UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ___________
For the transition period from _____ to _____
Commission File No. 000-51694
Perion Network Ltd.
(Exact Name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
26 HaRokmim Street
Holon, Israel 5885849
(Address of principal executive offices)
Maoz Sigron, Chief Financial Officer
Tel: +972-73-3981582; Fax: +972-3-644-5502
26 HaRokmim Street
Holon, Israel 5885849
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class
Ordinary shares, par value NIS 0.03 per share
Trading Symbol(s)
PERI
Name of Each Exchange on which Registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual
Report.
As of December 31, 2020, the Registrant had outstanding 27,351,974 ordinary shares, par value NIS 0.03 per share (excluding treasury shares).
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
Yes ☒ No ☐
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued by the International
Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Item 17 ☐ Item 18 ☐
Yes ☐ No ☒
Terms
PRELIMINARY NOTES
As used herein, and unless the context suggest otherwise, the terms “Perion,” “Company,” “we,” “us” or “ours” refer to Perion Network Ltd. and
subsidiaries. References to “dollar” and “$” are to U.S. dollars, the lawful currency of the United States, and references to “NIS” are to New Israeli
Shekels, the lawful currency of the State of Israel. This annual report on Form 20-F contains translations of certain NIS amounts into U.S. dollars at
specified rates solely for your convenience. These translations should not be construed as representations by us that the NIS amounts actually represent
such U.S. dollar amounts or could, at this time, be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated NIS
amounts into U.S. dollars at an exchange rate of NIS 3.215 to $1.00, the representative exchange rate reported by the Bank of Israel on December 31, 2020.
Changes in Share Capital
On August 26, 2018, following the approval of a special general meeting of our shareholder held on August 2, 2018, the Company executed a 3-
to-1 reverse share split of the Company’s ordinary shares, such that each three ordinary shares, par value NIS 0.01 per share, have been consolidated into
one ordinary share, par value NIS 0.03. Unless otherwise indicated, all of the share numbers and the option numbers in this Form 20-F have been adjusted,
on a retroactive basis, to reflect this 3-to-1 reverse share split.
Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements
relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our
industries’ actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed, implied or inferred by these forward-looking statements. In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,”
“potential” or “continue” or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve
positive future results, levels of activity, performance, or goals. Actual events or results may differ materially from our current expectations. All forward-
looking statements included in this report are based on information available to us on the date of this report. Except as required by applicable law, we
undertake no obligation to update or revise any of the forward-looking statements after the date of this annual report on Form 20-F to conform those
statements to reflect the occurrence of unanticipated events, new information or otherwise.
You should read this annual report on Form 20-F and the documents that we reference in this report completely and with the understanding that
our actual future results, levels of activity, performance and achievements may be materially different from what we currently expect.
Factors that could cause actual results to differ from our expectations or projections include certain risks, including but not limited to the risks and
uncertainties relating to our; business, intellectual property, industry and operations in Israel, as described in this annual report on Form 20-F under Item
3.D. – “Key Information – Risk Factors.” Assumptions relating to the foregoing, involve judgment with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are
beyond our control. In light of the significant uncertainties, inherent in the forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can
we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those
contained in any forward-looking statements.
We obtained statistical data, market data and other industry data and forecasts used in preparing this annual report from market research, publicly
available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and
forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the
information.
2
Summary Risk Factors
Business and Industry
• Our advertising customers may reduce or terminate their business relationship with us at any time. If customers representing a significant
portion of our revenue reduce or terminate their relationship with us, it could have a material adverse effect on our business, financial
condition and results of operations.
•
Large and established internet and technology companies, such as Google, Facebook and Amazon, play a substantial role in the digital
advertising market and may significantly impair our ability to operate in this industry.
• We depend on supply sources to provide us with advertising inventory in order for us to deliver advertising campaigns in a cost-effective
manner.
•
•
The advertising industry is highly competitive. If we cannot compete effectively and overcome the technological gaps in this market, our
revenues are likely to decline.
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.
• Our search solution depends heavily upon revenues generated from our agreement with Microsoft, and any adverse change in that agreement
could adversely affect our business, financial condition and results of operations.
• Our search revenue business is highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to
publishers and generate most of our revenues. If we were to lose all or a significant portion of those publishers, our revenues and results of
operations would be materially 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 revenues from our users’ search activity could
be significantly reduced.
The global COVID-19 health pandemic has begun to adversely affect and could potentially severely affect, our business, results of operations
and financial condition due to impacts on our industry, as well as impacts from remote work arrangements, actions taken to contain the virus
or treat its impact, and the speed and extent of the recovery.
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 have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and management
attention and have in the past and could in the future, cause further dilution to our shareholders and adversely affect our financial results.
• Our share price has fluctuated significantly and could continue to fluctuate significantly.
Technological Environment
• Our financial performance may be materially adversely affected by information technology, insufficient cyber security and other business
disruptions.
•
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.
3
• We depend on third party Internet, telecommunication and hosting providers to operate our platforms, websites and services. Temporary
failure of these services, including catastrophic or technological interruptions, would materially reduce our revenues and damage our
reputation, and securing alternate sources for these services could significantly increase our expenses and be difficult to obtain.
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.
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.
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 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.
•
Political, economic and military instability in the Middle East may impede our ability to operate and harm our financial results.
4
TABLE OF CONTENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4.A
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Item 13.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15.
Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E.
Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
5
Page
6
6
6
30
41
41
51
62
64
64
64
74
74
75
75
75
75
75
76
76
76
76
76
77
78
78
79
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
PART I
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A.
SELECTED FINANCIAL DATA
We derived the selected operations data below for the years ended December 31, 2018, 2019 and 2020 and the selected balance sheet data as of
December 31, 2019 and 2020 from our audited consolidated financial statements and the related notes to the financial statements included elsewhere herein
(the “Financial Statements”). We derived the selected operations data below for the years ended December 31, 2016 and 2017 and the selected balance
sheet data as of December 31, 2016, 2017 and 2018 from our audited consolidated financial statements not incorporated by reference in this report. Our
consolidated financial statements are prepared and presented in U.S. dollars and in accordance with U.S. Generally Accepted Accounting Principles (“U.S.
GAAP”). The following tables present selected financial data and should be read in conjunction with Item 5. “Operating and Financial Review and
Prospects” and our Financial Statements.
Year ended December 31,
(U.S. dollars in thousands, except share and per share data)
2018
2017
2019
2016
Revenues:
Display and Social Advertising
Search Advertising and other
Total Revenues
Costs and Expenses:
Cost of revenues
Customer acquisition costs and media buy
Research and development
Selling and marketing
General and administrative
Restructuring charges
Impairment, net of gain on reversal of contingent
consideration
Depreciation and amortization
Total Costs and Expenses
Income (Loss) from Operations
Financial expense, net
Income (Loss) before Taxes on Income
Taxes on income (Benefit)
Net Income (Loss) from Continuing Operations
Net loss from discontinued operations
$
$
140,111
172,683
312,794
$
134,481
139,505
273,986
$
125,977
126,868
252,845
$
87,863
173,587
261,450
25,924
140,210
25,221
54,559
28,827
728
-
25,977
301,446
11,348
8,288
3,060
212
2,848
2,647
24,659
130,885
17,189
52,742
21,911
-
85,667
16,591
349,644
(75,658)
5,922
(81,580)
(8,826)
(72,754)
-
23,757
128,351
18,884
38,918
16,450
2,075
-
9,719
238,154
14,691
3,794
10,897
2,776
8,121
-
25,520
135,891
22,585
34,736
14,999
-
-
9,711
243,442
18,008
3,470
14,538
1,645
12,893
-
2020
148,698
179,365
328,063
22,477
197,626
30,880
39,085
15,819
-
-
9,923
315,810
12,253
2,638
9,615
(610)
10,225
-
Net Income (Loss)
Net Earnings (Loss) per Share - Basic:
Continuing operations
Discontinued operations
Net Income (Loss)
Net Earnings (Loss) per Share – Diluted:
Continuing operations
Discontinued operations
Net Income (Loss)
$
$
$
$
$
$
$
201
$
(72,754) $
8,121
$
12,893
$
10,225
0.11
$
(0.10) $
$
0.01
0.11
$
(0.10) $
$
0.01
(2.81) $
$
-
(2.81) $
(2.81) $
$
-
(2.81) $
0.31
-
0.31
0.31
-
0.31
$
$
$
$
$
$
0.50
-
0.50
0.49
-
0.49
$
$
$
$
$
$
0.38
-
0.38
0.36
-
0.36
Number of shares continuing and discontinued:
Basic
Diluted
25,520,151
25,557,934
25,849,724
25,849,724
25,850,067
25,855,225
25,965,357
26,357,585
26,687,145
28,797,747
6
Balance Sheet Data
(U.S. dollars in thousands):
Cash and cash equivalents
Working capital
Total assets
Total liabilities
Shareholders’ equity
2016
2017
As of December 31,
2018
2019
2020
$
$
$
$
$
23,962
27,048
368,452
160,308
208,144
$
$
$
$
$
31,567
32,895
274,027
135,695
138,332
$
$
$
$
$
39,109
26,779
256,446
107,665
148,781
$
$
$
$
$
38,389
31,799
283,777
118,595
165,182
$
$
$
$
$
47,656
27,246
358,681
174,559
184,122
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR OFFER AND USE OF PROCEEDS
Not applicable.
D.
RISK FACTORS
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financial, legal
and other factors or conditions that may affect us. We believe that the occurrence of any one or some combination of the following factors could have a
material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Related to our Business and Industry
Our advertising customers may reduce or terminate their business relationship with us at any time. If customers representing a significant portion
of our revenue reduce or terminate their relationship with us, it could have a material adverse effect on our business, financial condition and
results of operation.
We generally do not enter into long-term contracts with our advertising customers, and such customers do business with us on a non-exclusive
basis. In most cases, our customers may terminate or reduce the scope of their agreements with little or no penalty or notice. Accordingly, our business is
highly vulnerable to adverse economic conditions, market evolution, development of new or more compelling offerings by our competitors and
development by our advertising customers of in-house replacement services. Any reduction in spending by, or loss of, existing or potential advertisers
would negatively impact our business, financial conditions and results of operation.
Furthermore, the discretionary, non-exclusive nature of our relationships with advertising customers subject us to increased pricing pressure.
Although we believe our rates are competitive, our competitors may be able to offer more favorable pricing or other advantageous terms. In light of the
above factors, we seek to diversify our offerings and as part of our strategy, provide our customers different advertising solutions and constantly adapt our
relationship with our customers to respond to their everchanging needs. As a result, we may be compelled to reduce our rates, offer other incentives or
other more compelling pricing models in order to maintain our current customers and attract new customers. If a significant number of customers are able
to compel us to charge lower rates or provide rate concessions or incentives, there is no assurance that we would be able to compensate for such price
reductions or conserve our profit margins.
Large and established internet and technology companies, such as Google, Facebook and Amazon, play a substantial role in the digital advertising
market and may significantly impair our ability to operate in this industry.
Google, Facebook and Amazon are substantial players in the digital advertising market and account for a large portion of the digital advertising
budgets, along with other smaller players. Such high concentration causes us to be subject to any unilateral changes they may make with respect to
advertising on their respective platforms, which may be more lucrative than alternative methods of advertising or partnerships with other publishers that are
not subject to such changes. Furthermore, we could have limited ability to respond to, and adjust for, changes implemented by such players.
These companies, along with other large and established Internet and technology companies, may also leverage their power to make changes to
their web browsers, operating systems, platforms, networks or other products or services in a way that impacts the entire digital advertising marketplace.
7
Google Chrome internet browser supports the “Better Ads Standards” implemented by the Coalition for Better Ads, an industry body formed by
leading international trade associations and companies involved in online media (in which Undertone is also a member), and removes all ads from certain
sites that violate this standard. In addition, in March 2021 Google announced the phase-out support for third-party cookies in Chrome. This, together with
other advertisement-blocking technologies incorporated in or compatible with leading internet browsers, could impact our (as well as those of our
competitors). These changes could materially impact the way we do business, and if we or our advertising partners are unable to quickly and effectively
adjust to those changes, there could be an adverse effect on our revenues and performance.
The consolidation among participants within the digital advertising market could have a material adverse impact on our business, financial
condition and results of operations.
The digital advertising industry has experienced substantial evolution and consolidation in recent years and we expect this trend to continue,
increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new or
stronger competitors to emerge. This consolidation could adversely affect our business, financial condition and results operations in a number of ways,
including:
•
•
our customers or partners could acquire, or be acquired by, our competitors and terminate their relationship with us;
our competitors could improve their competitive position or broaden their offerings through strategic acquisitions or mergers.
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 impair 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. Any
rapid and/or significant decline in the availability of inventory can adversely affect advertising spend with us and consequently adversely affect our
financial conditions and results of operations.
Our primary advertising customers are advertising agencies, and many of those agencies are owned, affiliated with or controlled by a small
number of large holding companies. If any of these holding companies decide to reduce or terminate their business relationship with us for any reason, it
may lead to a material adverse impact on our business, financial conditions and results of operation.
If the demand for digital advertising does not continue to grow or customers do not embrace our solutions, this could have a material adverse
effect on our business financial condition results of operation.
A substantial portion of our revenues is derived from the sale of our digital advertising solutions and we have made significant investments in our
ability to deliver different types of advertisements, including high impact advertising, CTV and iCTV which are compatible on multiple devices and
channels as well as different content monetization solutions for which we partnered with advertising networks in order to be able to serve ads on our
properties. Nonetheless, (i) if customers do not embrace our solutions (ii) if our integration with advertising networks is not successful, (iii) if there is a
reduction in general demand for digital advertising, in spend for certain channels or solutions, or (iv) if the demand for our specific solutions and offerings
decreases, our revenues could decline or otherwise our business may be adversely affected.
Due to our evolving business model and rapid changes in the Internet and the nature of services we provide, it is difficult to accurately predict our
future performance and may be difficult to increase revenue or profitability.
As the digital advertising ecosystem is dynamic, seasonal and challenging, it is hard to predict our future performance, particularly with regard to
the effect of our efforts to increase revenue and profitability. If we are unable to continuously improve our systems and processes, adapt to the changing and
dynamic needs of our customers or align our expenses with our revenue level, it will impair our ability to be compelling and profitable.
In addition, we may experience in the future an overall decline in advertising spend as a result of which we may experience revenue decrease due
to competition, market demand or other factors, which could influence our ability to continue our investment in technology (in response to industry
developments in order to remain competitive or otherwise). If we are unable to respond to such changes and timely adapt our business model, we may not
be able to sustain growth or to achieve or sustain profitability and our business may be adversely affected.
8
We depend on supply sources to provide us with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner.
We rely on a diverse set of publishers including direct publishers, advertising exchange platforms and other platforms, that aggregate advertising
inventory, to provide us with high-quality digital advertising inventory on which we deliver ads, collectively referred to as “supply sources”. The future
growth of our advertising business will depend, in part, on our ability to enter into, maintain and further develop successful business relationships in order
to increase the network of our supply sources.
Our supply sources typically make their advertising inventory available to us on a non-exclusive basis and are not required to provide any
minimum amounts of advertising inventory to us or to provide us with a consistent supply of advertising inventory, at any predetermined price or through
real time bidding. Supply sources often maintain relationships with various sources of demand that compete with us, and it is easy for supply sources to
quickly shift their advertising inventory among these demand sources, or to shift inventory to new demand sources, without notice or accountability. Supply
sources may also seek to change the terms at which they offer inventory to us, or they may allocate their advertising inventory to our competitors who offer
more favorable economic terms or whose offerings or technology are considered more beneficial. Supply sources may also elect to sell all, or a portion, of
their advertising inventory directly to advertisers and agencies, or they may develop their own competitive offerings, which could diminish the demand for
our solutions. In addition, significant supply sources within the industry may enter into exclusivity arrangements with our competitors, which could limit
our access to a meaningful supply of inventory. As a result of all of these factors, our supply sources may not supply us with sufficient amounts of 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:
•
•
•
•
Supply sources may impose significant restrictions on the advertising inventory they sell or may impose other unfavorable terms and conditions on
the advertisers using their sites or platforms. For example, these restrictions may include frequency caps, prohibitions on advertisements from
specific advertisers or specific industries, or restrictions on the use of specified creative content or advertising formats as well as content adjacent
restrictions, which would restrain our supply of available inventory.
Supply sources that offer online content and mobile applications may shift from an advertising-based monetization method to a pay for
content/services model, thereby reducing available inventory.
Social media platforms may be successful in keeping users within their sites via products such as Facebook’s Instant Articles which may be
competitive to our offerings and solutions. If, as a result, users are not on the open web, advertising inventory on the open web (including our
publisher’s and our owned and operated sites) may be reduced or may become less attractive to our advertising customers.
Supply sources may be reluctant or unable to adopt certain of our proprietary and unique high-impact, CTV and iCTV ad formats for a variety of
reasons (such as user preference changes making such ad formats less desirable, or technological limitations, such as connection with header
bidding or the ability to transact programmatically), resulting in limited advertising inventory supply for such formats and inhibiting our ability to
scale such formats.
Because of these factors, we seek to expand and diversify our supply sources; nonetheless, if our supply sources terminate or reduce our access to
their advertising inventory, increase the price of inventory or place significant restrictions on the sale of their advertising inventory, or if platforms or
exchanges terminate our access to them and we are unsuccessful in establishing or maintaining our relationships with supply sources on commercially
reasonable terms, we may not be able to replace this with inventory from other supply sources that satisfy our requirements in a timely and cost-effective
manner. If any of this 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.
Our advertising business depends on a strong brand reputation, and if we are not able to maintain and enhance our brand, our business and
results of operations could be materially adversely affected.
Maintaining and enhancing our brands is an important aspect of our efforts to attract and expand our agency, advertiser, and publisher base. We
have spent, and expect to continue spending considerable sums and other resources on the establishment, building and maintenance of our brands, as well
as on enhancing market awareness of them. Our brands, however, may be negatively impacted by a number of factors, including but not limited to,
fraudulent, inappropriate or misleading content on publisher sites on which we serve ads, service outages, product malfunctions, data protection and
security issues, and exploitation of our trademarks by others without our permission. If we are unable to maintain or enhance our brands in a cost-effective
manner, our business and operating results could be materially adversely affected.
9
Non-compliance with industry self-regulation could negatively impact on our business, brand and reputation.
In addition to compliance with applicable laws and regulations, we voluntarily participate in industry self-regulatory bodies such as the Network
Advertising Initiative, or the NAI, which promulgate best practices or codes of conduct addressing, inter alia, the delivery of digital advertising and
privacy. If we are unable to follow and abide by the rules and principles provided by such self-regulatory bodies and/or align the conduct of our business
and practices with changes to such rules and principles, we may be subject to investigations by such self-regulatory bodies or other accountability groups,
our customers and partners as well as users. Handling such actions may require us to devote financial and managerial resources, require us to change our
business practices, and cause damage to our brand, which in turn could materially adversely affect our business, financial condition and results of
operations.
We may be unable to deliver advertising in a brand-safe environment, which could harm our reputation and cause our business to suffer.
It is important for advertisers that their advertisements are not placed in or near content that is unlawful or would be deemed offensive or
inappropriate by their customers, or near other advertisements for competing brands or products. While we strive to have all of our online advertisements
appear in a brand-safe environment, we cannot guarantee that they will be delivered in such an environment. If we are not successful in doing so, our
reputation could suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our
customers may seek to avoid payment or demand refunds, any of which could harm our business, financial conditions and results of operations.
The advertising industry is highly competitive. If we cannot compete effectively and overcome the technological gaps in this market, our revenues
are likely to decline.
We face intense competition in the marketplace. We operate in a dynamic market that is subject to rapid development and the introduction of new
technologies, products and solutions, changing branding objectives, evolving customer demands rules, regulations and industry guidelines, all of which
affect our ability to remain competitive. There are a large number of digital media companies and advertising technology companies that offer products or
services similar to or more compelling than ours and that compete with us for finite advertising budgets and for limited inventory from publishers. There is
also a large number of niche companies that are competitive with us, as they provide a subset of the services that we provide. Some of our existing and
potential competitors may be better established, benefit from greater name recognition, may offer solutions and technologies that we do not offer or that are
more evolved than ours, and may have significantly more financial, technical, sales and marketing resources than we do. In addition, some competitors,
particularly those with a larger and more diversified revenue base and a broader offering, may have greater flexibility than we do to compete aggressively
on the basis of price and other contract terms as well as respond to market changes. Additionally, companies that do not currently compete with us in this
space may change their services to be competitive if there is a revenue opportunity, and new or stronger competitors may emerge through consolidations or
acquisitions. 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.
In addition, in certain periods in the past, we and our competitors engaged in the search business and have experienced negative market bias
relating to such activity. There is no assurance that our ability to compete effectively in the future may not be affected by negative market perception.
Because of these factors, we continuously seek to diversify our product suite to respond to the changing needs and interests of our customers to benefit
from a variety of different offerings, however, we cannot guarantee that we will always be able to accommodate such needs, that such efforts would yield
the expected revenue or that we will adapt quickly enough (and/or in a cost effective manner) to evolving changes to the Internet 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 solution experienced the lowest sales in the first quarter and the highest sales in the fourth quarter, with
the second and third quarters being slightly stronger than the first quarter. Nonetheless, as a result of the initial effect of COVID-19, overall ad-
spend reductions in the second quarter of 2020, across different sectors and in particular, travel and automobile, resulted in a decrease in our
business operations in comparison to the second quarter of 2019. Fourth quarter sales tend to be the highest due to a need to utilize remaining
budgets, and increased customer advertising volumes during the holiday selling season.
Product and service revenues are influenced by political advertising, which generally occurs every two years.
In any single period, product and service revenues and delivery costs are subject to significant variation based on changes in the volume and mix
of deliveries performed during such period.
10
•
•
•
Revenues are 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,
and we have no control over the timing or magnitude of these revenue changes.
Relative complexity of individual advertising formats, and the length of the creative design process.
As a result, our profit from these operations is seasonal, with the fourth quarter being the major contributor to our profits and the first quarter
possibly resulting in a loss. Moreover, due to the long receivable cycle and shorter payable cycle, this seasonality puts strains on our cash flow through the
first and second quarter of every year.
If our campaigns are not able to reach certain performance goals or we are unable to measure certain metrics proving achievement of those goals,
this could have a material adverse effect on our business.
Our advertising clients expect and often demand that our advertising campaigns achieve certain performance levels based on metrics such as user
engagement, clicks or conversions, to validate their value proposition, particularly as our services can be costlier. We may have difficulty achieving or
proving these performance levels for a variety of reasons. Additionally, customers may request measurement of campaign metrics that are difficult or
impossible to measure. For example, it may be difficult to track view-ability on our proprietary high-impact ad units, either directly or through a third-party
vendor. Accordingly, we may not be able to reach customer requested performance levels or measure certain metrics, which could cause customers to
cancel campaigns, not provide repeat business or request make-goods or refunds.
Increased availability of advertisement-blocking technologies could limit or block the delivery or display of advertisements by our solutions, which
could undermine the viability of our business, 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 and mobile users. Further, new browsers and operating systems, or updates to current browsers or operating systems, offer
native advertisement-blocking technologies to their users, such as the support of Google Chrome in blocking advertisements from web sites that violate the
“Better Ads Standards” established by the Coalition for Better Ads (in which Undertone is a member). As such technologies or practices become
widespread, this could have a material adverse effect on our business, financial condition and results of operations.
Our advertising business depends on our ability to collect and use data, and any limitation on the collection and use of this data could significantly
diminish the value of our solutions and cause us to lose customers, revenue and profit.
In most cases, when we deliver an advertisement, we are often able to collect certain information about the content and placement of the ad, the
relevancy of such ad to a user and the interaction of the user with the ad, such as whether the user viewed or clicked on the ad or watched a video. 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 might decide not to allow us to collect some or all of this data or might limit our use of this data. Our ability to either
collect or use data could be restricted by new laws or regulations, including, the General Data Protection Regulation (the “GDPR”), which entered into
effect in the European Union in May 2018. These laws and regulations define personal data to include location data and online identifiers, which are
commonly used and collected parameters in digital advertising, and impose more stringent user consent requirements, changes in technology, operating
system restrictions, requests to discontinue using certain data, restrictions imposed by advertisers and publishers, industry standards or consumer choice.
Additionally, in June 2018, California passed the California Consumer Privacy Act (“CCPA”), which provides data privacy rights for consumers
and operational requirements for companies. Specifically, companies covered by the CCPA must provide new disclosures to California consumers and
afford such consumers new abilities to opt-out of certain sales of personal information. The CCPA became operative in January 1, 2020 and additional U.S.
states may begin to implement similar new laws or regulation. The CCPA provides for civil penalties for violations, as well as a private right of action for
data breaches that is expected to increase data breach litigation. In addition to the CCPA, the California Privacy Rights Act (“CPRA”) which passed in
November 2020 will take effect in January 2023 and 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.
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Further, in March 2017, the United Kingdom (“U.K.”) formally notified the European Council of its intention to leave the EU pursuant to Article
50 of the Treaty on European Union (“Brexit”) and subsequently ceased to be an EU Member State on January 31, 2020, but enacted, a Data Protection Act
substantially implementing the GDPR, effective in May 2018, which was further amended to align more substantially with the GDPR following Brexit. At
the end of 2020, the law of the European Union ceased to apply to the U.K., and the U.K. and European Union are currently working under a temporary
cooperation agreement to establish rules governing the data flow between the U.K. and European Union. It is unclear how U.K. data protection laws or
regulations will develop in the medium to longer term and how data transfers to and from the U.K. will be regulated. In addition, some countries are
considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our services.
Additionally, recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to
the United States. Most recently, on July 16, 2020, in a case known as Schrems II, the Court of Justice of the European Union (“CJEU”) invalidated the
EU-US Privacy Shield Framework (“Privacy Shield”) under which personal data could be transferred from the EEA to US entities who had self-certified
under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the
European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them
alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking
into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional
measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. The CJEU
went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country
and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer.
There are few viable alternatives to the standard contractual clauses, and the law in this area remains dynamic.
In addition, failure to comply with the Israeli Privacy Protection Law 1981, and its regulations as well as the guidelines of the Israeli Privacy
Protection Authority, may expose us to administrative fines, civil claims (including class actions) and in certain cases criminal liability. Current pending
legislation may result in a change to the current enforcement measures and sanctions.
The Challenges imposed by the ongoing need to remain compliant with the such rules and regulations, as well the need to implement any changes
underlying newly introduced 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 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 revenues. Additional details are provided below under “Risks Related to Regulatory Changes” and “— Risks Related to Our Technological
Environment.”
If we do not continue to innovate and provide high-quality advertising solutions and services, we may not remain competitive, and our business
and results of operations could be materially adversely affected.
Our success depends on our ability to provide customers with innovative, high-quality advertising solutions and services that foster consumer
engagement. We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving industry standards, rules and
regulations and consumer needs, and the frequent introduction of new products and solutions by competitors, as well as publishers themselves, that we
must adapt and respond to in order to remain competitive. Therefore, our continued success depends in part upon our ability to develop new solutions and
technologies, enhance our existing solutions and expand the scope of our offerings to meet the evolving needs of the industry. As a result, we must continue
to invest significant resources in research and development in order to enhance our technology and our existing solutions and services, and introduce new
high-quality solutions and services.
Our operating results will also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market
opportunity or are not effectively brought to market. If we are unable to accurately forecast market demands or industry changes, if we are unable to
develop or introduce our solutions and services in a timely manner, or if we fail to provide quality solutions and services that run without complication or
service interruptions or do not respond properly to the ever changing technological landscape, we may damage our brand and our ability to retain or attract
customers. As online advertising technologies continue to develop, our competitors may be able to offer solutions that are, or that are perceived to be,
substantially similar to or better than those offered by us. Customers will not continue to do business with us if our solutions do not deliver advertisements
in an appropriate and effective manner, through a variety of distribution channels and methods, or if the advertising we deliver does not generate the desired
results. In addition, advertising customers may find that content made available through our properties is not suitable for their advertising requirements or
that our competitors offer content which is more lucrative and relevant to their advertising needs, resulting in reduction of their advertising spend with us. If
we are unable to meet these challenges, our business, financial condition and results of operations could be materially adversely affected.
12
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 revenues. If we are not successful in streamlining our sales
processes with potential clients in a cost-effective manner, or if our efforts are unsuccessful, our ability to grow our business may be adversely affected.
Our growth depends in part on the success of our relationships with advertising agencies.
While we work with some brand advertisers directly, our primary advertising customers are advertising agencies, who are paid by their brand
customers to develop their media plans. The agencies, in turn, contract with third parties, like us, to execute and fulfill their brands’ advertising campaigns.
As a result, our future growth will depend, in part, on our ability to enter into and maintain successful business relationships with advertising agencies.
Identifying agencies, engaging in sales efforts, and negotiating and documenting our agreements with agencies require significant time and
resources. These relationships may not result in additional brand customers or campaigns for our business, and may not ultimately enable us to generate
significant revenues. Our contracts with advertising agencies are typically non-exclusive and the agencies often work with our competitors or offer
competing services or solutions.
When working with agencies to deliver campaigns on behalf of their brand customers, we generally bill the agency for our products and services,
and in most cases, the brand has no direct contractual commitment to us to make any payments. Furthermore, some agencies contractually limit their
payment obligations to us through sequential liability provisions, whereby the agency is liable for payment if, and only to the extent, that the agency
collects a corresponding payment from the brand on whose behalf our services were rendered. These circumstances may result in longer collections
periods, increased costs associated with pursuing brands directly for payments, or our inability to collect payments. In summary, if we are unsuccessful in
establishing or maintaining our relationships with these agencies on commercially reasonable terms or if the agencies are unable to effectively collect
corresponding payments from the brands, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results
could suffer.
If the demand for social advertising does not grow as expected, or if our solution for advertising through those channels is not competitive, the
revenues related to our actionable performance monitoring platform could decline.
We leverage the capabilities of Paragone, our actionable performance monitoring SaaS platform, to offer our customers the ability to deliver ads
on social networks. The future growth of this market could be negatively impacted if consumers decrease the time they spend engaging on social media
sites or mobile applications. In addition, the demand for advertising in these channels, and the success of our social solutions in particular, may be
constrained by the limited flexibility, increased requirements that are associated with advertising in these channels, and the social networks working
through independent service providers. As a result, it is difficult to predict the future customer demand for our solution, and there is no guarantee that we
will be able to generate significant revenues from our actionable performance monitoring platform. In addition to the foregoing, our actionable performance
monitoring platform is dependent on our ability to create, optimize, and manage our customers’ advertising campaigns as well as retrieve and push
advertising campaign data to myriad of networks and tools in real time, such as Facebook, Instagram, Messenger, LinkedIn, Snapchat, Pinterest and
Twitter. We are subject to each social network’s respective terms and conditions governing our ability to access and utilize its platform. Our actionable
performance monitoring platform would be harmed if any of these social networks discontinues our partnership, makes changes to its platform, or modifies
the terms and standards applicable to its marketing partners or to advertising on its platform in general. Moreover, these social networks may develop
offerings or features that compete with or substitute our solution or may otherwise make changes to their platforms that would render our social advertising
solution obsolete. Further, consumers may migrate away to other social networking platforms with which we are not affiliated, which would in turn
decrease the demand for our solutions. Any of these outcomes could cause demand for our social marketing platform to decrease, our development costs to
increase, and our results of operations and financial condition to be materially adversely affected.
