales and marketing was 146 and 154 as of December 31, 2020 and 2021, respectively.
General and Administrative Expenses (“G&A”)
Our general and administrative expenses consist primarily of salaries and other personnel-related expenses, allocated facilities costs, professional fees and other general corporate expenses. General and administrative expenses were $15.8 million or 5% of revenue in 2020 and $20.9 million or 4% of revenue in 2021. The increase was primarily due to headcount increase, overachievement bonuses, increased stock-based compensation expenses and consulting expenses related to M&A transactions.
The number of G&A employees was 63 and 68 as of December 31, 2020 and 2021, respectively.53
Impairment, loss of goodwill on intangible assets
Goodwill and intangible assets has been recorded as a result of prior acquisitions. Goodwill represents the excess of the consideration over the net fair value of the assets of the businesses acquired, the fair value of intangible assets was based on the market participant approach to valuation, performed by a third-party valuation firm, using estimates and assumptions provided by management.
We perform tests for impairment of goodwill and intangible assets at the reporting unit level at least annually, or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Following an impairment review of our goodwill and intangible assets for 2020 and 2021, it was concluded that no such impairment charges should be recorded.
Depreciation and amortizationAmortization
Depreciation and amortization consist primarily of depreciation of our property and equipment and the amortization of our intangible assets as a result of our acquisitions. Depreciation
Financial Expenses (Income), Net
Financial expenses (income), net consists of mainly interest income, foreign currency exchange gains or losses and amortization expensesforeign exchange forward transactions expenses. Interest income consists of interest earned on our cash, cash equivalents and short and long-term bank deposits. We expect interest income to vary depending on our average investment balances and market interest rates during each reporting period. Foreign currency exchange changes reflect gains or losses related to transactions denominated in 2020 and 2021 were $9.9 million.currencies other than the U.S. dollar.
Income Tax Expense
A significant portion of our income is taxed in Israel and, as a result of previous acquisitions, in the United States. The standard corporate tax rate in Israel was 23% in 20202021 and 2021.2022. For our Israeli operations we have elected to implement a tax incentive program pursuant to a 2011 Israeli tax reform, referred to as a “Preferred Enterprise,” according to which a reduced tax rate of 16.0%16% has applied to our preferred income in 2016. Starting in 2017 and in 2018, 2019, 2020 and 2021,through 2022, we elected to implement the “Preferred Technological Enterprise” benefits pursuant to an amendment to the taxation laws which went into effect in 2017, under which a tax rate of 12% is applied to a portion of our income which qualifies for the benefits. Any other income which does not qualify for special benefits is subject to the standard corporate tax rate. With respect to U.S. tax, we continue to utilize accumulated losses. The federal statutory income tax rate in the United States washas been 21% in 2018, 2019, 2020 and 2021.since 2018. Subsidiaries in Europe are taxed according to the tax laws in their respective countries of residence.
Critical Accounting Policies and EstimatesComparison of Period to Period Results of Operations:
The discussionfollowing table sets forth our results of operations in dollars amounts and analysisas a percentage of revenue for the periods indicated (in thousands of U.S. dollars):
| | Year ended December 31, | |
| | 2021 | | | 2022 | |
| | Amount | | | % of Revenue | | | Amount | | | % of Revenue | |
Revenue: | | | | | | | | | | | | |
Display advertising | | $ | 265,323 | | | | 55 | % | | $ | 360,690 | | | | 56 | % |
Search advertising | | | 213,175 | | | | 45 | | | | 279,566 | | | | 44 | |
| | | | | | | | | | | | | | | | |
Total Revenue | | | 478,498 | | | | 100 | | | | 640,256 | | | | 100 | |
| | | | | | | | | | | | | | | | |
Costs and Expenses: | | | | | | | | | | | | | | | | |
Cost of revenue | | | 25,197 | | | | 5 | | | | 30,404 | | | | 5 | |
Traffic acquisition costs and media buy | | | 288,018 | | | | 60 | | | | 372,601 | | | | 58 | |
Research and development | | | 35,348 | | | | 8 | | | | 34,424 | | | | 5 | |
Selling and marketing | | | 53,209 | | | | 11 | | | | 56,014 | | | | 9 | |
General and administrative | | | 20,933 | | | | 4 | | | | 23,813 | | | | 4 | |
Depreciation and amortization | | | 9,897 | | | | 2 | | | | 13,838 | | | | 2 | |
Total Costs and Expenses | | | 432,602 | | | | 90 | | | | 531,094 | | | | 83 | |
| | | | | | | | | | | | | | | | |
Income from Operations | | | 45,896 | | | | 10 | | | | 109,162 | | | | 17 | |
Financial expense (income), net | | | 581 | | | | * | ) | | | (4,502 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | |
Income before Taxes on income | | | 45,315 | | | | 10 | | | | 113,664 | | | | 18 | |
Taxes on income | | | 6,609 | | | | 2 | | | | 14,439 | | | | 2 | |
| | | | | | | | | | | | | | | | |
Net Income | | $ | 38,706 | | | | 8 | % | | $ | 99,225 | | | | 16 | % |
(*) Represents amounts of less than 0.5%
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenue. Revenue increased by 34% (or 24% on a proforma basis) from $478.5 million in 2021 to $640.3 million in 2022.
Display Advertising revenue. Display Advertising revenue increased by 36%, from $265.3 in 2021 to $360.7 in 2022, accounting for 56% of revenue in 2022. This increase is mainly driven by 129% growth in video revenue, 108% growth in CTV revenue and 11% increase in the average deal size.
Search Advertising revenue. Search Advertising revenue increased by 31%, from $213.2 in 2021 to $279.6 in 2022, accounting for 44% of revenue in 2022. This increase is primarily due to a 21% increase in RPM and 11% increase in average daily searches.
Cost of revenue. Cost of revenue increased by 21%, from $25.2 million in 2021 to $30.4 million in 2022 and remained stable at 5% of revenue in 2021 and 2022. Cost of revenue expenses increased in 2022 compared to the prior year, primarily as a result of full year payroll and hosting expenses related to the acquisition of Vidazoo (in October 2021) in addition to increase in our headcount and data verification and targeting software expenses which was aligned with the increase in the company’s revenue.
The number of employees included in cost of revenue as of December 31, 2021 and 2022 were 83 and 91, respectively.
Traffic acquisition costs and media buy. TAC amounted to $288.0 million, or 60% of revenue in 2021, compared with $372.6 million, or 58% of revenue in 2022. The improvement in media margin was primarily due to a favorable product mix and our iHub which connect the supply and demand sides of the marketplace, bringing Perion and its client’s significant efficiencies.
Research and development expenses. R&D decreased by 3% from $35.3 million, or 8% of revenue in 2021 to $34.4 million, or 5% of revenue in 2022. Our research and development expenses in 2022 decreased compared to the prior year, primarily as a result of retention expenses related to M&A transactions recorded in 2021 offset by full year of payroll related to the acquisition of Vidazoo (in October 2021) and increase of stock-based compensation expenses in 2022.
The number of employees in research and development were 115 and 121 as of December 31, 2021 and 2022, respectively.
Selling and marketing expenses. S&M expenses increased by 5%, from $53.2 million, or 11% of revenue in 2021 to $56.0 million, or 9% of revenue in 2022. The increase was primarily as a result of full year of payroll and related expenses related to the acquisition of Vidazoo (in October 2021), as well as increased expenses in marketing related and conferences expenses.
The number of employees in sales and marketing was 154 and 150 as of December 31, 2021 and 2022, respectively.
General and administrative expenses. G&A increased by 14%, from $20.9 million, or 4% of revenue in 2021 to $23.8 million, or 4% of revenue in 2022. The increase of our general and administrative expenses resulted mainly from increased stock-based compensation expenses, increase in our headcount, management consulting and other corporate services.
The number of G&A employees was 68 and 78 as of December 31, 2021 and 2022, respectively.
Depreciation and amortization. Depreciation and amortization expenses increased by 40%, from $9.9 million in 2021 to $13.8 million in 2022. The increase was primarily as a result of full year of amortization of our intangible assets results from Vidazoo acquisition.
Financial Expenses (Income), Net. Finance income increased by $5.1 million from a finance expense of $0.6 million in 2021 to finance income of $4.5 million in 2022. The increase in financial income was primarily a result of interest income driven from higher cash balances invested in bank deposits along with higher yield rates in 2022.
Taxes on income (benefit). Our tax expenses increased from $6.6 million, or 2% of revenue in 2021 to $14.4 million, or 2% of revenue in 2022. The increase in tax expense resulted primarily from higher pre-tax income in 2022. In addition, the decrease of the effective tax rate derived from increases in tax deductible costs and the impact of foreign exchange fluctuations on non-USD tax assets and liabilities.
B.LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our general capital expenditures with cash generated from operations, debt and equity offerings. To the extent we acquire new businesses, these acquisitions may be financed by any of, or a combination of, current cash balance, cash generated from operations, debt or issuances of equity.
As of December 31, 2022, we had $429.6 million in cash, cash equivalents and short-term deposits, compared to $321.6 million at December 31, 2021. The $108.0 million increase is primarily result of $122.1 million cash provided by operating activities offset by $9.6 million cash paid in connection with acquisitions.
We believe that our current working capital and cash flow from operation, in addition to proceeds from our 2021 public offerings, are sufficient to meet our operating cash requirements for at least the next twelve months. Our cash requirements have principally been for working capital, capital expenditures and acquisitions.
The following table presents the major components of net cash flows for the periods presented (in thousands of U.S. dollars):
| | Year ended December 31, | |
| | 2021 | | | 2022 | |
Net cash provided by operating activities | | $ | 71,106 | | | $ | 122,119 | |
Net cash used in investing activities | | | (243,470 | ) | | | (46,816 | ) |
Net cash provided by (used in) financing activities | | | 229,054 | | | | (3,258 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | (33 | ) | | | (59 | ) |
Net increase in cash and cash equivalents and restricted cash | | $ | 56,657 | | | $ | 71,986 | |
Net cash provided by operating activities
In 2022, our operating activities provided cash in the amount of $122.1 million, primarily as result of income in the amount of $99.2 million, decreased by non-cash expenses, depreciation and amortization of $13.8 million, stock-based compensation expenses of $11.6, and net change of $2.7 million in operating assets and liabilities offset by change in accrued interest, net of $3.6 million and change in deferred taxes of $1.4 million.
In 2021, our operating activities provided cash in the amount of $71.1 million, primarily as result of income in the amount of $38.7 million, decreased by non-cash expenses, depreciation and amortization of $9.9 million, stock-based compensation expenses of $7.0 and net change of $17.7 million in operating assets and liabilities million offset by change in deferred taxes of $2.8 million.
Net cash used in investing activities
In 2022, we used in our investing activities $46.8 million cash, primarily due to $36.2 million investment in short-term deposits, $9.6 million cash paid in connection to acquisitions and $1.1 million purchase of property plant and equipment.
In 2021, we used in our investing activities $243.5 million cash, primarily due to $204.5 million investment in short-term deposits, $38.4 million cash paid in connection to acquisitions and $0.6 million purchase of property plant and equipment.
Net cash used in financing activities
In 2022, we used in our financing activities $3.3 million, primarily due to $9.1 million payment of contingent consideration, offset by $5.8 million proceeds from exercise of options.
In 2021, our financing activities provided cash in the amount of $229.1 million, primarily due to $230.5 million issuance of shares in private placement, net, and $6.9 million proceeds from exercise of options, offset by $8.3 million repayment of our long-term loan.
Bank Mizrahi Credit Facility
On December 17, 2018, ClientConnect Ltd. (“ClientConnect”), a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a new loan facility with Bank Mizrahi in the amount of $25 million. As of March 8, 2021, this credit facility was repaid in full.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements (as such term is defined by applicable SEC regulations) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
C.RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC.
We conduct our research and development activities primarily in Israel. As of December 31, 2022, our research and development department included 121 employees. Research and development expenses were $35.3 million and $34.4 million in the years ended December 31, 2021 and 2022, respectively. In 2022, our efforts were focused on adapting, extending and maintaining compatibility with the ever-changing business landscapes and automation of our platforms and operating systems.
For a discussion of our intellectual property and how we protect it, see “Business Overview—Intellectual Property” under Item 4.B. above.
D.TREND INFORMATION
Industry trends expected to affect our revenue, income from continuing operations, profitability and liquidity or capital resources:
1. The digital advertising environment is very crowded and consumers suffer from over exposure to advertising promotions. This in turn has brought on a certain level of blindness to advertising, decreasing their effectiveness and value to advertisers. We are therefore concentrating on unique stand-out quality ad formats with great creative execution that grabs the attention of consumers, increasing the effectiveness of the ad and ultimately the value to advertisers.
2. The macroeconomic downturn during 2022 forced advertisers to reassess their digital advertising budget allocations and shift budgets from social platforms and standard ad units to direct response platforms such as search advertising and high-impact ad units for video and display, including CTV and retail. Those actions are intended to increase customer engagement, thus enhancing their brand equity and increasing return on investment (ROI). Through its business diversification strategy, Perion operates in the three main pillars of digital advertising – social media, search advertising and display/video/CTV– and can rapidly react to those budget shifts and capitalize on them by focusing efforts and resources to where budgets are shifting.
3. Retail media is a fast-growing market segment, as retailers are looking into leveraging the first-party data they manage to create advertising opportunities both on the retailer site and into the open web. According to eMarketer, Retail media accounted for $37 billion in 2022, 15.0% of the U.S. digital ad spending, and is expected to increase by 48% to $55 billion by 2024, which would represent 17.8% of the U.S. digital ad spending. Perion’s Retail Media solutions provide a unique solution through advertising “Ads-as-a-platform” that enable personalized, dynamic solutions in Perion’s signature high-impact approach, which are highly sought as grocers as other retailers shift from print advertising to digital solutions. Perion also offers retailers an “always on” solution, ensuring retailers constant advertising that maintains high brand awareness along ongoing performance campaigns on one hand, and generates a steady revenue stream for Perion along the year.
4. Advertisers and consumers are becoming increasingly aware of user online privacy matters, recognizing the need protect user privacy ahead of the expected deprecation of cookies by Google. This is evident in the continuous increase in customer adoption of Perion’s cookieless SORT® solution, as 59% of our agencies and brand customers adopted our SORT® solution in Q4 2022.
5. Another trend we are seeing is a shift from linear TV to digital Connected TV (CTV). Though traditional linear TV ad spending dominates the market, CTV advertising is growing at a much faster rate. According to eMarketer, CTV ad spending is expected to increase from $19 billion in 2022 to $39 billion in 2026, while linear TV ad spending is expected to decrease by $720 million during that period. Perion’s CTV business continued to gain traction, growing by 42% year-over-year in 2022, representing 10% of the total display advertising revenue.
6. The digital advertising environment is complex and fragmented. As a result, it is increasingly difficult for advertisers, including brands and agencies, as well as investors, to discern the difference between the offerings, and this situation requires advertisers to maintain only small number of relationships which provide a comprehensive and holistic solution and service. In addition, advertisers are looking for clean, safe and transparent solutions. We are attempting to address these needs in our various revenue streams by providing robust, scalable and differentiated products across multiple platforms. Our solution offers a full suite of services for the advertising brand and agency, including the entire advertising process from creative through analytic data collection and processing which is also utilized through programmatic capabilities which has an increasing demand. Through Content IQ, we provide advertisers the ability to serve advertisements which are targeted to the end-user’s interests alongside relevant optimized content and page-level reader engagement. Our solution also includes a technology platform for buying media on social and mobile platforms which helps optimize the money spent by agencies and advertisers. In turn, we also provide the publisher a solution for creating new advertising inventory and increasing their revenue.
7. Our search monetization revenue is predominantly within the desktop computer environment. The transition in recent years of consumer consumption of applications, services and content from desktop towards mobile platforms has accelerated and, as a result, an increasing share of advertising campaigns are channeled towards mobile platforms resulting in fewer consumer software downloadable products are being developed. To address this trend, we have shifted the growth focus of all parts of this business away from downloadable desktop software towards the monetization of other search assets.