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Our search solution depends heavily upon revenues generated from our agreement with Microsoft, and any adverse change in that agreement
could adversely affect our business, 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
2020, the Microsoft Agreement accounted for 51% of our revenues. 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-generated revenues 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 very 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 revenues and, in turn, our business, financial
condition and results of operations would be adversely affected.
Our search revenue business is highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to
publishers and generate most of our revenues. If we were to lose all or a significant portion of those publishers, our revenues and results of
operations would be materially adversely affected.
In 2019 and 2020, the top five publishers distributing our search services accounted for approximately 36% and 22%, respectively, of our
revenues. There can be no assurance that these existing publishers will continue utilizing the revenue-generating monetization services at the levels they did
in the past or at all. The loss of a substantial portion of our relationships with these publishers, or a substantial reduction in their level of activity, could
cause a material decline in our revenues and profitability.
The generation of revenues from search activity through large publishers is subject to competition. If we cannot compete effectively in this market,
our revenues are likely to decline.
We obtain a significant portion of our revenues through the configuration of our search service as the default search provider during the download
and installation of our publishers’ products and/or use by their services of our search offering and the subsequent searches performed by the users thereof.
To achieve these goals, we rely heavily on third-party publishers to distribute and/or implement our search offering as a value-added component of their
own offerings. We are therefore constantly looking for more ways to distribute our search offering through various channels, including through independent
distribution efforts of our owned and operated products and services. There are other companies that generate revenue from searches, some of them may
have other monetization solutions. The large search engine companies, including Google, Microsoft, Verizon Media and others, have become increasingly
aggressive in their own search service offerings. In addition, we need to continually maintain the technological advantage of our platform, products and
other services in order to attract publishers to our offerings. If the search engine companies engage more direct relationships with publishers or we are
unable to maintain the technological advantage to service our publishers, we may lose both existing and potential new publishers and our ability to generate
revenues will be negatively impacted.
In order to receive advertisement-generated revenues from our search providers, we depend, in part, on factors outside of our control.
The amount of revenue we receive from search providers depends upon a number of factors outside of our control, including the amount such
search providers charge for advertisements, the efficiency of the search provider’s system in attracting advertisers and syndicating paid listings in response
to search queries and parameters established by it regarding the number and placement of paid listings displayed in response to search queries. In addition,
search providers make analysis about the relative attractiveness (to their advertiser) of clicks on paid listings from searches performed on or through our
search assets, and these judgments factor into the amount of revenue we receive. Changes in the efficiency of a search providers’ paid listings network, in
its judgment about the relative attractiveness of clicks on paid listings or in the parameters applicable to the display of paid listings, which could come
about for a number of reasons, including general market conditions, competition, inventory availability or policy and operating decisions made by
Microsoft or other search providers, could have an adverse effect on our business, financial condition and our results of operations.
14
Should the methods used for the distribution of our search solution, be blocked, constrained, limited, materially changed, based on a change of
guidelines, technology or otherwise (as has happened in the past), or made redundant by any of our search engine providers, our ability to
generate revenues from our users’ search activity could be significantly reduced.
Agreements with search providers, such as our agreement with Microsoft, require compliance with certain guidelines promulgated by them for the
use of the respective brands and services, including the manner in which paid listings are displayed within search results, and the establishment of
guidelines to govern certain activities of third parties to whom the search services are syndicated, including the manner in which those parties can acquire
new users and drive search traffic. Subject to certain limitations, search partners may unilaterally update their policies and guidelines, which could, in turn,
require modifications to, or prohibit and/or render obsolete certain of our search solutions, products, services and practices, which could be costly to
address or otherwise have an adverse effect on our business, our financial condition and results of operations. Noncompliance with the search partners’
guidelines, whether by us or by third parties to which we syndicate paid listings or by the publishers through whom we secure distribution arrangements
could, if not cured, result in such companies’ suspension of some or all of their services to us, or to the websites of our third party publishers, or the
reimbursement of funds paid to us, or the imposition of additional restrictions on our ability to syndicate paid listings or distribute our search solution or the
termination of the search distribution agreement by our search partners.
These guidelines, with respect to method of distribution, homepage resets and default search resets to search engine services, were changed by
both Microsoft and Google numerous times in the past, having negative revenue implications. Since then, both companies have continued instituting other
changes to the policies governing their relationship with search partners. Should any of our large partnerships be deemed non-compliant, blocked or partner
with another provider, it could be difficult to replace the revenues generated by that partnership and we would experience a material reduction in our
revenues and, in turn, our business, financial condition and results of operations would be adversely affected.
Should the providers of platforms, particularly browsers, further block, constrain or limit our ability to offer or change search properties, or
materially change their guidelines, technology or the way they operate, our ability to generate revenues from our users’ search activity could be
significantly reduced.
As we provide our services through the Internet, we are reliant on our ability to work with the different Internet browsers. The Internet browser
market is extremely concentrated with Google’s Chrome, Microsoft’s Internet Explorer, Microsoft Edge and Mozilla’s Firefox, accounting for over 83% of
the desktop browser market in 2020, and Google’s Chrome alone accounting for over 68%, 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 76% of the market in 2020, and Apple operating systems accounting for 17% 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 revenuegeneration 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 revenues. 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 was later stabilized and increased to 46.93% in 2020, 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 53.07% in 2020, 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 revenues generated through the download of these products. See Item 4.B. “Business Overview—Competition” for
additional discussion of our competitive market.
15
Our software or provision of search services or advertising is occasionally blocked by software or utilities designed to protect users’ computers,
thereby causing our business to suffer.
Some of our products and offerings are viewed by some third parties, such as anti-virus software providers, as promoting or constituting
“malware” or “spamming,” or unjustly changing the user’s computer settings. As a result, our software, the software of our publishers, provision of search
services or advertising is occasionally blocked by software or utilities designed to detect such practices. If this phenomenon increases or if we are unable to
detect and effectively deal with such categorization of our products, we may lose both existing and potential new users and our ability to generate revenues
will be negatively impacted.
The global COVID-19 health pandemic has begun to adversely affect and could potentially severely affect, our business, results of operations and
financial condition due to impacts on our industry, as well as impacts from remote work arrangements, actions taken to contain the virus or treat
its impact, and the speed and extent of the recovery.
As of December 31, 2020, the COVID-19 (coronavirus) pandemic had made a significant impact on global economic activity. Governmental
authorities around the world have implemented measures to reduce the spread of COVID-19. These measures, including shutdowns and “shelter-in-place”
orders suggested or mandated by governmental authorities or otherwise elected by companies as a preventative measure, have adversely affected
workforces, customers, consumer sentiment, economies and financial markets, and, along with decreased consumer spending, have led to an economic
downturn in many of our markets.
Since the beginning of March 2020, we have been navigating a rapidly changing business environment as the COVID-19 pandemic has unfolded.
In the second quarter of 2020, there was an estimated 10% to 20% decline in advertising spending. While in the first quarter of 2020, our digital advertising
business has been hurt by this reduction in spending, we have seen improvement in ad spend as the third quarter of 2020 progressed and the momentum
continued through the fourth quarter of 2020, this, despite the reduction in travel and entertainment advertising which contributed approximately $10
million in revenues in 2019. Nonetheless, we expect that our digital advertising business will continue to face difficulties, as brands and agencies reduce
and cautiously manage their digital advertising budgets. As part of our efforts to minimize the impact of that reduced advertising spending on the
profitability of our operations, we have implemented cost-saving measures yielding more than $10 million in annual savings (compared to our pro forma
financial results of operations for 2019, which combine our results with those of our recently acquired company, Content IQ, as if we had acquired it at the
start of 2019). During 2020, our search business experienced increased number of searches, despite lower RPMs (rate per mille). The strength of our search
business could reduce the harm that our adversely-impacted digital advertising business might cause to our overall results of operations.
Operationally, as a result of the COVID-19 pandemic and related response measures, we have transitioned our employees to remote working
arrangements and temporarily closed and/or otherwise implemented hybrid remote-work with limited onsite presence in our offices in the United States,
Europe and Israel. Due to the uncertainty of COVID-19, we will continue to assess the situation, including abiding by any government-imposed
restrictions, market by market.
Although currently our operations are handled mostly remotely (with some onsite hybrid presence) and run smoothly, the remote work
arrangements could, if interrupted, negatively impact the execution of our business plans and operations. If a natural disaster, power outage, connectivity
issue, or other event occurs that impacts 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 IT security and fraud incidents.
There are additional variables that frustrate our ability to accurately predict the impact that COVID-19 will have on our operations going forward.
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. 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.
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To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described herein.
Risks related to our Financial and Corporate Structure
A loss of the services of our senior management and other key personnel could adversely affect execution of our business strategy.
We depend on the capabilities and experience, and the continued services, of our senior management. The loss of the services of members of our
senior management could create a gap in management and could result in the loss of expertise necessary for us to execute our business strategy and thereby
adversely affect our business. We do not currently have “key person” life insurance with respect to any of our senior management.
Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled
technical and creative personnel and skilled management, marketing and sales personnel, as well as third party technology vendors and other consultants
and contractors. We operate out of different locations around the globe and competition for well-qualified employees in our industry is intense and our
continued ability to compete effectively depends, in part, upon our ability to retain existing key employees and to attract new skilled and qualified
employees as well, which can be difficult, expensive and time-consuming. If we cannot attract and retain additional experienced key employees or if we
lose one or more of our current key employees, our ability to develop or market our products and attract or acquire new users could be adversely affected.
Although we have established programs to attract new employees and provide incentives to retain existing employees, particularly senior management, we
cannot be assured that we will be able to retain the services of senior management or other key employees as we continue to integrate and develop our
solutions or that we will be able to attract new employees in the future who are capable of making significant contributions and we may face challenges in
adequately or appropriately integrating them into our workforce and organizational culture. See Item 6. “Directors, Senior Management and Employees.”
We have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and management
attention and have in the past and could in the future, cause further dilution to our shareholders and adversely affect our financial results.
We acquired Make Me Reach (currently, Paragone) in February 2015 and Undertone in November 2015, Captain Growth in March 2019, Content
IQ in January 2020 and Pub Ocean Limited, or Pub Ocean in July 2020, and we may continue to acquire complementary products, technologies or
businesses. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business concerns and is
expensive and time-consuming. Acquisitions expose us and our business to unforeseen liabilities or risks associated with the business or assets acquired or
with entering new markets. In addition, we lost and might continue to lose key employees and vendors while integrating new organizations and may not
effectively integrate the acquired products, technologies or businesses or achieve the anticipated revenues or cost benefits, and we might harm our
relationships with our future or current technology suppliers. Future acquisitions could result in customer dissatisfaction or vendor dissatisfaction or
performance problems with an acquired product, technology or company. Paying the purchase price for acquisitions in the form of cash, debt or equity
securities may weaken our cash position, increase our leverage or dilute our existing shareholders, as applicable. Furthermore, a substantial portion of the
price paid for these acquisitions is typically for intangible assets. We may be required to pay additional funds for earn-outs based on achievement of
milestones, or may incur contingent liabilities, amortization expenses related to intangible assets or possible impairment charges related to goodwill or
other intangible assets (which has occurred in the past) or become subject to litigation or other unanticipated events or circumstances relating to the
acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, acquisitions may end up
in losses, unwanted results and waste of valuable resources, time and money.
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 relationships, content, domain names and
acquired technology, among other things, as of the acquisition date, and are amortized based on their economic lives. Goodwill that is expected to
contribute indefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually. If the carrying value exceeds current fair
value as determined based on the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is
reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse changes in the regulatory
environment, a reduced market capitalization or other factors leading to reduction in expected long-term growth or profitability. Goodwill impairment
analysis and measurement is a process that requires significant judgment. Our stock price and any control premium are factors affecting the assessment of
the fair value of our underlying reporting units for purposes of performing any goodwill impairment assessment.
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In 2017, we recorded an impairment charge in the total amount of approximately $85.7 million - see Item 5.A. “Operating and Financial Review
and Prospects—Operating Results-Critical Accounting Policies and Estimates—Goodwill.” We will continue to conduct impairment analyses of our
goodwill as required. Further impairment charges with respect to our goodwill would have a material adverse effect on our results of operations and
shareholders’ equity in future periods.
Several shareholders may be able to control us.
As of March 14, 2021, we have several shareholders, that each 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, these shareholders are not party to a voting
agreement with respect to our shares. However, should they 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 them.
Our share price has fluctuated significantly and could continue to fluctuate significantly.
The market price for our ordinary shares, as well as the prices of shares of other Internet companies, has been volatile. Between January 2020 and
March 2021, our share price has fluctuated from a low of $3.67 to a high of $27.26, and the daily average trading volume in that period was 606,515 (and
for the period of January 1, 2020 and until December 31, 2020, was 377,014). The following factors may cause significant fluctuations in the market price
of our ordinary shares:
•
•
•
•
•
negative fluctuations in our quarterly revenues and earnings or those of our competitors;
pending sales into the market due to the sale of large blocks of shares, due to, among other reasons, the expiration of any tax-related or contractual
lock–ups with respect to significant amounts of our ordinary shares;
shortfalls in our operating results compared to levels forecast by us or securities analysts;
changes in our senior management;
changes in regulations or in policies of search engine companies or other industry conditions;
• mergers and acquisitions by us or our competitors;
•
•
•
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technological innovations;
the introduction of new products;
the conditions of the securities markets, particularly in the Internet and Israeli sectors; and
political, economic and other developments in Israel and worldwide.
In addition, share prices of many technology companies in general and ad-tech companies in particular fluctuate significantly for reasons that may
be unrelated or disproportionate to operating results. The factors discussed above may depress or cause volatility to our share price, regardless of our actual
operating results.
Class action litigation due to share price volatility or other factors could cause us to incur substantial costs and divert our management’s attention
and resources.
Historically, public companies that experience periods of volatility in the market price of their securities and/or engage in substantial transactions
are sometimes the target of class action litigation. Companies in the Internet and software industry, such as ours, are particularly vulnerable to this kind of
litigation as a result of the volatility of their stock prices and their regular involvement in transactional activities. In the past, we were named as a defendant
in this type of litigation in connection with our acquisition of ClientConnect, and although this lawsuit was dismissed, in the future litigation of this sort
could result in considerable costs and a diversion of management’s attention and resources.
Future sales of our ordinary shares could reduce our stock price.
As of March 14, 2021, there were outstanding an aggregate of 4,456,378 options to purchase our ordinary shares. As these securities vest, the
holders thereof could sell the underlying shares without restrictions, except for the volume limitations under Rule 144 applicable to our affiliates.
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Sales by shareholders of substantial amounts of our ordinary shares, or the perception that these sales may occur in the future, could materially and
adversely affect the market price of our ordinary shares. Furthermore, the market price of our ordinary shares could drop significantly if our executive
officers, directors, or certain large shareholders sell their shares, or are perceived by the market as intending to sell them.
Exchange rate fluctuations may harm our earnings and asset base if we are not able to hedge our currency exchange risks effectively.
A significant portion of our costs, primarily personnel expenses, are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S.
dollar cost of our operations in Israel. Further, since the U.S. dollar declined in value in relation to the NIS, it has become more expensive for us to fund our
operations in Israel. A revaluation of one percent of the NIS as compared to the U.S. dollar could impact our income before taxes by approximately $0.1
million. The exchange rate of the U.S. dollar to the NIS has been volatile in the past, increasing by approximately 8% in 2018, decreasing by approximately
8% in 2019 and decreasing by approximately 7% in 2020. As of December 31, 2020, we had a foreign currency net liability of approximately $13.4 million
(which number includes approximately $8.0 million in NIS denominated to the Right of Use liability relates to our offices in Israel), and our total foreign
exchange loss was approximately $1.3 million for the year ended December 31, 2020. To assist us in assessing whether or not, and how to, hedge risks
associated with fluctuations in currency exchange rates, we have contracted a consulting firm proficient in this area. We may incur losses from unfavorable
fluctuations in foreign currency exchange rates.
We do not intend to pay cash dividends.
Although we have paid cash dividends in the past, our current policy is to retain future earnings, if any, for funding growth and reducing our debt.
If we do not pay dividends, long-term holders of our shares will generate a return on their investment only if the market price of our shares appreciates
between the date of purchase and the date of sale of our shares.
See Item 8.A “Consolidated Statements and Other Financial Information—Policy on Dividend Distribution” for additional information regarding
the payment of dividends.
We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As an Israeli public company, traded on Nasdaq, we incur significant legal, accounting and other expenses. We incur costs associated with our
public company reporting requirements as well as costs associated with corporate governance and public disclosure requirements, including requirements
under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the Nasdaq Stock
Market, regulations of the SEC, the provisions of the Israeli Securities Law that apply to dual listed companies (companies that are listed on the Tel Aviv
Stock Exchange Ltd. (“TASE”) and another recognized stock exchange located outside of Israel) and the provisions of the Israeli Companies Law 5759-
1999 (the “Companies Law”) that apply to us. We have also contracted an internal auditor and a consultant for implementation of and compliance with the
requirements under the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires an annual assessment by our management of our internal
control over financial reporting of the effectiveness of these controls as of year-end. In connection with our efforts to comply with Section 404 and the
other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time, and we have hired, and
may need to hire, additional accounting and financial staff to assure that we comply with these requirements. We are also required to have our independent
registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the
evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert
that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our
independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could
lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we
may be subject to investigation or sanctions by the SEC. The additional management attention and costs relating to compliance with the foregoing
requirements could adversely affect our financial results. See Item 5.A “Operating and Financial Review and Prospects—Operating Results—General and
Administrative Expenses” for a discussion of our increased expenses as a result of being a public company.
If we lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with compliance with
the U.S. securities laws applicable to U.S. domestic issuers.
We are a foreign private issuer, as such term is defined under U.S. federal securities laws, and, therefore, we are not required to comply with all of
the periodic disclosure and current reporting requirements applicable to U.S. domestic issuers. If we lost our foreign private issuer status, we would be
required to comply with the reporting and other requirements applicable to U.S. domestic issuers, which are more extensive than the requirements for
foreign private issuers and more expensive to comply with.
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There can be no assurance that we will not be a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for any
taxable year.
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii)
50% or more of the value of its assets (generally determined on an average quarterly basis) consists of assets that produce, or are held for the production of,
passive income. For purposes of the above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes),
directly or indirectly, at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate
share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally
includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive asset for these purposes. Goodwill is generally characterized as a
non-passive or passive asset based on the nature of the income produced in the activity to which the goodwill relates.
We believe that we were not a PFIC for our 2020 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, 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 purposes. See “Taxation- U.S. Federal Income Tax Considerations- Passive Foreign Investment Company Rules.”
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our
securities.
In recent years, certain Israeli issuers listed on United States exchanges, including our Company, have been faced with governance-related
demands from activist shareholders, as well as unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to U.S.
proxy rules, responding to these types of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the
attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for
the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time
and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders also could affect
the market price and volatility of our securities.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of
association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of
shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and
fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among
other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at
the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share
capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require shareholders’ approval. There
is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
As a foreign private issuer, whose shares are listed on Nasdaq, we follow certain home country corporate governance practices instead of certain
Nasdaq requirements.
As a foreign private issuer, whose shares are listed on Nasdaq, we are permitted to follow certain home country corporate governance practices
instead of certain requirements contained in the Nasdaq listing rules. We follow the requirements of the Companies Law in Israel, rather than comply with
the Nasdaq requirements, in certain matters, including with respect to the quorum for shareholder meetings, sending annual reports to shareholders, and
shareholder approval with respect to certain issuances of securities. See Item 16.G. “Corporate Governance” in this Annual Report on Form 20-F for a
more complete discussion of the Nasdaq Listing Rules and the home country practices we follow. As a foreign private issuer listed on Nasdaq, we may also
elect in the future to follow home country practice with regard to other matters as well. Accordingly, our shareholders may not be afforded the same
protection as provided under Nasdaq’s corporate governance rules to shareholders of U.S. domestic companies.
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Provisions of our articles of association and Israeli law may delay, prevent or make an acquisition of our Company difficult, which could prevent a
change of control and, therefore, depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In
addition, our articles of association contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a staggered
board. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this
annual report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, and Item 10.E. “Taxation—Israeli Taxation” for
additional discussion about some anti-takeover effects of Israeli law.
These provisions of Israeli law may delay, prevent or make difficult an acquisition of our Company, which could prevent a change of control and
therefore depress the price of our shares.
We must meet the Global Select Market’s continued listing requirements and comply with the other Nasdaq rules, or we may risk delisting.
Delisting could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell securities in a financing and for
you to sell your ordinary shares.
We are required to meet the continued listing requirements of the Nasdaq Global Select and comply with the other Nasdaq rules, including those
regarding minimum shareholders’ equity, minimum share price and certain other corporate governance requirements. Delisting of our ordinary shares from
the Nasdaq Global Select would cause us to pursue eligibility for trading on other markets or exchanges, or on the pink sheets. In such case, our
shareholders’ ability to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes
and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. There can be no
assurance that our ordinary shares, if delisted from the Nasdaq Global Select in the future, would be listed on a national securities exchange or quoted on a
national quotation service, the OTCQB or OTC Pink. Delisting from the Nasdaq Global Select Market, or even the issuance of a notice of potential
delisting, would also result in negative publicity, make it more difficult for us to raise additional capital, adversely affect the market liquidity of our
ordinary shares, reduce security analysts’ coverage of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any
such delisting, our share price could be negatively affected and our shareholders would likely find it more difficult to sell, or to obtain accurate quotations
as to the prices of, our ordinary shares.
Our ordinary shares are traded on more than one market and this may result in price variations.
Our ordinary shares are traded on the Nasdaq Global Select Market and on TASE. Trading in our ordinary shares on these markets is effected in
different currencies (U.S. dollars on Nasdaq and NIS on TASE) and at different times (resulting from different time zones, different trading days per week
and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ,
resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States
and Israel. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary
shares on the other market.
Risks Related to Our Technological Environment
Our financial performance may be materially adversely affected by information technology, insufficient cyber security and other business
disruptions.
Our business is constantly challenged and may be impacted by disruptions, including information technology attacks or failures. Cybersecurity
attacks, in particular, are 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 include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches
that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data and overloading
our servers and systems with communications and data. Unidentified groups have hacked numerous Internet websites and servers, including our own, for
various reasons, political, commercial and other. Given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be
subject to substantial system downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our
customers, the compromising of confidential or otherwise protected information, the destruction or corruption of data, security breaches, other
manipulation or improper use of our systems and networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to
our reputation, any of which could have a material adverse effect on our cash flows, competitive position, financial condition and results of operations.
Although these attacks cause certain difficulties, they have not had, to date, a material adverse effect on our business, financial condition or results of
operations. However, because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until
they are launched against a target, there can be no assurance that such attacks can be prevented or that any such incidents will not have a material adverse
effect on us in the future. In addition, if we suffer a highly publicized security breach, even if our platforms and solutions perform effectively, such a breach
could have an adverse effect and cause us to suffer reputational harm, lose existing commercial relationships and customers or deter customers from
purchasing additional solutions and prevent new customers from purchasing our solutions.
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If we fail to detect or prevent suspicious traffic or other invalid traffic or engagement with our ads, or otherwise prevent against malware
intrusions, we could lose the confidence of our advertisers, damage our reputation and be responsible to make-good or refund demands, which
would cause our business to suffer.
Our business relies on delivering positive results to our advertisers and their consumers. We are exposed to the risk of fraudulent or suspicious impressions,
clicks or conversions that advertisers may perceive as undesirable. Such fraudulent activities may occur when a software program, known as a bot, spider
or crawler, intentionally simulates user activity causing impressions, ad engagements or clicks to be counted as real users. Such malicious software
programs can run on single machines or on tens of thousands of machines, making them difficult to detect and filter.
We implement and use proprietary and third party technologies to identify fraudulent or suspicious impressions, clicks or conversions. Despite our
efforts, it can be difficult to detect fraudulent suspicious activity for different reasons. If fraudulent or other malicious activity is perpetrated by others, and
we are unable to detect and prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid or
fraudulent activity could lead to dissatisfaction with our advertising services, refusals to pay, refund or make-good demands or withdrawal of future
business. Any of these occurrences could damage our brand and lead to a loss of our revenue.
A loss of the services of our technology vendors could adversely affect execution of our business strategy.
Should some of our technology vendors terminate their relationship with us, our ability to continue the development of some of our products could
be adversely affected, until such time that we find adequate replacement for these vendors, or until such time that we can continue the development on our
own.
We may not be able to enhance our platform to keep pace with technological and market developments in our evolving industry.
To keep pace with technological developments, satisfy increasing developer requirements, maintain the attractiveness and competitiveness of our
advertising solutions and ensure compatibility with evolving industry standards, we will need to regularly enhance our platform and solutions as well as
develop and introduce new services on a timely basis. We also must update our software to reflect changes in advertising networks’ application
programming interfaces (“APIs”), technological integration and terms of use. The success of any enhancement or new solution depends on several factors,
including timely completion, adequate quality testing, appropriate introduction and market acceptance. Our inability, for technological, business or other
reasons, to timely enhance, develop, introduce and deliver compelling advertising services in response to changing market conditions and technologies or
evolving expectations of advertisers or consumers could hurt our ability to grow our advertising business.
Our products operate in a variety of computer and device configurations and could contain undetected errors or defects that could result in
product failures, lost revenues and loss of market share.
Our software and advertising products may contain undetected errors, failures or defects, especially when the products are first introduced or when
new versions are released. Our customers’ computer and other device environments are often characterized by a wide variety of standard and non-standard
configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. As a result, there could be errors or
failures in our products. In addition, despite testing by us and beta testing by some of our users, errors, failures or bugs may not be found in new products
or releases until after commencement of commercial sales 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 revenues during the period required to correct these errors.
Errors, failures or defects in products released by us could result in negative publicity, product returns, make-goods, refunds, loss of or delay in
market acceptance of our products, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expense
and resources and could cause interruptions to our products.
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We depend on third party Internet, telecommunication and hosting providers to operate our platforms, websites and services. Temporary failure
of these services, including catastrophic or technological interruptions, would materially reduce our revenues and damage our reputation, and
securing alternate sources for these services could significantly increase our expenses and be difficult to obtain.
Our third-party Internet, hosting and telecommunication providers may experience disruptions, which would reduce our revenues and increase our
costs. We own servers located in Israel, Europe and the United States and we also rent the services of approximately 1,000 servers located around the
world, mainly through Amazon Web Services. Our servers include mainly web servers, application servers, data collection servers, data storage servers,
data processing servers, mail servers and database servers. While we believe that there are many alternative providers of hosting and other communication
services available to us, the costs associated with any transition to a new service provider could be substantial. Furthermore, although we maintain back-up
systems for most aspects of our operations, we could still experience deterioration in performance or interruption in our systems, delays, and loss of critical
data and registered users and revenues, in addition, the services of such providers could be vulnerable to damage or interruption from earthquakes,
hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures and similar events. The occurrence of a natural
disaster or an act of terrorism, a decision to close such providers facilities without adequate notice, or other unanticipated problems could result in lengthy
interruptions to our services. The facilities of such providers also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism
and other misconduct.
Our systems are also not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have
inadequate insurance coverage to compensate us for losses from a major interruption. Furthermore, interruptions in the services of our providers or their
inability to meet the service capacity we require, could result in interruptions in the availability or functionality of our solutions or materially impede our
ability to attract and onboard new customers to services and to maintain relationships with current customers. Difficulties of this kind could damage our
reputation, be expensive to remedy and curtail our growth.
The introduction of new browsers and other popular software products may materially adversely affect user engagement with our search services.
Users typically install new software and update their existing software as new or updated software is introduced online by third-party developers.
In addition, when a user purchases a new computing device or installs a new Internet browser, it generally uses the Internet search services that are
typically pre-installed on the new device or Internet browser. Our products are distributed online and are usually not pre-installed on computing devices.
Further, as many software vendors that distribute their solutions online also offer search services alongside their primary software product, users often
replace our search services with those provided by these vendors in the course of installing new software or updating existing software. After users have
installed search solutions offered by us, any event that results in a significant number of our users changing or upgrading their Internet browsers could
result in the failure to generate the revenues that we anticipate from our users and result in a decline in our user base. Should we not be able to timely
respond to such changes or in the event that the search solutions offered by vendors would offer better user experience than the one offered by us, this could
have an adverse effect on our business, financial condition and our results of operations. Finally, although we constantly monitor the compatibility of our
Internet search services and related solutions with such new versions and upgrades, we may not be able to make the required adjustments to ensure constant
availability and compatibility of such solutions.
Risks Related to Regulatory Changes
Regulatory, legislative, or self-regulatory developments relating to e-commerce, Internet advertising, privacy and data collection and protection,
and uncertainties regarding the application or interpretation of existing laws and regulations, could harm our business.
Our business is conducted through the Internet and therefore, among other things, we are subject to the laws and regulations that apply to e-
commerce and online businesses around the world. These laws and regulations are becoming more prevalent in the United States, Europe, Israel, Canada
and elsewhere and may impede the growth of the Internet and consequently our services. These regulations and laws may cover user privacy, data
collection and protection, location of data storage and processing, content, use of “cookies,” access changes, “net neutrality,” pricing, advertising,
distribution of “spam”, intellectual property, distribution of products, protection of minors, consumer protection, taxation and online payment services.
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Many areas of the law affecting the Internet remain largely unsettled, even in areas where there has been some legislative action. This uncertainty
can be compounded when services hosted in one jurisdiction are directed at users in another jurisdiction. For instance, European data protection rules may
apply to companies which are not established in the European Union. The General Data Protection Regulation (which became effective in May 2018)
presumably have an even wider territorial scope, broadened the definition of personal data to include location data and online identifiers, and imposes more
stringent user consent requirements. Further, it includes stringent operational requirements for companies that process personal data and will contain
significant penalties for non-compliance. Also in other relevant subject matters, such as cyber security, e-commerce, copyright and cookies, new European
initiatives have been announced by the European regulators. To further complicate matters in Europe, to date, member States have some flexibility when
implementing European Directives and certain aspects of the GDPR, which can lead to diverging national rules. Similarly, there have been laws and
regulations adopted in Israel and throughout the United States (including the California Consumer Privacy Act (2018) which became effective on January
1, 2020) that impose new obligations in areas such as privacy, in particular protection of personally identifiable information and implementing adequate
security measures to protect such information, and liability for copyright infringement by third parties. In addition to the foregoing, a new law, titled the
California Privacy Rights Act (“CPRA”) which passed in November 2020 will take effect in January 2023, will impose additional notice and opt out
obligations which will also be applicable to our advertising business. Similar to the GDPR and the CCPA, the CPRA 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, in the US, there
have been other privacy bills introduced at both the state and federal level and other countries around the world, such as Brazil, have also 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 existing laws, such as those governing intellectual property, privacy, data collection and protection, libel, marketing, data security and
taxation, apply to the Internet and our business.
Due to rapid changes in technology and the inconsistent interpretations of privacy and data protection laws, we may be required to materially
change the way we do business. For example, adapt our advertising solution to a “cookie-less” environment and introduce alternative solutions which may
not provide the targeting capabilities provided by cookies. In addition, we may be required to implement physical, administrative and technological security
measures that differ from those we have now, such as different data access controls or encryption technology. In addition, we use cloud-based computing,
which is not without substantial risk, particularly at a time when businesses of almost every kind are finding themselves subject to an ever- expanding
range of state and federal data security and privacy laws, document retention requirements, and other standards of accountability. Compliance with such
existing and proposed laws and regulations can be costly and can delay, or impede the development of new products, result in negative publicity, increase
our operating costs, require significant management time and attention and subject us to inquiries or investigations, claims or other remedies, including
fines or demands that we modify or cease existing business practices.
In addition to compliance with government regulations, Undertone voluntarily participates in several trade associations and industry self-
regulatory groups that promulgate best practices or codes of conduct relating to digital advertising, including the Internet Advertising Bureau, the Network
Advertising Initiative and the Digital Advertising Alliance as well as us TAG Certified Against Fraud. We could be adversely affected by new or altered
self-regulatory guidelines that are inconsistent with our current practices or in conflict with applicable laws and regulations in the United States, Europe,
Israel and other regions where we do business. If we fail to abide by or are perceived as not operating in accordance with industry best practices or any
industry guidelines or codes with regard to privacy or the provision of Internet advertising, our reputation may suffer and we could lose relationships with
both buyers and sellers.
For more information regarding government regulations to which we are subject, see Item 4.B. “Business Overview— Government Regulation”
for additional discussion of applicable regulations affecting our business.
If we are deemed to be non-compliant with applicable data protection laws, or are even thought to be so, our operating results could be materially
affected.
We collect, use, and maintain certain data about our customers (including, without limitation, customers' clients or users), partners, employees,
leads and consumers. Such collection and maintenance of information is subject to data protection laws and regulations. A failure to comply with
applicable regulations could result in class actions, governmental investigations and orders, administrative fines and criminal and civil liabilities, which
could materially affect our operating results. Moreover, concerns about our collection, use, sharing or handling of such data or other privacy related
matters, even if unfounded, could harm our reputation and operating results.
Although we strive to comply with the applicable laws and regulations and use our best efforts to comply with the evolving global standards
regarding privacy and inform our customers of our business practices prior to any installations of our product and use of our services, it is possible that
these laws may be interpreted and applied in a manner that is inconsistent with our data collection, use and preservation practices or that it may be argued
that our practices do not comply with other countries’ privacy and data protection laws and regulations. In addition to the possibility of fines, such a
situation could result in the issuance of an order requiring that we change our data collection or retention practices, which in turn could have a material
adverse effect on our business. See “Item 4.B. Business Overview—Government Regulation” for additional discussion of applicable regulations.
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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 revenues.
Similar bills have been introduced in several other states.
Certain countries in the European Union and elsewhere have recently adopted taxation on digital services including digital advertising, in various
forms, such enacted and proposed taxes may have an impact on us.
Under current Israeli, U.S., U.K., Ukrainian and French law, we may not be able to enforce non-competition and non-solicitation covenants and,
therefore, we may be unable to prevent our competitors from benefiting from the expertise of some of our former employees and/or vendors,
whether current or former.
We have entered into non-competition and non-solicitation agreements with many of our employees and vendors. These agreements prohibit our
employees and vendors, if they terminate their relationship with us, from competing directly with us, working for our competitors, or soliciting current
employees away from us for a limited period. Under current Israeli, U.S., U.K. Ukrainian and French law, we may be unable to enforce these agreements,
in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for
us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the
courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be
caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Risks Related to our Intellectual Property
Our proprietary information and intellectual property may not be adequately protected and thus our technology may be unlawfully copied by or
disclosed to other third parties.
We regard the protection of our proprietary information and technology and other intellectual property as critical to our success. We strive to
protect our intellectual property rights by relying on contractual restrictions, trade secret law and other common law rights, as well as federal and
international intellectual property registrations and the laws on which these registrations are based. However, the technology we use and incorporate into
our offerings may not be adequately protected by these means.
We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements
with parties with whom we conduct business, in order to limit access to, and the disclosure and use of, our proprietary information. However, we may not
be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our
intellectual property. In addition, those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach.
Further, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our
intellectual property and/or trade secrets, or deter independent development of similar intellectual property by others.
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In addition, there is no assurance that any existing or future patents or trademarks will afford adequate protection against competitors and similar
technologies. Our intellectual property rights may be challenged, invalidated, or circumvented by others or invalidated through administrative process or
litigation. Effective trademark and patent protections are expensive to develop and maintain, as are the costs of defending our rights. Further, we cannot
assure you that competitors will not infringe our patents or trademarks, or that we will have adequate resources to enforce our rights.
Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in costly
intellectual property litigation, which could adversely affect our financial position and our ability to execute our business strategy.
Given the competitive and technology-driven nature of the digital advertising industry, companies within our industry often design and use similar
products and services, which may lead to claims of intellectual property infringement and potentially litigation. We have been, and in the future may be, the
subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others. Regardless of whether such
claims have any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Our
business may suffer if we are unable to resolve infringement or misappropriation claims without major financial expenditures or adverse consequences.
If it appears necessary or desirable, we may seek to obtain licenses to use intellectual property rights that we are allegedly infringing, may infringe
or desire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered
or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights such as these from a third
party for technology or content, sound, or graphic used by us could cause us to incur substantial liabilities and to suspend the development and sale of our
products. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing technology. If we are
unable to re-design our products or develop non-infringing technology, our revenues could decrease and we may not be able to execute our business
strategy.
On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against Perion and Undertone alleging, inter alia, that Undertone’s UMotion
advertising format, “hand phone” image, and use of the full tilt library infringes on its intellectual property. On February 3, 2016, Adtile Technologies Inc.
filed a motion for preliminary injunction to, inter alia, prevent Undertone from creating or selling motion-activated advertisements. On June 23, 2016, the
court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Undertone’s
motion to stay the action and compel arbitration. As of the date of this report, Adtile had not commenced an arbitration proceeding and the court dismissed
the case for administrative reasons. We believe that we have strong defenses against this lawsuit and we intend to defend against it vigorously if the case is
ever resubmitted. However, if we do not prevail in this case, we may incur monetary damages and/or be prohibited from using certain intellectual property.
We may also become involved in litigation in connection with the brand name rights associated with our Company name or the names of our
products. We do not know whether others will assert that our Company name or any of our brands name infringe(s) their trademark rights. In addition,
names we choose for our products may be alleged to infringe names held by others. If we have to change the name of our Company or products, we may
experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be
time-consuming, expensive to resolve, and require additional management time and attention.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in
litigation and adversely affect our business.
A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli
Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with
a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the
employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli
Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to
remuneration for his inventions. 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.
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We use certain “open source” software tools that may be subject to intellectual property infringement claims or that may subject our derivative
works or products to unintended consequences, possibly impairing our product development plans, interfering with our ability to support our
clients or requiring us to allow access to the source code of our products or necessitating that we pay licensing fees.
Certain of our products contain open source code and we may use more open source code in the future. In addition, certain third party software
that we embed in our products contains open source code. Open source code is code that is covered by a license agreement that permits the user to liberally
use, copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original
developers of the open source code provide no warranties on such code.
As a result of the use of open source software, we could be subject to suits by parties claiming ownership of what they believe to be their
proprietary code or we may incur expenses in defending claims alleging non-compliance with certain open source code license terms. In addition, third
party licensors do not provide intellectual property protection with respect to the open source components of their products, and we may be unable to be
indemnified by such third-party licensors in the event that we or our customers are held liable in respect of the open source software contained in such third
party software. If we are not successful in defending against any such claims that may arise, we may be subject to injunctions and/or monetary damages or
be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would
negatively impact our revenues and cash flow.
Moreover, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code
available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to
varying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use an
open source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and our
competitors may have access to our products without cost to them which could harm our business. Certain open source licenses require as a condition to
use, modification and/or distribution of such open source that proprietary software incorporated into, derived from or distributed with such open source be
disclosed or distributed in source code form, be licensed for the purpose of making derivative works, or be redistributable at no charge. The foregoing may
under certain conditions be interpreted to apply to our software, depending upon the use of the open source and the interpretation of the applicable open
source licenses.
We monitor our use of open source code to avoid subjecting our products to conditions we do not intend. The use of open source code, however,
may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from
our development efforts.
Risks Related to the Geographical Location of our Operations
Our business is significantly reliant on the North American market. Any material adverse change in that market could have a material adverse
effect on our results of operations.
Our revenues have been concentrated within the North American market, accounting for approximately 83% of our revenues for 2020. A
significant reduction in the revenues generated in such market, whether as a result of a recession that causes a reduction in advertising expenditures
generally or otherwise, which causes a decrease in our North American revenues, could have a material adverse effect on our results of operations.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these
policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
We operate in a global market and are subject to tax in Israel and other jurisdictions. Our tax expenses may be affected by changes in tax laws,
international tax treaties, international tax guidelines (such as the Base Erosion and Profit Shifting project of the OECD’s Inclusive Framework (“BEPS”)).
The OECD’s Inclusive Framework on BEPS has recently made certain recommendations, informally known as BEPS 2.0, which aim to modify
international taxation norms with respect to allocation of taxing rights and introduction of minimum taxation, focusing mostly on the digital economy.
Currently, there is uncertainty as to what modifications will be made in these recommendations and how they will be implemented.
Certain of these changes could have a negative impact on our results of operations and business. The impact of these changes is uncertain, and
may not become evident for some period of time. The uncertainty surrounding the effect of the reforms on our financial results and business could also
weaken confidence among investors in our financial condition. This could, in turn, have a materially adverse effect on the price of our ordinary shares.
Shareholders are urged to consult their tax advisors regarding the effect of these changes to the U.S. federal tax laws on an investment in our shares.
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Our international operations involve special risks that could increase our expenses, adversely affect our operating results and require increased
time and attention of our management.
A large portion of our operations are performed from outside the United States. In addition, we derive and expect to continue to derive a portion of
our revenues from users outside the United States. Our international operations and sales are subject to a number of inherent risks, including risks with
respect to:
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potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rights than
those of the United States;
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 and data protection laws 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 may impede our ability to operate and harm our financial results.
Our principal executive offices are located in Israel. In addition, a number of our officers and directors are residents of Israel. Accordingly,
political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment of
the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as terrorist acts committed
within Israel by hostile elements. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could
adversely affect our operations and results of operations. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas, the
Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip, which resulted in missiles being fired from
the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being fired from the Gaza Strip into Southern Israel, as well at areas more
centrally located near Tel Aviv and at areas surrounding Jerusalem, occurred during November 2012 and July through August 2014. These conflicts
involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located,
and negatively affected business conditions in Israel. Since April 2011, internal conflict in Syria has escalated, and chemical weapons have been used in the
region. Foreign actors have and continue to intervene in Syria. This instability and any intervention may lead to deterioration of the political and economic
relationships that exist between the State of Israel and some of the countries in the region, and may have the potential for additional conflicts in the region.
In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran also has a strong influence among extremist groups in the
region, including Hamas in Gaza, Hezbollah in Lebanon and various rebel militia groups in Syria. Furthermore, in early January 2020, certain events
contributed to an increase in hostilities between the United States and Iran, and as a result Iran issued multiple public statements threatening to attack Israel
and the United States. These situations have escalated at various points in recent years and may escalate in the future to more violent events, which may
affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm
our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to
Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners
face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel
claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East.
Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot
assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us
could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business
conditions and could harm our results of operations.
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Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business
with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial
condition or the expansion of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also
adversely impact our business.
In addition, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until
they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be
called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that
there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of members of
our management. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.
There is currently a level of unprecedented political instability on Israel’s domestic front. The Israeli government has been in a transitionary phase
since December 2018 when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. Israel held general
elections twice in 2019, once again in 2020 and recently on March 23, 2021. The Knesset, for reasons related to this extended political turmoil, failed to
pass a budget for the year 2020, and certain government ministries, certain of which are critical to the operation of our business, operated without necessary
resources. Assuming the current political stalemate persists, such government ministries may not receive sufficient funding moving forward. This political
reality is further compounded by a budget deficit of NIS 160.3 billion (approximately $50.4 billion) for the year 2020, which is roughly three times larger
than in 2019 and the highest on record since Israel's founding. Given the likelihood that the current situation will not be resolved during the next calendar
year, our ability to conduct our business effectively may be materially adversely affected.
Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers or our directors or
asserting U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service of process on us, our Israeli subsidiaries, our directors and officers and the Israeli
experts, if any, named in this annual report on Form 20-F, substantially all of whom reside outside of the United States, may be difficult to obtain within the
United States.
Furthermore, because a significant portion of our assets and investments, and substantially all of our directors, officers and Israeli external experts
are located outside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United
States.
We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities laws claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate
forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to
the claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must
be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courts
may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a
monetary or compensatory judgment in a non-civil matter, provided that the following key conditions are met:
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subject to limited exceptions, the judgment is final and non-appealable;
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and
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an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court.
The tax benefits available to us for activities in Israel require us to meet several conditions and may be terminated or reduced in the future, which
would increase our costs and taxes.
We have benefited and currently benefit from a variety of Israeli government programs and tax benefits with regards to our operations in Israel,
that generally carry conditions that we must meet in order to be eligible to obtain any benefit. Our tax expenses and the resulting effective tax rate reflected
in our financial statements may increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in
which we operate, non-deductible expenses, loss and timing differences, or changes in the mix of countries, where we generate profit.
If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could
be required to refund tax benefits already received including interest and linkage to the Israeli consumer price index. Any of the following could have a
material effect on our overall effective tax rate:
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we may be unable to meet the requirements for continuing to qualify for some programs;
these programs and tax benefits may be unavailable at their current levels; or
we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.
Additional details are provided in Item 5.A “Operating Results” under the caption “Taxes on Income,” in Item 10.E. “Taxation” under the caption
“Israeli Taxation” and in Note 15 to our Financial Statements.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
Our History
We were incorporated in the State of Israel in November 1999 under the name Verticon Ltd., changed our name to IncrediMail Ltd. in November
2000 and in November 2011 changed our name to Perion Network Ltd. We operate under the laws of the State of Israel. Our headquarters are located at 26
HaRokmim Street, Holon 5885849, Israel. Our phone number is 972-73-398-1000. Our website address is www.perion.com. The information on our
website does not constitute a part of this annual report. Our agent for service in the United States is Intercept Interactive Inc. d/b/a Undertone, which is
located at One World Trade Center, 77th Floor, Suite A, New York, NY 10007.
We completed the initial public offering of our ordinary shares in the United States on February 3, 2006. Since November 20, 2007, our ordinary
shares are also traded on the TASE.
In the recent years, we completed several acquisitions, including the acquisition of ClientConnect Ltd. in 2014, the acquisition of Interactive
Holding Corp. in 2015, which we refer to, together with its subsidiaries, as “Undertone”, the acquisition of Septa Communications LLC, also known as
“Captain Growth”, in March 2019, the acquisition of Content IQ LLC in January 2020 and the acquisition of Pub Ocean in July 2020.
Our SEC filings are available to you on the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F and
is not incorporated by reference herein.
Principal Capital Expenditures
In 2018, 2019 and 2020, capital expenditures consisted of $2.0 million, $1.2 million and $0.5 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.
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B.
BUSINESS OVERVIEW
General
Perion is a global technology innovator in the digital advertising ecosystem, providing brands and publishers with an opportunity to unlock
lucrative growth opportunities. The company operates across the three main pillars of digital advertising – ad search, social media, and display/video/CTV,
representing a potential market of more than $340B in 2020 that is expected to grow to $542B in 2024, according to eMarketer.
Through its diversified solutions portfolio, Perion is perfectly positioned to respond to any changes in the direction branded and e-commerce
spending is headed. Each of these businesses is led by visionary and experienced leadership.
Perion further strengthens its technology moat by evolving an integrated offering, branded as “Capture and Convince,” which represents a
significant industry advance in the user funnel. This new user loop, using Artificial Intelligence, or AI, and machine learning to deliver optimized
advertising and content to brand-safe sites, has been shown to engage new users for an average of six minutes, generating significant revenue-per-session
by uniquely satisfying their interests and affinities.
Perion’s “capture and convince” solutions suite gives advertisers and publishers the ability to acquire customers — efficiently and at massive
scale, and moves them into a branded space created by Perion, where content, layout and advertising are personalized and optimized using predictive
algorithms that have been validated over billions of interactions, complemented by our search offering that provides monetization solutions and capabilities
to publishers’ own products and services.
The advanced technological solutions offered by Perion, which track with the entire consumer journey and marketing funnel, are poised to benefit
from the macro trends. These trends include:
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The growth in search driven by the growing shift to digital and contactless commerce activity;
The move towards in-house advertising;
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 creatives in what is called the “Attention Economy”.
In addition, brands are seeking new solutions that enable them to transcend the dominance of the triopoly— Google, Facebook and Amazon,
which now control 87% percent of ad spend in the U.S. — to enable more flexible options that respect their brands, users, and need for monetization.
Strength Through Diversification
Perion is positioned to benefit from the overall growth of the digital marketplace, through our diversified business solutions that cover the three
main pillars of digital advertising—our search ad monetization; cross-channel high impact advertising, including through video and connected television,
or CTV; social advertising through our actionable performance monitoring platform; and our content monetization system.
Intelligent High Impact Solutions that Win the War for Attention
Brands and advertisers are in a war for attention, and it is getting more intense. What is your winning strategy? Without delivering impactful
creative through the right channels, brands cannot express a cohesive, creative campaign throughout the purchase funnel, nor can they achieve successful
ROI (Return on Investment). Perion’s High Impact Advertising (HIA), which includes rich media and engaging iCTV, is the breakthrough answer to
effective creative expression. It breaks through the clutter and ad blindness that conventional ad units cannot overcome, inspiring engagement, and making
it possible for advertisers to “Capture and Convince.” Our solutions enable the upper- and mid-funnel brand objectives that all brands and agencies require,
turning awareness into performance.
We operationalize our proprietary, creatively-led solutions based on years of user engagement and interactions with different kinds of advertising
units. These units are informed by the requirements of our advertisers and our cultural insights. Because our mission is to assure that our HIA creative can
be distributed to the right audiences, we have built and grown our curated network of publishers where our HIA delivered.
Perion’s technology is designed to continually balance the right mix of channels – from display to video/CTV – to improve ROAS (Return on Ad
Spend). This complete moat delivers robustly optimized campaigns that combine creativity, reach, and targeting. This moat also includes Perion’s white-
glove service and the turnkey provision of comprehensive, full-funnel solutions to all brands and agencies.
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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 less 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, we drive incremental growth with traffic that comes from Facebook, Taboola, Yahoo and other unquestionable sources.
Perion has built a “Capture and Convince” loop that uses intent signals to keep users engaged – moment-after-moment - by continually optimizing
content, advertising and layout within mini-sites we operate. Our machine learning employs AI analysis and deploy tens of thousands of combinations of
content and advertising. Perion keeps users engaged for an average of six minutes. This monetization engine is tracked by our system, which is able to
optimize revenue-per-session, refining and informing decision-making by identifying pockets of profitability and loss.
Publishers will continue to be threatened by the behemoths of social media, and will require technology solutions that enable them to drive traffic
and revenue that is affordable and scalable. Perion’s “Capture and Convince” Publisher Solution is well positioned to such needs through the end-to-end
platform it offers.
Search monetization solution - Transforming Search into Revenue
Capturing consumers at the moment of highest intent simply works - so it’s no wonder that brands and publishes are allocating more and more
dollars to search advertising.
Searching is a fundamental digital habit that will continue to grow. As the category grows, Perion is not standing still. We are continuously
innovating, advancing our solutions to provide more value to our customers. We deploy advanced AI, neural networks, and machine learning to optimize
yield for our publishers and transform search into revenues.
At Perion we are poised to seize this shift, thanks to our longstanding relationship with Microsoft Bing and other leading search and content
partners, across 34 countries. Our search monetization solutions are built to “Capture and Convince” users more holistically and effectively than
conventional search solutions.
U.S. search advertising market is estimated at $59 billion for 2020 according to eMarketer reports, which represents 42% of all digital ad
spending. Microsoft Bing has been our partner for a decade, and we recently extended our partnership for four additional years. According to Microsoft, as
of September 2020, they had 639 million unique global PC users, delivered 13.9 billion monthly searches over PC and have a 13.5% worldwide PC market
share. In addition, it generated approximately $7.7 billion in revenue in the 2020 fiscal year. Perion, through its publisher network, delivered approximately
15 million daily searches in 2020 compared to 12 million daily searches in 2019, which represents an increase of 25% Year-over-Year.
Our Search monetization solution is comprised of the following 3 offerings:
Website Monetization
Leveraging intent signals to deliver text ads, shopping offers, and premium news that enable site owners to gain higher revenues and enhanced
user engagement.
Search Mediation
Enables media traders to monetize search demand and achieve higher yields by leveraging the machine learning that drives our mediation
platform.
App Monetization
Using intent-based search signals to monetize publishers' desktop and mobile apps, white-label search engines, and more.
Paragone’s Actionable Performance Monitoring (APM) Platform - The Cross-Channel Social SaaS platform that Lifts ROAS
APM allows you to observe, in real time, all paid social advertising activities - across networks - allowing performance marketers to easily
identify opportunities for improvement, use AI to predict campaign success, and take action to maximize performance.
The steady growth of social advertising was accelerated by COVID-19 and the boom in e-commerce. This dramatic shift creates the existential
challenge of running scaled campaigns across multiple social networks, and optimizing them for engagement in real-time. This requires the connection of
massive amounts of cross-network data.
We collect and centralize previously siloed data enabling agencies and brands to manage cross-platform social campaigns. We identify
performance bottlenecks, improve productivity, customize metrics, predict results, and test new networks.
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Our APM platform works with all the largest social networks: Facebook, Instagram, Messenger, LinkedIn, Snapchat, Pinterest, and Twitter. The
result is improved productivity and improved ROI.
Paragon’s APM Capabilities
Easily identify opportunities for improvement
Our predictive system calculates the probability of achieving campaign goals, so brand and agencies can take appropriate corrective measures and
increase performance. Campaigns, audiences and creatives are ranked based on performance, and validated statistically, so users of the platform can decide
when to increase or decrease investment in specific elements.
Predict the next best action and go for it
Our advanced AI algorithms analyze data from multiple social media channels to find actionable opportunities for growth. The AI suggests
multiple solutions for each cross-channel recommendation, enabling decision-making and implement suggestions at the click of a button – with no manual
work required.
Take action at the snap of a finger
The APM platform allows campaign adjustment in real time, and actions execution to maximize performance, through one centralized and single
view dashboard.
Consumer Engagement Offering
We continue to generate a small portion of our revenues through our consumer engagement offering called Smilebox, which enables people to tell
the stories of their lives—big and small—in fun, simple and creative ways with fully customizable eCards, slideshows, invitations, collages and more.
Industry Overview
Advertising
Our search, advertising and content solutions - which are largely driven by the integration of AI-based ad-tech, video, display, search, and social
ad units - address the majority of digital ad spend.
Based on eMarketer reports, digital advertising spend accounted for approximately 55% of total worldwide media advertising during 2020,
reaching $340 billion and expected to increase to $542 billion and approximately 64% of worldwide advertising spend by 2024. In 2020, US display
advertising spend, including banners, rich media, video and social, was approximately $78 billion and expected to increase by 76% and reach $137 billion
in 2024, 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 “capture and
convince” solution positions us in the sweet spot of these trends by providing a connective technology layer which tracks with the entire consumer journey
and marketing funnel.
Advertisers, including major brands, are increasingly allocating media advertising budgets to digital channels and formats. While we work with
some advertisers directly, our primary customers are advertising and media agencies, who are engaged by brand advertisers to develop and implement their
media plans. We work with both sides of the market to plan, design, deliver, manage, and measure their digital advertising investments. We generally do
not enter into long term contracts with our advertising customers, but respond to requests for specific campaigns, and are compensated based on ad formats,
campaign complexity, impressions, and creative requirements.
Undertone addresses the display advertising market through direct and programmatic media sales as well as managed and self-service advertising
campaign management tools. Programmatic customers benefit from increased automation, transparency and resulting efficiency. Clients receive support
throughout the campaign cycle, which starts with a consultative sales process to shape the best offering for that customer.
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Beyond ad-tech automation, advertisers are also increasingly looking for unique ad formats that are able to tell impactful stories on digital, by
utilizing content, rich media, and digital video. We believe the shift beyond standard banner ad formats is unstoppable. Rich media, including our high-
impact ad formats, as well as outstream and instream video accounted for $47 billion of US digital display ad spend in 2020 and is expected to increase by
107%, reaching approximately $98 billion in 2024, according to eMarketer. Digital video, including instream formats such as “pre-roll” and outstream
formats such as “inline” represented the vast majority of rich media ad spend in 2020, topping $41 billion, and is expected to reach $89 billion by 2024,
representing an increase of 115%, according to eMarketer.
Social networks are expected to continue to be a major platform for digital advertising, and with a lot of innovation in the sector, advertisers will
look for emerging platforms to reach existing and new audiences. According to eMarketer, in 2020, social networks accounted for $46.21 billion
representing 30% of the US digital ad spending, which is expected to increase by 73% and reach $79.83 billion of US digital ad spending by 2023,which
would represent 32% of the US digital ad spending.
Users are devoting more and more time to social networks, estimated to reach approximately 65 minutes per day on social networks in 2022 in the
US, representing 14.2% of time spent on digital media in 2022. Furthermore, emerging and new social networks, such as Instagram, Snapchat and TikTok,
are further expanding the audiences and demographic reach of social networks.
It is estimated that 88.2% of digital display ads will be transacted through programmatic channels by 2022, including programmatic direct and real
time bidding (RTB) campaigns, according to eMarketer. Driven by this trend, we invested and continue to make significant investments in AI-based
technologies, which optimize both the price and performance of our digital advertising campaigns, including our acquisition of Captain Growth, which
automates campaign performance with the capability of testing multiple ads and campaigns in real time.
In light of recent regulatory developments, including GDPR and CCPA, as well as existing and planned limitations to be enacted by major web
browser publishers, including Google (who announced, in March 2021 the phase-out the support for third-party cookies in Chrome), Apple, and Mozilla,
we expect advertisers to increasingly seek alternatives to third-party “cookie”-based targeting. We are focusing investments and R&D on opportunities in
alternative targeting technologies. These include:
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Development of audience and content targeting;
Leveraging first-party data from social networks via integrations with Facebook and other major social networks,
Content IQ’s ability to create page level engagement without the new privacy parameters;
Undertone’s contextual targeting;
CodeFuel’s search and intent-based targeting through our partnership with Microsoft Bing.
Search
In 2020, US search advertising spend reached $61.7 billion and expected to increase by 77% reaching $109 billion in 2024, representing 39.16%
of US digital ad spending, according to eMarketer.
Search is the most intent-based form of advertising, as advertisements are served in direct response to the search queries, resulting in relevant
advertisements yielding significant revenue to the search engine companies. Our search-related products address the market by engaging with premium
search providers like Microsoft, and offers end users the ability to search the Internet via easily embedded search functionality in different search assets.
The search engine market is highly competitive as providers such as Google, Microsoft, Verizon Media and other smaller players, seek to gain
more market share. We believe such competition will increase utilization of our search solution, which enables search providers to increase their market
share.
The factors that drive the ability of our search engine partners to increase their revenue per search, include the availability of search advertising
inventory relative to demand, as well as internal pricing dynamics. As search market continues to grow and we continue to expand our search solution, the
revenue earned by us and our partners is expected to grow as well.
Growth Strategy
High level Growth Plan
Our strategy is to grow our business by offering 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.
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We will achieve this by offering compelling data-driven, digital advertising solutions and search monetization through holistic customer
experiences and innovative platforms that cover the three main pillars of digital advertising - ad search, social media and display / video /CTV.
Growth through Innovation
Innovation, driven by the introduction of new technologies, tools, services and offerings, will address one of our key priorities, which is to make
our revenue models more predictable, sustainable and resilient. We are expanding our product portfolio to provide added value to our clients without
adding silos and overhead, while always maintaining efficiency across our different business units. 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 and the acquisition of Pub Ocean in July 2020, to allow us to expand our capabilities and maximize our existing businesses.
Growth through Connected Devices
Our advertising offering targets brands that are focused on their relationship with consumers. They recognize that their reputation and ability to
compete are determined by meaningful connections that are sequentially delivered by relevant, high-quality creative, across all platforms, including video,
CTV and iCTV, in brand-safe environments.
Our growth strategy also contemplates the migration to 5G networks and the growing access to high-speed Internet. Streaming of video content
that takes advantage of faster delivery, as well as the growth of CTV and internet-connected devices, is something we are investing in so we will be able to
take advantage of upgraded user experiences.
We also intend to continue to invest in technology, partnerships and sales that offer our advertising clients enhanced features and functionalities to
reach their consumers, including through the utilization of analytic tools such as ACR (Automated Content Recognition) TV viewership data.
Growth Through Content Optimization
Through our content optimization solution, we provide advertisers the ability to serve advertisements which are relevant to the end-user’s
interests, beside relevant optimized content and page-level reader engagement. Our “capture and convince” solution is complemented by the content
optimization platform, using proprietary data algorithms and analytic tools that dynamically link publisher content and audience interest to maximize return
on ad spend.
Growth Through Search 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 diversify our revenue sources and extend our products suite and partners, we are embedding our search functionality in
our new products, thus increasing our monetization potential.
Growth Through Pricing
We are offering and exploring new pricing models such as Software as a Services (“SaaS”) and other models in order to execute on our strategy to
have a more predictable and sustainable revenue streams. We are productizing our technology to enable agencies and other customers to directly offer their
consumers and brands with our platforms’ capabilities through SaaS based plans.
Technology
The Design principles of our technologies and research and development efforts consist of the following elements:
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Supply and publisher integration;
Innovative Creative;
Demand generation (direct and indirect);
Data and Analytics;
AI and optimization; and
Executional channels (Programmatic and Direct).
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Advertising Solutions
The technology backbone behind our advertising solutions is designed to connect brands with consumers via meaningful digital interactions and
experiences. This is done through 9 key components:
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Supply Management Platform;
Demand Management Platform;
Analytics Platform
High Impact Programmatic Marketplace;
Creative Platform;
Data Management Platform;
Data Lake Platform;
AI Platform; and
Actionable Performance Monitoring.
Supply Management Platform
The Supply management platform operationalizes relationships with our publishers by treating every impression in an optimal manner, and according to the
business requirements and monetary expectations that derive from which ads are allowed, what prices are expected, and what is the allowable frequency.
All components in our supply management platform are based on proprietary technology and are based on our specific needs and use cases.
Demand Management
The demand management platform addresses the needs of advertisers for campaign planning and design with a system that delivers a recommendation that
will hit the goals of the advertisers. It will recommend advertising channels, audience targeting strategy and ad product mix which are all based on
benchmarks and past experiences of the advertiser. Once the plan is created, the platform pushes instructions to the campaign management system for
execution, based on parameters like dates, volume level, list of supply sources and campaign goal.