8. The most recent trend that is shaking up internet in general and search advertising in particular, is generative AI and Microsoft’s Bing integration of the AI-driven ChatGPT. Though generative AI is expected to change the way we consume internet, ChatGPT, designed and developed by OpenAI as a conversational AI model that was released in late 2022, gained traction fast, reaching 1 million users in just 5 days. Though the technology is still evolving, and developers are working to correct existing bugs, popularity keeps growing as the new AI-powered Bing search engine reached 100 million daily active users during March 2023 with roughly one third was new to Bing while engagement was on the rise. It is expected that ChatGPT will revolutionize Bing search capabilities by providing more advanced and intuitive search experiences for its users, better meeting their needs and expectations. We believe that such superior search results will increase advertiser spending and as a result, we expect a potential positive impact on our search business.
9. In past years the browser companies, particularly Google and Microsoft, as well as others, have been instituting policy changes, regulations and technologies that is making it increasingly difficult to change a browser’s settings even with user consent, including the ability to change a browser’s default search settings. Changing such settings has been a major part of the Company’s monetization model and until now we have been successful in dealing with these measures, within the framework allowed by these companies We continue to believe, as supported by the level of revenue over the last couple of years, that as the market continues to consolidate around accepted marketing practices, there remains sufficient business at a level sufficient to generate significant revenue and profits.
For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our business, see Item 3.D “Key Information—Risk Factors.”
For additional trend information, see the discussion in Item 5.A. “Operating and Financial Review and Prospects—Operating Results.”
E.CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Accrued Severance Pay
As of December 31, 2022 our accrued severance pay amounted to $2.3 million and consisted of prior notice to our executive employees as well as severance pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable only upon termination, retirement or death of the respective employee and for which we are unable to reasonably estimate the ultimate amount and timing of settlement. Of this amount, $2.0 million is unfunded as of December 31, 2022. See also Note 2 to our consolidated financial statements appearing in “ITEM 18. Financial Statements” of this annual report.
Uncertain Tax Positions (ASC-740)
As of December 31, 2022 our accruals for uncertain tax positions amounted to $9.4 million and consisted of accruals for certain income tax positions under ASC 740 that are paid upon settlement with tax authorities, and for which we are unable to reasonably estimate the ultimate amount and timing of settlement. See Note 13(h) to our consolidated financial statements included in ITEM 18 of this annual report for further information regarding our liability under ASC 740.
Operating Leases
We have various non-cancelable operating leases for our headquarters in Holon, Israel and Undertone offices in New York.
The lease of our offices in Holon expires in 2025, with an option to extend for two additional two-year periods at its sole discretion and upon 180-day prior written notice.
The lease of Undertone offices in New York expires in 2025.
As of December 31, 2022, the aggregate future financial obligations under these lease agreements were $12.7 million, of which $4.6 million is due in the next twelve months.
F.CRITICAL ACCOUNTING ESTIMATES
We have provided a summary of our significant accounting policies, estimates and judgments in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report. The following critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operation are based on our financial statements,operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affectmay impact the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Under U.S. GAAP, when more than one accounting method or policy or its application is generally accepted, our management selects the accounting method or policy that it believes to be most appropriate in the specific circumstances. Our management considers some of these accounting policies to be critical.
A critical accounting policy is an accounting policy that management believes is both most important to the portrayalcomparability of our financial condition, results of operations and resultscash flows to those of other companies.
Revenue recognition
The Company applies the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”or “Topic 606”“=). The Company applies the practical expedient for incremental costs of obtaining contracts when the associated revenue is recognized over less than one year.
The Company generates revenue primarily from two major sources, Display Advertising Revenue and requires management’s most difficult subjectiveSearch Advertising Revenue. The Company evaluates whether Search Advertising Revenue and Display Advertising Revenue should be presented on a gross basis, which is the amount that a customer pays for the service, or complex judgment, oftenon a net basis, which is the amount of the customer payment less amounts the Company pays to publishers. In making that evaluation, the Company considers whether it controls the promised good or service before transferring that good or service to the customer. The Company considers indicators such as whether the Company is the primary obligor in the arrangement and assumes risks and rewards as a resultprincipal or an agent, whether it changes the products or performs part of the needservice, whether the Company has discretion in establishing prices and whether it controls the underlying advertising space. The evaluation of these factors is subject to make accounting estimates aboutsignificant judgment and subjectivity. Generally, in cases in which the effect of matters that are inherently uncertain. While our significant accounting policies are discussed in Note 2 ofCompany controls the Financial Statements, we believe the following accounting policiesspecified good or service before it is transferred to be critical:a customer, revenue is recorded on a gross basis.
Stock-Based Compensation
We accountThe Company accounts for stock-based payment awards made to employees and directors in accordance withshare-based compensation under ASC 718, “Compensation –- Stock Compensation”, which requires the measurement and recognition of compensation expense based on estimated fair values. Determiningvalues for all share-based payment awards made to employees, contractors and directors. ASC 718 requires companies to estimate the fair value of stock-basedequity-based awards on the date of grant, using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income. The Company estimates forfeitures to be estimated at the time of grant, date requires the exercise of judgment, as well as the determination of the amount of stock-based awards that are expected to be forfeited. We adopted ASU 2016-09 on January 1, 2017, and chose to continue to use the current method of estimating forfeitures each period rather than accounting for forfeitures as they occur. The adoption of the new standard had no material impact on our consolidated financial statements. Ifrevised if necessary in subsequent periods, if actual forfeitures differ from our estimates, stock-basedthose estimates.
The Company recognizes compensation expense and our results of operations would be impacted. Expense is recognizedexpenses for the value of theits awards, which have graded vesting based on service conditions, using the straight-line method, over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. For performance-based stockshare units, expense is recognizedthe Company recognizes compensation expenses for the value of such awards, if and when we concludethe Company concludes that it is probable that a performance condition will be achieved. We are required toachieved based on the accelerated attribution method over the requisite service period. The Company reassess the probability of the vesting at each reporting period for awards with performance conditions and adjust compensation cost based on its probability assessment.
We account for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances.
In order to keep our competitive hiring position in the industry, following our board of directors’ approval in December 2017, we effected in 2018 an option repricing plan. Under the repricing plan, among others, options granted to all of our employees, with certain limited exceptions and other than our directors, were adjusted to have an exercise price per share equal to $3.24, which was the weighted average price of our ordinary shares on Nasdaq in the last 90 days prior to the date of approval of the plan by our board of directors as well as have a new vesting schedule. The total incremental fair value of these repriced options amounted to $1.5 million, and was determined based on the binomial pricing options model.
Total stock-based compensation expense recorded during 20212022 was $7.0$11.6 million, of which $0.2$0.5 million was included in cost of revenue, $1.0$2.1 million in research and development costs, $3.2$4.5 million in selling and marketing expenses, and $2.6$4.5 million in general and administrative expenses.
As of December 31, 2021,2022, the maximum total compensation cost related to options and RSU’s, granted to employees and directors not yet recognized amounted to $16.3$20.7 million. This cost is expected to be recognized over a weighted average period of 1.591.57 years.
We estimate the fair value of standard stock options granted using the Binomial method option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant is expected stock price volatility. Expected volatility was calculated based upon actual historical stock price movements of our stock. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The fair value of RSUsrestricted share units is based on the market value of the underlying shares at the date of grant.
Taxes on Income
We are subject to income taxes primarily in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit,upon examination by the relevant tax authority, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit,examination, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We record valuation allowances for deferred tax assets that we believe are not more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 20212022 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 1413 of the Financial Statements for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
Business Combinations
We allocateaccount for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based onand liabilities assumed at their estimated fair values.values on the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair valuesvalue of assets acquired and liabilities assumed, management makes significantwe make estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and acquired patents and developed technology; and discount rates. Management’s Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and, as a result, actual results may differ from estimates.
Goodwill During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
Goodwill is allocated to reporting units expected to benefit fromand Other Intangible Assets
Goodwill and certain other purchased intangible assets have been recorded in our financial statements as a result of acquisitions. In business combination. We perform tests for impairment of goodwill at the reporting unit level at least annually, or more frequently if events or changescombinations, in circumstances occur that would more likely than not reduceaccordance with ASC Topic 805, “Business Combination,” we allocate the fair value of a reporting unit below its carrying value. Goodwill impairment testspurchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. Such valuations require judgment,us to make significant estimates, assumptions, and judgments, especially with respect to intangible assets. The estimated fair values and useful lives of identifiable intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the identificationacquired business, market conditions, technological developments and specific characteristics of reporting units, assignmentthe identified intangible assets. The allocation of assets and liabilitiesthe consideration transferred in certain cases may be subject to reporting units, assignment of goodwill to reporting units, andrevision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.
Goodwill represents excess of the purchase price in a business combination over the fair value of eachidentifiable tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject to an impairment test.
ASC No. 350, “Intangible—Goodwill and Other” requires goodwill to be tested for impairment at least annually and, in certain circumstances, between annual tests. The accounting guidance gives the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment includes judgement and considers events and circumstances that might indicate that a reporting unit.unit’s fair value is less than its carrying amount.
No impairment of goodwill charges were recorded in 2020 nor 2021.
For the years ended December 31, 2021 and 2022, no impairment losses were recorded.
Impairment of Long-Lived Assets
We are required to assess the impairment of tangible and intangible long-lived assets and right-of-use assets subject to amortization, under ASC 360 “Property, Plant and Equipment”, on a periodic basis and when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period.
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows from the use of the asset or asset group to the carrying amount of the asset, an impairment charge is recorded for the excess of carrying amount over the fair value. We measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable, but these estimates are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. In 2020
For the years ended December 31, 2021 and 20212022, no impairment of long-livedlong lived assets charges were recorded.
Derivative and Hedge Accounting
During fiscal 20202021 and 2021,2022, approximately 8% and 9%, respectively, of our operating expenses, were denominated in NIS. In order to mitigate the potential adverse impact on cash flows resulting from fluctuations in the NIS exchange rate, we started to hedge portions of our NIS forecasted expenses with derivatives contracts. We implement hedge accounting under ASC-815, therefore, the effective portion of the change in fair value on the derivatives is reported as a component of other comprehensive income and gains or losses are reclassified into the relevant period earnings. We recognize in “financial income,expenses (income), net” the ineffective portion of a derivative change in fair value, if any, as well as the change in fair value of all non-designated under hedge accounting derivatives.
Establishing and accounting for foreign exchange contracts involve judgments, such as determining the fair value of the contracts, determining the nature of the exposure, assessing its amount and timing, and evaluating the effectiveness of the hedging arrangement.
Although we believe that our estimates are accurate and meet the requirement of hedge accounting, if actual results differ from these estimates, such difference could cause fluctuation of our recorded expenses.
Recent Accounting Standards
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In October 2021 the FASB issuedASU 2021-08, Topic 805 “Business Combinations” – Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”.Customers. The amendments in this update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impactadoption of the new guidance will have an immaterial impact on its consolidated financial statements.statements
Results of Operations
The following table presents, for the periods indicated, our costs and expenses of our continuing operations, by category (in thousands of U.S. dollars):
| | Year ended December 31, | |
| | 2020 | | | 2021 | |
Cost of revenue | | $ | 22,477 | | | $ | 25,197 | |
Traffic acquisition costs and media buy | | | 197,626 | | | | 288,018 | |
Research and development | | | 30,880 | | | | 35,348 | |
Selling and marketing | | | 39,085 | | | | 53,209 | |
General and administrative | | | 15,819 | | | | 20,933 | |
Depreciation and amortization | | | 9,923 | | | | 9,897 | |
Total Costs and Expenses | | $ | 315,810 | | | $ | 432,602 | |
The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenue (the percentages may not equal 100% because of the effects of rounding):
| | Year Ended December 31, | |
| | 2020 | | | 2021 | |
Revenue: | | | | | | |
Display Advertising | | | 45 | % | | | 55 | % |
Search Advertising | | | 55 | | | | 45 | |
Total revenue | | | 100 | % | | | 100 | % |
| | | | | | | | |
Costs and expenses: | | | | | | | | |
Cost of revenue | | | 7 | % | | | 5 | % |
Traffic acquisition costs and media buy | | | 60 | | | | 60 | |
Research and development | | | 9 | | | | 8 | |
Selling and marketing | | | 12 | | | | 11 | |
General and administrative | | | 5 | | | | 4 | |
Depreciation and amortization | | | 3 | | | | 2 | |
Total costs and expenses | | | 96 | | | | 90 | |
| | | | | | | | |
Operating income | | | 4 | | | | 10 | |
Financial expenses, net | | | 1 | | | | (0 | ) |
Income before taxes on income | | | 3 | | | | 10 | |
Income tax expense (benefit) | | | (0 | ) | | | 2 | |
Net Income | | | 3 | % | | | 8 | % |
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue. Revenue increased by 46%, from $328.1 million in 2020 to $478.5 million in 2021.
Display Advertising revenue. Display Advertising revenue increased by 78% in 2021, from $148.7 million in 2020 to $265.3 million in 2021. This increase was a result of the acceleration of our Connected TV advertising offering.
Search Advertising revenue. Search Advertising revenue increased by 19% in 2021, from $179.4 million in 2020 to $213.2 million in 2021. This increase is result of higher numbers of daily monetizable searches that were delivered to Microsoft Bing and others as well as increased numbers of publishers.
Cost of revenue. Cost of revenue increased by 12%, from $22.5 million in 2020 to $25.2 million in 2021. Cost of revenue decreased in terms of the percentage of revenue, representing 7% of revenue in 2020 and 5% in 2021. The decrease as a percentage from revenue results from our efforts to enhance process automation, the iHUB that acts as a shared infrastructure resource and offshoring our operations.
Traffic acquisition costs (“TAC”) and media buy. TAC and media buy increased by 46%, from $197.6 million or 60% of revenue in 2020 to $288.0 million or 60% of revenue in 2021. The stabilization of traffic acquisition costs and media buy level results from the continuous iHUB efforts to serve direct demand and supply in a closed loop and the product mix.
Research and development expenses (“R&D”). R&D increased by 14%, from $30.9 million in 2020 to $35.3 million in 2021. Our research and development expenses in 2021 increased compared to the prior year, primarily as a result of full year of payroll and subcontractors expenses related to the acquisition of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) and our continued investment in technology to strengthen our technology moat.
Selling and marketing expenses (“S&M”). S&M expenses increased by 36%, from $39.1 million in 2020 to $53.2 million in 2021. The increase was primarily as a result of full year of payroll and related expenses related to the acquisitions of Pub Ocean (in July 2020), the acquisition of Vidazoo (in October 2021) as well as headcount increase, overachievement commissions, retention plans related to acquisitions and increased stock-based compensation expenses.
General and administrative expenses (“G&A”). G&A increased by 32%, from $15.8 million in 2020 to $20.9 million in 2021. The increase was primarily due to headcount increase, overachievement bonuses, increased stock-based compensation expenses and consulting expenses related to M&A transactions.
Depreciation and amortization. Depreciation and amortization expenses remained stable in the amount of $9.9 million in 2021 and 2020. Depreciation and amortization consist primarily of depreciation of our property and equipment and the amortization of our intangible assets as a result of our acquisitions.
Taxes on income (benefit). Taxes on income increased by $7.2 million from a tax income of $0.6 million in 2020 to $6.6 million tax expense in 2021. The increase was primarily a result of higher pre-tax income in 2021 ($9.6 million pre-tax tax income in 2020 vs. $45.3 million pre-tax income in 2021) in addition to internal entities merger completed during 2020, which enabled the company to utilize its tax attributes more efficiently.
B. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2021, we had $321.6 million in cash, cash equivalents and short-term deposits, compared to $60.4 million at December 31, 2020. The $261.3 million increase is primarily the result of $230.5 million cash provided from issuance of shares in private placement, net, $71.1 million cash provided by operating activities and $6.9 million cash provided from exercise of share options, offset by $38.4 million cash paid in connection with acquisitions and $8.3 million repayment of our debt and $0.5 million used in other investing activities.
Net cash provided by operating activities
In 2021, our operating activities provided cash in the amount of $71.1 million, primarily as result of income in the amount of $38.7 million, decreased by non-cash expenses, depreciation and amortization of $9.9 million, stock-based compensation expenses of $7.0, change in Accrued severance pay, net of $0.7 and net change of $17.7 million in operating assets and liabilities million offset by change in deferred taxes of $2.8 million.
In 2020, our operating activities provided cash in the amount of $22.2 million, primarily as result of income in the amount of $10.2 million, decreased by non-cash expenses, depreciation and amortization of $9.9 million, stock-based compensation expenses of $4.4, change in payment obligation related to acquisitions of $4.6 million offset by change in deferred taxes of $3.1 million and net change of $3.9 million in operating assets and liabilities.
Net cash used in investing activities
In 2021, we used in our investing activities $243.5 million cash, primarily due to $204.5 million investment in short-term deposits, $38.4 million cash paid in connection to acquisitions and $0.5 million purchase of property plant and equipment.
In 2020, we used in our investing activities $8.9 million cash, primarily due to $19.0 million cash paid in connection to acquisitions and $0.5 million purchase of property plant and equipment offset by a $10.5 million withdrawal from short-term deposits.
Net cash used in financing activities
In 2021, our financing activities provided cash in the amount of $229.1 million, primarily due to $230.5 million issuance of shares in private placement, net, and exercise of options in the amount of $6.9 million, offset by $8.3 million repayment of our long-term loan.
In 2020, we used in our financing activities $4.0 million cash, primarily due to $8.3 million repayment of our long and short-term loan offset by proceeds from exercise of options in the amount of $4.3 million.
Bank Mizrahi Credit Facility
On December 17, 2018, ClientConnect Ltd. (“ClientConnect”), a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a new loan facility with Bank Mizrahi in the amount of $25 million. As of March 8, 2021, this credit facility was repaid in full.
Financing Needs
We believe that our current working capital and cash flow from operation, in addition to proceeds from our January 2022 public offering, are sufficient to meet our operating cash requirements for at least the next twelve months, including payments required under our existing bank loans.
Off Balance Sheet Arrangements
We do not have off-balance sheet arrangements (as such term is defined by applicable SEC regulations) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
C. RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC.
Our research and development activities are conducted internally by 115 persons at December 31, 2021. Research and development expenses were $30.9 million and $35.3 million in the years ended December 31, 2020 and 2021, respectively. In 2021, our efforts were focused on adapting, extending (organically and in-organically through acquisitions) and maintaining compatibility with the ever-changing business landscapes and automation of our platforms and operating systems.
For a discussion of our intellectual property and how we protect it, see “Business Overview—Intellectual Property” under Item 4.B. above.
D. TREND INFORMATION
Industry trends expected to affect our revenue, income from continuing operations, profitability and liquidity or capital resources:
1. The digital advertising environment is very crowded and consumers suffer from over exposure to advertising promotions. This in turn has brought on a certain level of blindness to advertising, decreasing their effectiveness and value to advertisers. We are therefore concentrating on unique stand-out quality ad formats with great creative execution that grabs the attention of consumers, increasing the effectiveness of the ad and ultimately the value to advertisers.
2. The digital advertising environment is also complex and fragmented. As a result, it is increasingly difficult for advertisers, including brands and agencies, as well as investors, to discern the difference between the offerings, and this situation requires that advertisers to maintain only small number of relationships which provide a comprehensive and holistic solution and service. In addition, advertisers are looking for clean, safe and transparent solutions. We are attempting to address these needs in our various revenue streams by providing robust, scalable and differentiated products across multiple platforms. Our solution offers a full suite of services for the advertising brand and agency, including the entire advertising process from creative through analytic data collection and processing which is also utilized through programmatic capabilities which has an increasing demand. Through Content IQ, we provide advertisers the ability to serve advertisements which are targeted to the end-user’s interests alongside relevant optimized content and page-level reader engagement. Our solution also includes a technology platform for buying media on social and mobile platforms which helps optimize the money spent by agencies and advertisers. In turn, we also provide the publisher a solution for creating new advertising inventory and increasing their revenue.
3. Our search monetization revenue is predominantly within the desktop computers environment. The transition in recent years of consumer consumption of applications, services and content from desktop towards mobile platforms has accelerated and, as a result, an increasing share of advertising campaigns are channeled towards mobile platforms resulting in fewer consumer software downloadable products are being developed. To address this trend, we have shifted the growth focus of all parts of this business away from downloadable desktop software towards the monetization of other search assets.
4. In past years the browser companies, particularly Google and Microsoft, as well as others, have been instituting policy changes, regulations and technologies that is making it increasingly difficult to change a browser’s settings even with user consent, including the ability to change a browser’s default search settings. Changing such settings has been a major part of the Company’s monetization model and until now we have been successful in dealing with these measures, within the framework allowed by these companies We continue to believe, as supported by the level of revenue over the last couple of years, that as the market continues to consolidate around accepted marketing practices, there remains sufficient business at a level sufficient to generate significant revenue and profits.
For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our business, see Item 3.D “Key Information—Risk Factors.”
For additional trend information, see the discussion in Item 5.A. “Operating and Financial Review and Prospects—Operating Results.”
E. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual commitments as of December 31, 2021 and the effect those commitments are expected to have on our liquidity and cash flow in future periods. All numbers below are in US dollars in thousands.
| | Payments Due by Period(****) | |
Contractual Commitments as of December 31, 2021 | | Total | | | Less than 1 year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | |
Accrued severance pay (1) | | | 2,371 | | | | | | | | | | | | | |
Uncertain tax positions (ASC-740) (2) | | | 6,928 | | | | | | | | | | | | | |
Operating leases | | | 15,368 | | | | 4,485 | | | | 8,205 | | | | 2,678 | | | | - | |
Total | | $ | 24,667 | | | $ | 4,485 | | | $ | 8,205 | | | $ | 2,678 | | | $ | - | |
_________________
| (1) | Prior notice to our executive employees as well as severance pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable only upon termination, retirement or death of the respective employee. Of this amount, $1.8 million is unfunded as of December 31, 2021. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table. See also Note 2 to our consolidated financial statements appearing in “ITEM 18. Financial Statements” of this annual report.
|
| (2) | Consists of accruals for certain income tax positions under ASC 740 that are paid upon settlement, and for which we are unable to reasonably estimate the ultimate amount and timing of settlement. See Note 14(h) to our consolidated financial statements included in ITEM 18 of this annual report for further information regarding our liability under ASC 740. Payment of these obligations would result from settlements with tax authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are only presented in their total amount. |
ITEM 6ITEM 6.. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | DIRECTORS AND SENIOR MANAGEMENT |
A.DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information regarding our executive officers and directors as of 5,March 6, 2022:
Name | | Age | | Position |
Eyal Kaplan*(1)(2) | | 62 | 63 | Chairman of the Board of Directors |
Doron Gerstel | | 61 | 62 | Chief Executive Officer; Director |
Tal Jacobson | 48 | General Manager, CodeFuel |
Maoz Sigron | | 44 | 45 | Chief Financial Officer |
Dror Erez*Michal Drayman*(1)(3)(4)
| | 52 | 50 | Director |
Sarit Firon*Amir Guy*(1)(4)(3)
| | 55 | 53 | Director |
Rami Schwartz* (3)(4) | | 64 | | Director |
Michael Vorhaus*(2)(3)(4) | | 64 | 65 | Director |
Joy Marcus*(2)(3) | | 60 | 61 | Director |
Daniel E. Aks | | 62 | | President, Undertone |
Tal JacobsonDaniel Slivkin | 39 | 47 | | General Manager, CodeFuelChief Executive Officer, Vidazoo |
Eliran Ben YehudaGal Dagan | 38 | 37 | | General Manager, CIQVP R&D, Vidazoo |
_________________________
* “Independent director” under the Nasdaq Listing Rules.
(1) Member of our investment committee.
(2) Member of our nominating and governance committee.
(3) Member of our compensation committee.
(4) Member of our audit committee.
EffectiveWe recently announced entering a CEO transition period, as ofTal Jacobson will be promoted to Chief Executive Officer on August 26, 2019, our board of directors adopted1, 2023. Following Mr. Jacobson’s promotion, Mr. Gerstel will step down from the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, as a result our director in office who was electedexecutive team and classified as external director, Ms. Sarit Firon, is no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such former external directors have the right to remain in office as company’s directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation. Ms. Sarit Firon’s term of office expired in January 2020, however our board of directors has re-appointed Ms. Firon with the term of office that expired on our 2021 annual meetingBoard of shareholders. Ms. Sarit Firon was re-elected on our 2021 annual general meeting of shareholders to serve as our director until our 2024 annual general meeting of shareholders. Directors.
There are no arrangements or understandings between any of our directors or executive officers and any other person pursuant to which our directors or executive officers were selected.
Eyal Kaplan has beenserved as the chairperson of the board of directors of the Company since May 2018. Mr. KaplanHe is also the chairperson of Expand Investments, anMedial Earlysign, a privately held company in the healthcare technology field, since 2016. Mr. Kaplan is also engaged in advisory and consulting, firm focusing on growth-through-innovation and corporate strategies. Prior to that, he was Managing General Partner with Walden Israel, a venture capital firm, during which time he was Director and chairperson of numerous portfolio companies. In 1990 he co-founded Geotek Communications, an international wireless communications company, and served as senior vice president with broad strategic, managerial and operational responsibilities until 1995. Mr. Kaplan has been a member of the Technion (Israel Institute of Technology) Council (executive board) since January 2014, where he chairschaired (and is currently a member of) the Finance Committee, and is a member of the Endowment Investment Committee. Since 2012 he has been a member of the Technion Board of Governors, a body of some 300 high-profile visionaries and decision makers with outstanding achievements in the fields of science, technology, economy, industry, culture and society. From 2007 to 2012, Mr. Kaplan was a member of the Advisory Committee of Caesarea Center for Capital Markets & Risk Management, and from 2005 to 2014, he was a member of the Advisory Committee of the Global Consulting Practicum at the Wharton School of the University of Pennsylvania. Mr. Kaplan holds an MBA from the Wharton School of the University of Pennsylvania, a Master of Arts in International Studies from the Lauder Institute of the University of Pennsylvania, and a Bachelor of Science degree (with Honors) in economics and management from the Technion - Israel Institute of Technology.
Doron Gerstel has been a director of the Company since May 2018, and the Chief Executive Officer of the Company since April 2017. In his previous role as CEO of Panaya Ltd., Mr. Gerstel led a company turnaround that saw an increase in annual revenue and the company’s acquisition by Infosys Limited. Mr. Gerstel has also held CEO positions at Nolio Ltd., Syneron Medical Ltd. and Zend Technologies Ltd. Mr. Gerstel holds a BSc. in Economics and Management from the Technion Institute of Technology in Haifa, and an MBA from Tel Aviv University.
Tal Jacobson has served as the General Manager of CodeFuel since November 2018. Mr. Jacobson has been an executive in the Israeli high-tech industry for over 20 years. Previously to joining Perion, Mr. Jacobson served as the Chief Revenue Officer and Chief Business Development Officer at SimilarWeb. He also founded Monotizer, which provided a technology for generating traffic to online retailers. Previously, Mr. Jacobson was the VP of Business at McCann Erickson as well as held the position of CEO at Watchitoo - a video collaboration platform. Mr. Jacobson was also the Director of Business Development at AOL as part of the IM division (ICQ).
Maoz Sigron has beenserved as the Chief Financial Officer of the Company since February 2018. Prior to that, sincefrom September 2017 until February 2018, Mr. Sigron served as our VP Finance. Previously, he served in various finance leadership and senior accounting positions at Tnuva Dairy Corporation, Allot Communications Ltd. (Nasdaq:ALLT) and Stratasys Ltd. (Nasdaq:SSYS) as well served as a CPA with PwC. Mr. Sigron holds a B.A in accounting and Economics from the College of Management.Management, Israel.
Dror ErezMichal Drayman has beenserved as a director of the Company since January 2014. In 2005, Mr. Erez co-founded ConduitJune 2022. Ms. Drayman is a venture partner in JVP Foodtech Impact Fund L.P., the Foodtech and served as its Chief Technology Officer until January 2014, when he became Conduit’s President and in May, 2018 became Conduit’s chairperson of the board of directors for a year. Mr. Erez is also a member of the Conduit board of directors. Mr. Erez is now acting as a CEO of Trevi, io and is also advising for startups on strategy, product and technology. Prior to founding Conduit, he served in various executive roles in private technology companies. Mr. Erez holds a B.A. in Physics and Computer Science from Bar Ilan University.
Sarit Firon has been an external director of the Company since January 2017 and following the Company’s opt out from the Israeli external directors regime in August 2019, continued as an independent director. Ms. Firon is managing partner of Team8 Group and co-founder and managing partner of Team8 Capital, theAgtech investment arm of Team8 Group, which invests in early stage technology startups. Previously, she was a managing partner of Cercathe Jerusalem Venture Partners VC (JVP), an Israeli venture capital fund. She has served at Extreme Reality Ltd., as its chief executive officer from December 2012 to November 2014 andMs. Drayman serves as a director since December 2014.of privately held companies including Innovopro Ltd., Kinoko Tech Ltd., Agrint Ltd., Greeneye – Centure application Ltd. BioBetter Ltd , aVISI Ltd and MetzerPlast. From November 20112005 to November 2012,2020 Ms. Firon wasDrayman served as a director of Epitomee Medical Ltd. (EPIT). From 2005 to 2014 Ms. Drayman served as a CFO and VP business development at the Chief Financial OfficerEuropean High Tech Capital, a privately held investment firm which is focused on healthcare investments. From 2001 to 2004 Ms. Drayman served as the VP Finance America of Kenshoo Ltd. From November 2007 to October 2011, Ms. Firon was the Chief Financial Officer of MediaMind TechnologiesLumenis Inc., a Nasdaq listed company which was acquired by DG, Inc. in August 2011.California based company. From May 20051994 to June 2007,2001 Ms. Firon was the Chief Financial Officer of OliveSoftware and from January 2000 to October 2004, she was the CFO of P-Cube, a private company which was acquired in October 2004 by Cisco Systems, Inc. (Nasdaq:CSCO). From October 2004 to January 2005, Ms. Firon was employed by Cisco to be responsible for the post-merger integration of P-Cube. From January 1995 to December 1999, Ms. FironDrayman served in variousdifferent financial positions at Radcomin Lumenis Ltd. (Nasdaq:RDCM), including as its Chief Financial Officer(previously, Nasdaq:LMNS). Ms. Drayman holds a BA in Economics and Accounting from September 1997 to December 1999. Since July 2015, she has served as chairpersonHaifa University and an MBA, with honors, from The College of the board of directors of myThingsManagement, Rishon Letzion, Israel, Ltd. Since June 2014, Ms. FironBiomedical Management Track.
Amir Guy has served as a director of Mediwound Ltd. (Nasdaq:MDWD), andthe Company since June 2012, Ms. Firon has served2022. Mr. Guy spent most of his career, more than 26 years, in the advertising industry, both in corporate and entrepreneurial settings. Mr. Guy is the founder of togetherr (a Fiverr company) since March 2021. Mr. Guy serves as a director of Datorama Ltd. From October 2000Adler-Chomski Group/ Grey Israel. Prior to December 2006, Ms. Fironjoining Adler-Chomski Group, Mr. Guy served as a director of MetaLink Ltd. (OTCMKTS:MTLK). Ms. Fironin various accounting roles, including Wunderman Thompson LLC and other private advertising companies. Mr. Guy holds a B.A.B.B.A in Accountingmarketing and Economicsfinance from Tel-Aviv University, Israel.the College of Management in Israel and an MBA from the Kellog School of Management at Northwestern University.