Analytics Platform
Our Analytics platform provides information and performance insights on the results of campaign investment and other campaign metrics - demonstrating
the value of our solutions for our customers. This is a flexible system that reports all the required data based on reach and impressions delivered, budget
invested engagement metrics, etc. The analytics platform supports our data driven culture – providing business stakeholders full visibility of KPI’s on key
processes while facilitating data and reporting in a self-service manner, with pre-build dashboards and reports.
High Impact Programmatic Marketplace
Our High Impact Programmatic Marketplace is a platform that allows our advertisers to buy from us in an automated fashion. This marketplace is built on
the standard programmatic infrastructure so advertisers have the flexibility of using different systems and platforms to buy from us. Our advertisers
maintain full control and have transparency into our inventory, bidding in real time to purchase available supply.
Creative Rich Media Platform
The creative platform is a key component of our ”capture and convince” solution and allows us to innovate quickly on end user experiences. Our full-
blown rich media platform leverages our proprietary ad units, and is tailored to the needs of our advertisers, providing them with a comprehensive solution
to create compelling, engaging, dynamic, cross-platform and high-impact advertisements.
Data Management Platform
Our data management platform (DMP) is at the heart of our ”capture and convince”. Its main functionality is to manage available data on a user level, what
messages an individual user was exposed to, how that user responded, what third party information can make that data richer, and so on. The DMP is
connected to all key systems to inform campaign planning, delivery, optimization, creative optimization and analytics. In addition to user level data, the
DMP manages various data assets and the data is collected at scale with well-defined schemas. Data assets managed in the DMP are used to support data
driven objectives and services like analytic and AI processes.
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AI Platform
Our AI platform uses machine learning to bring deep intelligence to the various phases of campaigns: planning, activation and reporting which utilize
models built on top of our data platforms. Based on campaign-to-campaign learnings and heuristics, the platform generates better performance for our
customers and improved efficiency by providing rules-based and budget optimizations.
Actionable Performance Monitoring
The Actionable Performance Monitoring platform supports the various phases of campaign management across different channels. The platform manages
each of the planning, execution, optimization and measurement phases and simplifies complexity of cross channel advertising for brands and agencies
while optimizing performance through AI in one unified, actionable holistic and intuitive dashboard.
Content Optimization Platform
Our content optimization platform, was acquired with our purchase of ContentIQ and enhanced by the acquisition of Pub Ocean; the tech is composed of
the following systems that can power both Content IQ owned and operated websites, and those of third-party publishers
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Content management platform;
Content web sites management system;
Content monetization system; and
Distribution system.
The content management platform supports the process of planning, creation, testing and measurement of content articles. The platform provides tools for
content creators to structure their content in a variety of formats to optimize performance for unique audience segments. Once content articles are deployed,
the management backend serves the content at scale and with the supporting analysis tools that enable continuous optimization at scale.
Content Web Site Management System
The content web site management system supports the process of website creation, testing, optimization and analysis. The platform provides tools for
publishers to build dynamic sites driven by a powerful configuration system, which can be optimized to deliver elastic content in a dynamic page layout.
The content articles are sourced from the content management system and served at scale.
Content Monetization System
The content monetization system provides publishers the tools to maximize ad revenues from reader sessions. The system integrates ads within the content
layouts, at the page level, maintaining a user-friendly experience while driving monetization from a variety of programmatic sources. This system is
powered by a highly customized header bidding technology which controls ad delivery with optimal viewability measures.
Distribution System
The distribution system provides publishers with AI-powered tools to distribute content articles to optimized audience segments, at scale, on a variety of
platforms. Its campaign management components automatically manage, through machine learning capabilities, thousands of campaigns - adjusting the
bids and budgets in real time. The distribution system optimizes campaigns based on revenue attribution technology which ties the content management,
content web sites and content monetization systems together, in order to optimize margins and revenues.
Search Solution
The technology of our search solution is composed of the following systems:
Publishers management system;
Search demand management system;
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• Monetization products; and
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AI system.
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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.
Monetization Products
Our monetization products are designed to deliver algorithmic search results concurrently with sponsored listings which are served for the same search
queries. They can be operationalized in different ways, including the transmission of search queries to search engines such as Bing, search Feed APIs
operated on the publisher’s domain and an enriched and optimized hosted search results page which offers an enhanced user experience.
AI System
The AI technology behind our search solutions optimizes the various phases of the funnel including intent detection and demand optimization to yield
performance optimization and maximized consumer experience.
Products Under Development
Innovation is a core driver of our culture and operations and essential for our growth and hence we invest substantial resources in research and
development to develop new solutions, offerings, applications and services, improve our core technologies and enhance our technology facilities and
infrastructure and capabilities. Our research and development activities are primarily conducted internally in Israel and Europe, focusing on the
development of new services, platforms and SaaS based solutions that will offer our customers (i) standout brand experience (ii) effective distribution tools,
(iii) increased monetization capabilities through content features and applications, and (iv) enhanced optimization via powerful and reliable data analytics
driven by AI. Additionally, we focus our research and development efforts on developing new products and improving existing products through software
updates and upgraded features. Our research and development department is divided into groups based on scientific disciplines and types of applications
and products.
Breakdown of Revenues
Our search monetization solutions, advertising and other, are distributed and sold throughout the world (mainly in North America and Europe).
The following table shows the revenues, presented in our statement of operations, generated by territory in the years ended December 31, 2018, 2019 and
2020.
2018
2019
2020
Search
Advertising
and other
Revenues
Display and
Social
Advertising
Revenues
Search
Advertising
and other
Revenues
Display and
Social
Advertising
Revenues
Search
Advertising
and other
Revenues
Display and
Social
Advertising
Revenues
65%
29%
6%
100%
91%
8%
1%
100%
67%
25%
8%
100%
91%
9%
0%
100%
73%
24%
3%
100%
95%
5%
0%
100%
North America (Mainly
U.S.)
Europe
Other
Total
Intellectual Property
Our research and development efforts and the underlying proprietary technologies, solutions and products we develop, are meaningful to our
operations and competitive advantage and we rely upon trade secret, trademark, copyright, and patent laws in the United States and abroad to establish and
protect our intellectual property.
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Although we have a number of patents, copyrights, trademarks and trade secrets and confidentiality and invention assignment agreements to
protect our intellectual property rights, we believe that our competitive advantage depends primarily on our marketing, business development, services,
applications, know-how and ongoing research and development efforts. Accordingly, we believe that the expiration of any of our patents or patent licenses,
or the failure of any of our patent applications to result in issued patents, would not be material to our business or financial position.
Part of the components of our software products were developed solely by us. We have licensed certain components of our software from third
parties. We believe that the components we have licensed are not material to the overall performance of our software and may be replaced without
significant difficulty.
We enter into licensing arrangements with third parties for the use of software components, graphic, sound and multimedia content integrated into
our products.
All employees and consultants are required to execute confidentiality covenants in connection with their employment and consulting relationships
with us. These agreements (excluding those with our former German and U.K. employees) also contain assignment and waiver provisions relating to the
employee’s or consultant’s rights in respect of inventions.
Competition
The markets in which we are active are subject to intense competition.
We compete with many other companies offering solutions for online publishers and developers, including search services and other software in
conjunction with changing a user’s default search settings.
The advertising technology industry is highly competitive. There are a large number of digital media companies and advertising technology
companies that offer services similar to those of our advertising solution and that compete for finite advertiser/agency budgets and publisher inventory.
There are a large number of niche companies that are competitive with our advertising solution because they provide a subset of the services that we
provide (e.g., mobile in-app ad networks). Some of these companies are larger and have more financial resources than we have, including, Google,
Facebook and Microsoft. New entrants and companies that do not currently compete with our advertising solution such as Amazon may compete in the
future given the relatively low barriers to entry in the industry.
As a major part of our revenues stem from our offering of search properties, we compete with search engine providers themselves such as Google,
Microsoft, Verizon Media, IAC and others. We also compete with many other companies offering consumer software, albeit totally different software,
utilizing the same strategy, to offer their search properties, such as Interactive Corporation, Oath, System1 and others.
Our ability to attract developers is largely dependent on our ability to pay higher rates to our publishers and developers, our success in creating
strong commercial relationships with developers that have successful software, websites or distribution channels, and our ability to differentiate our
distribution, monetization, and optimization tools from those of our competitors.
As we innovate evolve and introduce new solutions, and as our competitors as well as other companies introduce new products and services, we
may be subject to additional competition. Many of our current and potential competitors may have significantly greater financial, research and
development, back-end analytical systems, manufacturing, and sales and marketing resources than we have. These competitors could potentially use their
greater financial resources to acquire other companies to gain even further enhanced name recognition and market share, as well as to develop new
technologies, enhanced systems and analytical capabilities, products or features that could effectively compete with our existing solutions, products and
search services. Demand for our solutions, products and search services could be diminished by solutions, products, services and technologies offered by
competitors, whether or not their solutions, products, services and technologies are equivalent or superior.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet.
The manner in which existing laws and regulations will be applied to the Internet in general, and how they will relate to our business in particular is
unclear. Accordingly, we cannot be certain how existing laws will be interpreted or how they will evolve in areas such as user privacy, data protection,
content, use of “cookies,” access changes, “net neutrality,” pricing, advertising, distribution of “spam,” intellectual property, distribution, protection of
minors, consumer protection, taxation and online payment services.
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For example, we are subject to U.S. federal and state laws regarding copyright infringement, privacy and protection of user data, many of which
are subject to regulation by the Federal Trade Commission. These laws include the California Consumer Privacy Act, which provides data privacy rights
for consumers and operational requirements for companies, the Digital Millennium Copyright Act, which aims to reduce the liability of online service
providers for listing or linking to third-party websites that include materials that infringe copyrights or the rights of others, and other federal laws that
restrict online service providers’ collection of user information on minors as well as distribution of materials deemed harmful to minors. In addition to the
CCPA, the California Privacy Rights Act (“CPRA”) which passed in November 2020 will take effect in January 2023, will expand the rights granted under
the CCPA and impose additional notice and opt out obligations, including an obligation to provide an opt-out for behavioral advertising and may affect us.
Many U.S. states, such as California, are adopting statutes that require online service providers to report certain security breaches of personal data and to
report to consumers when personal data will be disclosed to direct marketers. There are also a number of legislative proposals pending before the U.S.
Congress and various state legislative bodies concerning data protection which could affect us. The interpretation of data protection laws, and their
application to the Internet, is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways and in a
manner that is not consistent with our current data protection practices.
Foreign data protection, privacy and other laws and regulations may affect our business, and such laws can be more restrictive than those in the
United States. For example, in Israel, privacy laws require that any request for personal information for use or retention in a database, be accompanied by a
notice that indicates: whether a person is legally required to disclose such information or that such disclosure is made at such person’s free will and
consent; the purpose for which the information is requested; and to whom the information is to be delivered and for which purposes. A breach of privacy
under such laws is considered a civil wrong and subject to administrative fines as well as civil damages. Certain violations of the law are considered
criminal offences punishable by imprisonment. In the European Union, similar data protection rules exist as well was privacy legislation restricting the use
of cookies and similar technologies. Subject to some limited exceptions, the storing of information, or the gaining of access to information already stored,
in the terminal equipment of a subscriber or user is only allowed on condition that the subscriber or user concerned has given his or her informed consent.
Moreover, the General Data Protection Regulation (which became effective in May 2018) presumably have an even wider territorial scope, broadened the
definition of personal data to include location data and online identifiers, and imposes more stringent user consent requirements. Further, it includes
stringent operational requirements for companies that process personal data and will contain significant penalties for non-compliance. Also in other
relevant subject matters, such as cyber security, e-commerce, copyright and cookies, new European initiatives have been announced by the European
regulators. To further complicate matters in Europe, to date, member States have some flexibility when implementing European Directives and certain
aspects of the General Data Protection Regulation, which can lead to diverging national rules.
Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in
jurisdictions where we have no local entity, employees or infrastructure.
These regulations result in significant compliance costs and could result in restricting the growth and profitability of our business.
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 Limited, our wholly-owned England and Wales subsidiary, was acquired 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.
40
D.
PROPERTY, PLANTS AND EQUIPMENT
Our headquarters are located in Holon, Israel. As of December 31, 2020, we lease approximately 67,759 square feet, excluding office space which
we currently sublease. The lease expires in 2025, with an option to extend for two additional two-year periods at its sole discretion and upon 180-day prior
written notice. Annual net cost is approximately $1.4 million.
As of December 31, 2020, we lease office spaces in various locations in the United States, excluding office spaces we currently sublease. Our
primary locations, and their principal terms, are as follows:
New York, New York
Chicago, Illinois
Annual Rent
for 2020 in
US$ in
thousands
(net)
Lease expires
on (not
including
options)
Square feet
(net)
25,550
3,984
$
$
1,737
79
2026
2023
Undertone’s offices are located at the World Trade Center (WTC) New York and Chicago, pursuant to a lease agreement that expires in May 2026
and September 2023, respectively. Under the lease agreement, we are entitled to terminate the lease of our offices in New York in 2023, at our sole
discretion.
In addition, we lease offices in various locations throughout Europe. Our primary location, and its principal terms, are as follows:
Paris, France
Annual Rent
for 2020 in
US$ in
thousands
Lease expires
on (not
including
options)
Square feet
9,182
$
735
2028
MakeMeReach’s offices in Paris are located at rue de la Poissonniere pursuant to a lease agreement that expires in March 2028. Under the lease
agreement we are entitled to terminate the lease in 2023, at our sole discretion.
ITEM 4.A UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our 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.
A.
OPERATING RESULTS
General
Perion is a global technology company that provides agencies, brands and publishers with innovative solutions that cover the three main pillars of
digital advertising. From its data-driven Synchronized Digital Branding platform and high-impact ad formats in the display domain, to its powerful
advertising cloud platform, to its branded search network.
Our headquarters and primary research and development facilities are located in Israel and Kiev, we have our primary sales office in the United
States and several other offices located in Europe.
The following describes the nature of our principal items of income and expense:
41
Revenues
We generate our revenues primarily from two major sources: (i) Display and Social Advertising; and (ii) Search Advertising and other. The
following table shows our revenues by category (in thousands of U.S. dollars):
Display and Social Advertising
Search Advertising and other
Total Revenues
$
$
125,977 $
126,868
252,845 $
87,863 $
173,587
261,450 $
Year Ended December 31,
2019
2018
2020
148,698
179,365
328,063
In 2019, revenues increased by 3% compared to 2018, primarily driven by 37% growth in our Search advertising and other revenues due to new
publishers, higher RPMs and an increased number of searches, partially offset by Display and Social Advertising decline of 30% as we continued to
prioritize margins over short-term sales. In 2020, revenues increased by 25% compared to 2019, primarily due to 69% growth in Display and Social
Advertising primarily resulting from the acceleration of our Connected TV advertising offering and the contribution of our content monetization platform
evolving from the acquisition of Content IQ and Pub Ocean. Search Advertising and other revenues increased by 3% due to a higher number of daily
searches partially offset by lower RPMs.
Cost of Revenues
Cost of revenues consists primarily of salaries and related expenses, license fees and payments for content and server maintenance. Cost of
revenues were $25.5 million or 10% of revenues in 2019 and $22.5 million or 7% of revenues in 2020. The reduction results from optimization in servers
costs as well as reduction in salaries and related expenses mainly due to automation of processes. The number of employees included in cost of revenues as
of December 31, 2018, 2019 and 2020 were 76, 79 and 73, respectively.
Customer Acquisition Costs and Media Buy
Our customer acquisition costs 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. Customer acquisition costs are primarily based on revenue share agreements with our traffic
sources. Media buy costs consist mainly of the costs of advertising inventory incurred to deliver ads. Customer acquisition and media buy costs were
$135.9 million or 52% of revenues and $197.6 million or 60% of revenues in 2019 and 2020, respectively. The increase as a percentage of revenues is
primarily due to the acquisitions of Content IQ and Pub Ocean, as well as product mix.
Research and Development Expenses
Our research and development expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged in
research and development activities, allocated facilities costs, subcontractors and consulting fees. Research and development expenses were $22.6 million
or 9% of revenues in 2019 and $30.9 million or 9% of revenues in 2020. Our research and development expenditures in 2020 increased compared to the
prior year, primarily as a result of headcount increase and retention plans related to the acquisitions of Content IQ and Pub Ocean as well as our continued
investment in technology to strengthen our technology moat.
The number of employees in research and development were 86, 117 and 135 as of December 31, 2018, 2019 and 2020, respectively.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged in
marketing activities, allocated facilities costs, as well as other outsourced marketing activities. Selling and marketing expenses were $34.7 million or 13%
of revenues in 2019 and $39.1 million or 12% of revenues in 2020. The increase was primarily as a result of headcount increase and retention plans related
to the acquisitions of Content IQ and Pub Ocean as well as increased content creation related expenses.
The number of employees in sales and marketing was 141, 136 and 146 as of December 31, 2018, 2019 and 2020, respectively.
42
General and Administrative Expenses (“G&A”)
Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive and administrative
personnel, allocated facilities costs, professional fees and other general corporate expenses. General and administrative expenses were $15.0 million or 6%
of revenues in 2019 and $15.8 million or 5% of revenues in 2020. The increase was primarily due to expenses related to M&A transactions.
The number of G&A employees was 60, 67 and 63 as of December 31, 2018, 2019 and 2020, respectively.
Restructuring Charges
In 2019 and 2020, there were no restructuring charges.
In 2018, we incurred restructuring charges of $2.1 million, in connection with the restructuring plan, mainly to reduce workforce, close certain
facilities, as well as other cost saving measures.
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 2019 and 2020, it was concluded that no such impairment charges
should be recorded.
Depreciation and amortization
Depreciation and amortization consist primarily of depreciation of our property and equipment and the amortization of our intangible assets as a
result of our acquisitions. Depreciation and amortization expenses in 2019 were $9.7 million and in 2020 were $9.9 million.
Income Tax Expense
A significant portion of our income is taxed in Israel and, as a result of previous acquisitions, in the United States. The standard corporate tax rate
in Israel was 23% in 2018, 2019 and 2020. For our Israeli operations we have elected to implement a tax incentive program pursuant to a 2011 Israeli tax
reform, referred to as a “Preferred Enterprise,” according to which a reduced tax rate of 16.0% has applied to our preferred income in 2016. Starting in
2017 and in 2018, 2019 and 2020, we elected to implement the “Preferred Technological Enterprise” benefits pursuant to an amendment to the taxation
laws which went into effect in 2017, under which a tax rate of 12% is applied to a portion of our income which qualifies for the benefits. Any other income
which does not qualify for special benefits is subject to the standard corporate tax rate. With respect to U.S. tax, we continue to utilize accumulated losses.
The federal statutory income tax rate in the United States was 21% in 2018, 2019 and 2020. Subsidiaries in Europe are taxed according to the tax laws in
their respective countries of residence.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operation are based on our financial statements, which have been prepared in
conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues 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.
43
A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial condition
and results and requires management’s most difficult subjective or complex judgment, often as a result of the need to make accounting estimates about the
effect of matters that are inherently uncertain. While our significant accounting policies are discussed in Note 2 of the Financial Statements, we believe the
following accounting policies to be critical:
Stock-Based Compensation
We account for share-based payment awards made to employees and directors in accordance with ASC 718, “Compensation – Stock
Compensation”, which requires the measurement and recognition of compensation expense based on estimated fair values. Determining the fair value of
stock-based awards at the grant date requires the exercise of judgment, as well as the determination of the amount of stock-based awards that are expected
to be forfeited. We adopted ASU 2016-09 on January 1, 2017, and chose to continue to use the current method of estimating forfeitures each period rather
than accounting for forfeitures as they occur. The adoption of the new standard had no material impact on our consolidated financial statements. If actual
forfeitures differ from our estimates, stock-based compensation expense and our results of operations would be impacted. Expense is recognized for the
value of the awards, which have graded vesting based on service conditions, using the straight-line method, over the requisite service period of each of the
awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. For performance-based stock units, expense
is recognized for the value of such awards, if and when we conclude that it is probable that a performance condition will be achieved. We are required to
reassess the probability of the vesting at each reporting period for awards with performance conditions and adjust compensation cost based on its
probability assessment.
We account for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated
as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the
incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new
(modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on
current circumstances.
In order to keep our competitive hiring position in the industry, following our board of directors’ approval in December 2017, we effected in 2018
an option repricing plan. Under the repricing plan, among others, options granted to all of our employees, with certain limited exceptions and other than our
directors, were adjusted to have an exercise price per share equal to $3.24, which was the weighted average price of our ordinary shares on Nasdaq in the
last 90 days prior to the date of approval of the plan by our board of directors as well as have a new vesting schedule. The total incremental fair value of
these repriced options amounted to $1.5 million, and was determined based on the binomial pricing options model.
Total stock-based compensation expense recorded during 2020 was $4.4 million, of which $0.1 million was included in cost of revenues, $0.9
million in research and development costs, $1.9 million in selling and marketing expenses, and $1.5 million in general and administrative expenses.
As of December 31, 2020, the maximum total compensation cost related to options, granted to employees and directors not yet recognized
amounted to $6.8 million. This cost is expected to be recognized over a weighted average period of 1.54 years.
We estimate the fair value of standard stock options granted using the Binomial method option-pricing model. The option-pricing model requires a
number of assumptions, of which the most significant is expected stock price volatility. Expected volatility was calculated based upon actual historical
stock price movements of our stock. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The
fair value of RSUs is based on the market value of the underlying shares at the date of grant.
Taxes on Income
We are subject to income taxes primarily in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions
and determining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these
matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an
estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will
impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate.
44
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, 2020 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 15 of the Financial Statements for further information regarding
income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The
amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately
provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable
adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential
assessments expire.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on
their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded
as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions,
especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and
acquired patents and developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Goodwill
Goodwill is allocated to reporting units expected to benefit from a business combination. We perform tests for impairment of goodwill at the
reporting unit level at least annually, or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value of
a reporting unit below its carrying value. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
No impairment of goodwill charges were recorded in 2018, 2019 nor 2020.
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 2018, 2019 and 2020
no impairment of long-lived assets charges were recorded.
Derivative and Hedge Accounting
During fiscal 2018, 2019 and 2020, approximately 9%, 10% and 8%, respectively, of our operating expenses, were denominated in NIS. In order
to mitigate the potential adverse impact on cash flows resulting from fluctuations in the NIS exchange rate, we started to hedge portions of our NIS
forecasted expenses with derivatives contracts. We implement hedge accounting under ASC-815, therefore, the effective portion of the change in fair value
on the derivatives is reported as a component of other comprehensive income and gains or losses are reclassified into the relevant period earnings. We
recognize in “financial income, net” the ineffective portion of a derivative change in fair value, if any, as well as the change in fair value of all non-
designated under hedge accounting derivatives. We also entered into a cross currency interest rate SWAP agreements in order to translate our convertible
debt (principal and interests) NIS cash flow into USD (see Note 8 and Note 10 of the Financial Statements). On June 6, 2019, the SWAP agreements were
terminated concurrently with the early redemption of the convertible bond. The SWAP agreements were not designated as hedging instruments and
therefore gains or losses resulting from the change of their fair value are recognized in “financial income, net.” We estimate the fair value of such derivative
contracts by reference to rates quoted in active markets.
45
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 June 2016 the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments”. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This
standard requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term
financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional
disclosures related to credit risks. The Company adopted Topic 326 effective January 1, 2020. The adoption of this standard did not have a material impact
on the Company’s condensed consolidated financial statements. The Consolidated Financial Statements for the year ended December 31, 2020 are
presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s
historical accounting policy. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement”. This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing
disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the
changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end
of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain
disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. The guidance was adopted for interim and
annual periods beginning after December 15, 2019, although early adoption is permitted. The adoption of this standard did not have a material impact on
the Company’s condensed consolidated financial statements. The Consolidated Financial Statements and disclosures for the year ended December 31, 2020
are presented under the new standard, while comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s
historical accounting policy.
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):
Cost of revenues
Customer acquisition costs and media buy
Research and development
Selling and marketing
General and administrative
Depreciation and amortization
Restructuring costs
Total Costs and Expenses
46
Year ended December 31,
2019
2018
2020
23,757
128,351
18,884
38,918
16,450
9,719
2,075
238,154
$
$
25,520
135,891
22,585
34,736
14,999
9,711
-
243,442
$
$
22,477
197,626
30,880
39,085
15,819
9,923
-
315,810
$
$
The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenues (the percentages
may not equal 100% because of the effects of rounding):
Revenues:
Display and Social Advertising
Search Advertising and other
Total revenues
Costs and expenses:
Cost of revenues
Customer acquisition costs and media buy
Research and development
Selling and marketing
General and administrative
Depreciation and amortization
Restructuring charges
Total costs and expenses
Operating income
Financial expenses, net
Income before taxes on income
Income tax expense (benefit)
Net Income
Year Ended December 31,
2019
2018
2020
50%
50
100%
9%
51
7
15
7
4
1
94
6
2
4
1
3%
34%
66
100%
10%
52
9
13
6
4
-
93
7
1
6
1
5%
45%
55
100%
7%
60
9
12
5
3
-
96
4
1
3
(0)
3%
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues. Revenues increased by 25%, from $261.5 million in 2019 to $328.1 million in 2020.
Display and Social Advertising revenues. Display and Social Advertising revenues increased by 69% in 2020, from $87.9 million in 2019 to
$148.7 million in 2020. This increase was a result of the acceleration of our Connected TV advertising offering and the contribution of our content
monetization platform evolving from the acquisition of Content IQ and Pub Ocean.
Search Advertising and other revenues. Search Advertising and other revenues increased by 3% in 2020, from $173.6 million in 2019 to $179.4
million in 2020. This increase is due to higher number of daily searches partially offset by lower RPMs.
Cost of revenues. Cost of revenues decreased by 12%, from $25.5 million in 2019 to $22.5 million in 2020. Cost of revenues decreased in terms of
the percentage of revenues, representing 10% of revenues in 2019 and 7% in 2020.
Customer acquisition costs (“CAC”) and media buy. CAC and media buy increased by 45%, from $135.9 million or 52% of revenues in 2019 to
$197.6 million or 60% of revenues in 2020. The increase of customer acquisition costs is mainly as a result of the acquisitions of Content IQ and Pub
Ocean, as well as product mix.
Research and development expenses (“R&D”). R&D increased by 37%, from $22.6 million in 2019 to $30.9 million in 2020. The increase was
primarily as a result of headcount increase and retention plans related to the acquisitions of Content IQ and Pub Ocean.
Selling and marketing expenses (“S&M”). S&M expenses increased by 13%, from $34.7 million in 2019 to $39.1 million in 2020. The increase
was primarily as a result of headcount increase and retention plans related to the acquisitions of Content IQ and Pub Ocean.
General and administrative expenses (“G&A”). G&A increased by 5%, from $15.0 million in 2019 to $15.8 million in 2020. The increase was
primarily due to expenses related to M&A transactions.
Depreciation and amortization. Depreciation and amortization increased by 2%, from $9.7 million in 2019 to $9.9 million in 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.
47
Taxes on income (benefit). Taxes on income decreased by $2.2 million from a tax expense of $1.6 million in 2019 to $0.6 million tax income in
2020. The decrease was primarily a result of internal entities merger completed during 2020, which enabled the company to utilize its tax attributes more
efficiently.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues. Revenues increased by 3%, from $252.8 million in 2018 to $261.5 million in 2019.
Advertising revenues. Advertising revenues decreased by 30% in 2019, from $126.0 million in 2018 to $87.9 million in 2019. This decrease was a
result of the transition from selling formats to an integrated solution.
Search and other revenues. Search and other revenues increased by 37% in 2019, from $126.9 million in 2018 to $173.6 million in 2019. This
increase is due to additional new publishers, higher RPMs and an increased number of searches.
Cost of revenues. Cost of revenues increased by 7%, from $23.8 million in 2018 to $25.5 million in 2019. Cost of revenues remained stable in
terms of the percentage of revenues, representing 9% of revenues in 2018 and 10% in 2019.
Customer acquisition costs (“CAC”) and media buy. CAC and media buy increased by 6%, from $128.4 million or 51% of revenues in 2018 to
$135.9 million or 52% of revenues in 2019. The increase of customer acquisition costs is mainly as a result of the churn of our search legacy products.
Research and development expenses (“R&D”). R&D increase by 20%, from $18.9 million in 2018 to $22.6 million in 2019. The increase was
primarily as a result of headcount increase to support our significant technology investments in 2019.
Selling and marketing expenses (“S&M”). S&M expenses decreased by 11%, from $38.9 million in 2018 to $34.7 million in 2019. The decrease
resulted mainly from reduction of headcount and other cost optimizations.
General and administrative expenses (“G&A”). G&A decreased by 9%, from $16.5 million in 2018 to $15.0 million in 2019. The decrease was
primarily due to optimization of our rent expenses as a result of Undertone’s transition to new office facilities.
Restructuring costs. In 2019, no restructuring charges were recorded. In 2018, the Company incurred a restructuring costs of $2.1 million in
connection with the restructuring plan, mainly to reduce workforce, close certain facilities, as well as other cost saving measures.
Depreciation and amortization. Depreciation and amortization expenses remained stable in the amount of $9.7 million in 2019 and 2018.
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 decreased by $1.2 million from a tax expense of $2.8 million in 2018 to $1.6 million in 2019. The
decrease was primarily a result of utilization of tax attributes in foreign subsidiaries during 2019
B.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2020, we had $60.4 million in cash, cash equivalents and short-term deposits, compared to $61.6 million at December 31,
2019. The $1.2 million decrease is primarily the result of $19.0 million cash paid in connection with acquisitions, $8.3 million repayment of our debt and
$0.5 million used in other investing activities, offset by $22.2 million cash provided by operating activities and $4.3 million cash provided from exercise of
share options.
Net cash provided by operating activities
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, share-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.
In 2019, our operating activities provided cash in the amount of $44.7 million, primarily as result of income in the amount of $12.9 million,
decreased by non-cash expenses, depreciation and amortization of $9.7 million, share-based compensation expenses of $2.3 million and net change of
$19.8 million in operating assets and liabilities.
In 2018, our operating activities provided cash in the amount of $32.8 million, primarily as result of income in the amount of $8.1 million,
decreased by non-cash expenses, depreciation and amortization of $9.7 million, share-based compensation expenses of $2.7 million and net change of
$12.3 million in operating assets and liabilities.
48
Net cash used in investing activities
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.
In 2019, we used in our investing activities $21.2 million cash, primarily due to $19.2 million investment in short-term deposits, $1.2 million cash
paid in connection to acquisitions and $1.2 million invested in the purchase of property and equipment offset by $0.5 million proceeds from sales of
property and equipment.
In 2018, we used in our investing activities $1.8 million cash, primarily due to $1.7 million invested in development costs that were capitalized,
$1.9 million of proceeds from maturities of short-term bank deposits and $2.0 million invested in the purchase of property and equipment.
Net cash used in financing activities
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.
In 2019, we used in our financing activities $24.8 million cash, primarily due to $15.9 million repayment of our convertible debt and $8.3
repayment of our long and short-term loan.
In 2018, we used in our financing activities $23.0 million cash, primarily due to $36.5 million in repayments of long-term loans, $8.2 million
repayment of our convertible bonds and $3.3 million used for the repayment of obligations related to the SweetIM acquisition, partially offset by $25.0
million proceeds from long-term loans following the new Mizrahi Credit facilities.
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.
The credit facility is secured by liens on the assets ClientConnect of and Undertone and is guaranteed by Perion and Undertone. Each such
guarantee is limited in amount to $33 million. Financial covenants for the loan facility are tested at the level of Perion on a consolidated basis.
The major financial covenants under the Bank Mizrahi credit facility are as follows:
shareholders’ equity of at least $80 million at the end of each quarter;
ratio of net financial indebtedness to twelve-month EBITDA of not more than 2.25 at the end of each quarter; and
•
•
• maintenance at all times of cash and cash equivalents in an amount equal to the lesser of (i) $10 million and (ii) the amount of the following
payment of principal and interest.
As of December 31, 2020, we were in compliance with all of the foregoing covenants.
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. See Note 9 of the Financial Statements for further information. As of December 21, 2020, 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 2021 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.
49
C.
RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC.
Our research and development activities are conducted internally by 135 persons at December 31, 2020. Research and development expenses were
$18.9 million, $22.6 million and $30.9 million in the years ended December 31, 2018, 2019 and 2020, respectively. In 2020, 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 revenues, 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
revenues 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 revenues 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.
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, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
50
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual commitments as of December 31, 2020 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.
Contractual Commitments as of December 31,
2020
Short-term debt, including current portion (*)
Accrued severance pay (**)
Uncertain tax positions (ASC-740)
Operating leases
Total
Total
Less than
1 year
1-3 Years
3-5 Years
More than
5 Years
$
$
8,333
1,748
4,525
26,609
41,215
$
$
8,333
-
-
5,970
14,303
$
$
-
-
-
10,199
10,199
$
$
-
-
-
7,838
7,838
$
$
-
1,748
4,525
2,602
8,875
Payments Due by Period(****)
_________________
(*)
(**)
Long-term debt obligation represent maximum repayment of principal and do not include interest payments due thereunder.
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 are for the most part
covered by ongoing payments to funds to cover such obligations.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information regarding our executive officers and directors as of March 14, 2020:
Name
Eyal Kaplan*(1)(2)
Doron Gerstel
Maoz Sigron
Dror Erez*(1)(3)
Sarit Firon*(1)(4)
Rami Schwartz* (3)(4)
Michael Vorhaus*(2)(4)
Joy Marcus*(2)(3)
Daniel E. Aks
Tal Jacobson
_________________________
*
(1)
(2)
(3)
(4)
“Independent director” under the Nasdaq Listing Rules.
Member of our investment committee.
Member of our nominating and governance committee.
Member of our compensation committee.
Member of our audit committee.
Age
Position
61
60
43
51
54
63
63
59
61
46
Chairman of the Board of Directors
Chief Executive Officer; Director
Chief Financial Officer
Director
Director
Director
Director
Director
President, Undertone
General Manager, CodeFuel
Effective as of August 26, 2019, our board of directors adopted the exemption under the Israeli Companies Regulations (Reliefs for Public
Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, as a result our director in office who was elected and
classified as external director, Ms. Sarit Firon, is no longer classified as such under the Companies Law. The transition rules set forth under the Regulation
provide that such former external directors have the right to remain in office as company’s directors at their option after the exemption under the Regulation
is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption
under the Regulation. Ms. Sarit Firon’s term of office expired in January 2020, however our board of directors has re-appointed Ms. Firon with the term of
office that expires as of our 2021 annual meeting of shareholders.
There are no arrangements or understandings between any of our directors or executive officers and any other person pursuant to which our
directors or executive officers were selected.
51
Eyal Kaplan has been the chairperson of the board of directors of the Company since May 2018. Mr. Kaplan is also the chairperson of Expand
Investments, an advisory and consulting firm focusing on growth-through-innovation and corporate strategies. Prior to that, he was Managing General
Partner with Walden Israel, a venture capital firm, during which time he was Director and chairperson of numerous portfolio companies. In 1990 he co-
founded Geotek Communications, an international wireless communications company, and served as senior vice president with broad strategic, managerial
and operational responsibilities until 1995. Mr. Kaplan has been a member of the Technion (Israel Institute of Technology) Council (executive board) since
January 2014, where he chairs the Finance Committee and is a member of the Endowment Investment Committee. Since 2012 he has been a member of the
Technion Board of Governors, a body of some 300 high-profile visionaries and decision makers with outstanding achievements in the fields of science,
technology, economy, industry, culture and society. From 2007 to 2012, Mr. Kaplan was a member of the Advisory Committee of Caesarea Center for
Capital Markets & Risk Management, and from 2005 to 2014, he was a member of the Advisory Committee of the Global Consulting Practicum at the
Wharton School of the University of Pennsylvania. Mr. Kaplan holds an MBA from the Wharton School of the University of Pennsylvania, a Master of
Arts in International Studies from the Lauder Institute of the University of Pennsylvania, and a Bachelor of Science degree (with Honors) in economics and
management from the Technion - Israel Institute of Technology.
Doron Gerstel has been a director of the Company since May 2018, and the Chief Executive Officer of the Company since April 2017. In his
previous role as CEO of Panaya Ltd., Mr. Gerstel led a company turnaround that saw an increase in annual revenue and the company’s acquisition by
Infosys Limited. Mr. Gerstel has also held CEO positions at Nolio Ltd., Syneron Medical Ltd. and Zend Technologies Ltd. Mr.Gerstel holds a BSc. in
Economics and Management from the Technion Institute of Technology in Haifa, and an MBA from Tel Aviv University.
Maoz Sigron has been the Chief Financial Officer of the Company since February 2018. Prior to that, since September 2017 until February 2018,
Mr. Sigron served as our VP Finance. Previously, he served in various finance leadership and senior accounting positions at Tnuva Dairy Corporation, Allot
Communications Ltd. (Nasdaq:ALLT) and Stratasys Ltd. (Nasdaq:SSYS) as well served as a CPA with PwC. Mr. Sigron holds a B.A in accounting and
Economics from the College of Management.
Dror Erez has been a director of the Company since January 2014. In 2005, Mr. Erez co-founded Conduit and served as its Chief Technology
Officer until January 2014, when he became Conduit’s President and in May, 2018 became Conduit’s chairperson of the board of directors for a year. Mr.
Erez is also a member of the Conduit board of directors. Mr. Erez is now acting as a CEO of Trevi,io and is also advising for startups on strategy, product
and technology. Prior to founding Conduit, he served in various executive roles in private technology companies. Mr. Erez holds a B.A. in Physics and
Computer Science from Bar Ilan University.
Sarit Firon has been an external director of the Company since January 2017 and following the Company’s adoption of the exemption under the
Regulation in August 2019 continued as an independent director. Ms. Firon is the founding partner and managing partner of Team8 Capital, an early stage
venture capital fund, and a partner at Team8 Group.Since November 2014, Ms. Firon has been a managing partner of Cerca Partners, an Israeli venture
capital fund. She has served at Extreme Reality Ltd., as its chief executive officer from December 2012 to November 2014 and as a director since
December 2014. From November 2011 to November 2012, Ms. Firon was the Chief Financial Officer of Kenshoo Ltd. From November 2007 to October
2011, Ms. Firon was the Chief Financial Officer of MediaMind Technologies Inc., a Nasdaq listed company which was acquired by DG, Inc. in August
2011. From May 2005 to June 2007, Ms. Firon was the Chief Financial Officer of OliveSoftware and from January 2000 to October 2004, she was the CFO
of P-Cube, a private company which was acquired in October 2004 by Cisco Systems, Inc. (Nasdaq:CSCO). From October 2004 to January 2005, Ms.
Firon was employed by Cisco to be responsible for the post-merger integration of P-Cube. From January 1995 to December 1999, Ms. Firon served in
various positions at Radcom Ltd. (Nasdaq:RDCM), including as its Chief Financial Officer from September 1997 to December 1999. Since July 2015, she
has served as chairperson of the board of directors of myThings Israel Ltd. Since June 2014, Ms. Firon has served as a director of Mediwound Ltd.
(Nasdaq:MDWD), and since June 2012, Ms. Firon has served as a director of Datorama Ltd. From October 2000 to December 2006, Ms. Firon served as a
director of MetaLink Ltd. (OTCMKTS:MTLK). Ms. Firon holds a B.A. in Accounting and Economics from Tel-Aviv University, Israel.
Rami Schwartz has been a director of the Company since January 2019. Mr. Schwartz joined The Portland Trust as Managing Director of the Tel
Aviv office in April 2018. Mr. Schwartz also serves as an advisory board member of Algosec. Previously, Mr. Schwartz was the President of the Amdocs
Products and Amdocs Delivery groups for 7 years. Prior to joining Amdocs, Mr. Schwartz was the chairperson of Olive Software (acquired by ESW
Capital), and Comply, the co-founder and CEO of Zizio and DigiHOO, and an EIR at Cedar Fund. Mr. Schwartz was CEO and director of Exanet (acquired
by Dell) and General Manager of Precise Software (acquired by Veritas software) and an EIR at Cedar Fund. Mr. Schwartz holds a B.Sc. in excellence, in
Mathematics and Computer Science from the Hebrew University in Jerusalem.
52
Michael Vorhaus has been a director of the Company since April 2015. Mr. Vorhaus also serves as a director of Altimar Acquisitions Corporation
(NYSE: ATAC).Starting December of 2018, Mr. Vorhaus has founded Vorhaus Advisors and is CEO of the firm. From 1994 to November 2018, he was in a
variety of positions at of Frank N. Magid Associates, Inc., a research-based strategic consulting firm. From 1994 to 2008, he served as its Senior Vice
President and Managing Director and from 2008 to 2018 he served as the President of Magid Advisor, a unit of Magid Associates. From 2013 to 2014, Mr.
Vorhaus served as a director of Grow Mobile. In 1987, he founded Vorhaus Investments. Mr. Vorhaus holds a B.A. in Psychology from Wesleyan
University and completed the Management Development Program at the University of California, Berkeley’s Haas School of Business.
Joy Marcus has been a director of the Company since November 2019. Ms. Marcus has a wealth of experience in the media industry, including as
EVP and GM Digital Video at Conde Nast Entertainment, CEO of Bloglovin’ (acquired by Impact), SVP Global Marketing Solutions at Time Warner (now
WarnerMedia), VP International at MTV Networks, a division of Viacom and GM North America for Dailymotion (acquired by Orange/France Telecom).
Ms. Marcus is a board member at digital media company Qwire and the non-profits New York Tech Alliance, The Video Consortium and Hoops4Hope. Joy
is currently Co-Founder of the female focused investment group Brilliant Friends, a full-time Lecturer at Princeton University, where she was the James
Wei Visiting Professor in Entrepreneurship in 2014, and a Venture Fellow at VC firm JVP, where she advises the firm on digital media, advertising and
consumer investments. Joy graduated with Magna Cum Laude, Phi Beta Kappa from Princeton University, has a JD from NYU Law School and completed
the management course in finance and accounting from Columbia University.
Daniel E. Aks has been the President of Undertone since August 2019 and an external director of the Company from August 2018 until August
2019. Since December 2017, Mr. Aks is the Chief Executive Officer of Antenna International, a story-maker and creative technology company devoted to
cultural, iconic site and commercial attractions. Prior to Antenna, from December 2010 to December 2017 he was the owner of C3 Multimedia LLC., a
consulting firm in the fields of information, education K-16 and media and during his term with C3 was, inter-alia, the Acting Chief Operating Officer for
the Educational Records Bureau (ERB), a K-12 assessment organization serving private education and high performing public institutions (from March
2015 until December 2017). From January 2014 until December 2017, Mr. Aks was the Co-Founder of The EdTech Fund, an investment vehicle for seed
capital investments in educational technologies. He also served as the Senior Vice President and Chief of Staff for McGraw-Hill Education (MHE) from
September 2008 until November 2010 where he was responsible for information technology, public relations, strategy and business development, K-12
differentiated instruction pilots, and content management system development. From July 2007 until April 2008 he served as the Chief Operating Officer
and Executive Vice President at The Greenspun Companies, where he had general management responsibility of the company’s magazine and companion
web site businesses. Prior to that from January 2006 to July 2007, he held positions with MTV Networks (MTVN) as a Senior Vice President of both
Operations and Consumer Products. Prior to MTVN from August 1999 to June 2004, Mr. Ask served PRIMEDIA’s Consumer Magazine Group as Chief
Operating Officer, where he managed the Direct Response Advertising Group, Manufacturing, Production, Distribution, IT, Strategy, Business
Development, Global Sourcing, and at times Circulation. He was also President of PRIMEDIA Consumer Magazine Internet Group during that term. Prior
to joining PRIMEDIA, Mr. Aks was a partner with the Booz Allen Hamilton consulting firm where he specialized in business growth, operations strategy
and restructuring in the media, education, telecommunications and consumer goods industries. Mr. Aks holds a BS in Manufacturing/Industrial Engineering
and a B.A. in Business Administration from Rutgers University and earned an MBA from the Harvard University Graduate School of Business
Administration, where he graduated with second-year honors.
Tal Jacobson has been the General Manager of CodeFuel since November 2018. Tal has been an executive in the Israeli high-tech industry for
over 20 years. Previously to joining Perion, Tal 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, Tal was the VP of Business at McCann Erickson as
well as held the position of CEO at Watchitoo - a video collaboration platform. Tal was also the Director of Business Development at AOL as part of the
IM division (ICQ).
There are no family relationships between any of our directors or executive officers.
B.
COMPENSATION
The aggregate direct compensation we paid to our officers as a group (including our former officers, 6 persons) for the year ended December 31,
2020, was approximately $5.8 million, which included approximately $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, 2020 was approximately $0.4 million. In addition, our directors are reimbursed for expenses incurred in order to attend board of directors or committee
meetings.
53
In the year ended December 31, 2020, we granted (i) options to purchase 400,000 ordinary shares to our officers, at a weighted average exercise
price of $5.35 per share, and the latest expiration date for such options is July 2027, and (ii) 500,000 of restricted share units (“RSUs”) to Mr. Gerstel, in
accordance with the terms provided below. These awards were granted under our Equity Incentive Plan, as amended, formerly known as the 2003 Israeli
Share Option Plan (the “Incentive Plan”).
In 2020, we paid each of our non-executive directors $50,000 per year. Our non-executive directors were also entitled for an annual grant of
options to purchase 15,000 ordinary shares under the Incentive Plan. Such options were granted on February 6, 2020.Each option is exercisable for a term
of five years at an exercise price per share equal to the average stock market price of the 90 days prior to the date of grant (and not less than the closing
share price on the date of grant in the case of U.S. grantees). The options vested on a quarterly basis, in equal tranches, during the year following the grant,
such that as of today these options are vested in full. Following termination or expiration of the applicable director’s service with the Company, provided
that the termination or expiration is not for “cause” and is not a result of the director’s resignation, the options would retain their original expiration dates.
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, 2020 was $ 100,000 plus VAT,
paid in four quarterly payments and reimbursement of out-of-pocket expenses incurred in connection with Mr. Kaplan’s services as chairman. Mr. Kaplan is
also entitled for indemnification and liability insurance as provided to other members of the board of directors. Mr. Kaplan’s services agreement also
includes customary non-disclosure, non-compete, and ownership assignment of intellectual property undertakings.
Following the approval of the extraordinary general meeting of our shareholders held on August 2, 2018, Mr. Kaplan was granted with a one-time
grant of options to purchase 66,666 Ordinary Shares, with a 3-year vesting schedule, commencing on May 9, 2018 (the “August 2018 Grant”). In addition,
following the approval of the annual general meeting of our shareholders held on February 6, 2020, and subject to the continued engagement as our
chairman of the board of directors, Mr. Kaplan was granted with a one-time grant of options to purchase 90,000 Ordinary Shares with a 3-year vesting
schedule (the options will vest quarterly in equal tranches over a three-year period), commencing on May 9, 2021, at an exercise price per share equal to
the average stock market price of the 90 days period preceding the date of the general meeting of our shareholders, as reported by the Nasdaq Stock Market
(together with August 2018 Grant, the “Chairperson’s Previous Grants”). The options granted are subject to the terms and conditions of the Incentive Plan
and the option agreement pursuant to the Incentive Plan. Upon removal of Mr. Kaplan from office either by a vote of the board of directors or by a vote of
the Company’s shareholders, either (i) as a direct result of the negotiation of a Change of Control; or (ii) within six months following a Change of Control
event (for the avoidance of doubt, in both (i) and (ii), other than for “cause” – as such term defined in the Incentive Plan) all unvested options shall
automatically be accelerated and become fully vested on the effective date of any such event described in either (i) or (ii).
Following the approval of the annual general meeting of our shareholders held on December 23, 2020, the equity grant structure to Mr. Kaplan,
our chairperson of the board of directors, was changed as well, from grant of option to grant of RSUs. Accordingly, Mr. Kaplan was granted an annual
grant with a value of up to $200,000, such annual grant, which shall be made in the form of RSUs, shall be equal to the difference between the fair market
value per vesting annum of the Chairperson’s Previous Grants and the approved cap of $200,000. The initial grant was made on February 6, 2021.With
respect to new appointed chairperson of our board of directors, such grant shall be made initially upon the initial election or appointment and on each
anniversary of such date. The RSUs granted are subject to the terms and conditions of the Incentive Plan and the RSU agreement pursuant to the Incentive
Plan. The RSUs shall vest on a quarterly basis, in equal tranches, during the year following the grant. All unvested RSUs held by a chairperson in office
will automatically vest upon a Change of Control event. In addition, the Company’s shareholders approved a one-time special grant of 19,000 fully vested
RSUs. The grant date of the special grant is the date of our board of directors’ approval which occurred on October 27, 2020.
54
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, 2020. 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, 2020, 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)
Doron Gerstel, Chief Executive Officer
Daniel E. Aks, President, Undertone Business Unit
Tal Jacobson, General Manager, CodeFuel Business Unit
Maoz Sigron, Chief Financial Officer
Ran Cohen, Senior VP Product, CodeFuel Business Unit
498
621
293
308
172
1,051
320
467
420
62
_________________
(1) Unless otherwise indicated herein, all Covered Executives are employed on a full-time (100%) basis.
Equity-Based
Compensation (4)
834
69
193
115
55
Total
2,383
1,010
953
841
290
(2) Salary cost includes the Covered Executive’s gross salary plus payment of social benefits made by the Company on behalf of such Covered Executive.
Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g.,
Managers’ Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or
work disability insurance), payments for social security and tax gross-up payments, vacation, car, medical insurances and benefits, phone,
convalescence or recreation pay and other benefits and perquisites consistent with the Company’s policies.
(3) Annual bonuses granted to the Covered Executives based on formulas set forth in the annual compensation plan approved by the board of directors.
(4) Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2020. Such
numbers are based on the option grant date fair value in accordance with accounting guidance for equity-based compensation and does not necessarily
reflect the cash proceeds to be received by the applicable officer upon the vesting and sale of the underlying shares. For a discussion of the
assumptions used in reaching this valuation, see Note 2 to our Financial Statements.
Compensation Terms of our Chief Executive Officer
Doron Gerstel serves as our Chief Executive Officer from April 2017 and as a director of the Company since May 2018. His monthly base salary
is NIS 130,000 (equivalent to approximately $40,435), effective as of January 1, 2021, as approved by the annual general meeting of our shareholders held
on December 23, 2020.Mr. Gerstel also entitled to customary benefits (including those mandated by applicable law and/or generally provided to other
executive officers of the Company), including managers’ insurance or pension arrangement, disability insurance, severance pay (pursuant to Section 14 of
the Severance Pay Law), educational savings fund, private health insurance, indemnification, liability insurance (including for the period of seven years
following termination), convalescence pay, meal plan, cellular telephone and personal computer. Mr. Gerstel is not compensated for his role as director.
Mr. Gerstel is also entitled for a target annual cash bonus of up to a maximum of twelve (12) monthly salaries, or eighteen (18) in case of over
achievement, subject to performance matrix to be approved by the Company’s compensation committee and board of directors on an annual basis, while up
to 25% of such annual bonus may be discretionary and not subject to measurable performance indexes. In addition, our compensation committee and the
board of directors are authorized to grant Mr. Gerstel, from time to time, a special bonus in accordance with and subject to our Compensation Policy for
Directors and Officers.
Upon joining the Company, Mr. Gerstel was granted with two stock option grants under the Company’s Incentive Plan: (i) option to purchase up to
387,278 ordinary shares at an exercise price per share of $4.98 (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”).
55
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 1.1% of the outstanding ordinary shares as of March 14, 2021.
At the annual general meeting of our shareholders held on February 15, 2018, and as part of a cross-company repricing plan designed mainly to
keep our competitive hiring position in the industry, the repricing of options granted to Mr. Gerstel was approved. The first tranche of 387,278 options was
adjusted to have an exercise price per of $3.24 (which is equal to the weighted average price of our ordinary shares on Nasdaq in the last 90 days prior to
the date of approval of the repricing plan by our board of directors) (the “Adjusted Exercise Price”), and the second tranche of 387,278 options was
adjusted to have an exercise price per share equal to $4.23, which is 130% of the Adjusted Exercise Price.
At the extraordinary meeting of our shareholders held on April 11, 2019, Mr. Gerstel was granted with additional grant of options to purchase
150,000 Ordinary Shares, with a 3-year vesting schedule (the options will vest on a quarterly basis in equal tranches over a three-year period), commenced
on January 15, 2019 (the “2019 Options”). The exercise price per share for the shares underlying the 2019 Options is as follows: (i) the first 75,000 of
shares underlying the 2019 Options will be exercised at a price per share equal to $2.87, which is the weighted average closing price of our ordinary shares
on Nasdaq in the last 90 days prior to the date of approval of the grant by our board of directors on February 12, 2019, as reported by the Nasdaq Stock
Market (the “Base PPS”); and (ii) the remaining 75,000 of shares underlying the 2019 Options will be exercised at a price per share equal to $3.30 which is
a price 15% higher than the Base PPS. The 2019 Options will be subject to the terms and conditions of the Company’s Incentive Plan, as amended and the
terms of the option agreement issued to Mr. Gerstel pursuant to the Company’s Incentive Plan. The vesting schedule of the Option will fully accelerate in
accordance of the acceleration provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the
shareholders meeting).
Each grant constitutes approximately 0.2% of the outstanding ordinary shares as of March 14, 2021.
At the annual general meeting of our shareholders held on December 23, 2020, Mr. Gerstel was granted with 500,000 RSUs, which is versting
over a three-year period commenced on February 1, 2021, with a 6-month cliff after which the RSUs will continue to vest on a quarterly basis over the
following ten (10) quarters, unless such RSUs have been cancelled in accordance with the employment terms of Mr. Gerstel (the “RSU Grant”). The grant
date is the date of the board of directors’ approval, which occurred on October 27, 2020. The vesting schedule of the RSU Grant will fully accelerate in
accordance with the acceleration provisions of the options previously granted to Mr. Gerstel (with Change in Board Event measured as of the date of the
shareholders meeting). Consistent with the previous options grants granted to Mr. Gerstel, the RSU Grant will be subject to the same terms and conditions
of prior grants, the terms and conditions of the Company’s Incentive Plan and the terms of the grant agreements issued to Mr. Gerstel pursuant to the
Company’s Incentive Plan.
Such grant constitutes approximately 1.5% of the outstanding ordinary shares as of March 14, 2021.
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 0.7% of the outstanding ordinary shares as of March 14, 2021.
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.
56
“Change of Control” will occur if any person or “group” of persons becomes the “beneficial owner” (as such terms are used for purposes of
Section 13(d) of the U.S. Securities Exchange Act of 1934, as amended), directly or indirectly, of 35% or more of the outstanding share capital of the
Company, excluding a reorganization resulting in the Company being held by an entity beneficially owned by the holders of the Company’s share capital
immediately prior to the transaction or any Change in Board Event (as defined below).
“Change in Board Event” shall mean any time at which individuals who, as of April 2, 2017, constitute the board of directors (the “Incumbent
Board”) cease for any reason to constitute at least a majority of the board of directors; provided, however, that any individual becoming a director
subsequent to April 2, 2017 whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board but excluding, for
this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened (in writing) election contest with respect to
the election or removal of directors or other actual or threatened (in writing) solicitation of proxies or consents by or on behalf of a person other than the
board of directors.
The agreement also includes customary covenants regarding confidentiality, IP assignment, non-competition and non-solicitation.
The employment term is for an indefinite period. We may terminate the employment upon 12 months’ prior notice and Mr. Gerstel may resign
upon nine months’ prior notice. During the notice period, Mr. Gerstel will be entitled to all benefits under the employment agreement, including the
continued vesting of stock options, even if the Company waives its right to continued service. In the event of termination for “Cause” (as defined in the
employment agreement), we may terminate the employee without prior notice.
We also have employment agreements with our other executive officers. These agreements usually do not contain any change of control provisions
and otherwise contain salary, benefit and non-competition provisions that we believe to be customary in our industry.
C.
BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such
matters as external directors (or, to the extent applicable, the provisions of the opt-out from external directors), the audit committee, the internal auditor and
approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of Nasdaq and other relevant provisions of U.S.
securities laws. Under the Nasdaq Listing Rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the
comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee. For further information, see
Item 16.G “Corporate Governance.”
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;
57
•
•
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 14, 2021, our board of directors consists of seven directors. Our directors (other than the directors who were in the position of
external directors until August 2019) are elected in three staggered classes by the vote of a majority of the ordinary shares present and entitled to vote at
meetings of our shareholders at which directors are elected. The members of only one staggered class will be elected at each annual meeting for a three-
year term, so that the regular term of only one class of directors expires annually. Our annual meeting of shareholders is required to be held at least once
during every calendar year and not more than fifteen months after the last preceding meeting. Effective as of August 2019, following our adoption of the
exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000,
or the Regulation, our director in office who was elected and classified as external directors, Ms. Sarit Firon, is no longer classified as such under the
Companies Law. The transition rules set forth under the Regulation provide that such directors have the right to remain in office as our directors at their
option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of
shareholders after the adoption of the exemption under the Regulation. Ms. Firon’s term of office expired in January 2020, accordingly our board of
directors has re-appointed Ms. Firon with the term of office that expires as of our 2021 annual meeting of shareholders.
If the number of directors constituting our board of directors is changed, any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors constituting our board of
directors reduce the term of any then current director.
Our board of directors may appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of
directors, provided that the total number of directors shall not, at any time, exceed seven directors. Any director so appointed shall hold office until the
annual meeting of shareholders at which the term of his class expires, unless otherwise determined by our board of directors. There is no limitation on the
number of terms that a non-external director may serve.
Shareholders may remove a non-external director from office by a resolution passed at a meeting of shareholders by a vote of the holders of more
than two-thirds of our voting power.
A resolution proposed at any meeting of our board of directors is deemed adopted if approved by a majority of the directors present and voting on
the matter. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise,
as defined in the regulations that our board of directors should have. In determining the number of directors required to have such expertise, the board of
directors must consider, among other things, the type and size of the company and the scope and complexity of its business and operations. Our board of
directors has determined that we require at least one director with the requisite financial and accounting expertise and that Ms. Sarit Firon has such
expertise.
Under the Companies Law, a person, who is, directly or indirectly subordinated to the chief executive officer of a public company, may not serve
as the chairman of its board of directors. In addition, neither the chief executive officer nor his relative is eligible to serve as chairman of the board of
directors (and vice versa), unless such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and
either: (i) such majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not
controlling shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal did not
exceed 2% of company voting shareholders. The term can be extended for additional three year terms, in the same manner.
External Directors
Under the Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint at least
two individuals to serve as external directors.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq
Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related
Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these
regulations, in August 2019, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules
concerning the composition of the audit committee and compensation committee of the board of directors (the “Opt-Out”).
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Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have
a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq
Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition
requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee, an investment committee and a nominating and governance
committee.
Audit Committee
Our audit committee is comprised of Ms. Sarit Firon (chairperson), Mr. Michael Vorhaus and Mr. Rami Schwartz, and operates pursuant to a
written charter.
Nasdaq Requirements
Under the listing requirements of the Nasdaq Stock Market, a foreign private issuer is required to maintain an audit committee that has certain
responsibilities and authority. The Nasdaq Listing Rules require that all members of the audit committee must satisfy certain independence requirements,
subject to certain limited exceptions. We have adopted an audit committee charter as required by the Nasdaq Listing Rules. Our audit committee assists the
board of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and
financial statements. Our audit committee is also responsible for the establishment of policies and procedures for review and pre-approval by the committee
of all audit services and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our
auditor’s independence. For more information see Item 16.C “Principal Accountant Fees and Services.” Under the Nasdaq Listing Rules, the approval of
the audit committee is also required to effect related-party transactions that would be required to be disclosed in our annual report.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at
least three directors who meet certain independence criteria. The responsibilities of the audit committee under the Companies Law include to identify and
address problems in the management of the company, review and approve interested party transactions, establish whistleblower procedures and procedures
for considering controlling party transactions and oversee the company’s internal audit system and the performance of the internal auditor.
Compensation Committee
Pursuant to the Companies Law, the compensation committee of a public company must be comprised of at least three directors, include all of the
external directors (and also the chairman is required to be an external director), and any other members must satisfy certain independence standards under
the Companies Law. Following the Opt-Out, our compensation committee is comprised of Ms. Joy Marcus (chairperson), Mr. Dror Erez and Mr. Rami
Schwartz, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and Nasdaq Listing Rules for compensation
committee members. Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.
Our compensation committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries,
incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or
arrangements of our executive officers and directors. In addition, our compensation committee is required to propose for shareholder approval by a special
majority, a compensation policy governing the compensation of office holders based on specified criteria, to review, from time to time, modifications to the
said compensation policy and examine its implementation, and to approve the actual compensation terms of office holders prior to approval thereof by the
board of directors. Our shareholders adopted a new Compensation Policy for Directors and Officers on February 6, 2020. Our compensation committee
also oversees the administration of our Incentive Plan.
Investment Committee
Our investment committee is comprised of Mr. Eyal Kaplan (chairperson), Ms. Sarit Firon and Mr. Dror Erez. 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.
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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:
Cost of sales
Research and development
Selling and marketing
General and administration
Total
2018
December 31,
2019
2020
76
86
141
60
363
79
117
136
67
399
73
135
146
63
417
As of December 31, 2020, 158 of our employees were located in Israel, 172 of our employees were located in the United States and 87 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.
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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 14, 2021 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 33,851,574 ordinary shares outstanding as of March 14, 2021 (such amount excludes
115,339 Ordinary Shares held by the Company).
All directors and officers as a group (10 persons) (1)
Name
Number of
Ordinary
Shares
Beneficially
Owned
Percentage of
Ordinary
Shares
Outstanding
2,014,959
5.95%
(1)
Includes options to purchase 1,711,327 ordinary shares, that are vested or will vest within 60 days of March 14, 2020.
Employee Benefit Plans
The Incentive Plan, our current equity incentive plan, was initially adopted in 2003, providing certain tax benefits in connection with share-based
compensation under the tax laws of Israel and the United States. The term of the Incentive Plan will expire on December 9, 2022. Please also see Note 13
to our Financial Statements for information on the options issued under the Incentive Plan.