Rami Schwartz has beenserved as a director of the Company since January 2019. Mr. Schwartz joined The Portland Trust as Managing Director of the Tel Aviv office in April 2018. Mr. Schwartz also serves as an advisory board member of Algosec. Previously, Mr. Schwartz was the President of the Amdocs Products and Amdocs Delivery groups for 7 years. Prior to joining Amdocs, Mr. Schwartz was the chairperson of Olive Software (acquired by ESW Capital), and Comply, the co-founder and CEO of Zizio and DigiHOO, and an EIR at Cedar Fund. Mr. Schwartz was CEO and director of Exanet (acquired by Dell) and General Manager of Precise Software (acquired by Veritas software) and an EIR at Cedar Fund.. Mr. Schwartz holds a B.Sc. in excellence, in Mathematics and Computer Science from the Hebrew University in Jerusalem.
Michael Vorhaushas beenserved as a director of the Company since April 2015. Mr. Vorhaus also serves as a director of Altimar Acquisitions Corporation I and II (both on Nasdaq) and he is currently a director of Altimar III (NYSE: ATAC).StartingATAQ). Mr. Vorhaus also serves as a Director of Popreach (TSE: POPR). Starting December of 2018, Mr. Vorhaus has founded Vorhaus Advisors and is CEO of the firm. From 1994 to November 2018, he was in a variety of positions at of Frank N. Magid Associates, Inc., a research-based strategic consulting firm. From 1994 to 2008, he served as its Senior Vice President and Managing Director and from 2008 to 2018 he served as the President of Magid Advisor, a unit of Magid Associates. From 2013 to 2014, Mr. Vorhaus served as a director of Grow Mobile. In 1987, he founded Vorhaus Investments. Vorhaus advises a number of start-ups and venture capital firms. He also has a wide variety of early stage investments primarily in media and related areas. Mr. Vorhaus holds a B.A. in Psychology from Wesleyan University and completed the Management Development Program at the University of California, Berkeley’s Haas School of Business.
Joy Marcus has been a director of the Company since November 2019. Ms. Marcus has a wealth of experience in the media industry, including as EVP and GM Digital Video at CondeCondé Nast Entertainment, CEO of Bloglovin’ (acquired by Impact), SVP Global Marketing Solutions at Time Warner (now WarnerMedia), VP International at MTV Networks, a division of Viacom (now Paramount) and GM North America for Dailymotionof DailyMotion (acquired by Orange/France Telecom) and VP Business Development at B&N.com (IPO). Ms. Marcus is a board member atShe sits on the Boards of digital media companycompanies BBC Maestro and Qwire, and the non-profitsnonprofits New York Tech Alliance The Video Consortium and Hoops4Hope.MOUSE. Joy is currentlythe Co-Founder and Managing Director of the female focused investment group Brilliant Friends,The 98, a full-timeventure fund that invests in women led tech enabled businesses. She is a full time Lecturer on Entrepreneurship at Princeton University where she was the James Wei Visiting Professor in Entrepreneurship in 2014 and is a Venture Fellow at VC firm JVP, where she advises the firm on digital media, advertising and consumer investments.Jerusalem Venture Partners. Joy graduated with Magna Cum Laude, Phi Beta Kappa, from Princeton University and has a JD from NYU Law School and completed the management course in finance and accounting fromFinance & Accounting at Columbia University.University Graduate School of Business.
Daniel E. Aks has been theserved as President of Undertone since August 2019 and an external director of the Company from August 2018 until August 2019. Since December 2017, Mr. Aks is the Chief Executive Officer of Antenna International, a story-maker and creative technology company devoted to cultural, iconic site and commercial attractions. Prior to Antenna, from December 2010 to December 2017 he was the owner of C3 Multimedia LLC., a consulting firm in the fields of information, education K-16 and media and during his term with C3 was, inter-alia, the Acting Chief Operating Officer for the Educational Records Bureau (ERB), a K-12 assessment organization serving private education and high performing public institutions (from March 2015 until December 2017). From January 2014 until December 2017, Mr. Aks was the Co-Founder of The EdTech Fund, an investment vehicle for seed capital investments in educational technologies. He also served as the Senior Vice President and Chief of Staff for McGraw-Hill Education (MHE) from September 2008 until November 2010 where he was responsible for information technology, public relations, strategy and business development, K-12 differentiated instruction pilots, and content management system development. From July 2007 until April 2008 he served as the Chief Operating Officer and Executive Vice President at The Greenspun Companies, where he had general management responsibility of the company’s magazine and companion web site businesses. Prior to that from January 2006 to July 2007, he held positions with MTV Networks (MTVN) as a Senior Vice President of both Operations and Consumer Products. Prior to MTVN from August 1999 to June 2004, Mr. Ask served PRIMEDIA’s Consumer Magazine Group as Chief Operating Officer, where he managed the Direct Response Advertising Group, Manufacturing, Production, Distribution, IT, Strategy, Business Development, Global Sourcing, and at times Circulation. He was also President of PRIMEDIA Consumer Magazine Internet Group during that term. Prior to joining PRIMEDIA, Mr. Aks was a partner with the Booz Allen Hamilton consulting firm where he specialized in business growth, operations strategy and restructuring in the media, education, telecommunications and consumer goods industries. Mr. Aks holds a BS in Manufacturing/Industrial Engineering and a B.A. in Business Administration from Rutgers University and earned an MBA from the Harvard University Graduate School of Business Administration, where he graduated with second-year honors.
Tal JacobsonDaniel Slivkin is co-founder and Chief Executive Officer of Vidazoo, which was acquired by us in October 2021. Mr. Slivkin has been the General Manager of CodeFuelleading Vidazoo’s business and general management since November 2018.2014. Since Vidazoo’s acquisition by Perion, Mr. JacobsonSlivkin has been an executive inresponsible for the Israeli high-tech industry for over 20 years. Previously to joining Perion, Mr. Jacobson served as the Chief Revenue Officergrowth and Chief Business Development Officer at SimilarWeb. He also founded Monotizer, which provided a technology for generating traffic to online retailers. Previously, Mr. Jacobson was the VP of Business at McCann Erickson as well as held the position of CEO at Watchitoo - a video collaboration platform. Mr. Jacobson was also the Director of Business Development at AOL as partstrategy of the IM division (ICQ).
Eliran Ben Yehuda has been the General Manager of CIQ since January 2022. Mr. Ben Yehuda has served in senior management positions for over 10 years.online video business & monetization at Perion. Prior to joining Perion,co-founding Vidazoo, Mr. Ben Yehuda served asSlivkin was involved in several startups and has worked in several key business and marketing roles in private technology companies. Mr. Slivkin holds a Director at Taboola.com Ltd. (TBLA, TBLAW), where he also served as country manager for Israel. Mr. Ben Yehuda also serves as an advisory board member for Papaya Global Ltd. Mr. Ben Yehuda holds an LL.B and B.A. in Business AdministrationManagement from the University of Derby, IL.
Gal Dagan is co-founder and VP Research and Development of Vidazoo. Since Vidazoo’s acquisition by Perion in October 2021, Mr. Dagan has been leading the Product & Technology vision of Vidazoo. Mr. Dagan holds a B.Sc. Engineering & Management, major in IT systems and B.Sc. Economics Management, both from Reichman University.the Technion – Israel Institute of Technology (graduated with honors).
There are no family relationships between any of our directors or executive officers.
B.COMPENSATION
The aggregate direct compensation we paid to our directors and officers as a group (4(15 persons) for the year ended December 31, 2021,2022, was approximately $6.8$13.2 million, which included approximately $0.4$0.5 million that was set aside or accrued to provide for pension, retirement, severance or similar benefits. This amount includes bonuses paid to our officers pursuant to our executive bonus plan based on company performance measures, in accordance with our Compensation Policy for Directors and Officers. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel.
The aggregate compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31, 2021 was approximately $0.4 million. In addition, our directors are reimbursed for expenses incurred in order to attend board of directors or committee meetings.
In the year ended December 31, 2021,2022, we granted to our officers (i) 157,700264,000 restricted share units (“RSUs”), which vest over a three-year period; and (ii) 110,300264,000 performance-based share units (“PSUs”), linked to certain financial KPI’s. These awards were granted under our Equity Incentive Plan, as amended, formerly known as the 2003 Israeli Share Option Plan (the “Incentive Plan”).
In 2021,2022, we paid each of our non-executive directors $50,000$56,250 (following update of the annual fee of our non-executive directors to $62,500, as approved by our shareholders as of June 30, 2022) per year. Following the approval of the annual general meeting of our shareholders held on December 23, 2020, the annual equity grant structure to our non-executive directors has been changed from a grant of options to a grant of RSUs, with a variable value based on the role held by such member of the board of directors. With respect to new appointed directors, such grant shall be made initially upon the initial election or appointment and on each anniversary of such date. With respect to our incumbent non-executive directors, the initial grant, was made on February 6, 2021, the date of the first anniversary of the most recent option grant. Such RSU grant was made in lieu (and not in addition) to the scheduled grant of options to our directors. The RSUs granted are subject to the terms and conditions of the Incentive Plan and the RSU agreement pursuant to the Incentive Plan. The RSUs shall vest on a quarterly basis, in equal tranches, during the year following the grant. All unvested RSUs held by a director in office will automatically vest upon a change of control of the Company, which is defined for this purpose as (i) a merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, (ii) a sale of all or substantially all of the assets of the Company, or (iii) a transaction or a series of related transactions as a result of which more than 50% of the outstanding shares or the voting rights of the Company are beneficially owned by one person or group (as defined in the SEC rules) (the “Change of Control”). Accordingly, each non-executive director was granted with an annual RSU grant according to his/her role, with a value as follows:
chairperson of our audit committee: $110,000;
chairperson of our compensation committee: $107,500;
chairperson of our nominating and governance committee: $105,000; and
other non-executive directors: $97,500.
The compensation we paid to our chairman of the board of directors, Mr. Kaplan, for the year ended December 31, 20212022 was $100,000$112,500, (following update of the annual fee of our chairman of the board of directors to $125,000, as approved by our shareholders as of June 30, 2022) plus VAT, paid in four quarterly payments and reimbursement of out-of-pocket expenses incurred in connection with Mr. Kaplan’s services as chairman. Mr. Kaplan is also entitled for indemnification and liability insurance as provided to other members of the board of directors. Mr. Kaplan’s services agreement also includes customary non-disclosure, non-compete, and ownership assignment of intellectual property undertakings.
Following the approval of the extraordinary general meeting of our shareholders held on August 2, 2018, Mr. Kaplan was granted with a one-time grant of options to purchase 66,666 Ordinary Shares, with a 3-year vesting schedule, commencing on May 9, 2018 (the “August 2018 Grant”). In addition, following the approval of the annual general meeting of our shareholders held on February 6, 2020, and subject to the continued engagement as our chairman of the board of directors, Mr. Kaplan was granted with a one-time grant of options to purchase 90,000 Ordinary Shares with a 3-year vesting schedule (the options will vest quarterly in equal tranches over a three-year period), commencing on May 9, 2021, at an exercise price per share equal to the average stock market price of the 90 days period preceding the date of the general meeting of our shareholders, as reported by the Nasdaq Stock Market (together with August 2018 Grant, the “Chairperson’s Previous Grants”). The options granted are subject to the terms and conditions of the Incentive Plan and the option agreement pursuant to the Incentive Plan. Upon removal of Mr. Kaplan from office either by a vote of the board of directors or by a vote of the Company’s shareholders, either (i) as a direct result of the negotiation of a Change of Control; or (ii) within six months following a Change of Control event (for the avoidance of doubt, in both (i) and (ii), other than for “cause” – as such term defined in the Incentive Plan) all unvested options shall automatically be accelerated and become fully vested on the effective date of any such event described in either (i) or (ii).
Following the approval of the annual general meeting of our shareholders held on December 23, 2020, the equity grant structure to Mr. Kaplan, our chairperson of the board of directors, was changed as well, from grant of option to grant of RSUs. Accordingly, Mr. Kaplan was granted an annual grant with a value of up to $200,000, such annual grant, which shall be made in the form of RSUs, shall be equal to the difference between the fair market value per vesting annum of the Chairperson’s Previous Grants and the approved cap of $200,000. The initial grant was made on February 6, 2021. With respect to new appointed chairperson of our board of directors, such grant shall be made initially upon the initial election or appointment and on each anniversary of such date. The RSUs granted are subject to the terms and conditions of the Incentive Plan and the RSU agreement pursuant to the Incentive Plan. The RSUs shall vest on a quarterly basis, in equal tranches, during the year following the grant. All unvested RSUs held by a chairperson in office will automatically vest upon a Change of Control event. In addition, the Company’s shareholders approved a one-time special grant of 19,000 fully vested RSUs. The grant date of the special grant is the date of our board of directors’ approval which occurred on October 27, 2020.
The table below reflects the compensation granted to our five most highly compensated office holders during or with respect to the year ended December 31, 2021.2022. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table below, “compensation” includes salary cost, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2021,2022, including the compensation paid to such Covered Executive following the end of the year in respect of services provided during the year. Each of the Covered Executives was covered by our D&O liability insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association. All numbers below are in US Dollars in thousands.
Name and Principal Position (1) | | Salary Cost (2) | | | Bonus (3) | | | Equity-Based Compensation (4) | | | Total | | | Salary Cost (2) | | | Bonus (3) | | | Equity-Based Compensation (4) | | | Total | |
Doron Gerstel, Chief Executive Officer | | | 634 | | | | 1,254 | | | | 946 | | | | 2,834 | | | | 755 | | | | 1,312 | | | | 1,711 | | | | 3,778 | |
Tal Jacobson, General Manager, CodeFuel Business Unit | | | | 455 | | | | 826 | | | | 549 | | | | 1,830 | |
Maoz Sigron, Chief Financial Officer | | | 343 | | | | 535 | | | | 514 | | | | 1,392 | | | | 368 | | | | 560 | | | | 837 | | | | 1,765 | |
Daniel E. Aks, President, Undertone Business Unit | | | 540 | | | | 600 | | | | 202 | | | | 1,342 | | | | 540 | | | | 625 | | | | 459 | | | | 1,624 | |
Tal Jacobson, General Manager, CodeFuel Business Unit | | | 387 | | | | 677 | | | | 260 | | | | 1,324 | | |
Gal Dagan, Co-Founder and VP R&D, Vidazoo Business Unit | | | | 486 | | | | 273 | | | | 675 | | | | 1,435 | |
_________________
(1) Unless otherwise indicated herein, all Covered Executives are employed on a full-time (100%) basis.
(2) Salary cost includes the Covered Executive’s gross salary plus payment of social benefits made by the Company on behalf of such Covered Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers’ Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up payments, vacation, car, medical insurances and benefits, phone, convalescence or recreation pay and other benefits and perquisites consistent with the Company’s policies.
(3) Annual bonuses granted to the Covered Executives based on formulas set forth in the annual compensation plan approved by compensation committee and of the board and the board of directors.
(4) Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2021.2022. Such numbers are based on the RSU or option grant date fair value in accordance with accounting guidance for equity-based compensation and does not necessarily reflect the cash proceeds to be received by the applicable officer upon the vesting and sale of the underlying shares. For a discussion of the assumptions used in reaching this valuation, see Note 2 to our Financial Statements.