Under the Incentive Plan, as amended from time to time, we may grant to our directors, officers, employees, consultants, advisers, service
providers and controlling shareholders options to purchase our ordinary shares, restricted shares and RSUs. As of December 31, 2020, a total of 4,527,047
ordinary shares were subject to the Incentive Plan. As of March 14, 2021, options to purchase a total of 4,456,378 ordinary shares were outstanding under
our Incentive Plan, of which options to purchase a total of 2,263,540 ordinary shares were held by our directors and officers (10 persons) as a group. The
outstanding options are exercisable at purchase prices which range from $0.01 to $8.34 per share. Any expired or cancelled options 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 2020 and additional National Security contributions). In addition, in certain circumstances, an excess tax of 3% will be imposed as well.
We are not entitled to deduct for Israeli tax purposes the expenses recorded with respect to grant of awards on the “Capital Gains Route.” However, in case
the employee has an ordinary income component under section 102(b)(3) of the Ordinance, that component is deductible by the company for tax purposes.
The voting rights of any shares held by the trustee under Section 102 remain with the trustee.
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The Incentive Plan contains a U.S. addendum that provides for the grant of awards to U.S. citizens and resident aliens of the United States for U.S.
tax purposes. Pursuant to the approval of our board of directors and shareholders, stock options granted to U.S. citizens and resident aliens may be either
incentive stock options under the Code or nonqualified options that do not qualify as incentive stock options. Subject to the fulfillment of the applicable
conditions of the Code, an incentive stock option may provide tax benefits to the holder in that it converts ordinary income into income taxed at capital gain
rates and defers the tax until the sale of the underlying share. In that event, we would not recognize a tax deduction with respect to such capital gain.
Our board of directors has the authority to administer, and to grant awards, under the Incentive Plan. However, the compensation committee
appointed by the board provides recommendations to the board with respect to the administration of the plan. Generally, RSUs and options granted under
the Incentive Plan vest in two or three installments on each anniversary of the date of grant.
See Item 6.B. “Compensation” for a description of awards granted under the Incentive Plan to our directors and officers in 2020.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
The following table sets forth information with respect to the beneficial ownership of our shares as of March 14, 2021, 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 33,851,574 Ordinary Shares issued and outstanding as of March 14, 2020 (such amount excludes 115,339 Ordinary Shares held by the Company).
Except as indicated in the footnotes to this table, to our knowledge, each shareholder in the table have 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
shareholders do not have different voting rights than our other shareholders.
Name of Beneficial Owner
Private Capital Management, LLC(1)
Zack and Orli Rinat(2)
Renaissance Technologies LLC(3)
Shares Beneficially Owned
Number
Percentage
2,386,268
2,161,449
1,818,025
7.05%
6.39%
5.37%
(1) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the SEC on February 5, 2021, by Private Capital
Management, LLC (“PCM”). PCM exercises shared voting authority with respect to shares held by those PCM clients that have delegated proxy
voting authority to PCM. Such delegation may be granted or revoked at any time at the client's discretion. The address of PCM is 8889 Pelican Bay
Boulevard, Suite 500, Naples, Florida 34108.
(2) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the SEC on January 16, 2014, by Zack and Orli Rinat. The
Ordinary Shares are held by Zack Rinat and Orli Rinat as community property. The address of Zack and Orli Rinat is 26319 Esperanza Drive Los
Altos Hills, CA.
(3) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the SEC on February 12, 2020, by Renaissance
Technologies LLC (“RTC”) and Renaissance Technologies Holdings Corporation (“RTHC”). RTHC owns the majority of the membership interests of
RTC. As the holder of the majority of the membership interests of RTC, RTHC has shared voting or dispositive power over the 1,818,025 Ordinary
Shares held by RTC. The address of each of RTC and RTHCS is 800 Third Avenue New York, New York 10022.
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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 held by Renaissance Technologies LLC and Renaissance
Technologies Holdings Corporation above 5% during the year 2019; (ii) the decrease in the percentage of ownership held by Dror Erez below the 5%
during the year 2019; (iii) the decrease in the percentage of ownership held by Ronen Shilo below the 5% during the year 2019; (iv) 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; (v) the decrease in the percentage of ownership held by Benchmark Israel II, L.P. below the 5% during the year 2020; (vii) the increase in the
percentage of ownership held by Private Capital Management, LLC above 5% in 2020; (vi) 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 (vii) the decrease in
the percentage of ownership held by EA2K Ltd. below the 5% during the year 2020.
To our knowledge, as of March 14, 2021, we had 6 shareholders of record of which 6 (excluding the Depository Trust Company) were registered
with addresses in the United States. These U.S. holders were, as of such date, the holders of record of approximately 0.1% of our outstanding shares. The
number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial
holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
B.
RELATED PARTY TRANSACTIONS
It is our policy that transactions with office holders or transactions in which an office holder has a personal interest will be on terms that, on the
whole, are no less favorable to us than could be obtained from independent parties.
See Exhibit 2.1 to this annual report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, for a discussion of the
requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders.
The following is a description of some of the transactions with related parties to which we are party and which were in effect within the past three
fiscal years. The descriptions provided below are summaries of the terms of such agreements and do not purport to be complete and are qualified in their
entirety by the complete agreements.
Indemnification Agreements
Our articles of association permit us to exculpate, indemnify and insure our directors and officeholders to the fullest extent permitted by the
Companies Law. We have obtained directors’ and officers’ insurance for each of our officers and directors and have entered into indemnification
agreements with all of our current officers and directors.
We have entered into indemnification and exculpation agreements with each of our current office holders and directors exculpating them to the
fullest extent permitted by the law and our articles of association and undertaking to indemnify them to the fullest extent permitted by the law and our
articles of association, including with respect to liabilities resulting from this annual report, to the extent such liabilities are not covered by insurance. See
also Item 10.B. “Related Party Transactions—Indemnification Agreements.”
Employment and Consulting Agreements
We have or have had employment, consulting or related agreements with each member of our senior management. For more information on
employment and consulting agreements see Item 6.B. “Compensation.”
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our Financial Statements are included in this annual report pursuant to Item 18.
Legal Proceedings
On December 22, 2015, Adtile Technologies Inc. (“Adtile”) filed a lawsuit against Perion and its wholly-owned subsidiary, Intercept Interactive
Inc. (“Intercept”) in the United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept
related to Intercept’s alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. Adtile is seeking injunctive relief
and unspecified monetary damages. We are unable to predict the outcome or range of possible loss at this stage. On June 23, 2016, the court denied Adtile’s
motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Intercept’s motion to stay the action
and compel arbitration. As of the date of this report, Adtile had not commenced an arbitration proceeding and the court dismissed the case for
administrative reasons. We believe that we have strong defenses against this lawsuit and we intend to defend against it vigorously if the case is ever
resubmitted.
Policy on Dividend Distribution
It is currently our policy not to distribute dividends.
B.
SIGNIFICANT CHANGES
Since the date of our audited Financial Statements incorporated by reference in this report, there have not been any significant changes other than
as set forth in note 20 to our Financial Statements.”
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Our ordinary shares have been listed on the Nasdaq Stock Market since January 2006. Our ordinary shares commenced trading on the TASE on
December 4, 2007. Our trading symbol on Nasdaq is “PERI” and on TASE is “PERION.”
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
See “—Listing Details” above.
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable
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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
Acquisition of Content IQ
On January 14, 2020, we entered into and consummated a Membership Interest Purchase Agreement, or MIPA, with Asaf Katzir and Ziv
Yirmiyahu, or the Sellers, Content IQ and Perion for the acquisition of all the shares of Content IQ, a privately held company founded in 2014, based in
New York City with offices in Tel Aviv. Content IQ has created data algorithm and analytics tools that deconstruct content, revenue and distribution to
solve digital publishing challenges. The acquisition was made for a total consideration of $73.05 million, of which $15 million in cash was paid upon
closing, with an additional maximum $11 million will be paid as a retention incentive. As part of the total consideration, there is a maximum of $47.05
million in earn-outs over a period of two years. The earn-outs are tied to revenue and EBITDA-based metrics that would be paid in full if Content IQ
generates $158 million in revenues and more than $17 million of EBITDA in aggregate, over the next two years. The agreement also contains customary
representations, warranties, covenants and indemnification provisions.
On July 22, 2020, in connection with the acquisition of Pub Ocean, we amended the MIPA. Under the terms of the amended MIPA, it was agreed
with the Sellers, that (i) revenues and EBITDA of Pub Ocean will be attributed towards Sellers’ revenue and EBITDA targets under the MIPA with Perion;
and (ii) Sellers will bear 40% of the cost of milestone payments that are ultimately payable to Pub Ocean under the Asset Purchase Agreement (as defined
below), which will be paid solely by deductions from their own earn-out payments and certain escrowed amounts.
Acquisition of Pub Ocean
On July 22, 2020, we entered into an agreement to acquire the assets of Pub Ocean, or the Asset Purchase Agreement a rapidly-growing digital
publisher-focused technology company with scalable content distribution and real-time revenue analytics technology. Pub Ocean offers significant and
immediate synergies to Content IQ, driving incremental revenue opportunities and enhanced profitability. The acquisition was for an aggregate cash
consideration of up to $22 million, of which (i) $4 million was paid upon signing, (ii) $17 million of earn-out payments tied to financial targets to be paid
over a two-year period, and (iii) an additional amount of $1 million in retention incentives to be paid over a two-year period. The agreement also contains
customary representations, warranties, covenants and indemnification provisions.
Search Services Agreement with Microsoft
In November 2020, we entered into a renewed agreement with Microsoft Ireland Operations Limited effective as of January 1, 2021 until
December 31, 2024 which includes desktop and mobile distribution with limited exclusivity in the United States and an extended geography distribution.
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. 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. See Note 9 of the Financial Statements for further information. As of December 21, 2020, this credit facility was
repaid in full.
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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 the 2020 tax year. Under an amendment to the
Israeli Income Tax Ordinance, the corporate tax rate was decreased to 23% for 2018 and thereafter. However, the effective tax rate payable by a company
that derives income from a Preferred Enterprise (as further discussed below) may be considerably lower.
Under Israeli tax legislation, a corporation is considered as an “Israeli resident company” under the Ordinance if it meets one of the following: (i)
it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
Foreign Currency Regulations
We are permitted to measure our Israeli taxable income in U.S. dollars pursuant to regulations published by the Israeli Minister of Finance, which
provide the conditions for doing so. We believe that we meet and will continue to meet, the necessary conditions and as such, we measure our results for
tax purposes based on the U.S. dollar/NIS exchange rate as of December 31st of each year.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959 (the “Investment Law”) provides tax benefits for income of Israeli companies meeting
certain requirements and criteria. The Investment Law has undergone certain amendments and reforms in recent years.
The Israeli parliament enacted a reform to the Investment Law, effective January 2011 (the “2011 Amendment”). The reform introduced new
benefits instead of the benefits granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However,
companies entitled to benefits under the Investment Law in effect up to January 1, 2011, which were referred to as an Approved Enterprise and Benefited
Enterprise, were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such
benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing
tax benefits. According to the 2011 Amendment, a flat rate tax applies to companies eligible for the “Preferred Enterprise” status. In order to be eligible for
Preferred Enterprise status, a company must meet minimum requirements to establish that it contributes to the country’s economic growth and is a
competitive factor for the Gross Domestic Product (a competitive enterprise).
66
We elected “Preferred Enterprise” status commencing in 2011. We believe that our Israeli subsidiary (ClientConnect Ltd.), which merged into
Perion on June 30, 2020, qualified as a “Preferred Technological Enterprise” in 2017, 2018 and 2019 and therefore, the portion of the income derived from
ClientConnect in those years, which qualifies for the benefits, was subject to a lower tax rate of 12% according to Amendment 73 to the Law, as described
below.
On December 31, 2019 the Israeli subsidiary – ClientConnect Ltd., was merged into the Company. In 2020 the Company elected to implement
“Preferred Technological Enterprise” benefits.
Benefits granted to a Preferred Enterprise’s Preferred Income include reduced tax rates. In peripheral regions (Development Area A) the reduced
tax rate was 9% in 2015 and 2016. Under an amendment to the Investment Law enacted in December 2016, the reduced tax rate was decreased to 7.5%
starting from 2017 and thereafter. In other regions the tax rate was 16% in 2015 and thereafter. Preferred Enterprises in peripheral regions will be eligible
for grants from the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), as well as the applicable
reduced tax rates.
A dividend distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 20% withholding tax for Israeli-resident
individuals (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate from the Israel Tax Authority ("ITA") allowing
for a reduced tax rate, 20% or such lower rate as may be provided under an applicable double tax treaty). Dividend distributions out of “Preferred Income”
to an Israeli company, are not subject to withholding tax.
Pursuant to an amendment to the Investments Law which became effective on November 12, 2012 (“Amendment 69”), a company that elects by
November 11, 2013 to pay a corporate tax rate as set forth in that amendment (rather than the regular corporate tax rate applicable to Approved Enterprise
or Beneficiary Enterprise income) with respect to undistributed exempt income accumulated by the company up until December 31, 2011, will be entitled
to distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so
elected must make certain qualified investments in Israel over the five-year period commencing in 2013. A company that has elected to apply the
amendment cannot withdraw from its election.
During 2013, we applied the provisions of Amendment 69 to all undistributed exempt profits accrued prior to 2011 by us and our Israeli
subsidiary. Consequently, we paid NIS 6.3 million (approximately $1.8 million) corporate tax on exempt income of NIS 63.2 million (approximately $17.9
million). This income is available to be distributed as dividends in future years with no additional corporate tax liability. As a result, we are required to
invest (and have already invested) NIS 4.7 million (approximately $1.2 million) in our industrial enterprises in Israel over a five year period. Such
investment may be in the form of the acquisition of industrial assets (excluding real estate assets), investment in R&D in Israel, or payroll payments to new
employees to be hired by the enterprise.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget
Years), 2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments, was published. Amendment 73 prescribes special
tax routes for technological enterprises as described below, and is in addition to the other existing tax beneficial programs under the Investment Law. On
June 30, 2021, certain grandfather rules in Amendment 73 pertaining the preferred enterprises will expire, 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.
New Tax benefits under Amendment 73 that became effective on January 1, 2017.
Amendment 73 provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing
tax beneficial programs under the Investment Law.
Amendment 73 applies to “Preferred Technology Enterprise” that meet certain condition, including all of the following:
•
•
A company's average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7% of its total revenue or
exceed NIS 75 million (approximately $21 million) per year; and
A company must also satisfy one of the following conditions: (1) at least 20% of the workforce (or at least 200 employees) are employed in
R&D; (2) a venture capital investment of an amount approximately equivalent to at least NIS 8 million was previously made in the company; or
(3) growth in sales or workforce by an average of 25% over the three years preceding the tax year.
A “Special Preferred Technological Enterprise” is an enterprise that meets conditions one and two above, and in addition is a part of a group of
companies that have total annual consolidated revenues above NIS 10 billion (approximately $2.8 billion).
67
A “Preferred Technology Enterprise” satisfying the required conditions will thereby enjoy a reduced corporate tax rate of 12% on income that
qualifies as “Preferred Technology Income,” as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology
Enterprise located in development area A. In addition, a Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 12% on capital gain
derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible
Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the
National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist), to which we refer as IIA.
A “Special Preferred Technology Enterprise” satisfying the required conditions, will thereby enjoy a reduced corporate tax rate of 6% on
“Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will
enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the
Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January
1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign
company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment
Law.
Dividends distributed to Israeli shareholders by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of
Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the
receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax
treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If more than 90% of the Preferred Technology
Enterprise or Special Preferred Technology Enterprise are held by foreign company shareholders and other conditions are met, such dividends, distributed
to a foreign company, will be subject to a 4% withholding tax rate (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a
valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We believe that we qualified as a “Preferred Technological Enterprise” in 2020 and that our former Israeli subsidiary, ClientConnect, qualified as a
“Preferred Technological Enterprise” in 2017, 2018 and 2019 and was subject to a lower tax rate of 12% according to Amendment 73 to the Law, as
described above.
Law for the Encouragement of Industry (Taxes), 1969
We believe that we currently qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969,
or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as a company resident of Israel which was
incorporated in Israel, of which 90% or more of its income in any tax year, other than of income from defense loans, is derived from an “Industrial
Enterprise” owned by it and located in Israel or in the “Area”, in accordance with the definition in section 3a of the Ordinance. An “Industrial Enterprise” is
defined as an enterprise whose major activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
Amortization of the cost of purchased know-how, patents, and right to use patent or know how, which are used for the development or promotion
of the Industrial Enterprise, over an eight-year period;
Accelerated depreciation rates on equipment and buildings;
Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and
Deduction of expenses related to a public offering in equal amounts over three years.
•
•
•
•
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We
cannot assure that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.
68
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 2020), 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 2020) and a marginal tax rate of up to 47% for an individual in 2020 (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 revenues 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; however, under the United
States-Israel Tax Treaty, the taxpayer may be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such
sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not
provide such credit against any U.S. state or local taxes.
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Regardless of whether non-Israeli shareholders may be liable for Israeli capital gains tax on the sale of our ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their
capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident
company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations
in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli tax residents, and, in
the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
In addition, with respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances but makes the
deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction
during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap
transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time, and
when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax deferral, a pre-ruling
from the Israel Tax Authority might be required.
Taxation of Non-Israeli Resident Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) are generally
subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless relief is provided under the provisions of an
applicable tax treaty between Israel and the shareholder’s country of residence (provided that a certificate from the Israel Tax Authority allowing for a
reduced withholding tax rate or a tax exemption is obtained in advance). With respect to a person who is a “substantial shareholder” (described above) at
the time of receiving the dividend or on any time during the preceding 12 months, the applicable tax rate is 30%. Dividends paid on publicly traded shares,
like our ordinary shares, to non-Israeli residents, are generally subject to Israeli withholding tax at a rate of 25%, so long as the shares are registered with a
nominee company (whether or not the recipient is a substantial shareholder), unless a lower rate is provided under an applicable tax treaty (provided that a
certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance). However, a distribution of dividends to non-
Israeli residents is generally subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an “Approved
Enterprise” or a “Benefited Enterprise” and 20% if the dividend is distributed from income attributed to a “Preferred Enterprise” (as such terms are defined
in the Law for the Encouragement of Capital Investments, 5719-1959, or the Encouragement Law), subject to the receipt in advance of a valid certificate
from the ITA allowing for a reduced tax rate, or such lower rate as may be provided under an applicable tax treaty. If such dividends are distributed by a
“Preferred Technological Enterprise” or a “Special Preferred Technological Enterprise”, paid out of “Preferred Technological Income” (as such terms are
defined under the Encouragement Law), to a non-Israeli company that holds, alone or together with other foreign companies, 90% or more in the Israeli
company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance
of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
For example, under the United States-Israel Tax Treaty and subject to the eligibility to the benefits under such treaty, the maximum rate of tax
withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty)
is 25%. However, for dividends not generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprises and paid to a U.S. corporation
holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year,
the maximum rate of withholding tax is generally 12.5%, provided that not more than 25% of the gross income of the Israeli resident paying corporation for
such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an
Approved Enterprise, Benefited Enterprise or Preferred Enterprise are not entitled to such reduction under such tax treaty but are subject to withholding tax
at the rate of 15% or 20% for such a United States corporate shareholder (subject to the receipt in advance of a valid certificate from the ITA allowing for a
reduced tax rate), provided that the conditions related to the holding of 10% of our voting capital and to our gross income for the previous year (as set forth
in the previous sentence) are met. The aforementioned rates under the United States-Israel Tax Treaty would not apply if the dividend income is derived
through a permanent establishment of the U.S. resident in Israel.
If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, and partly to
other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents (for purposes
of the United States-Israel Tax Treaty) who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States
federal income tax purposes up to the amount of the taxes withheld, subject to detailed rules contained in U.S. tax law.
We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
70
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 651,600 for 2020 (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 our ordinary shares.
This discussion applies only to a U.S. Holder that holds the ordinary shares as capital assets for U.S. federal income tax purposes (generally,
property held for investment). It does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances,
including the alternative minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to
special rules, such as:
•
•
•
•
•
•
•
•
•
certain financial institutions;
dealers or traders in securities that use a mark-to-market method of tax accounting;
persons holding ordinary shares as part of a straddle, integrated or similar transaction;
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
entities classified as partnerships for U.S. federal income tax purposes and their partners;
tax-exempt entities, “individual retirement accounts” or “Roth IRAs”;
persons who acquired our ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation;
persons that own or are deemed to own 10% or more of our stock by voting power or value; or
persons holding ordinary shares in connection with a trade or business outside the United States.
If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ordinary shares, the U.S. federal
income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning ordinary
shares and their partners should consult their tax advisers as to their particular U.S. federal income tax consequences of owning and disposing of ordinary
shares.
This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, final,
temporary and proposed Treasury regulations, and the income tax treaty between the United States and Israel, or the Treaty, all as of the date hereof, any of
which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a person that for U.S. federal income tax purposes is 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.
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.
71
Taxation of Distributions
This discussion is subject to the discussion under “—Passive Foreign Investment Company Rules” below.
We currently do not intend to make distributions on the ordinary shares. Any distributions (other than certain pro rata distributions of ordinary
shares) will be treated as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax
principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions
generally will be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S.
corporations under the Code. Subject to applicable limitations, dividends paid on our ordinary shares to certain non-corporate U.S. Holders may be taxable
at a favorable rate, provided that we are not a passive foreign investment company, or PFIC, for our taxable year in which the dividend is paid or the
preceding taxable year. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of this favorable rate in their particular
circumstances.
Dividend income will include any amounts withheld in respect of Israeli taxes and will be treated as foreign-source income. 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.
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 will be creditable against the U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and
U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a foreign tax
credit, U.S. Holders may elect to deduct foreign taxes (including Israeli taxes) in computing their taxable income, subject to applicable limitations. An
election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year.
Sale or Other Taxable Disposition of Ordinary Shares
This discussion is subject to the discussion under “—Passive Foreign Investment Company Rules” below.
Gain or loss realized on the sale or other taxable disposition of our ordinary shares will be capital gain or loss and will be long-term capital gain or
loss if the U.S. Holder has owned the ordinary shares for more than one year. The amount of the gain or loss will equal the difference between the U.S.
Holder’s tax basis in the ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or
loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Israeli taxes on
capital gains will generally not be eligible for foreign tax credits to the extent that the U.S. Holder is entitled to an exemption from such taxes under Israeli
domestic law or the Treaty. 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 2020 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, our risk of being or becoming a PFIC for any taxable year will increase if
our market capitalization declines.
72
If we are a PFIC for any taxable year and any of our subsidiaries or other companies in which we own equity interests is also a PFIC (any such
entity, a “Lower-tier PFIC”), a U.S. Holder will be deemed to own a proportionate amount (by value) of the shares of any Lower-tier PFIC and will be
subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain distributions by the Lower-tier PFIC and (ii)
dispositions of shares of the Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though the U.S. Holder will not receive the
proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which a U.S. Holder holds ordinary shares, gain recognized by such U.S. Holder on a sale
or other disposition (including certain pledges) of its ordinary shares will be allocated ratably over the U.S. Holder’s holding period. The amounts allocated
to the taxable year of the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income. The amount allocated to each other
taxable year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge will
be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions received by a U.S. Holder in any year on its
ordinary shares exceed 125% of the average of the annual distributions on the ordinary shares received during the preceding three years or the U.S.
Holder’s holding period, whichever is shorter, such distributions will be subject to taxation in the same manner. If we are a PFIC for any taxable year
during which a U.S. Holder owns ordinary shares, we will generally continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding
years during which the U.S. Holder owns the ordinary shares, even if we cease to meet the threshold requirements for PFIC status. If we are a PFIC for any
taxable year but cease to be PFIC for subsequent years, U.S. Holders should consult their tax advisers regarding the advisability of making a “deemed sale”
election that will allow them to eliminate the continuing PFIC status under certain circumstances.
Alternatively, if we are a PFIC for any taxable year and if our ordinary shares are “regularly traded” on a “qualified exchange,” a U.S. Holder can
make a mark-to-market election that will result in tax treatment different from the general tax treatment for PFICs described above. The ordinary shares
will be treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ordinary shares are traded on a qualified
exchange on at least 15 days during each calendar quarter. Nasdaq, where the ordinary shares are listed, is a qualified exchange for this purpose. If a U.S.
Holder of ordinary shares makes a timely mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair
market value of the ordinary shares at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess
of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income
previously included as a result of the mark- to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ordinary shares will
be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares in a year in which we
are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously
included as a result of the mark-to-market election, with any excess treated as 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.
73
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements
file reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. As a foreign private
issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and
principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as
promptly as United States companies whose securities are registered under the Exchange Act. However, we will file with the SEC, within 120 days after
the end of each subsequent fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements
audited by an independent registered public accounting firm, and will submit to the SEC reports on Form 6-K containing unaudited quarterly financial
information.
Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov. This site contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC. The information on that website is not part of this
annual report on Form 20-F and is not incorporated by reference herein.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Risk. A portion of our revenues 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 gains in 2018, $1.0 million net losses in 2019
and $1.3 million net losses in 2020. These gains and losses are included in financial expenses, net, as presented in our statements of income.
As of December 31, 2020, balance sheet financial items in U.S. dollars, our functional currency, and those currencies other than the U.S. dollars
were as follows:
Current assets
Long-term assets
Current liabilities
Long-term liabilities
Total
U.S. dollars
NIS
Other
Currencies
Total
In thousands of U.S. dollars
141,873
4,312
(104,533)
(42,173)
(521)
3,585
2,130
(8,522)
(7,677)
(10,484)
1,901
1,165
(1,347)
(4,596)
(2,877)
147,359
7,607
(114,402)
(54,446)
(13,882)
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 $0.3 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 3%. 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:
Average rate for period
Rate at year-end
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
74
Year Ended December 31,
2019
2018
2020
3.597
3.748
3.564
3.456
3.437
3.215
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15.
CONTROLS AND PROCEDURES
(a)
Disclosure controls and procedures
Our interim chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of
December 31, 2020, 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, 2020. 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,
2020.
(c)
Attestation Report of the Registered Public Accounting Firm
Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation report
on the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered Public
Accounting Firm” on page F-6.
(d)
Changes in internal control over financial reporting
During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Sarit Firon, who is an independent director (as defined in the Nasdaq Listing Rules) and serves as
our chairperson of the audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics (which was amended in February 2017) applicable to all of our directors,
officers and employees as required by the Nasdaq Listing Rules, which also complies with the definition of a “code of ethics” set out in Section 406(c) of
the Sarbanes-Oxley Act of 2002. A copy of the code of ethics can be found on our website at: http://www.perion.com/governance-documents. We granted
no waivers under our code of business conduct and ethics in 2020.
75
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for the professional services rendered by our independent accountants Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global,
for each of the last two fiscal years were as follows (in thousands):
Audit Fees
Tax Fees
Audit Related fees
Total
2019
2020
$
$
$
610
240
187
1,037
$
500
236
86
822
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 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
2019 and 2020 and the fees paid for such services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed on the Nasdaq Global Select Market. As such, we are required to comply with U.S.
federal securities laws, including the Sarbanes-Oxley Act, and the Nasdaq Listing Rules, including the Nasdaq corporate governance requirements. The
Nasdaq Listing Rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to
certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign private issuer
discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a
concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of Nasdaq
applicable to domestic U.S. listed companies:
Shareholder Approval. Although the Nasdaq Listing Rules generally require shareholder approval of equity compensation plans and material
amendments thereto, we follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless such
arrangements are for the compensation of chief executive officer or directors, in which case they also require the approval of the compensation committee
and the shareholders.
76
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 16H. MINE SAFETY DISCLOSURE
Not applicable.
77
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
PART III
The following financial statements and related auditors’ report are filed as part of this annual report on Form 20-F:
78
PERION NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
IN U.S. DOLLARS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2020
Consolidated Statements of Income for the Years Ended December 31, 2018, 2019 and 2020
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2019 and 2020
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2018, 2019 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2019 and 2020
Notes to the Consolidated Financial Statements
Page
F-2
F-8
F-9
F-10
F-11
F-12
F-14
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of directors of Perion Network Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Perion Network Ltd. and subsidiaries ("the Company") as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 25, 2021 expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
F - 2
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing
separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition Gross versus Net presentation
Description of the Matter As described in Note 2 to the consolidated financial statements, the Company’s revenues are comprised primarily of Search
Advertising Revenues and Display and Social Advertising Revenues. To determine whether Search Advertising and Display and
Social Advertising revenues should be presented on a gross or net basis, the Company considers whether it controls the promised
good or service before transferring that good or service to the customer.
Auditing the Company's gross or net basis evaluation was complex and required a high degree of auditor judgment due to the
significant judgment and subjectivity used by the Company in determining whether revenue should be presented on a gross or
net basis. The significant judgment was primarily due to the evaluation, for each contract, of whether the Company is the
primary obligor in the arrangement.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the
Company’s revenue recognition process, including controls over the review of contracts and assessment of principal versus
agent, and controls over the completeness and accuracy of data.
Our substantive audit procedures included, among others, reviewing, on a sample basis, the terms of contracts with publishers,
evaluating management’s assessment on the principal versus agent analysis, discussing the terms of contracts with legal and
finance personnel responsible for managing the contractual arrangements and evaluating the related disclosures in the
consolidated financial statements.
F - 3
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Acquisition accounting for Content IQ LLC (CIQ) business combination
Description of the Matter As described in Note 4.b to the consolidated financial statements, on January 14, 2020, the Company acquired 100% of the
shares of Content IQ LLC” ("the CIQ Acquisition") for a total consideration of $38 million, of which $15 million was paid in
cash upon the completion of the transaction and $23 million as earn-out tied to financial targets over a two-year period. The CIQ
Acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations". Accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including
total intangible assets of $17 million, which consist primarily of $12.5 million of technology intangible asset.
Auditing the Company's accounting for the CIQ acquisition was complex and involved subjective auditor judgment in applying
procedures relating to the fair value measurement of the technology intangible asset. The Company used the discounted cash
flow method under the income approach ("the valuation model") to measure the fair value of the technology intangible asset. The
significant assumptions used to estimate the fair value of the technology intangible asset included the discount rate applied and
certain assumptions that form the basis of the forecasted results, such as revenue growth rates and profitability margins. These
significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the
Company's accounting for acquisitions process, such as controls over the measurement of the technology intangible asset,
including the valuation model and underlying assumptions used to develop such estimates.
We performed substantive audit procedures that included, among others, evaluating the completeness and accuracy of the
underlying data and the reasonableness of management’s significant assumptions and estimates. These procedures included
comparing the significant assumptions to current industry, market and economic trends, historical results of the acquired business
and to other relevant third-party industry outlooks. We involved our valuation specialists to assist us in evaluating the
appropriateness of the Company’s valuation model as well as the significant assumptions used to estimate the fair value of the
technology intangible asset such as the weighted average cost of capital calculation. Our audit procedures included comparing
the Company’s discount rate to a discount rate range that was independently developed using publicly available market data for
comparable peers. We also evaluated the appropriateness of the related disclosures included in Note 4.b to the consolidated
financial statements in relation to the CIQ Acquisition.