Compensation Terms of our Chief Executive Officer
Doron Gerstel serveshas served as our Chief Executive Officer fromsince April 2017 and as a director of the Company since May 2018. HisOn February 8, 2023, Doron Gerstel announced his intention to step down from his position as our Chief Executive Officer effective as of August 1, 2023, and is expected to maintain his position as member of our board of directors. As the Chief Executive Officer, Doron Gerstel’s monthly base salary is NIS 130,000160,000 (equivalent to approximately $41,800)$45,467), effective as of January 1, 2021,June 30, 2022, as approved by the annual general meeting of our shareholders held on December 23, 2020.June 30, 2022. Mr. Gerstel is also entitled to customary benefits (including those mandated by applicable law and/or generally provided to other executive officers of the Company), including managers’ insurance or pension arrangement, disability insurance, severance pay (pursuant to Section 14 of the Severance Pay Law), educational savings fund, private health insurance, indemnification, liability insurance (including for the period of seven years following termination), convalescence pay, meal plan, cellular telephonetelephone. personal computer and personal computer.travel expenses. Mr. Gerstel is not compensated for his role as director.director.
Mr. Gerstel is also entitled forto a target annual cash bonus of up to a maximum of twelve (12) monthly salaries, or eighteen (18) in case of over achievement, subject to performance matrix to be approved by the Company’s compensation committee and board of directors on an annual basis, while up to 25% of such annual bonus may be discretionary and not subject to measurable performance indexes. In addition, our compensation committee and the board of directors are authorized to grant Mr. Gerstel, from time to time, a special bonus in accordance with and subject to our Compensation Policy for Directors and Officers.
Upon joining the Company, Mr. Gerstel was granted with two stock option grants under the Company’s Incentive Plan: (i) option to purchase up to 387,278 ordinary shares at an exercise price per share of $4.89 (which was the approximate market price per ordinary shares on the Nasdaq Stock Market on the date of the employment agreement); and (ii) option to purchase up to 387,278 ordinary shares at an exercise price per share of $7.89 (together, the “Options”).
The Options are exercisable for cash or on a “cashless” basis, at the election of Mr. Gerstel, and have a term of six years, which will not be reduced in the event that employment terminates prior thereto, except in the event of termination for “Cause” (as defined in the employment agreement). The Options vest during the term of employer-employee relations, in quarterly installments, over a period of four years. The vesting schedule of the Options will fully accelerate (i) upon the closing of a “Transaction” (as defined below) or (ii) if Mr. Gerstel is terminated without “Cause” or if he resigns as a result of being demoted or relocated, in each case, within 12 months following a “Change of Control” (as defined below).
Each grant constitutes approximately 0.9% of the outstanding ordinary shares as of March 5, 2022.
At the annual general meeting of our shareholders held on February 15, 2018, and as part of a cross-company repricing plan designed mainly to keep our competitive hiring position in the industry, the repricing of options granted to Mr. Gerstel was approved. The first tranche of 387,278 options was adjusted to have an exercise price per of $3.24 (which is equal to the weighted average price of our ordinary shares on Nasdaq in the last 90 days prior to the date of approval of the repricing plan by our board of directors) (the “Adjusted Exercise Price”), and the second tranche of 387,278 options was adjusted to have an exercise price per share equal to $4.23, which is 130% of the Adjusted Exercise Price.
At the extraordinary meeting of our shareholders held on April 11, 2019,June 30, 2022, Mr. Gerstel was granted with additional grant of options to purchase(i) 150,000 Ordinary Shares, with a 3-year vesting schedule (the options will vest on a quarterly basis in equal tranches over a three-year period), commenced on January 15, 2019 (the “2019 Options”). The exercise price per share for the shares underlying the 2019 Options is as follows: (i) the first 75,000 of shares underlying the 2019 Options will be exercised at a price per share equal to $2.87, which is the weighted average closing price of our ordinary shares on Nasdaq in the last 90 days prior to the date of approval of the grant by our board of directors on February 12, 2019, as reported by the Nasdaq Stock Market (the “Base PPS”); and (ii) the remaining 75,000 of shares underlying the 2019 Options will be exercised at a price per share equal to $3.30 which is a price 15% higher than the Base PPS. The 2019 Options will be subject to the terms and conditions of the Company’s Incentive Plan, as amended and the terms of the option agreement issued to Mr. Gerstel pursuant to the Company’s Incentive Plan. The vesting schedule of the Option will fully accelerate in accordance of the acceleration provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the shareholders meeting).
Each grant constitutes approximately 0.2% of the outstanding ordinary shares as of March 5, 2022.
At the annual general meeting of our shareholders held on December 23, 2020, Mr. Gerstel was granted with 500,000 RSUs, which is vestingvest over a three-year period commenced on Februarycommencing as of April 1, 2021,2022, with a 6-month12-month cliff after which the balance of the RSUs will continue to vestvests on a quarterly basis over the following ten (10) quarters, unless such RSUs have been cancelledeight (8) quarters. (the “2022 RSU Grant”) and (ii) 150,000 PSUs, which vest based on certain financial KPIs. The calculation of the actual achievement (and accordingly, the actual vesting) for a fiscal year will be made as part of the approval of the Company’s year-end financial results (as approved by the Board) provided, however, that the PSUs conditioned on the Company's performance in accordance withfiscal year 2022 shall not vest earlier than the employment termsfirst anniversary of Mr. Gerstel (the “RSU Grant”). The grant date is the date of the board of directors’ approval, which occurred on October 27, 2020.grant (the “2022 PSU Grant”). The vesting schedule of the 2022 RSU Grant willand the 2022 PSU Grant fully accelerate in accordance with the acceleration provisions of the optionsawards previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the shareholders meeting). Consistent with the previous options grantsawards granted to Mr. Gerstel, the 2022 RSU Grant will beand 2022 PSU Grant are generally subject to the same terms and conditions of prior grants, the terms and conditions of the Company’s Incentive Plan and the terms of the grant agreements issued to Mr. Gerstel pursuant to the Company’s Incentive Plan.Plan.
Such grant constitutes approximately 1.1% of the outstanding ordinary shares as of March 5, 2022.
In addition, at the same meeting, our shareholders approved a one-time grant to Mr. Gerstel of performance based options to purchase 225,000 ordinary shares linked to certain KPI’s in connection with the renewal of the strategic partnership agreement with Microsoft Bing (the “2020 Options”), approved by our board of directors on July 28, 2020, to those members of our management who participated in the efforts for the renewal of the strategic partnership for a period of four additional years, whereas 50% of the 2020 Options vested upon the renewal of the Search Distribution Agreement by and between the Company and Microsoft Ireland Operations Limited which occurred on November 2, 2020 (the “Renewal Date”), and the remaining 50% of the 2020 Options will vest in two equal portions on each anniversary of the Renewal Date. The exercise price per share for the ordinary shares underlying the 2020 Options is the weighted average closing price of our ordinary shares in the last 90 days, as reported by the Nasdaq Stock Market, prior to the date of approval of the grant by the board which occurred on July 28, 2020. The vesting schedule of the 2020 Options will fully accelerate in accordance with the acceleration provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the shareholders meeting). Consistent with the previous options grants granted to Mr. Gerstel, the 2020 Options will be subject to the same terms and conditions of prior grants, the terms and conditions of the Company’s Incentive Plan and the terms of the grant agreements issued to Mr. Gerstel pursuant to the Company’s Incentive Plan.
Such grant constitutes approximately 0.5% of the outstanding ordinary shares as of March 5, 2022.
For the purpose of Mr. Gerstel’s employment agreement, “Transaction” means the occurrence and closing, in a single transaction or in a series of related transactions, of any one or more of the following events pursuant to the approval or recommendation of the board of directors: (i) a sale or other disposition of 90% or more of the consolidated assets of the Company and its subsidiaries; (ii) a sale or other disposition of 90% of more of the outstanding securities of the Company resulting in a Change of Control; or (iii) a merger, consolidation or similar transaction involving 90% of more of the outstanding securities of the Company, resulting in a Change of Control.
“Change
“Change of Control” will occur if any person or “group” of persons becomes the “beneficial owner” (as such terms are used for purposes of Section 13(d) of the U.S. Securities Exchange Act of 1934, as amended), directly or indirectly, of 35% or more of the outstanding share capital of the Company, excluding a reorganization resulting in the Company being held by an entity beneficially owned by the holders of the Company’s share capital immediately prior to the transaction or any Change in Board Event (as defined below).
“Change in Board Event” shall mean any time at which individuals who, as of April 2, 2017, constitute the board of directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the board of directors; provided, however, that any individual becoming a director subsequent to April 2, 2017 whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened (in writing) election contest with respect to the election or removal of directors or other actual or threatened (in writing) solicitation of proxies or consents by or on behalf of a person other than the board of directors.
The agreement also includes customary covenants regarding confidentiality, IP assignment, non-competition and non-solicitation.
The employment term is for an indefinite period. We may terminate the employment upon 12 months’ prior notice and Mr. Gerstel may resign upon nine months’ prior notice. During the notice period, Mr. Gerstel will be entitled to all benefits under the employment agreement, including the continued vesting of stock options and RSUs, even if the Company waives its right to continued service. In the event of termination for “Cause” (as defined in the employment agreement), we may terminate the employee without prior notice.
We also have employment agreements with our other executive officers. These agreements usually do not contain any change of control provisions and otherwise contain salary, benefit and non-competition provisions that we believe to be customary in our industry.
C.BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such matters as external directors (or, to the extent applicable, the provisions of the opt-out from external directors), the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of Nasdaq and other relevant provisions of U.S. securities laws. Under the Nasdaq Listing Rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee. For further information, see Item 16.G “Corporate Governance.”
Nasdaq Requirements
As required by the Nasdaq Listing Rules, a majority of our directors are “independent directors” as defined in the Nasdaq Listing Rules.
As contemplated by the Nasdaq Listing Rules, we have an audit committee, a compensation committee and a nominating and governance committee, all of whose members are independent directors.
See Item 16.G. “Corporate Governance” for exemptions that we have taken from certain Nasdaq Listing Rule requirements.
Israeli Companies Law
Board of Directors
According to the Companies Law and our articles of association, our board of directors is responsible, among other things, for:
establishing our policies and overseeing the performance and activities of our chief executive officer;
convening shareholders’ meetings;
approving our financial statements;
determining our plans of action, principles for funding them and the priorities among them, our organizational structure and examining our financial status; and
issuing securities and distributing dividends.
Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our board of directors also appoints and may remove our chief executive officer and may appoint or remove other executive officers, subject to any rights that the executive officers may have under their employment agreements.
As of March 5, 2022,6, 2023, our board of directors consists of seven directors. Our directors (other than the directors who were in the position of external directors until August 2019) are elected in three staggered classes by the vote of a majority of the ordinary shares present and entitled to vote at meetings of our shareholders at which directors are elected. The members of only one staggered class will be elected at each annual meeting for a three-year term, so that the regular term of only one class of directors expires annually. Our annual meeting of shareholders is required to be held at least once during every calendar year and not more than fifteen months after the last preceding meeting. Effective as of August 2019, following our adoption of the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, our then director in office who was elected and classified as external directors, Ms. Sarit Firon, iswas no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such directors have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation. Ms. Firon’s term of office expired in January 2020, accordingly our board of directors has re-appointed Ms. Firon with the term of office that expired as of our 2021 annual meeting of shareholders. Ms. Sarit Firon was re-elected on our 2021 annual general meeting of shareholders to serve as our director until our 2024 annual general meeting of shareholders.shareholders, and on June 15, 2022 Ms. Firon resigned from the Board of Directors.
If the number of directors constituting our board of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors constituting our board of directors reduce the term of any then current director.
Our board of directors may appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of directors, provided that the total number of directors shall not, at any time, exceed seven directors. Any director so appointed shall hold office until the annual meeting of shareholders at which the term of his class expires, unless otherwise determined by our board of directors. There is no limitation on the number of terms that a non-external director may serve.
Shareholders may remove a non-external director from office by a resolution passed at a meeting of shareholders by a vote of the holders of more than two-thirds of our voting power.
A resolution proposed at any meeting of our board of directors is deemed adopted if approved by a majority of the directors present and voting on the matter. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations that our board of directors should have. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its business and operations. Our board of directors has determined that we require at least one director with the requisite financial and accounting expertise and that Ms. Sarit FironMichal Drayman has such expertise.
Under the Companies Law, a person, who is, directly or indirectly subordinated to the chief executive officer of a public company, may not serve as the chairman of its board of directors. In addition, neither the chief executive officer nor his relative is eligible to serve as chairman of the board of directors (and vice versa), unless such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and either: (i) such majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not controlling shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal did not exceed 2% of company voting shareholders. The term can be extended for additional three year terms, in the same manner.
External Directors
Under the Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint at least two individuals to serve as external directors.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in August 2019, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors (the “Opt-Out”).
Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee, an investment committee and a nominating and governance committee.
Audit Committee
Our audit committee is comprised of Ms. Sarit FironMichal Drayman (chairperson), Mr. Michael Vorhaus and Mr. Rami Schwartz, and operates pursuant to a written charter.
Nasdaq Requirements
Under the listing requirements of the Nasdaq Stock Market, a foreign private issuer is required to maintain an audit committee that has certain responsibilities and authority. The Nasdaq Listing Rules require that all members of the audit committee must satisfy certain independence requirements, subject to certain limited exceptions. We have adopted an audit committee charter as required by the Nasdaq Listing Rules. Our audit committee assists the board of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements. Our audit committee is also responsible for the establishment of policies and procedures for review and pre-approval by the committee of all audit services and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’s independence. For more information see Item 16.C “Principal Accountant Fees and Services.” Under the Nasdaq Listing Rules, the approval of the audit committee is also required to effect related-party transactions that would be required to be disclosed in our annual report.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors who meet certain independence criteria. The responsibilities of the audit committee under the Companies Law include to identify and address problems in the management of the company, review and approve interested party transactions, establish whistleblower procedures and procedures for considering controlling party transactions and oversee the company’s internal audit system and the performance of the internal auditor.
Compensation Committee
Pursuant to the Companies Law, the compensation committee of a public company must be comprised of at least three directors, include all of the external directors (and also the chairman is required to be an external director), and any other members must satisfy certain independence standards under the Companies Law. Following the Opt-Out, our compensation committee is comprised of Ms. Joy Marcus (chairperson), Mr. Dror ErezMichael Vorhaus and Mr. Rami Schwartz,Amir Guy, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and Nasdaq Listing Rules for compensation committee members. Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.
Our compensation committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements of our executive officers and directors. In addition, our compensation committee is required to propose for shareholder approval by a special majority, a compensation policy governing the compensation of office holders based on specified criteria, to review, from time to time, modifications to the said compensation policy and examine its implementation, and to approve the actual compensation terms of office holders prior to approval thereof by the board of directors. Our shareholders adopted a new Compensation Policy for Directors and Officers on February 6, 2020.June 30, 2022. Our compensation committee also oversees the administration of our Incentive Plan.
Investment Committee
Our investment committee is comprised of Mr. Eyal Kaplan (chairperson), Ms. Sarit FironMichal Drayman and Mr. Rami Schwartz.Amir Guy. The Investment Committee is responsible for formulating the overall investment policies of the Company, and establishing investment guidelines in furtherance of those policies. The Committee monitors the management of the portfolio for compliance with the investment policies and guidelines and for meeting performance objectives over time as well as assist the board of directors in fulfilling its oversight responsibility for the investment of assets of the company.
Nominating and Governance Committee
Our nominating and governance committee is comprised of Mr. Michael Vorhaus (chairperson), Mr. Eyal Kaplan, and Ms. Joy Marcus, and operates pursuant to a written charter. It is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. Under the Companies Law, nominations for director are generally made by our board of directors but may be made by one or more of our shareholders pursuant to applicable law and our articles of association.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated based on the audit committee’s recommendation. The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of the company employed specifically to perform internal audit functions but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a substantial shareholder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. The internal auditor’s term of office shall not be terminated without his or her consent, nor shall he or she be suspended from such position unless the board of directors has so resolved after hearing the opinion of the audit committee and after giving the internal auditor a reasonable opportunity to present his or her position to the board and to the audit committee. Our internal auditor is Ms. Linur Dloomy, CPA, of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu.