F - 4
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Acquisition accounting for Pub Ocean business combination
Description of the Matter As described in Note 4.c to the consolidated financial statements, on July 22, 2020 the Company acquired the net assets of Pub
Ocean (the “Pub Ocean acquisition”) for an aggregate cash consideration of up to $13.4 million, of which $4 million was paid
upon the completion of transaction and $9.4 million as earn-out tied to financial targets over a two-year period. The Pub Ocean
Acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations". Accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including
total intangible assets of $10.3 million, which consist primarily of $8.6 million of current technology intangible asset.
Auditing the Company's accounting for the Pub Ocean acquisition was complex and involved subjective auditor judgment in
applying procedures relating to the fair value measurement of the current technology intangible asset. The Company used the
discounted cash flow method under the income approach ("the valuation model") to measure the fair value of the current
technology intangible asset. The significant assumptions used to estimate the fair value of the current technology intangible asset
included the discount rate applied and certain assumptions that form the basis of the forecasted results, such as revenue growth
rates and profitability margins. These significant assumptions are forward-looking and could be affected by future economic and
market conditions.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the
Company's accounting for acquisitions process, such as controls over the measurement of the current technology intangible
asset, including the valuation model and underlying assumptions used to develop such estimates.
We performed substantive audit procedures that included, among others, evaluating the completeness and accuracy of the
underlying data and the reasonableness of management’s significant assumptions and estimates. These procedures included
comparing the significant assumptions to current industry, market and economic trends, historical results of the acquired business
and to other relevant third-party industry outlooks. We involved our valuation specialists to assist us in evaluating the
appropriateness of the Company’s valuation model as well as the significant assumptions used to estimate the fair value of the
current technology intangible asset such as the weighted average cost of capital calculation. Our audit procedures included
comparing the Company's discount rate to a discount rate range that was independently developed using publicly available
market data for comparable peers. We also evaluated the appropriateness of the related disclosures included in Note 4.c to the
consolidated financial statements in relation to the Pub Ocean Acquisition.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company‘s auditor since 2004.
Tel-Aviv, Israel
March 25, 2021
F - 5
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Perion Network Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Perion Network Ltd. and subsidiaries' ("the Company") internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of the businesses of Content IQ LLC ("Content IQ") and Pub
Ocean Limited ("Pub Ocean") that were acquired during 2020 and included in the 2020 consolidated financial statements of the Company and constitute
19% and 10% of total and net assets, respectively, as of December 31, 2020 and 19% of revenues, for the year then ended. Our audit of internal control
over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the business of Content IQ and
Pub Ocean.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes, and our report dated March
25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
F - 6
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 25, 2021
F - 7
PERION NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
Assets
Current Assets:
Cash and cash equivalents
Restricted cash
Short-term bank deposits
Accounts receivable (net of allowance of $694 and $417 at December 31, 2020 and 2019, respectively)
Prepaid expenses and other current assets
Total Current Assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Deferred taxes
Other assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable
Accrued expenses and other liabilities
Short-term operating lease liability
Short-term loans and current maturities of long-term loans
Deferred revenues
Short-term payment obligation related to acquisitions
Total Current Liabilities
Long-Term Liabilities:
Long-term debt, net of current maturities
Long-term operating lease liability
Payment obligation related to acquisition
Other long-term liabilities
Total Liabilities
Commitments and Contingencies
Shareholders' Equity:
Ordinary shares of ILS 0.03 par value - Authorized: 43,333,333 shares at December 31, 2020 and 2019; Issued:
27,467,313 and 26,357,798 shares at December 31, 2020 and 2019, respectively; Outstanding: 27,351,974
and 26,242,459 shares at December 31, 2020 and 2019, respectively
Additional paid-in capital
Treasury shares at cost (115,339 shares at December 31, 2020 and 2019)
Accumulated other comprehensive income
Accumulated deficit
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
December 31,
2020
2019
$
$
$
47,656
1,222
12,700
81,221
4,560
147,359
6,770
20,266
24,376
152,303
7,111
496
358,681
72,498
21,188
4,514
8,333
5,711
7,869
120,113
-
17,698
30,035
6,713
174,559
38,389
1,216
23,234
49,098
3,170
115,107
10,918
22,429
2,635
125,809
6,171
708
283,777
47,681
18,414
3,667
8,333
4,188
1,025
83,308
8,333
20,363
-
6,591
118,595
224
251,933
(1,002)
112
(67,145)
184,122
358,681
$
213
243,211
(1,002)
130
(77,370)
165,182
283,777
$
$
$
$
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except share and per share data)
Revenues:
Display and Social Advertising
Search Advertising and other
Total Revenues
Costs and Expenses:
Cost of revenues
Customer acquisition costs and media buy
Research and development
Selling and marketing
General and administrative
Depreciation and amortization
Restructuring charges
Total Costs and Expenses
Income from Operations
Financial expenses, net
Income before Taxes on Income
Taxes on income (benefit)
Net Income
Net Earnings per Share - Basic:
Net Earnings per Share - Diluted:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
148,698
179,365
328,063
$
87,863
173,587
261,450
22,477
197,626
30,880
39,085
15,819
9,923
-
315,810
12,253
2,638
9,615
(610)
10,225
0.38
0.36
$
$
$
25,520
135,891
22,585
34,736
14,999
9,711
-
243,442
18,008
3,470
14,538
1,645
12,893
0.50
0.49
$
$
$
125,977
126,868
252,845
23,757
128,351
18,884
38,918
16,450
9,719
2,075
238,154
14,691
3,794
10,897
2,776
8,121
0.31
0.31
$
$
$
$
Weighted average number of shares – Basic:
26,687,145
25,965,357
25,850,067
Weighted average number of shares – Diluted:
28,797,747
26,357,585
25,855,225
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
U.S. dollars in thousands
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
Net income
$
10,225
$
12,893
$
8,121
Other comprehensive income (loss):
Change in foreign currency translation adjustment
Cash Flow Hedge:
Unrealized gain (loss) from cash flow hedges
Less: reclassification adjustment for net gain (loss) included in net income (loss)
Net change
Other comprehensive loss
Comprehensive income
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
49
697
(764)
(67)
(18)
(185)
445
(272)
173
(12)
(167)
(429)
206
(223)
(390)
$
10,207
$
12,881
$
7,731
PERION NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands (except share data)
Common shares
Additional
paid-in
capital
Accumulated
Other
Comprehensive
income (loss)
Retained
earnings
(Accumulated
deficit)
Treasury
shares
Total
shareholders'
equity
Number of
Shares
$
$
$
$
$
$
Balance as of December 31,
2017
25,850,021
211
236,975
Share-based compensation
Proceeds from exercise of stock-
based compensation
Other comprehensive loss
Net income
Balance as of December 31,
2018
-
167
-
-
-
*)
-
-
2,718
*)
-
-
25,850,188
211
239,693
Share-based compensation
Proceeds from exercise of stock-
based compensation
Other comprehensive loss
Net income
-
392,271
-
-
-
2
-
-
2,293
1,225
-
-
Balance as of December 31,
2019
26,242,459
213
243,211
Share-based compensation
Proceeds from exercise of stock-
based compensation
Other comprehensive loss
Net income
-
1,109,515
-
-
-
11
-
-
4,447
4,275
-
-
532
-
-
(390)
-
142
-
-
(12)
-
130
-
-
(18)
-
(98,384)
(1,002)
138,332
-
-
-
8,121
-
-
-
-
2,718
*)
(390)
8,121
(90,263)
(1,002)
148,781
-
-
-
12,893
-
-
-
-
2,293
1,227
(12)
12,893
(77,370)
(1,002)
165,182
-
-
-
10,225
-
-
-
-
4,447
4,286
(18)
10,225
Balance as of December 31,
2020
27,351,974
224
251,933
112
(67,145)
(1,002)
184,122
The accompanying notes are an integral part of the consolidated financial statements.
*) Less than $1
F - 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Operating activities:
Net income
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Restructuring costs related to impairment of property and equipment
Share-based compensation expense
Foreign currency translation
Accrued interest, net
Deferred taxes, net
Accrued severance pay, net
Change in payment obligation related to acquisitions
Fair value revaluation - convertible debt
Loss from sale of property and equipment
Net changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other current assets
Operating lease right-of-use assets
Operating lease liabilities
Accounts payable
Accrued expenses and other liabilities
Deferred revenues
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Capitalization of development costs
Short-term deposits, net
Cash paid in connection with acquisitions, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from exercise of stock-based compensation
Payments made in connection with acquisition
Proceeds from long-term loans
Repayment of convertible debt
Repayment of long-term loans
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of year
Cash and cash equivalents and restricted cash at end of year
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
10,225
$
12,893
$
8,121
9,923
-
4,447
19
(125)
(3,093)
(23)
4,646
-
10
(32,049)
(1,185)
2,595
(2,255)
24,742
2,776
1,506
22,159
$
(459) $
5
-
10,534
(19,000)
(8,920) $
$
4,286
-
-
-
(8,333)
(4,047) $
9,711
-
2,293
(86)
(204)
(1,756)
96
1,025
600
-
6,416
646
3,119
(1,518)
9,459
1,653
394
44,741
$
(1,209) $
492
-
(19,234)
(1,200)
(21,151) $
$
1,227
(1,813)
-
(15,850)
(8,332)
(24,768) $
9,719
462
2,718
3
1,005
335
(783)
-
(1,585)
-
7,423
9,451
-
-
(1,066)
(1,524)
(1,478)
32,801
(2,038)
59
(1,756)
1,913
-
(1,822)
-
(3,333)
25,000
(8,167)
(36,509)
(23,009)
81
(20)
78
9,273
$
(1,198) $
8,048
39,605
48,878
$
40,803
39,605
$
32,755
40,803
$
$
$
$
$
$
$
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance
sheet
Cash and cash equivalents
Restricted cash included in Long-term interest-bearing bank deposits
Total cash, cash equivalents, and restricted cash
Supplemental Disclosure of Cash Flow Activities:
Cash paid during the year for:
Income taxes
Interest
Non-cash investing and financing activities:
Creation of new lease right-of-use assets arising from lease liability
Purchase of property and equipment on credit
The accompanying notes are an integral part of the consolidated financial statements.
F - 13
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31
2019
2020
2018
$
$
$
$
$
$
47,656
1,222
48,878
3,180
1,097
1,671
3
$
$
$
$
$
$
38,389
1,216
39,605
4,007
2,320
25,537
15
$
$
$
$
$
$
39,109
1,694
40,803
1,256
3,567
-
1
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:
GENERAL
Perion Network Ltd. ("Perion") and its wholly-owned subsidiaries (collectively referred to as the "Company"), is a global technology
company that provides agencies, brands and publishers with innovative solutions that cover the three main pillars of digital advertising – ad
search, social media, and display/video and CTV advertising.
On January 14, 2020, the Company completed the acquisition of Content IQ LLC (see Note 4) and on July 22, 2020, the Company
consummated the assets acquisition of Pub Ocean (see Note 4).
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of Perion and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial
statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company's
management evaluates its estimates, including those related to sales allowances and allowance for credit losses, fair value of intangible
assets and goodwill, useful lives of intangible assets, fair value of share-based awards, realizability of deferred tax assets, tax uncertainties,
and contingent liabilities, among others. Such estimates are based on historical experience and on various other assumptions that are
believed to be reasonable, the results of which form the basis for making judgments about the carrying values of the Company’s assets and
liabilities.
Financial statements in U.S. dollars
The reporting currency of the Company is the U.S. dollar (“USD”). Major parts of the Company’s operations are carried out by the
Company and its subsidiaries in the United States and Israel. The functional currency of these entities is the USD. Accordingly, monetary
accounts maintained in currencies other than the USD are remeasured into USD, in accordance with ASC 830, "Foreign Currency Matters".
All transaction gains and losses resulting from the re-measurement of the monetary balance sheet items are reflected in the statements of
income as financial income or expenses, as appropriate.
Management believes that the USD is the currency of the primary economic environment in which the Company operates. The financial
statements of other subsidiaries, whose functional currency is determined to be their local currency, have been translated into USD. All
balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts
have been translated using the average exchange rate for each applicable quarter. The resulting translation adjustments are reported as an
accumulated other comprehensive income (loss) component of shareholders' equity.
F - 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
Cash and cash equivalents and short-term deposits
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Company considers all short-term, highly liquid and unrestricted cash balances, with stated maturities of three months or less from date
of purchase, as cash equivalents. Short-term deposits are bank deposits with maturities of more than three months but less than one year. The
short-term deposits as of December 31, 2020 and 2019 are denominated primarily in USD and bear interest at an average annual rate of
0.35% and 2.16%, respectively.
Restricted cash
Restricted cash is comprised primarily of security deposits that are held to secure the Company’s hedging activity, lease obligations and
certain letters of credit associated with lease obligations. Restricted cash in the amount of $1,222 and $1,216, as of December 31, 2020 and
2019, respectively.
Accounts receivable and allowance for credit losses
Trade accounts receivables are stated at realizable value, net of an allowance for credit losses. The Company evaluates its outstanding
accounts receivable and establishes an allowance for credit losses. based on information available on their credit condition, current aging,
historical experience and future economic and market conditions. These allowances are reevaluated and adjusted periodically as additional
information is available.
As of December 31, 2020 and 2019, the Company has recorded an allowance in the amounts of $694 and $417, respectively.
Total expenses for doubtful debts during 2020, 2019 and 2018 amounted to $323, $78 and $180, respectively.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-
line method over the estimated useful lives of the assets at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
%
33
6 - 15
Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the
improvements, whichever is shorter.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, other current liabilities and operating lease liabilities in the Company’s consolidated balance sheets. Finance leases are included in
property, plant and equipment, net, other current liabilities, and other long-term liabilities in the Company’s consolidated balance sheets.
F - 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term.
The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the
lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease
incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise
that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term.
Impairment of long-lived assets, Right-of-use assets and intangible assets subject to amortization
The Company’s long-lived assets (assets group) to be held or used, including property and equipment, right of use assets and intangible
assets subject to amortization are reviewed for impairment in accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The
recoverability of these assets is measured by comparing the carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the
amount by which the carrying value of the asset exceeds its fair market value.
In determining the fair values of long-lived assets for the purpose of measuring impairment, the Company's assumptions include those that
market participants will consider in valuations of similar assets.
Goodwill and intangible assets
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized
but instead is tested for impairment, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at the reporting unit level, at least
annually at December 31 each year, or more frequently if events or changes in circumstances indicate that the carrying value may be
impaired. Following the early adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment" by the Company in January 2017,
any excess of the carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of
goodwill is written down to fair value.
The majority of the inputs used in the discounted cash flow model to determine the fair value of the reporting units are unobservable and
thus are considered to be Level 3 inputs.
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. The Customer
Relationship, technology and trade name are amortized over their estimated useful lives in proportion to the economic benefits realized. This
accounting policy results in accelerated amortization of such intangible assets as compared to the straight-line method.
Revenue recognition
The Company applies the provisions of Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606" or
"Topic 606").
F - 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Company applies the practical expedient for incremental costs of obtaining contracts when the associated revenues is recognized over
less than one year.
The Company generates revenues primarily from two major sources:
Display and Social Advertising Revenues (“Advertising”) - the Company generates advertising revenues from delivering high impact ad
formats through different channels – display, social and video/CTV, creatively designed to capture consumer attention and drive
engagement, across a hand-picked portfolio of websites and mobile applications. In addition, the Company also generates advertising
revenues from content optimization solutions and services, which are being recognizes once the advertisement partners serve their
advertisement across owned and operated properties as well as those of our publishers.
Search Advertising and other Revenues (“Search Monetization”) - the Company obtains its search revenues from service agreements
with its search partners. Search revenue is generated primarily from monthly transaction volume-based fees earned by the Company for
making its applications available to online publishers and app developers on a revenue share basis relative to the revenue generated by the
search partners.
For more disaggregated information of revenues refer to Note 19.
The Company’s payments terms are less than one year. Therefore, no finance component is recognized.
The Company evaluates whether Search and Advertising Revenues should be presented on a gross basis, which is the amount that a
customer pays for the service, or on a net basis, which is the amount of the customer payment less amounts the Company pays to publishers.
In making that evaluation, the Company considers whether it controls the promised good or service before transferring that good or service
to the customer. The Company considers indicators such as whether the Company is the primary obligor in the arrangement and assumes
risks and rewards as a principal or an agent, including the credit risk, whether the Company has latitude in establishing prices and selecting
its suppliers and whether it changes the products or performs part of the service. The evaluation of these factors is subject to significant
judgment and subjectivity. Generally, in cases in which the Company is primarily obligated in a transaction, is subject to risk, involved in the
determination of the product (or the service) specifications, separately negotiates each revenue service agreement or publisher agreement
and can have several additional indicators, revenue is recorded on a gross basis.
Remaining performance obligations (RPOs) represent amounts collected on contracted revenues that have not yet been recognized. As of
December 31, 2020, the aggregate amount of the RPOs was $5,711. The Company anticipates that it will satisfy all of its remaining
performance obligation associated with the deferred revenue within the prospective fiscal year.
Contract balances are presented separately on the consolidated balance sheets as either Accounts receivable or Deferred revenues. The
Company does not have contract assets.
Accounts receivable includes amounts billed and currently due from customers.
Deferred revenues are recorded when payments are received from customers in advance of the Company's rendering of services.
Revenues recognized during 2020 from amounts included within the Deferred revenues balance at the beginning of the period amounted to
$4,188.
F - 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
Cost of revenues
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Cost of revenues consists primarily of expenses associated with the operation of the Company’s server hosting, data verification and
targeting, campaign creative, labor, as well as content acquisition costs and customer support.
Customer acquisition costs and media buy
Customer acquisition costs and media buy consist of amounts paid to publishers who distribute the Company’s search solutions and services
as well as the costs of advertising inventory and user acquisition costs incurred in our advertising business. Customer acquisition costs are
based either on revenue share arrangements with minimum guarantee or fixed rates, which are charged as incurred.
Research and development costs
Research and development costs are charged to the statement of income as incurred, except for certain costs relating to internally developed
software, which are capitalized.
The Company capitalizes certain internal and external software development costs, consisting primarily of direct labor associated with
creating the internally developed software. Software development projects generally include three stages: (i) the preliminary project stage
(all costs expensed as incurred); (ii) the application development stage (costs are capitalized) and (iii) the post implementation/operation
stage (all costs expensed as incurred). The costs capitalized in the application development stage primarily include the costs of designing the
application, coding and testing of the system. Capitalized costs are amortized using the straight-line method over the estimated useful life of
the software, generally three years, once it is ready for its intended use. The Company believes that the straight-line recognition method best
approximates the manner in which the expected benefit will be derived. Management evaluates the useful lives of these assets on an annual
basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Capitalized software development costs, net of accumulated amortization, of $1,392 and $4,448 are included in property and equipment in
the consolidated balance sheets as of December 31, 2020 and 2019, respectively (see Note 5).
Income taxes
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability
method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected
to reverse. To the extent necessary, the Company provides a valuation allowance to reduce deferred tax assets to their estimated realizable
value.
The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach for recognizing and
measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if
the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution
of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement.
F - 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
Severance pay
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Company's agreements with employees in Israel are in accordance with section 14 of the Severance Pay Law, 1963 (“Section 14”),
where the Company's contributions for severance pay is paid to the employee upon termination instead of the severance liability that would
otherwise be payable under the law as aforementioned. Upon contribution to a fund, based on the full amount of the employee's monthly
salary, and release of the fund to the employee, no additional severance payments are required to be made by the Company to the employee.
Therefore, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as the Company is
legally released from obligation to such employees once the deposit amounts have been paid.
Severance expenses for the years ended December 31, 2020, 2019 and 2018 amounted to $1,754, $1,270 and $1,230, respectively. The
balances of severance deposits and accrued severance pay are immaterial and included in other assets and other long-term liabilities on the
accompanying balance sheets, respectively.
Employee benefit plan
The Company’s U.S. operations maintain a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings, up to the Internal
Revenue Service’s annual contribution limit. The Company matches up to 100% of each participant’s contributions, up to 6% of employee
deferral. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statement of income.
Total employer 401(k) contributions for the years ended December 31, 2020, 2019 and 2018 were $624, $691 and $751, respectively.
Comprehensive income (loss)
The Company accounts for comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income". This statement establishes
standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. The Company determined that its other comprehensive income (loss) relates to hedging derivative
instruments and foreign currency translation adjustments.
Net earnings per share
In accordance with ASC 260, "Earnings Per Share", basic net earnings per share ("Basic EPS") is computed by dividing net earnings
attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net earnings
per share ("Diluted EPS") reflects the potential dilution that could occur if share options and other commitments to issue ordinary shares
were exercised or equity awards vested, resulting in the issuance of ordinary shares that could share in the net earnings of the Company.
F - 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The weighted average number of ordinary shares related to the outstanding options, restricted shares, convertible debt and warrants excluded
from the calculations of diluted net earnings per ordinary share, as these securities are anti-dilutive, was 3,178,024, 4,087,559 and 4,725,618
for the years ended December 31, 2020, 2019 and 2018, respectively.
Concentrations of credit risk
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash
equivalents, bank deposits, restricted cash and accounts receivable.
The majority of the Company’s cash and cash equivalents, bank deposits and restricted cash are invested in USD instruments with major
banks in the U.S. and Israel. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally,
these deposits may be redeemed upon demand and, therefore, bear minimal risk.
The Company’s major customers are financially sound, and the Company believes low credit risk is associated with these customers. To
date, the Company has not experienced any material bad debt losses.
Share-based compensation
The Company accounts for share-based compensation under ASC 718, "Compensation - Stock Compensation", which requires the
measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to
employees, contractors and directors. ASC 718 requires companies to estimate the fair value of equity-based awards on the date of grant,
using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated statement of income. The Company estimates forfeitures to be estimated at the time
of grant, and revised if necessary in subsequent periods, if actual forfeitures differ from those estimates.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using
the straight-line method, over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based
on actual historical pre-vesting forfeitures. For performance-based share units, the Company recognizes compensation expenses for the
value of such awards, if and when the Company concludes that it is probable that a performance condition will be achieved based on the
accelerated attribution method over the requisite service period. The Company should reassess the probability of vesting at each reporting
period for awards with performance conditions and adjust compensation cost based on its probability assessment.
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an
award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value
of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is
based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award
measured immediately before its terms are modified based on current circumstances.
F - 20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Company estimates the fair value of its new share-based awards using the Binomial option-pricing model.
The following table presents the various assumptions used to estimate the fair value of the Company's share-based awards granted to
employees and directors in the periods presented:
Risk-free interest rate
Expected volatility
Early exercise factor
Forfeiture rate post vesting
Dividend yield
2020
Year ended December 31
2019
2018
0.29% - 1.60%
53% - 59%
110% - 200%
0% - 34%
0%
0.70% - 2.90%
43% - 55%
110% - 230%
0% - 34%
0%
1.50% - 3.00%
48% - 57%
150% - 200%
0% - 34%
0%
The expected volatility is calculated based on the actual historical share price movements of the Company’s share. The expected option term
represents the period that the Company’s share options are expected to be outstanding. The early exercise factor and the forfeiture rate post-
vesting are calculated based on the Company’s estimated early exercise and post-vesting forfeiture multiples, which are based on
comparable companies and on actual historical data. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds,
with a term which is equivalent to the expected term of the share-based awards. The dividend yield is based on the current decision of the
Company’s management not to distribute any dividends.
The fair value of restricted share units (“RSU”) is based on the market value of the underlying shares on the date of grant.
Derivative instruments
The Company accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging", which requires recognizing all
derivatives on the balance sheet at fair value. If the derivatives meet the definition of a cash flow hedge and are so designated, depending on
the nature of the hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income
and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. The ineffective portion of
a derivative’s change in fair value, if any, is recognized in earnings, as well as gains and losses from a derivative’s change in fair value that
are not designated as hedges are recognized in earnings immediately.
In order to mitigate the potential adverse impact on cash flows resulting from fluctuations in the exchange rate of the new Israeli shekels
(“ILS”), the Company hedges portions of its forecasted expenses denominated in ILS with SWAP and options contracts. The Company does
not speculate in these hedging instruments in order to profit from foreign currency exchanges, nor does it enter into trades for which there
are no underlying exposures.
To protect against the increase in value of forecasted foreign currency cash flow resulting mainly from salaries and related benefits paid in
ILS during the year, the Company hedges portions of its anticipated payroll denominated in ILS for a period of one to twelve months with
forward and options contracts (the “Hedging Contracts”). Accordingly, when the USD strengthens against the ILS, the decline in present
value of future ILS currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the USD weakens, the
increase in the present value of future ILS expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts
are designated as cash flow hedges.
F - 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Company follows the requirements of ASC No. 815, Derivatives and Hedging (“ASC 815”), which requires companies to recognize all
of their derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in fair value (i.e.
gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and
further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge
of a net investment in a foreign operation.
Additionally, in order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate in connection with the
convertible debt (see Note 10), the Company has entered into a cross currency interest rate SWAP agreement (the “SWAP”) in order to
hedge the future interest and principal payments, which are all denominated in ILS. However, since the convertible debt was measured at
fair value at each reporting date, the SWAP does not qualify and was not designated as hedge under ASC 815. Therefore, gains or losses
resulted from the change of the SWAP's fair value were recognized immediately as incurred in "financial expenses, net". The Company
measured the fair value of these contracts in accordance with ASC 820, "Fair Value Measurement and Disclosures", and they were classified
as level 2. On June 6, 2019, the SWAP agreements were terminated concurrently with the early redemption of the convertible bond.
In order to limit the Company’s interest expenses derived from the secured credit agreement in which the Company entered concurrently
with the closing of Interactive Holding Corp. acquisition in 2015 (“Undertone”), the Company has purchased a Cap Option for the interest
amounts that was expected to be paid until June 2018. The cap option was designated as cash flow hedge under ASC 815.
The notional value of the Company’s derivative instruments as of December 31, 2020 and 2019, amounted to $0 and $3,918, respectively.
Notional values in USD are translated and calculated based on the spot rates for options and swap. Gross notional amounts do not quantify
risk or represent assets or liabilities of the Company; however, they are used in the calculation of settlements under the contracts.
Fair value of financial instruments
The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term deposits, restricted cash,
accounts receivable, and other assets, accounts payable, accrued expenses and other liabilities approximate their fair value due to the short-
term maturities of such instruments.
The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date.
In determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market
participants would use in pricing an asset or liability, based on the best information available under given circumstances.
F - 22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:
• Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active
markets.
• Level 2 - Other inputs that are directly or indirectly observable in the market place.
• Level 3 - Unobservable inputs which are supported by little or no market activity.
Treasury shares
In the past, the Company repurchased its ordinary shares on the open market. The Company holds the shares as treasury shares and presents
their cost as a reduction of shareholders' equity.
Business combinations
The Company accounted for business combination in accordance with ASC 805, "Business Combinations". ASC 805 requires recognition of
assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any
excess of the fair value of net assets acquired over purchase price is allocated to goodwill and any subsequent changes in estimated
contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in
acquired income tax position are to be recognized in earnings.
Acquisition related costs are expensed to the statement of income in the period incurred.
Recent Adopted Accounting Pronouncements:
In June 2016 the FASB issued Accounting Standards Update (ASU) No. 2016-13 "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments". The FASB subsequently issued amendments to ASU 2016-13, which have the
same effective date and transition date of January 1, 2020. This standard requires entities to estimate an expected lifetime credit loss on
financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses
model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks.
The Company adopted Topic 326 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s
condensed consolidated financial statements.
The Consolidated Financial Statements for the year ended December 31, 2020 are presented under the new standard, while comparative
periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.
The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement”. This guidance removes certain disclosure requirements related to the fair value hierarchy,
modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements.
F - 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other
comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance
must be applied on a retrospective basis and others on a prospective basis. The guidance was adopted for interim and annual periods
beginning after December 15, 2019, although early adoption is permitted.
The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
The Consolidated Financial Statements and disclosures for the year ended December 31, 2020 are presented under the new standard, while
comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.
Recent Accounting Pronouncements not yet adopted
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting
for Income Taxes” (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2020, and early adoption is permitted. The Company is currently
evaluating the impact of the new guidance on its consolidated financial statements.
Reclassifications
Certain items of expense have been reclassified to conform to current year financial statement presentation.
F - 24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:
FAIR VALUE OF FINANCIAL INSTRUMENTS
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The following table present liabilities measured at fair value on a recurring basis as of December 31, 2020:
Liabilities:
Contingent consideration in connection to the acquisitions
Total financial liabilities
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
$
-
-
$
$
-
-
$
$
37,904
37,904
$
$
37,904
37,904
The following table present assets measured at fair value on a recurring basis as of December 31, 2019:
Assets:
Derivative assets
Total financial assets
NOTE 4:
ACQUISITIONS
a.
Septa Communications LLC
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
$
$
-
-
$
$
73
73
$
$
-
-
$
$
73
73
On March 28, 2019, the Company consummated the acquisition of 100% of the shares of Septa Communications LLC, also known as
“Captain Growth”.
Captain Growth is a Ukrainian-based start-up that has developed a proprietary AI platform to better connect and deliver relevant
campaign messages through the entire ad journey.
Total consideration for the acquisition was $1,200 paid in cash at closing.
b. Content IQ LLC
On January 14, 2020, the Company consummated the acquisition of Content IQ LLC (“Content IQ”), a privately held company
founded in 2014, based in New York City. Content IQ has created data algorithm and analytics tools that deconstruct content, revenue
and distribution to solve current major digital publishing challenges.
The total consideration for the acquisition was $37,838, comprised of $15,000 paid in cash at closing and a contingent consideration
(with a maximum amount of up to $47,050), tied to revenues and EBITDA-based metrics over a period of two years, estimated at fair
value of $22,838 at the acquisition date. As of December 31, 2020, the contingent consideration is estimated at fair value of $19,546.
The change in fair value of the contingent consideration was recorded to general and administrative expenses. In addition, the
acquisition includes a retention-based component of up to $11,000.
F - 25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Property and equipment, net
Technology
Customer Relationship
Deferred Taxes
Goodwill
Net assets acquired
Fair value
4
12,483
4,243
(2,253)
23,361
37,838
$
$
Technology includes publishing orchestration system with proprietary data algorithms and analytic tools which deconstruct content,
revenue and distribution to solve digital publishing challenges. The technology is amortized over the estimated useful life of 5 years
using the straight-line method.
Customer relationships is derived from customer contracts and related customer relationships with existing customers. Customer
relationships is amortized based on the accelerated method over the estimated useful life of 7 years.
The following table represents the pro-forma condensed unaudited consolidated statements of operations as if the acquisition completed
during the years ended December 31, 2019 and 2020, had been included in the condensed consolidated statements of operations of the
Company for the years ended December 31, 2019 and 2020:
Revenues
Net Income
Year ending
December 31,
2020
2019
$
$
329,068
8,079
$
$
299,871
3,985
The pro-forma results have been calculated after applying the Company’s accounting policies and adjusting the results of all acquisitions to
reflect the additional payroll related expenses, revaluation of the earnout liability and depreciation and amortization that would have been
charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied since the acquisitions
date, together with the consequential tax effects.