D.EMPLOYEES
The breakdown of our employees, by department, as of the end of each of the past three fiscal years is as follows:
| | December 31, | | | December 31, | |
| | 2019 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2022 | |
Cost of sales | | | 79 | | | | 73 | | | | 83 | | | | 73 | | | | 83 | | | | 91 | |
Research and development | | | 117 | | | | 135 | | | | 115 | | | | 135 | | | | 115 | | | | 121 | |
Selling and marketing | | | 136 | | | | 146 | | | | 154 | | | | 146 | | | | 154 | | | | 150 | |
General and administration | | | 67 | | | | 63 | | | | 68 | | | | 63 | | | | 68 | | | | 78 | |
Total | | | 399 | | | | 417 | | | | 420 | | | | 417 | | | | 420 | | | | 440 | |
As of December 31, 2021, 1912022, 230 of our employees were located in Israel, 168 of our employees were located in the United States and 6142 employees were located in Europe.
In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to some provisions of the collective bargaining agreements. These provisions of collective bargaining agreements apply to our Israeli employees by virtue of extension orders issued in accordance with relevant labor laws by the Israeli Ministry of Economy and Industry, and which apply such provisions under the extension orders to certain or all Israeli employees including our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern, among others, minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The extension orders which apply to our employees principally concern, among others, the requirement for the length of the workday and the work-week, annual recuperation pay and commuting expenses, and payments to pension funds. As mentioned above, we are required to insure all of our employees by a comprehensive pension plan or a managers’ insurance according to the terms and the rates detailed in the extension order. In addition, Israeli laws determine minimum wages for workers, minimum paid leave or vacation, sick leave, working hours and days of rest, insurance for work-related accidents, determination of severance pay, the duty to give notice of dismissal or resignation and other benefits and terms of employment. We have never experienced a work stoppage, and we believe our relations with our employees are good.
Israeli law generally requires the payment of severance by employers upon the retirement or death of an employee or upon termination of employment by the employer or, in certain circumstances, by the employee. Substantially all of our agreements with employees in Israel contain an arrangement made in accordance with Section 14 of the Severance Pay Law, 1963 (“Section 14”), where our contributions for severance pay are paid in lieu of any severance liability. Upon termination of employment, for any reason, and subject to contribution of the employee’s entire monthly salary as of the commencement date of his/her employment, and release of the policy to the employee, no additional severance payments are required to be made by us to the employee. Additionally, the related obligation and amounts deposited pursuant to such obligation are not stated on the balance sheet, as we are legally released from any obligation to employees once the deposit amounts have been paid.
Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which covers, amongst other benefits, payments for state retirement benefits and survivor benefits (similar to the United States Social Security Administration), as well as state unemployment benefits. These amounts also include payments for national health insurance. The payments to the National Insurance Institute can equal up to approximately 19.6% of wages subject to a cap if an employee’s monthly wages exceed a specified amount, of which the employee contributes up to approximately 12% and the employer contributes approximately 7.6%.
E.SHARE OWNERSHIP
Security Ownership of Directors and Executive Officers
The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 5, 20226, 2023 by all of our directors and executive officers as a group and by each officer and director who beneficially owns 1% or more of our outstanding ordinary shares.
Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants, RSUs or stock options that are vested or will vest within 60 days of a specified date are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Except as indicated in the footnotes to this table, each officer and director in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 44,292,78046,524,574 ordinary shares outstanding as of March 5, 20226, 2023 (such amount excludes 115,339 Ordinary Shares held by the Company).
Name | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Outstanding | | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Outstanding | |
All directors and officers as a group (11 persons) (1) | | | 1,233,406 | | | | 2.78 | % | |
All directors and officers as a group (12 persons) (1) | | | | 457,685 | | | | 0.98 | % |
(1) | Includes 279,754 RSUs and options to purchase 632,539 ordinary shares that are vested or will vest within 60 days of March 5, 2022. 6, 2023. |
Employee Benefit Plans
The Incentive Plan, our current equity incentive plan, was initially adopted in 2003, providing certain tax benefits in connection with stock-based compensation under the tax laws of Israel and the United States. TheOn November 8, 2022 our board of directors approved to extend the term of the Incentive Plan will expirefor an additional period of two years, expiring on December 9, 2022.2024. Please also see Note 1311 to our Financial Statements for information on the options and RSUs issued under the Incentive Plan.
Under the Incentive Plan, as amended from time to time, we may grant to our directors, officers, employees, consultants, advisers, service providers and controlling shareholders options to purchase our ordinary shares, restricted shares and RSUs. As of December 31, 2021,2022, a total of 4,478,3013,657,185 ordinary shares were subject to the Incentive Plan. As of March 5, 2022,6, 2023, 3,572,969 RSUs and options to purchase a total of 3,977,554our ordinary shares were outstanding under our Incentive Plan, of which RSUs and options to purchase a total of 1,427,1881,191,373 ordinary shares were held by our directors and officers (11(12 persons) as a group. The outstanding options are exercisable at purchase prices which range from $0.01$5.35 to $7.97$6.56 per share. RSUs are exercisable at a price of $0.01 per share. Any expired or cancelled options or RSUs are available for reissuance under the Incentive Plan.
Our Israeli employees and directors may be granted awards under Section 102 (“Section 102”) of the Israeli Income Tax Ordinance [New Version], 1961 (the “Ordinance”), which provides them with beneficial tax treatment, and non-employees (such as service providers, consultants and advisers) and controlling shareholders may only be granted awards under section 3(i) of the Ordinance, which does not provide for similar tax benefits. In order to be eligible for tax benefits under Section 102, the securities must be issued through a trustee, and if held by the trustee for the minimum required period, the employees and directors are entitled to defer any taxable event with respect to the award until the earlier of (the “Exercise Date”) (i) the transfer of securities from the trustee to the employee or director or (ii) the sale of securities to a third party. Our board of directors has resolved to elect the “Capital Gains Route” (under Section 102) for the grant of awards to Israeli grantees under the Company's incentive plan. Based on such election, and subject to the fulfillment of the conditions of Section 102, under the Capital Gains Route, gains realized from the sale of shares issued pursuant to the Incentive Plan will generally be taxed at the capital gain tax rate of 25%, provided the trustee holds the securities for 24 months following the date of grant of the award. To the extent the conditions of Section 102 are not met, tax will be payable at the Exercise Date at the marginal income tax rate applicable to the employee or director (47% in 20202023 and additional National Security contributions). In addition, in certain circumstances, an excess tax of 3% will be imposed as well. We are not entitled to deduct for Israeli tax purposes the expenses recorded with respect to grant of awards on the “Capital Gains Route.” However, in case the employee has an ordinary income component under section 102(b)(3) of the Ordinance, that component is deductible by the company for tax purposes. The voting rights of any shares held by the trustee under Section 102 remain with the trustee.
The Incentive Plan contains a U.S. addendum that provides for the grant of awards to U.S. citizens and resident aliens of the United States for U.S. tax purposes. Pursuant to the approval of our board of directors and shareholders, stock options granted to U.S. citizens and resident aliens may be either incentive stock options under the Internal Revenue Code of 1986, as amended (the “Code”) or nonqualified options that do not qualify as incentive stock options. Subject to the fulfillment of the applicable conditions of the Code, an incentive stock option may provide tax benefits to the holder in that it converts ordinary income into income taxed at capital gain rates and defers the tax until the sale of the underlying share. In that event, we would not recognize a tax deduction with respect to such capital gain. The incentive stock options issued under our Incentive Plan are not qualified stock options under the Code.
Our board of directors has the authority to administer, and to grant awards, under the Incentive Plan. However, the compensation committee appointed by the board provides recommendations to the board with respect to the administration of the plan. Generally, RSUs and options granted under the Incentive Plan vest in two orover a period of three installments on each anniversary ofyears following the grant date of grant.
See Item 6.B. “Compensation” for a description of awards granted under the Incentive Plan to our directors and officers in 2020.2022.
ITEM 7ITEM 7.. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information with respect to the beneficial ownership of our shares as of March 5, 2022,6, 2023, by each person or entity known by us to beneficially own 5% or more of our outstanding Ordinary Shares.
Beneficial ownership of shares is determined in accordance with the Exchange Act and the rules promulgated thereunder, and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary Shares that are issuable pursuant to an outstanding right within 60 days of a specified date are deemed to be outstanding and beneficially owned by the person holding the right for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
For the purpose of calculating the percentage of shares beneficially owned by any shareholder, this table lists the applicable percentage ownership based on 44,292,78046,524,574 Ordinary Shares issued and outstanding as of March 5, 20226, 2023 (such amount excludes 115,339 Ordinary Shares held by the Company).
Except as indicated in the footnotes to this table, to our knowledge, the shareholder in the table has voting and investment power for the shares shown as beneficially owned by such shareholder, except to the extent the power is shared by spouses under community property law. Our major shareholder does not have different voting rights than our other shareholders. The information in the table below with respect to the beneficial ownership of shareholders is based on the public filings of such shareholders with the SEC through March 6, 2023 and information provided to us by such shareholders.
Name of Beneficial Owner | | Shares Beneficially Owned | |
| | Number | | | Percentage | |
| | | | | | |
The Phoenix Holdings Ltd. (1) | | | 2,443,477 | | | | 5.52 | % |
Name of Beneficial Owner | | Shares Beneficially Owned | |
| | Number | | | Percentage | |
| | | | | | |
Harel Insurance Investments & Financial Services Ltd. (1) | | | 2,352,922 | | | | 5.06 | % |
| | | | | | | | |
(1) Based solely upon, information written statement providedand qualified in its entirety with reference to, usAmendment No.1 to Schedule 13G/A filed with the SEC on January 17, 2023, by Phoenix HoldingsHarel Insurance Investments & Financial Services Ltd., of the 2,352,922 Ordinary Shares reported as of December 31, 2021. The shares are beneficially owned by various direct Harel Insurance Investments & Financial Services Ltd. (i) 2,317,967 Ordinary Shares are held for members of the public through, among others, provident funds and/or indirect, majority mutual funds and/or wholly-ownedpension funds and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of the Phoenix HoldingsHarel Insurance Investments & Financial Services Ltd. (the “Subsidiaries”). The Subsidiaries manage their own funds and/or the funds, each of others, including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients. Each of the Subsidiarieswhich subsidiaries operates under independent management and makes its own independent voting and investment decisions.decisions, (ii) 34,712 Ordinary Shares are held by third-party client accounts managed by a subsidiary of Harel Insurance Investments & Financial Services Ltd. as portfolio managers, which subsidiary operates under independent management and makes independent investment decisions and has no voting power in the securities held in such client accounts, and (iii) 243 Ordinary Shares are beneficially held for its own account. The address of the Phoenix HoldingsHarel Insurance Investments & Financial Services Ltd. is Derech Hashalom 53, Givataim, 53454,Harel House; 3 Aba Hillel Street; Ramat Gan 52118, Israel.
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years preceding the date of this annual report on Form 20-F have been: (i) the increase in the percentage of ownership by Harel Insurance Investments & Financial Services Ltd. and its third-party client accounts and various direct or indirect, majority or wholly-owned subsidiaries, above 5% during the year 2022; (ii) the increase in the percentage of ownership by the Phoenix Holdings Ltd. and its various direct or indirect, majority or wholly-owned subsidiaries, above 10% and the decrease in the percentage of ownership below 10% during the year 2022 and further decrease in their ownership percentage below 5% during 2023, according to a written notice provided to us by Phoenix Holdings Ltd. on February 21, 2023; (ii) the decrease in the percentage of ownership held by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation below 5% during the year 2021; (ii) the decrease in the percentage of ownership held by Private Capital Management, LLC below the 5% during the year 2021 (iii) the decrease in the percentage of ownership held by Dror Erez below the 5% during the year 2019; (iv) the decrease in the percentage of ownership held by Ronen Shilo below the 5% during the year 2019; (v) the decrease in the percentage of ownership held by J.P. Morgan Investment Management Inc., Digital Growth Fund L.P. and Project Condor LLC below the 5% during the year 2019;2021; (vi) the decrease in the percentage of ownership held by Benchmark Israel II, L.P. below the 5% during the year 2020; (viii) the increase in the percentage of ownership held by Private Capital Management, LLC above 5% in 2020; (ix) the increase in the percentage of ownership held by The Phoenix Holdings Ltd., and its various direct or indirect, majority or wholly-owned subsidiaries, above 5% during the year 2020; and (x) the decrease in the percentage of ownership held by EA2K Ltd. below the 5% during the year 2020.
To our knowledge, as of March 5, 2022,6, 2023, we had 5 shareholders of record of which 5 (excluding the Depository Trust Company) all of which were registered with addresses in the United States. These U.S. holders were, as of such date, the holders of record of approximately 0.1%0.02% of our outstanding shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
B.RELATED PARTY TRANSACTIONS
It is our policy that transactions with office holders or transactions in which an office holder has a personal interest will be on terms that, on the whole, are no less favorable to us than could be obtained from independent parties.
See Exhibit 2.1 to this annual report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, for a discussion of the requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders.
The following is a description of some of the transactions with related parties to which we are party and which were in effect within the past three fiscal years. The descriptions provided below are summaries of the terms of such agreements and do not purport to be complete and are qualified in their entirety by the complete agreements.
Indemnification Agreements
Our articles of association permit us to exculpate, indemnify and insure our directors and officeholders to the fullest extent permitted by the Companies Law. We have obtained directors’ and officers’ insurance for each of our officers and directors and have entered into indemnification agreements with all of our current officers and directors.
We have entered into indemnification and exculpation agreements with each of our current office holders and directors exculpating them to the fullest extent permitted by the law and our articles of association and undertaking to indemnify them to the fullest extent permitted by the law and our articles of association, including with respect to liabilities resulting from this annual report, to the extent such liabilities are not covered by insurance. See also Item 10.B. “Related Party Transactions—Indemnification Agreements.”
Employment and Consulting Agreements
We have or have had employment, consulting or related agreements with each member of our senior management. For more information on employment and consulting agreements see Item 6.B. “Compensation.”
C.INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8ITEM 8.. FINANCIAL INFORMATION
A.CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our Financial Statements are included in this annual report pursuant to Item 18.
Legal Proceedings
On December 22, 2015, Adtile Technologies Inc. (“Adtile”) filed a lawsuit against Perion and its wholly-owned subsidiary, Intercept Interactive Inc. (“Intercept”) in the United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept related to Intercept’s alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. Since Adtile is seeking injunctive relief and unspecified monetary damages. We are unable to predict the outcome or range of possible loss at this stage. On June 23, 2016, the court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Intercept’s motion to stay the action and compel arbitration. As of the date of this report, Adtile hadhas not commenced an arbitration proceeding andor otherwise taken any steps to prosecute its claims, on September 22, 2022, the court dismissed the case for administrative reasons. We believehas granted Intercept’s motion and ruled that we have strong defenses against this lawsuit and we intend to defend against it vigorously if the case is ever resubmitted.dismissed without prejudice.
Policy on Dividend Distribution
It is currently our policy not to distribute dividends.
B.SIGNIFICANTB. SIGNIFICANT CHANGES
Since the date of our audited Financial Statements incorporated by reference in this report, there have not been any significant changes other than as set forth in note 20 to our Financial Statements.”None.
ITEM 9ITEM 9.. THE OFFER AND LISTING
A.OFFER AND LISTING DETAILS
Our ordinary shares have been listed on the Nasdaq Stock Market since January 2006. Our ordinary shares commenced trading on the TASE on December 4, 2007. Our trading symbol on Nasdaq is “PERI” and on TASE is “PERION.”
B.PLAN OF DISTRIBUTION
Not applicable.
C.MARKETS
See “—Listing Details” above.
D.SELLING SHAREHOLDERS
Not applicable.
E.DILUTION
Not applicable.
F.EXPENSES OF THE ISSUE
Not applicable.
ITEM 10ITEM 10.. ADDITIONAL INFORMATION
A.SHARE CAPITAL
Not applicable
B.MEMORANDUM AND ARTICLES OF ASSOCIATION
A copy of our amended and restated articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item is set forth in Exhibit 2.1 to this annual report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.
C.MATERIAL CONTRACTS
We have not entered into any material contract within the twothree years prior to the date of this Annual Report, other than contracts entered into in the ordinary course of business, or as otherwise described herein in Item 4.A “History and Development of the Company,” Item 4.B “Business Overview,” Item 5.B “Operating and Financial Review and Prospects—Liquidity and Capital Resources,” Item 6.C “Board Practices” and Item 7.B “Related Party Transactions.”
Bank Mizrahi Credit Facility
On May 10, 2017, ClientConnect, a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a credit facility with Mizrahi Tefahot Bank Ltd. (“Bank Mizrahi”), an Israeli bank, pursuant to which ClientConnect was permitted to borrow up to $17.5 million. This facility was repaid in full from the proceeds of the new Bank Mizrahi facility.
On December 17, 2018, ClientConnect executed a new loan facility with Bank Mizrahi in the amount of $25 million. Proceeds of the loan facility were applied to the refinancing of existing debt of ClientConnect with Bank Mizrahi as well as existing debt of Undertone with SunTrust Bank. See Note 9 of the Financial Statements for further information. As of March 8, 2021, this credit facility was repaid in full.
Bank Mizrahi 2020 Credit Line
On May 19, 2020, we entered into a short-term secured credit line in the amount of up to $20 million with Bank Mizrahi, which was scheduled to mature on May 18, 2021. On August 11, 2020, we withdrawn an amount of $12.5 million from this credit line. Such a withdrawal was a short-term revolving loan for a three-month period. As of December 21, 2020, this credit facility was repaid in full.
D.EXCHANGE CONTROLS
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.
E.TAXATION
The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes.
ISRAELI TAXATION
THE FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons acquiring our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
The discussion below should not be construed as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure in Israel
Taxable income of Israeli companies is generally subject to corporate tax at the rate of 23% for 2018 and subsequent tax years. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise (as further discussed below) may be considerably lower.
Under Israeli tax legislation, a corporation is considered as an “Israeli resident company” under the Ordinance if it meets one of the following: (i) it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
Foreign Currency Regulations
We are permitted to measure our Israeli taxable income in U.S. dollars pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for doing so. We believe that we meet and will continue to meet, the necessary conditions and as such, we measure our results for tax purposes based on the U.S. dollar/NIS exchange rate as of December 31st of each year.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959 (the “Investment Law”) provides tax benefits for income of Israeli companies meeting certain requirements and criteria. The Investment Law has undergone certain amendments and reforms in recent years.
The Israeli parliament enacted a reform to the Investment Law, effective January 2011 (the “2011 Amendment”). The reform introduced new benefits for “Preferred Enterprises” instead of the benefits granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law in effect up to January 1, 2011, which were referred to as an Approved Enterprise and Benefited Enterprise, were entitled to choose to continue to enjoy such benefits, provided that certain conditions arewere met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment.Preferred Enterprise. The 2017 Amendment introducesintroduced new benefits for Technological Enterprises, alongside the existing Preferred Enterprise tax benefits. According to the 2011 Amendment, a flat rate tax applies to companies eligible for the “Preferred Enterprise”Preferred Enterprise status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establish that it contributes to the country’s economic growth and is a competitive factor for the Gross Domestic Product (a competitive enterprise).
We elected “Preferred Enterprise”Preferred Enterprise status commencing in 2011.2011 and one of our Israeli subsidiaries became a Preferred Enterprise in 2017. We believe that the Company and certain of its Israeli subsidiaries, qualify as a “PreferredPreferred Technological Enterprise”Enterprise in 20212022 and therefore, the portion of the income derived from “PreferredPreferred Technology Income”,Income, as defined in the Investment Law, which qualifies for the benefits, is subject to a lower tax rate of 12% according to Amendment 73 to the Law, as described below.
On December 31, 2019 the Israeli subsidiary – ClientConnect Ltd., was merged into the Company. In 2020 the Company elected to implement “Preferred Technological Enterprise” benefits.benefit.
Benefits granted to a Preferred Enterprise’s Preferred Income include reduced tax rates. In peripheral regions (Development Area A) the reduced tax rate was 7.5% starting from 2017 and thereafter. In other regions the tax rate was 16% in 2015 and thereafter. Preferred Enterprises in peripheral regions will be eligible for grants from the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), as well as the applicable reduced tax rates.
A dividend distribution from a Preferred Enterprise out of the “Preferred Income” would be generally subject to 20% withholding tax for Israeli-resident individuals (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the Israel Tax Authority ("ITA") allowing for a reducedsuch withholding tax rate, 20% or such lower rate as may be provided under an applicable double tax treaty). Dividend distributions out of “Preferred Income” to an Israeli company, are not subject to withholding tax.tax (although, if such dividends are subsequently distributed to individuals or a non-Israeli company the aforesaid will apply).
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments, was published. Amendment 73 prescribes special tax routestracks for technological enterprises as described below, and is in addition to the other existing tax beneficial programs under the Investment Law. On June 30, 2021, certain grandfather rules in Amendment 73 pertaining the preferred enterprises have expired, most significantly the limitation of Preferred Income to exclude such which is generated by intangible assets not related to the manufacturing or such that would not have been recognized as Preferred Technological Income.
Tax benefits under Amendment 73 that became effective on January 1, 2017.
Amendment 73 provides tax benefits for two types of “Technology“Technological Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
Amendment 73 applies to “Preferred TechnologyTechnological Enterprise” that meet certain condition, including, all ofinter-alia, the following:
A company's average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7% of its total revenue or exceed NIS 75 million (approximately $21
| ● | A company's average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7% of its total revenue or exceed NIS 75 million (approximately $22 million) per year; and |
A company must also satisfy one of the following conditions: (1) at least 20% of the workforce (or at least 200 employees) are employed in R&D; (2) a venture capital investment of an amount approximately equivalent to at least NIS 8 million was previously made in the company; or (3) growth in sales or workforce by an average of 25% over the three years preceding the tax year.
| ● | A company must also satisfy one of the following conditions: (1) at least 20% of the workforce (or at least 200 employees) are employed in R&D; (2) a venture capital investment of an amount approximately equivalent to at least NIS 8 million was previously made in the company, and the company did not change its type of business after such investment; (3) growth in sales or workforce by an average of 25% over the three years preceding the tax year provided that the company's turnover in the tax year and in each of the previous three years was at least NIS 10 million; or (4) the number of the company’s employees increased by 25% (on average) or more in the course of three years, provided that the company employed at least 50 employees in the tax year and in each of the previous three years. |
| ● | Companies that do not meet one of the above two conditions may request preliminary approval from the National Authority for Technological Innovation regarding being companies that own an innovation-promoting enterprise. |
| ● | A company must qualify as a “Competitive Enterprise” as described under the Investment Law. |
A “Special Preferred Technological Enterprise” is an enterprise that meets conditions one and two above, and in addition is a part of a group of companies that have total annual consolidated revenue in excess of NIS 10 billion (approximately $2.8$2.9 billion).
A “Preferred TechnologyTechnological Enterprise” satisfying the required conditions will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred TechnologyTechnological Income,” as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred TechnologyTechnological Enterprise located in development area A. In addition, a Preferred TechnologyTechnological Enterprise will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist), to which we refer as IIA.
A “Special Preferred TechnologyTechnological Enterprise” satisfying the required conditions, will thereby enjoy a reduced corporate tax rate of 6% on “Preferred TechnologyTechnological Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred TechnologyTechnological Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred TechnologyTechnological Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred TechnologyTechnological Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed to Israeli shareholders by a Preferred TechnologyTechnological Enterprise or a Special Preferred TechnologyTechnological Enterprise, paid out of Preferred TechnologyTechnological Income, are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the ITA allowing for a reducedsuch withholding tax rate 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld.withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company the aforesaid will apply). If more than 90% of the Preferred TechnologyTechnological Enterprise or Special Preferred TechnologyTechnological Enterprise are held by foreign company shareholders and other conditions are met, such dividends, distributed to a foreign company, will be subject to a 4% withholding tax rate (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax AuthorityITA allowing for a reduced tax rate).
We believe that we and our Israeli subsidiary Vidazoo are qualified as a “Preferred Technological Enterprise” in 2020 and 2021, that our Israeli subsidiary Vidazoo qualified as “Preferred Technological Enterprise” in 2021 and that our former Israeli subsidiary, ClientConnect, qualified as a “Preferred Technological Enterprise” in 2017, 20182022, and 2019 and was subject to a lower tax rate of 12% according to Amendment 73 to the Law, as described above.
Law for the Encouragement of Industry (Taxes), 1969
We believe that we currently qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as a company resident of Israel which was incorporated in Israel, of which 90% or more of its income in any tax year, other than of income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel or in the “Area”, in accordance with the definition in section 3A of the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
Amortization of the cost of purchased know-how, patents, and right to use patent or know how, which are used for the development or promotion of the Industrial Enterprise, over an eight-year period;
Accelerated depreciation rates on equipment and buildings;
Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and
Deduction of expenses related to a public offering in equal amounts over three years.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.
Transfer Pricing
In accordance with Section 85A of the Ordinance and the regulations promulgated under it, an international transaction (where at least one party is a non-Israeli or the income from such transaction, in whole or in part, is taxable income abroad as well as in Israel) of which the parties are related (including relations between a person and their relative, and also control of one party to the transaction over the other, control of one person over the parties to the transaction, whether direct or indirect, alone or together with another), and due to this relationship the price set for an asset, right, service or credit was determined or other conditions for the transaction were set such that a smaller profit was realized rather than what would have been realized, if the price or the conditions had been set between parties that are not related (the "Market Terms"), then such transaction shall be reported in accordance with the Market Terms. The assessment of whether a transaction falls under the aforementioned definition shall be implemented in accordance with one of the procedures mentioned in the regulations and is based, among others, on comparisons of characteristics which portray similar transactions in ordinary market conditions, such as profit, the area of activity, nature of the asset, the contractual conditions of the transaction and according to additional terms and conditions specified in the regulations.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. The Israeli Income Tax Ordinance [New Version], 5721-1961, or the Tax Ordinance, generally imposes a capital gains tax on the disposition of capital assets by non-Israeli tax residents if those assets (i) are located in Israel, (ii) are shares or a right to shares in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The Tax Ordinance distinguishes between real capital gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain equivalent to the increase of the relevant asset’s tax basis attributable to an increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of disposition. Inflationary surplus is not currently subject to tax in Israel. The real capital gain is the excess of the total capital gain over the inflationary surplus.
Generally, a non-Israeli resident (whether an individual or a corporation) who derives capital gains from the sale of shares in an Israeli resident company purchased upon or after the registration of the shares on the TASE or on a regulated market outside of Israel (such as Nasdaq) should be exempt from Israeli capital gains tax unless, among others, (i) the shares were held through a permanent establishment that the non-Israeli resident shareholder maintains in Israel, or (ii) the Israeli resident company is classified as a real estate investment trust or ceased to be a real estate investment trust (as defined in the Tax Ordinance). If not exempt, a non-Israeli resident shareholder would generally be subject to tax on capital gain at the ordinary corporate tax rate (23% in 2021)2022), if generated by a company, or at the rate of 25%, if generated by an individual, or 30%, if generated by an individual who is a “substantial shareholder” (as defined under the Tax Ordinance), at the time of sale or at any time during the preceding 12-month period (or if the shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares). A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include, among others, the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation (23% in 2021)2022) and a marginal tax rate of up to 47% for an individual in 20212022 (excluding excess tax as discussed below)) unless contrary provisions in a relevant tax treaty apply. Non-Israeli entities (including corporations) will not be entitled to the foregoing exemption if Israeli residents, whether directly or indirectly: (i) have a controlling interest of more than 25% in such non-Israeli entity or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenue or profits of such non-Israeli entity. Such exemption is not applicable, inter alia, to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty between Israel and the shareholder’s country of residence. For example, under the Convention Between the Government of the United States and the Government of the State of Israel with respect to Taxes of Income, as amended, or the United States-Israel Tax Treaty, the disposition of shares by a shareholder who (i) is a U.S. resident (for purposes of the United States-Israel Tax Treaty), (ii) holds the shares as a capital asset, and (iii) is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply, inter alia, if (a) the capital gain arising from such sale, exchange or disposition is attributed to a permanent establishment that the shareholder maintains in Israel, (b) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital of the company at any time in the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, (c) such U.S. resident is an individual and was present in Israel for a period or periods aggregating to 183 days or more during the relevant taxable year, (d) the capital gains arising from such sale, exchange or disposition is attributed to real estate located in Israel, or (e) the capital gain arising from such sale, exchange or disposition is attributed to royalties. In each case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable.
Regardless of whether non-Israeli shareholders may be liable for Israeli capital gains tax on the sale of our ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax AuthorityITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax AuthorityITA to confirm their status as non-Israeli tax residents, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
In addition, with respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax deferral, a pre-ruling from the Israel Tax AuthorityITA might be required.
Taxation of Non-Israeli Resident Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless relief is provided under the provisions of an applicable tax treaty between Israel and the shareholder’s country of residence (provided that a certificate from the Israel Tax AuthorityITA allowing for a reduced withholding tax rate or a tax exemption is obtained in advance). With respect to a person who is a “substantial shareholder” (described above) at the time of receiving the dividend or on any time during the preceding 12 months, the applicable tax rate is 30%. Dividends paid on publicly traded shares, like our ordinary shares, to non-Israeli residents, are generally subject to Israeli withholding tax at a rate of 25%, so long as the shares are registered with a nominee company (whether or not the recipient is a substantial shareholder), unless a lower rate is provided under an applicable tax treaty (provided that a certificate from the Israel Tax AuthorityITA allowing for a reduced withholding tax rate is obtained in advance). However, a distribution of dividends to non-Israeli residents is generally subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an “Approved Enterprise” or a “Benefited Enterprise” and 20% if the dividend is distributed from income attributed to a “Preferred Enterprise” (as such terms are defined in the Law for the Encouragement of Capital Investments, 5719-1959, or the Encouragement Law), subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, or such lower rate as may be provided under an applicable tax treaty. If such dividends are distributed by a “Preferred Technological Enterprise” or a “Special Preferred Technological Enterprise”, paid out of “Preferred Technological Income” (as such terms are defined under the Encouragement Law), to a non-Israeli company that holds, alone or together with other foreign companies, 90% or more in the Israeli company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax AuthorityITA allowing for a reduced tax rate).
For example, under the United States-Israel Tax Treaty and subject to the eligibility to the benefits under such treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, for dividends not generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprises and paid to a U.S. corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, the maximum rate of withholding tax is generally 12.5%, provided that not more than 25% of the gross income of the Israeli resident paying corporation for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are not entitled to such reduction under such tax treaty but are subject to withholding tax at the rate of 15% or 20% for such a United States corporate shareholder (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate), provided that the conditions related to the holding of 10% of our voting capital and to our gross income for the previous year (as set forth in the previous sentence) are met. The aforementioned rates under the United States-Israel Tax Treaty would not apply if the dividend income is derived through a permanent establishment of the U.S. resident in Israel.
If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise ora Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents (for purposes of the United States-Israel Tax Treaty) who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes up to the amount of the taxes withheld, subject to detailed rules contained in U.S. tax law.
We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel in respect of such income, provided, inter alia, that (i) such income was not derived from a business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed and (iii) the taxpayer is not obliged to pay excess tax (as further explained below).
Excess Tax. Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 647,640663,240 for 20212022 (which amount is linked to the annual change in the Israeli consumer price index), including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax. Israeli tax law presently does not impose estate or gift taxes.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of our ordinary shares, but this discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to own, or dispose of, our ordinary shares.
This discussion applies only to a U.S. Holder that holds the ordinary shares as capital assets for U.S. federal income tax purposes (generally, property held for investment). It does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such as:
certain financial institutions;
dealers or traders in securities that use a mark-to-market method of tax accounting;
persons holding ordinary shares as part of a straddle, integrated or similar transaction;
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
entities classified as partnerships for U.S. federal income tax purposes and their partners;
tax-exempt entities, “individual retirement accounts” or “Roth IRAs”;
persons who acquired our ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation;
persons that own or are deemed to own 10% or more of our stock by voting power or value; or
persons holding ordinary shares in connection with a trade or business outside the United States.
IfStates .If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ordinary shares and their partners should consult their tax advisers as to their particular U.S. federal income tax consequences of owning and disposing of ordinary shares.
This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and Israel, or the Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a person that is eligible for the benefits of the Treaty and is, for U.S. federal income tax purposes, a beneficial owner of ordinary shares and:
a citizen or individual resident of the United States;
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
Treasury regulations that apply to taxable years beginning on or after December 28, 2021 may in some circumstances prohibit a U.S. person from claiming a foreign tax credit with respect to certain non-U.S. taxes that are not creditable under applicable income tax treaties. Accordingly, U.S. investors that are not eligible for Treaty benefits should consult their tax advisers regarding the creditability or deductibility of any Israeli taxes imposed on them. This discussion does not apply to investors in this special situation.
This discussion does not address any U.S. federal taxes (such as estate or gift taxes) other than income taxes, nor does it address any state, local or non-U.S. tax considerations. U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of our ordinary shares in their particular circumstances.
Taxation of Distributions
This discussion is subject to the discussion under “—Passive Foreign Investment Company Rules” below.
We currently do not intend to make distributions on the ordinary shares. Any distributions (other than certain pro rata distributions of ordinary shares) will be treated as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Subject to applicable limitations, dividends paid on our ordinary shares to certain non-corporate U.S. Holders may be taxable at a favorable rate, provided that we are not (and are not treated with respect to any U.S. Holder as) a passive foreign investment company, or PFIC, for our taxable year in which the dividend is paid or the preceding taxable year. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of this favorable rate in their particular circumstances.
Dividends will generally be included in a U.S. Holder’s income on the date of receipt. If any dividend is paid in NIS, the amount of dividend income will be the U.S. dollar amount of the dividend calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Such gain or loss will generally be treated as U.S.-source ordinary income or loss.
Dividend income will include any amounts withheld in respect of Israeli taxes and will be treated as foreign-source income. Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s circumstances, Israeli taxes withheld from dividends on our ordinary shares generally will be creditable against the U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complexcomplex. For example, recently published Treasury regulations provide that, in the absence of an election to apply the benefits of an applicable income tax treaty, in order for foreign income taxes to be creditable the relevant foreign income tax rules must be consistent with certain U.S. federal income tax principles, and we have not determined whether the Isreali income tax system meets these requirements. U.S. Holders should consult their tax advisers regarding the creditability of foreignIsraeli taxes in their particular circumstances. In lieu of claiming a foreignnon-U.S. tax credit, U.S. Holders may elect to deduct foreignnon-U.S. taxes (including Israeli taxes) in computing their taxable income, subject to applicable limitations. An election to deduct creditable foreignnon-U.S. taxes instead of claiming foreign tax credits applies to all such foreignnon-U.S. taxes paid or accrued in the taxable year.
Sale or Other Taxable Disposition of Ordinary Shares
This discussion is subject to the discussion under “—Passive Foreign Investment Company Rules” below.
Gain or loss realized on the sale or other taxable disposition of our ordinary shares will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder has owned the ordinary shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Israeli taxes on capital gains will generally not be eligible for foreign tax credits. U.S. Holders should consult their tax advisers with respect to the creditability or deductibility of Israeli taxes, if any, on disposition gains in their particular circumstances.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the value of its assets (generally determined on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly, at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate share of the assets of the other corporation or partnership and received directly its proportionate share of the income of the other corporation or partnership. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes. Goodwill is generally characterized as a non-passive or passive asset based on the nature of the income produced in the activity to which the goodwill relates.
We believe that we were not a PFIC for our 20212022 taxable year. However, there can be no assurance that we will not be a PFIC for the current or any future taxable year because our PFIC status is an annual determination that can be made only after the end of the relevant taxable year and will depend on the composition of our income and assets and the value of our assets from time to time (including the value of our goodwill, which may be determined, in large part, by reference to the market price of our ordinary shares, which has been, and may continue to be, volatile). Because the value of our goodwill may be determined by reference to our market capitalization from time to time, and because we hold and may continue to hold significant amounts of cash and cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase if our market capitalization declines.
If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries or other companies in which we own equity interests is also a PFIC (any such entity, a “Lower-tier PFIC”), a U.S. Holder will be deemed to own a proportionate amount (by value) of the shares of any Lower-tier PFIC and will be subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain distributions by the Lower-tier PFIC and (ii) dispositions of shares of the Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though the U.S. Holder will not receive the proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which a U.S. Holder holds ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of its ordinary shares will be allocated ratably over the U.S. Holder’s holding period. The amounts allocated to the taxable year of the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income. The amount allocated to each other taxable year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge will be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions received by a U.S. Holder in any taxable year on its ordinary shares exceed 125% of the average of the annual distributions on the ordinary shares received during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter, such distributions will be subject to taxation in the same manner. If we are a PFIC for any taxable year during which a U.S. Holder owns ordinary shares, we will generally continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding taxable years during which the U.S. Holder owns the ordinary shares, even if we cease to meet the threshold requirements for PFIC status. If we are a PFIC for any taxable year but cease to be a PFIC for subsequent taxable years, U.S. Holders should consult their tax advisers regarding the advisability of making a “deemed sale” election that will allow them to eliminate the continuing PFIC status under certain circumstances.
Alternatively, if we are a PFIC for any taxable year and if our ordinary shares are “regularly traded” on a “qualified exchange,” a U.S. Holder can make a mark-to-market election that will result in tax treatment different from the general tax treatment for PFICs described above. The ordinary shares will be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter. Nasdaq, where the ordinary shares are listed, is a qualified exchange for this purpose. If a U.S. Holder of ordinary shares makes a timely mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark- to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ordinary shares will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares in a year in which we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election, with any excess treated as a capital loss). If a U.S. Holder of ordinary shares makes a timely mark-to-market election, distributions paid on ordinary shares will be treated as discussed under “—Taxation of Distributions” above. U.S. Holders should consult their tax advisers regarding the availability and advisability of making a mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market election with respect to their ordinary shares given that we may have Lower-tier PFICs and that there is no provision in the Code, Treasury regulations or other official guidance that would permit them to make a mark-to-market election with respect to any Lower-tier PFIC the shares of which are not “regularly traded” as described above.
We do not intend to provide information necessary for U.S. Holders to make “qualified electing fund” elections which, if available, would result in tax treatment different from the general tax treatment for PFICs described above.
If we are a PFIC for any taxable year during which a U.S. Holder owns any ordinary shares, the U.S. Holder will generally be required to file annual reports with the Internal Revenue Service. U.S. Holders should consult their tax advisers regarding the determination of whether we are a PFIC for any taxable year and the potential application of the PFIC rules to their ownership of our ordinary shares.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” and (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information relating to their ownership of ordinary shares or non-U.S. accounts through which the ordinary shares are held. U.S. Holders should consult their tax advisers regarding their reporting obligations with respect to our ordinary shares.
F.DIVIDENDS AND PAYING AGENTS
Not applicable.
G.STATEMENT BY EXPERTS
Not applicable.
H.DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements file reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we will file with the SEC, within 120 days after the end of each subsequent fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and will submit to the SEC reports on Form 6-K containing unaudited quarterly financial information.
Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F and is not incorporated by reference herein.
I.SUBSIDIARY INFORMATION
Not applicable.
J. ANNUAL REPORT TO SECURITY HOLDERS
Not applicable.
ITEM 11ITEM 11.. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Risk. A portion of our revenue and expenses are denominated in foreign currencies. As a result, numerous balances are denominated or linked to these currencies. Foreign currency related fluctuations resulted in $1.0 million net losses in 2019, $1.3$1.5 million net losses in 2020, and $0.6$0.5 million net losses in 2021.2021 and $0.3 million in 2022. These losses are included in financial expenses, net, as presented in our statements of income.
As of December 31, 2021,2022, balance sheet financial items in U.S. dollars, our functional currency, and those currencies other than the U.S. dollars were as follows:
| | U.S. dollars | | | NIS | | | Other Currencies | | | Total | | | U.S. dollars | | | NIS | | | Other Currencies | | | Total | |
| | In thousands of U.S. dollars | | | In thousands of U.S. dollars | |
Current assets | | | 435,033 | | | | 6,590 | | | | 4,548 | | | | 446,171 | | | | 589,485 | | | | 9,013 | | | | 4,960 | | | | 603,458 | |
Long-term assets | | | 1,239 | | | | 3,088 | | | | 980 | | | | 5,307 | | | | 1,213 | | | | 3,714 | | | | 901 | | | | 5,828 | |
Current liabilities | | | (174,474 | ) | | | (14,823 | ) | | | (558 | ) | | | (189,855 | ) | | | (210,074 | ) | | | (20,895 | ) | | | (1,262 | ) | | | (232,231 | ) |
Long-term liabilities | | | (46,124 | ) | | | (6,188 | ) | | | (253 | ) | | | (52,565 | ) | | | (48,239 | ) | | | (3,757 | ) | | | (480 | ) | | | (52,476 | ) |
Total | | | 215,674 | | | | (11,333 | ) | | | 4,717 | | | | 209,058 | | | | 332,385 | | | | (11,925 | ) | | | 4,119 | | | | 324,579 | |
In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. We may compensate for such fluctuations by changing product prices accordingly. We also hold a small part of our financial investments in other currencies, mainly NIS and Euro. The dollar value of those investments may decline. A revaluation of 1% of the foreign currencies (i.e. other than U.S. dollar) would not have a material effect on our income before taxes possibly reducing it by $0.4 million.
A significant portion of our costs, including salaries and office expenses are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of 1% of the New Israeli Shekel will affect our income before tax by approximately 0.4%. The exchange rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates published by the Bank of Israel, was as follows:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2019 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2022 | |
Average rate for period | | | 3.564 | | | | 3.437 | | | | 3.231 | | | | 3.437 | | | | 3.231 | | | | 3.359 | |
Rate at year-end | | | 3.456 | | | | 3.215 | | | | 3.110 | | | | 3.215 | | | | 3.110 | | | | 3.519 | |
ITEM 12ITEM 12.. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13ITEM 13.. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14ITEM 14.. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15ITEM 15.. CONTROLS AND PROCEDURES
| (a) | Disclosure controls and procedures |
Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of December 31, 2021, which did not include the internal controls of the business of Vidazoo, our recent acquisition in 2021,2022, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our interim chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
| (b) | Management annual report on internal control over financial reporting |
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting and has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework” (2013 framework). Our management has concluded, based on its assessment, that our internal control over financial reporting was effective as of December 31, 2021.2022.
| (c) | Attestation Report of the Registered Public Accounting Firm |
Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered Public Accounting Firm” on page F-6.F-2.
| (d) | Changes in internal control over financial reporting |
During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16ITEM 16.. RESERVED
ITEM 16AITEM 16A.. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Sarit Firon,Michal Drayman, who is an independent director (as defined in the Nasdaq Listing Rules) and serves as our chairperson of the audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F.
ITEM 16BITEM 16B.. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics (which was amended in February 2017) applicable to all of our directors, officers and employees as required by the Nasdaq Listing Rules, which also complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of 2002. A copy of the code of ethics can be found on our website at: http://www.perion.com/governance-documents. We granted no waivers under our code of business conduct and ethics in 2021.
ITEM 16CITEM 16C.. PRINCIPAL ACCOUNTANTACCOUNTANTING FEES AND SERVICES
Fees for the professional services rendered by our independent accountants Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for each of the last two fiscal years were as follows (in thousands):
| | 2020 | | | 2021 | | | 2021 | | | 2022 | |
Audit Fees | | $ | 500 | | | $ | 568 | | | $ | 568 | | | $ | 643 | |
Tax Fees | | | 236 | | | | 181 | | | | 181 | | | | 109 | |
Audit Related fees | | | 86 | | | | 394 | | | | 394 | | | | 288 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 822 | | | $ | 1,143 | | | $ | 1,143 | | | $ | 1,040 | |
Audit fees include fees for professional services rendered by our principal accountant in connection with the annual audit, review of quarterly consolidated financial data, internationally required statutory audits, consents and assistance with review of documents filed with the SEC.
Tax fees include services related to tax compliance and claims for refunds, tax planning and advice, including assistance with tax audits and appeals, advice related to additional efforts required in connection with mergers and acquisitions and assistance with respect to requests for rulings from tax authorities.
Audit-related fees principally include assistance with audit services and consultations, mainly related to follow-on public offerings, mergers and acquisitions.
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management. Our audit committee has authorized all auditing and non-auditing services provided by our independent accountants during 20202021 and 20212022 and the fees paid for such services.
ITEM 16DITEM 16D.. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16EITEM 16E.. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16FITEM 16F.. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16GITEM 16G.. CORPORATE GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed on the Nasdaq Global Select Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the Nasdaq Listing Rules, including the Nasdaq corporate governance requirements. The Nasdaq Listing Rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign private issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of Nasdaq applicable to domestic U.S. listed companies:
Shareholder Approval. Although the Nasdaq Listing Rules generally require shareholder approval of equity compensation plans and material amendments thereto, we follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless such arrangements are for the compensation of chief executive officer or directors, in which case they also require the approval of the compensation committee and the shareholders.
In addition, rather than follow the Nasdaq Listing Rules requiring shareholder approval for the issuance of securities in certain circumstances, we follow Israeli law, under which a private placement of securities requires approval by our board of directors and shareholders if it will cause a person to become a controlling shareholder (generally presumed at 25% ownership) or if:
the securities issued amount to 20% or more of our outstanding voting rights before the issuance;
some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
the transaction will increase the relative holdings of a shareholder that holds 5% or more of our outstanding share capital or voting rights or will cause any person to become, as a result of the issuance, a holder of more than 5% of our outstanding share capital or voting rights.
Shareholder Quorum. The Nasdaq Listing Rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Companies Law, provide that if at the adjourned meeting a legal quorum is not present after 30 minutes from the time specified for the commencement of the adjourned meeting, then the meeting shall take place regardless of the number of members present and in such event the required quorum shall consist of any number of shareholders present in person or by proxy.
Executive Sessions. While the Nasdaq Listing Rules require that “independent directors,” as defined in the Nasdaq Listing Rules, must have regularly scheduled meetings at which only “independent directors” are present. Israeli law does not require, nor do our independent directors necessarily conduct, regularly scheduled meetings at which only they are present.
Approval of Related Party Transactions. Although the Nasdaq Listing Rules require the approval of the audit committee or another independent body of a Company’s board of directors for all “related party transactions” required to be disclosed pursuant to Item 7.B. of Form 20-F, we follow the provisions of the Israeli Companies Law. Specifically, that all related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Israeli Companies Law, and the regulations promulgated thereunder, which allow for the approval of certain related party transactions, which are immaterial, in the normal course of business and on market terms, by the board of directors. Other specified transactions can require audit committee approval and shareholder approval, as well as board approval. See also Exhibit 2.1 to this annual report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, for the definition and procedures for the approval of related party transactions.
ITEM 16HITEM 16H.. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I.ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION |
Not applicable.
PART III
ITEM 17. 17.FINANCIAL STATEMENTS
Not applicable.
ITEM 18. 18.FINANCIAL STATEMENTS
The following financial statements and related auditors’ report are filed as part of this annual report on Form 20-F:
PERION NETWORK LTD. AND ITS SUBSIDIARIES