The pro-forma results are based on estimates and assumptions, which the Company believes are reasonable. The pro-forma results are not
the results that would have been realized had the acquisitions actually occurred on January 1, 2019 and 2020, are not necessarily indicative
of the Company’s condensed consolidated statements of operations in future periods.
F - 26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
c.
Pub Ocean
PERION NETWORK LTD. AND ITS SUBSIDIARIES
On July 22, 2020, the Company acquired the net assets of Pub Ocean Limited, also known as “Pub Ocean” (the "Pub Ocean
Acquisition"), a rapidly growing digital publisher-focused technology company with scalable content distribution and real-time revenue
analytics technology.
The total consideration for the acquisition was $13,399, comprised of $4,000 paid in cash at closing and a contingent consideration
(with a maximum amount of up to $17,000), tied to financial targets over a two-year period, estimated at fair value of $9,399 at the
acquisition date. As of December 31, 2020, the contingent consideration is estimated at fair value of $12,313. The change in fair value
of the contingent consideration was recorded to general and administrative expenses. In addition, the acquisition includes a retention-
based component of up to $1,000.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Property and equipment, net
Other creditors
Technology
Customer Relationship
Goodwill
Net assets acquired
Fair value
15
(25)
9,618
658
3,133
13,399
$
$
Technology includes content recommendation system based on proprietary data algorithms and analytic tools which complement the
technology offered by Content IQ. The technology is amortized over the estimated useful life of 5 years using the straight-line method.
Customer relationships is derived from customer contracts and related customer relationships with existing customers. Customer
relationships is amortized based on the accelerated method over the estimated useful life of 7 years.
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s
consolidated statements of operations.
In connection with the Pub Ocean Acquisition, the Company amended the Content IQ Membership Interest Purchase Agreement (“MIPA”).
Under the terms of the amended MIPA, it was agreed with the sellers of Content IQ (“the Sellers”), that (i) revenues 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 Acquisition agreement, which will be paid solely by
deductions from their own earn-out payments and certain escrowed amounts.
F - 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 5:
PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Capitalized software
Total cost
Less: accumulated depreciation and amortization
Property and equipment, net
PERION NETWORK LTD. AND ITS SUBSIDIARIES
December 31,
2020
2019
$
$
6,776
2,682
8,658
12,473
30,589
(23,819)
6,770
$
$
7,212
2,703
8,678
12,473
31,066
(20,148)
10,918
Depreciation and amortization expenses totaled to $4,662, $5,455 and $4,950, for the years ended December 31, 2020, 2019 and 2018,
respectively.
During 2018 the Company capitalized software development costs of $1,756. During 2019 and 2020 there were no software development
capitalization cost.
Amortization expense for the related capitalized internally developed software in the consolidated statements of income amounted to $3,056,
$3,607 and $2,978 during 2020, 2019 and 2018, respectively.
NOTE 6:
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
a. Goodwill
The changes in the net carrying amount of goodwill in 2019 and 2020 were as follows:
Balance as of January 1, 2019
Acquisition of Captain growth
Balance as of December 31, 2019
Acquisition of Content IQ
Acquisition of Pub Ocean
Balance as of December 31, 2020
$
$
$
$
$
$
125,051
758
125,809
23,361
3,133
152,303
Goodwill has been recorded as a result of prior acquisitions and represents excess of the consideration over the net fair value of the
assets of the businesses acquired. As of December 31, 2020, the Company has two reporting units – Advertising and Search
monetization. The Company performs tests for impairment of goodwill at the reporting unit level at least annually, or more frequently if
events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying
value.
No impairment was incurred for the years ended December 31, 2020, 2019 and 2018.
F - 28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
b.
Intangible assets, net
The following is a summary of intangible assets as of December 31, 2020:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Acquired technology
Accumulated amortization
Impairment
Acquired technology, net
Customer relationships
Accumulated amortization
Impairment
Customer relationships, net
Tradename and other
Accumulated amortization
Impairment
Tradename and other, net
Intangible assets, net
December 31,
2019
Additions
Amortization
OCI
December 31,
2020
$
$
31,159
(21,810)
(8,749)
600
31,911
(20,727)
(10,426)
758
18,284
(11,897)
(5,110)
1,277
$
22,101
-
-
22,101
4,901
-
-
4,901
-
-
-
-
$
-
(3,579)
-
(3,579)
-
(1,465)
-
(1,465)
-
(217)
-
(217)
$
152
(159)
-
(7)
48
31
-
79
219
(291)
-
(72)
53,412
(25,548)
(8,749)
19,115
36,860
(22,161)
(10,426)
4,273
18,503
(12,405)
(5,110)
988
$
2,635
$
27,002
$
(5,261) $
-
$
24,376
The following is a summary of intangible assets as of December 31, 2019:
Acquired technology
Accumulated amortization
Impairment
Acquired technology, net
Customer relationships
Accumulated amortization
Impairment
Customer relationships, net
Tradename and other
Accumulated amortization
Impairment
Tradename and other, net
Intangible assets, net
December 31,
2018
Additions
Amortization
OCI
December 31,
2019
$
30,807
(21,242)
(8,749)
816
31,940
(19,825)
(10,426)
1,689
18,415
(9,314)
(5,110)
3,991
$
$
442
-
-
442
-
-
-
-
-
-
-
-
$
-
(649)
-
(649)
-
(928)
-
(928)
-
(2,679)
-
(2,679)
(90) $
81
-
(9)
(29)
26
-
(3)
(131)
96
-
(35)
31,159
(21,810)
(8,749)
600
31,911
(20,727)
(10,426)
758
18,284
(11,897)
(5,110)
1,277
$
6,496
$
442
$
(4,256) $
(47) $
2,635
F - 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
The estimated useful life of the intangible assets are as follows:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Acquired technology
Customer relationships
Tradename and other
Amortization of intangible assets, net, in each of the succeeding five years and thereafter is estimated as follows:
2021
2022
2023
2024
2025
Thereafter
Estimated
useful life
3-5 years
4-7 years
4-11 years
$
5,438
5,450
5,462
5,395
1,858
773
$
24,376
NOTE 7:
ACCRUED EXPENSES AND OTHER LIABILITIES
Employees and payroll accruals
Government authorities
Accrued expenses
Other short-term liabilities
F - 30
December 31,
2020
2019
$
$
$
13,970
3,422
3,003
793
10,506
2,540
5,092
276
21,188
$
18,414
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 8:
DERIVATIVES AND HEDGING ACTIVITES
As of December 31, 2019, The fair value of the Company’s outstanding derivative instruments reflected as prepaid expenses and other
current assets was $73 and reflected as Accumulated other comprehensive income was $67.
As of December 31, 2020 the fair value of the Company’s outstanding derivatives instruments was $0.
The net amounts reclassified from accumulated other comprehensive loss to the operating expenses are as follows:
Gain
recognized in
Statements of
Comprehensive
Income
Year ended
December 31,
2020
Gain (loss) recognized
in consolidated statements of
Income
Statement of Income
2020
Year ended December 31,
2019
2018
Derivatives designated as hedging
instruments:
Foreign exchange options and
forward contracts
Derivatives not designated as
hedging instruments:
Foreign exchange options and
forward contracts
SWAP
Total
$
$
NOTE 9:
SHORT TERM AND LONG-TERM DEBT
67
"Operating expenses"
$
764
$
272
$
(206)
-
-
67
"Financial expenses"
"Financial expenses"
(166)
-
59
380
(186)
(2,487)
$
598
$
711
$
(2,879)
On December 17, 2018, ClientConnect Ltd., a former Israeli subsidiary of Perion, which merged into Perion on June 30, 2020, executed a
new loan facility, in the amount of $25,000. Proceeds of the loan facility were applied to refinancing of the existing debt as well as the debt
of Undertone, a US subsidiary of Perion. ClientConnect's obligations under the facility were assumed by Perion in the context of the merger.
Principal on the loan is payable in twelve equal quarterly instalments beginning March 2019 and maturing on December 31, 2021. The
interest on the loan is at the rate of three-month LIBOR plus 5.7% per annum, payable quarterly. The credit facility is secured by liens on the
assets of Perion and Undertone and is guaranteed by Undertone. The guarantee by Undertone is limited to $33,000. Financial covenants for
the loan facility are tested at the level of Perion on a consolidated basis. As of December 31, 2020, the Company meets all of its covenants.
F - 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
As of December 31, 2020, the aggregate principal annual maturities according to all of the above loan agreements were as follows:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
2021
Present value of principal payments
Less: current portion
Long-term debt
Repayment
amount
8,333
8,333
(8,333)
-
$
$
On May 19, 2020, the Company 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, the Company 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. On December 21, 2020, this credit facility was repaid in full.
On March 8, 2021, the Company had repaid it’s loan facility (see Note 20).
NOTE 10: CONVERTIBLE DEBT
In September 2014, the Company completed a public offering in Israel of its Series L Convertible Bonds (the "Bonds"), with an aggregate
par value of approximately ILS 143.5 million. The Bonds were issued at a purchase price equal to 96.5% of their par value and bear annual
interest at a rate of 5%, payable semi-annually, subject to a possible increase up to 6% in the event and to the extent the Company’s debt
rating is downgraded. The Bonds’ principal, denominated in ILS, was repayable in five equal annual instalments commencing on March 31,
2016.
The Bonds were convertible, at the election of each holder, into the Company’s ordinary shares at a conversion price of ILS 100.815 per
share from the date of issuance and until March 15, 2020. The ordinary shares issued upon conversion of the Bonds will be listed on the
NASDAQ Stock Market (“Nasdaq”) and the Tel-Aviv Stock Exchange (“TASE”), to extent that the Company's ordinary shares are listed
thereon at the time of conversion. The conversion price is subject to adjustment in the event that the Company effects a share split or reverse
share split, rights offering or a distribution of bonus shares or a cash dividend.
The Company had the option to redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions. In addition, the
Company was able to redeem the Bonds or any part thereof at its discretion after December 1, 2014, subject to certain conditions.
The Company elected to apply the fair value option in accordance with ASC 825, “Financial Instruments”, to the Bonds and therefore all
unrealized gains and losses were recognized in earnings.
On May 15, 2019 the Company announced it provided a Notice of Redemption to the Noteholders of its 5% Series L Convertible Bonds that
was fully paid on June 6th, 2019. Following the redemption, the bond was delisted from the Tel Aviv Stock Exchange.
F - 32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
The changes of the long-term convertible debt in 2020 and 2019 were as follows:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Balance as of January 1, 2019 (*)
Change in accrued interest
Change in fair value
Payment of interest
Payment of principal
Balance as of December 31, 2019
Balance as of December 31, 2020
(*) Includes accrued interest of $193.
NOTE 11: LEASES
$
15,453
267
600
(470)
(15,850)
-
-
$
$
In January 2014, the Company entered into a lease agreement for new corporate offices in Holon, Israel. The lease expires in January 2025,
with an option by the Company to extend for two additional terms of 24 months each. The Company sublease part of the office to three
different sub-tenants.
In June 2018, Undertone entered into a lease agreement for its office at World Trade Center (WTC) New York. The lease expires in May
2026. Additionally, the Company may choose an early termination in 2023.
In January 2019, Our French subsidiary entered into a lease agreement for its office at Paris, France. The lease expires in March 2028.
Certain other facilities of the Company are rented under operating lease agreements, which expire on various dates, the latest of which is in
2023. The Company recognizes rent expense under such arrangements on a straight-line basis.
The Company's capitalized operating lease agreements have remaining lease terms ranging from 0.83 year to 7.25 years.
The following table represents the weighted-average remaining lease term and discount rate:
Weighted average remaining lease term
Weighted average discount rate
Year ended
December 31, 2020
5.13 Years
7.42%
The discount rate was determined based on the estimated collateralized borrowing rate of the Company, adjusted to the specific lease term
and location of each lease.
F - 33
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
Maturities of operating lease liabilities were as follows:
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments *)
Less – imputed interest
$
5,970
5,290
4,909
4,907
2,931
2,602
26,609
(4,397)
Present value of lease liabilities
$
22,212
*) Total lease payments have not been reduced by sublease rental payments of $6,376 due in the future under non-cancelable subleases.
Facilities leasing expenses (net) in the years 2020, 2019 and 2018 were $3,493, $3,076 and $4,123 respectively. Out of which, Sublease
income amounted to $3,235, $2,682 and $2,213 in the years 2020, 2019 and 2018, respectively.
Cash paid for amounts included in measurement of lease liabilities during 2020 was $ 6,521.
NOTE 12:
COMMITMENT AND CONTINGENT LIABILITIES
a. Contingent purchase obligation
On November 30, 2012, the Company completed the acquisition of 100% of Sweet IM’s shares. Pursuant to the terms of the Share
Purchase Agreement (“SPA”) between the Company and SweetIM, the Company was obligated to pay SweetIM's shareholders, among
other payments, a payment of up to $7,500 in cash in May 2014 if certain milestones were met (the “Contingent Payment”). The
milestones were based on the Company's GAAP revenues in 2013, and the absence of certain changes in the industry in which the
Company operates. On May 28, 2014, the Company paid $2,500 in respect of the Contingent Payment. Following such payment, on
June 22, 2014, SweetIM’s Shareholders’ representative notified the Company claiming that the Company owes SweetIM’s shareholders
the entire Contingent Payment. In April 2015, pursuant to the SPA, an arbitration process with respect to this claim has commenced in
Israel. Based on the August 2018 ruling of the arbitrator, the remaining balance of the Contingent Payment shall be paid to SweetIM's
shareholders in 3 equal installments, the last of which was paid during January 2019.
F - 34
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
b. Legal Matters
On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against the Company and Intercept Interactive Inc. (“Intercept”), a
subsidiary of Interactive Holding Corp., in the United States District Court for the District of Delaware. The lawsuit alleges various
causes of action against Perion and Undertone related to Undertone’s alleged unauthorized use and misappropriation of Adtile’s
proprietary information and trade secrets. Adtile is seeking injunctive relief and, unspecified monetary damages. On June 23, 2016, the
court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted the Company’s motion to dismiss, and
(ii) granted Intercept’s motion to stay the action and compel arbitration. In November 2017, the court dismissed the case for
administrative reasons, since Adtile had not commenced arbitration proceedings. The Company is still unable to predict the outcome or
range of possible loss as of the date of these financial statements, since to date Adtile had not commenced arbitration procedures.
Regardless, the Company believes it has strong defenses against this lawsuit and intends to defend against it vigorously.
In addition, from time to time, the Company is party to other various legal proceedings, claims and litigation that arise in the ordinary
course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
NOTE 13:
SHAREHOLDERS' EQUITY
a. Ordinary shares
The ordinary shares of the Company entitle their holders to voting rights, the right to receive cash dividend and the right to a share in
excess assets upon liquidation of the Company.
On August 2, 2018 the Company's Shareholders' approved a 3:1 “Reverse Share Split” of its Ordinary shares, which became effective
on August 26, 2018. The accompanying consolidated financial statements and notes give retroactive effect to the reverse share split for
all periods presented. All fractional shares created by the Reverse Share Split have been rounded down to the nearest whole share.
b.
Share Options, Restricted Share Units and Warrants
In 2003, the Company's Board of Directors approved the 2003 Equity Incentive Plan (the "Plan") for an initial term of ten years from
adoption and on December 9, 2012, extended the term of the Plan for an additional ten years. On August 7, 2013, the Company’s Board
of Directors approved amendments to the Plan which include the ability to grant RSUs and restricted shares.
The contractual term of the share options is generally no more than seven years and the vesting period of the options and RSUs granted
under the Plan is between one and three years from the date of grant. The rights of the ordinary shares issued upon the exercise of share
options or RSUs are identical to those of the other ordinary shares of the Company.
As of December 31, 2020, there were 691,577 ordinary shares reserved for future share-based awards under the Plan.
F - 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
The following table summarizes the activities for the Company’s service-based share options for the year ended December 31, 2020:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Outstanding at January 1, 2020
Granted
Exercised
Cancelled
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Vested and expected to vest at December 31, 2020
Weighted average
Number of
options
Exercise
price
Remaining
contractual
term
(in years)
Aggregate
intrinsic
value
4,091,127
1,915,435
(1,042,849)
(436,666)
4,527,047
1,902,226
3,789,743
$
$
$
$
3.79
2.66
3.86
4.36
3.24
3.70
3.36
4.70
-
-
-
21.79
3.51
3.22
$
$
$
$
10,226
-
5,010
-
42,942
17,171
35,604
The weighted-average grant-date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $3.14,
$1.75 and $1.27, respectively.
The aggregate intrinsic value of the outstanding share options at December 31, 2020, represents the intrinsic value of all outstanding
options since they were all in-the-money as of such date.
The number of options expected to vest reflects an estimated forfeiture rate.
The following table summarizes the activities for the Company’s performance-based share options for the year ended December 31,
2020:
Outstanding at January 1, 2020
Granted
Exercised
Cancelled
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Vested and expected to vest at December 31, 2020
Weighted average
Number of
Performance
based
options
Exercise
price
Remaining
contractual
term
(in years)
Aggregate
intrinsic
value
$
66,666
815,354
(66,666)
(46,043)
769,311
200,000
596,988
$
3.24
2.62
3.24
-
2.78
5.35
3.58
$
4.95
-
-
-
40.53
6.58
199
-
514
-
7,653
1,476
4.51
$
5,460
The weighted-average grant-date fair value of options granted during the year ended December 31, 2020 was $3.12. No performance-
based options were granted during 2019 and 2018.
F - 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The aggregate intrinsic value of the outstanding performance-based options at December 31, 2020, represents the intrinsic value of all
outstanding options since they were all in-the-money as of such date.
The following table summarizes additional information regarding outstanding and exercisable options under the Company's share
Option Plan as of December 31, 2020:
Outstanding
Range of
exercise price
Number of
options
Weighted average
remaining
contractual
life (years)
Weighted
average
exercise price
Number of
options
Exercisable
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise price
$
0.00 – 0.50
1.03 – 2.94
3.00 – 3.38
4.23 – 6.90
7.08 – 9.81
$ 10.01 –12.75
1,051,494
316,567
1,509,699
1,508,954
132,000
8,333
4,527,047
$
79.46
3.98
3.88
4.79
5.66
0.00
21.79
$
-
2.76
3.19
5.18
8.20
11.07
3.24
-
190,741
1,082,647
598,005
22,500
8,333
1,902,226
$
-
3.76
3.51
3.47
4.10
0.00
3.51
$
-
2.71
3.21
4.66
7.97
11.07
3.70
The Company recognized share-based compensation expenses related to its share-based awards in the consolidated statements of
operations as follows:
Cost of revenues
Research and development
Selling and marketing
General and administrative
Total
Year ended December 31,
2019
2020
2018
$
$
$
102
887
1,898
1,560
$
164
488
515
1,126
136
448
848
1,286
4,447
$
2,293
$
2,718
As of December 31, 2020, there was $6,815 of unrecognized compensation cost related to outstanding options. These amounts are
expected to be recognized over a weighted-average period of 1.54 years related to outstanding options. To the extent the actual
forfeiture rate is different from what has been estimated, share-based compensation related to these awards will differ from the initial
expectations.
c. As part of the acquisition of Undertone, the Company granted warrants to purchase 66,666 ordinary shares, at a weighted average
exercise price of $9.09 per share, to a third-party vendor that provides development services to Undertone. The warrants were
exercisable until December 27, 2020 and wasn’t exercised by this date. No expense incurred in 2020. The total expense incurred in
2019 and 2018 was $59 and $61, respectively.
F - 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14:
FINANCIAL INCOME (EXPENSE), NET
Financial income:
Interest income
Foreign currency translation gains
Change in fair value of convertible debt
Change in fair value of SWAP
Other
Financial expense:
Foreign currency translation losses
Interest expense on debts
Change in fair value of SWAP
Change in fair value of convertible debt
Bank charges and other
Financial expense, net
NOTE 15:
INCOME TAXES
a.
Income before taxes on income
Income before taxes on income is comprised as follows:
Domestic
Foreign
Total
F - 38
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
$
$
$
$
287
-
-
-
45
332
$
$
(1,537) $
(1,045)
-
-
(388)
(2,970) $
624
-
-
380
147
1,151
$
$
(950) $
(2,334)
-
(600)
(737)
(4,621) $
296
827
1,585
-
366
3,074
-
(3,938)
(2,487)
-
(443)
(6,868)
(2,638) $
(3,470) $
(3,794)
Year ended December 31,
2019
2020
2018
$
$
12,175
(2,560)
$
21,095
(6,557)
$
9,081
1,816
9,615
$
14,538
$
10,897
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
b. Taxes on income
Taxes on income are comprised as follows:
Current taxes
Taxes in respect of previous years
Deferred tax expense (benefit)
Total
Taxes on income by jurisdiction were as follows:
Domestic
Foreign
Total
Domestic:
Current taxes
Deferred tax (benefit) expense
Taxes in respect of previous years
Total - Domestic
Foreign:
Current taxes
Deferred tax benefit
Taxes in respect of previous years
Total - Foreign
Total income tax expense (benefit)
F - 39
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
2,498
6
(3,114)
$
3,816
(129)
(2,042)
1,706
612
458
(610) $
1,645
$
2,776
Year ended December 31,
2019
2020
2018
1,031
(1,641)
$
3,055
(1,410)
$
2,187
589
(610) $
1,645
$
2,776
$
1,466
(984)
549
$
3,519
(197)
(267)
1,121
649
417
1,031
$
3,055
$
2,187
$
1,032
(2,130)
(543)
$
297
(1,845)
138
585
(191)
195
(1,641) $
(1,410) $
589
(610) $
1,645
$
2,776
$
$
$
$
$
$
$
$
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
c. Deferred Taxes
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax
assets and liabilities are as follows:
December 31,
2020
2019
Deferred tax assets:
Net operating loss and other losses carry forwards
Research and development
Intangible assets
Other temporary differences mainly relating to reserve and allowances
Deferred tax assets, before valuation allowance
Valuation allowance
Total deferred tax assets, net
Domestic:
Long term deferred tax asset, net
Foreign:
Long term deferred tax asset, net
Total deferred tax asset, net
$
$
$
$
$
$
$
$
$
4,049
2,287
1,476
1,553
9,365 $
2,254
7,111
$
2,034
2,034
$
$
5,077
$
5,077 $
4,490
2,865
2,543
624
10,522
4,351
6,171
1,050
1,050
5,121
5,121
7,111
$
6,171
The $2,097 change in the total valuation allowance for the year ended December 31, 2020, relates to the projected utilization of certain
operating loss carry-forwards and temporary differences for which a full valuation allowance was previously recorded.
F - 40
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
d. Reconciliation of the Company’s effective tax rate to the statutory tax rate in Israel
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the
Company, and the actual tax expense as reported in the statement of income is as follows:
Income before taxes on income
Statutory tax rate in Israel
Theoretical tax expense
Increase (decrease) in tax expenses resulting from:
"Preferred Enterprise" benefits *
Non-deductible expenses
Tax adjustment in respect of different tax rate of foreign subsidiaries
Deferred taxes related to prior years
Change in valuation allowance
Other
Taxes on income
* Benefit per ordinary share from "Preferred Enterprise" status:
Basic
Diluted
e.
Income tax rates
Year ended December 31,
2019
2020
2018
9,615
23.0%
2,211
$
$
14,538
23.0%
3,344
$
$
10,897
23.0%
2,506
(1,701)
2,409
228
(1,576)
(2,097)
(84)
(2,973)
(1,301)
374
397
-
421
82
298
511
-
541
221
(610)
$
1,645
$
2,776
0.06
0.06
$
$
0.11
0.11
$
$
0.05
0.05
$
$
$
$
$
Taxable income of Israeli companies was generally subject to corporate tax at the rate of 23% in 2018, 2019 and 2020. However, the
effective tax rate payable by a company that derives income from a Preferred Enterprise (as discussed below) may be considerably
lower.
Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.
Deferred taxes were not provided for undistributed earnings of the Company’s foreign subsidiaries. Currently, the Company does not
intend to distribute any amounts of its undistributed earnings as dividends. The Company intends to reinvest these earnings indefinitely
in the foreign subsidiaries and pay down its debt. Accordingly, no deferred income taxes have been provided in respect of these
subsidiaries. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to
additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. The amount of
undistributed earnings of foreign subsidiaries is immaterial.
F - 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
f.
Law for the Encouragement of Capital Investments, 1959
PERION NETWORK LTD. AND ITS SUBSIDIARIES
The Law for Encouragement of Capital Investments, 1959 (the "Investment Law") provides tax benefits for Israeli companies meeting
certain requirements and criteria. The Investment Law has undergone certain amendments and reforms in recent years.
The Israeli parliament enacted a reform to the Investment Law, effective January 2011 (which was amended in August 2013).
According to the reform, a flat rate tax applies to Preferred Income of companies eligible for the "Preferred Enterprise" status. In order
to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establish that it contributes to the
country’s economic growth and is a competitive factor for the gross domestic product.
The Company’s Israeli operations elected “Preferred Enterprise” status, starting in 2011.
Benefits granted to a Preferred Enterprise include reduced tax rates. As part of the Economic Efficiency Law (Legislative Amendments
for Accomplishment of Budgetary Targets for Budget Years 2017-2018), 5777-2016, the tax rate is 16% for all other Areas other than
Development Area A (which was 7.5% from 2017 onward).
A distribution from a Preferred Enterprise out of the "Preferred Income" would be subject to 20% withholding tax for Israeli-resident
individuals and non-Israeli residents (subject to applicable treaty rates), for dividends which are distributed on or after January 1, 2014
and from “Preferred Income” that was produced or accrued after such date. A distribution from a Preferred Enterprise out of the
"Preferred Income" would be exempt from withholding tax for an Israeli-resident company.
g. The New Technological Enterprise Incentives Regime (Amendment 73 to the Investment Law)
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018
Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("Amendment 73") was
published and was pending the publication of regulations, in May 2017 regulations were promulgated by the Finance Ministry to
implement the "Nexus Principles" based on OECD guidelines published as part of the Base Erosion and Profit Shifting (BEPS) project.
Following the publication of the regulations Amendment 73 became fully effective. According to Amendment 73, a Preferred
Technological Enterprise, as defined in Amendment 73, with total consolidated revenues of less than NIS 10 billion, shall be subject to
12% tax rate on income derived from intellectual property (in development area A—a tax rate of 7.5%). In order to qualify as a
Preferred technological enterprise certain criteria must be met, such as a minimum ratio of annual R&D expenditure and R&D
employees, as well as having at least 25% of annual revenues derived from exports.
Any dividends distributed from income from the preferred technological enterprises will be subject to tax at a rate of 20%. Amendment
73 further provides that, in certain circumstances, a dividend distributed to a foreign corporate shareholder, would be subject to a 4%
tax rate (if the percentage of foreign shareholders exceeds 90%).
F - 42
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
The Company assessed the criteria for qualifying as a “Preferred Technological Enterprise,” status and concluded that the Company is
eligible to the above-mentioned benefits.
h. Uncertain tax positions
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
Balance at the beginning of the year
Increase (Decrease) related to prior year tax positions, net
Increase related to current year tax positions, net
Balance at the end of the year
December 31,
2020
2019
$
$
$
4,232
293
-
4,034
(249)
447
4,525
$
4,232
In 2020, The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in tax
expenses. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $444, $158 and $12 in
interest and penalties. The Company had $1,017 and $573 for the payment of interest and penalties accrued at December 31, 2020, and
2019, respectively which are included in the balance of the end at the year.
The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements
with tax authorities, the likelihood and timing of which are difficult to estimate.
The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlements,
although the final tax outcome of its tax audits could be different from that which is reflected in the Company's income tax provisions
and accruals. Such differences could have a material effect on the Company's income tax provision and net income in the period in
which such determination is made.
The Company’s tax assessments in Israel and the U.S. for tax years prior to 2015 and 2016 respectively are considered final. The
Company has net operating losses in the U.S. from prior tax periods beginning in 2011 which may be subject to examination upon
utilization in future tax periods
i.
Tax loss carry-forwards
As of December 31, 2020, the Company’s U.S. subsidiaries have Federal net operating loss carry-forwards of $3,471 and States net
operating loss carry-forwards of $2,746.
Net operating losses in the U.S. may be carried forward through periods which will expire in the years starting from 2031 up to 2035.
Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating
losses before utilization. NOLs created in 2018 onwards may be carried forward indefinitely.
F - 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
PERION NETWORK LTD. AND ITS SUBSIDIARIES
As of December 31, 2020, the Company’s European subsidiaries have net operating loss carry-forwards of $6,402 which may be
carried forward indefinitely.
The Company has accumulated net operating losses for tax purposes as of December 31, 2020, in the amount of approximately
$11,111, which may be carried forward and offset against taxable income in the future for an indefinite period. The net operating losses
may be offset against taxable income annually with a limitation of up to 20% of the total accumulated losses but no more than 50% of
the Company's taxable income. The limitation applies during the years 2020-2024. In addition, the Company has accumulated capital
losses for tax purposes as of December 31, 2020, of approximately $1,570, which may be carried forward and offset against taxable
capital gains in the future for an indefinite period, but are limited as stated above.
j. US Tax Reform:
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “TCJA”). The TCJA makes broad and complex changes to the Code. The changes include, but are not limited to:
•
•
•
A corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate
Reduction”);
The transition of U.S international taxation from a worldwide tax system to a territorial system by providing a 100 percent
deduction to an eligible U.S. shareholder on foreign sourced dividends received from a foreign subsidiary (“100% Dividend
Received Deduction”);
A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017;
In March 2018, the FASB issued Accounting Standards Update No. 2018-05, "Income Taxes Topic (740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118" ("ASU 2018-05") to address situations when a registrant does not have
the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for
certain income tax effects of the TCJA.
In March 2020, in response to the COVID-19 pandemic the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was
enacted. The CARES Act comprises of a spending package and tax reliefs in order to reduce the impact of the pandemic. The tax
portion of the CARES Act includes several corporate tax relief provisions such as: eliminating the taxable income limitation and
allowing carryback to the prior 5 years for net operating losses (“NOLs”) arising in 2018, 2019 and 2020; increasing the business
interest deduction limitation from 30% to 50%; accelerated refunds of AMT credits and other provisions. The Company is considering
which provisions are relevant for its US subsidiaries.
F - 44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:
EARNINGS PER SHARE
The table below presents the computation of basic and diluted net earnings per common share:
PERION NETWORK LTD. AND ITS SUBSIDIARIES
Numerator:
Net income attributable to ordinary shares - basic
Net income - diluted
Denominator:
Number of ordinary shares outstanding during the year
Weighted average effect of dilutive securities:
Employee options and restricted share units
Diluted number of ordinary shares outstanding
Basic net earnings per ordinary share
Diluted net earnings per ordinary share
Year ended December 31,
2019
2020
2018
10,225
10,225
$
$
12,893
12,893
$
$
8,121
8,121
26,687,145
25,965,357
25,850,067
2,110,602
392,228
5,158
28,797,747
26,357,585
25,855,225
0.38
0.36
$
$
0.50
0.49
$
$
0.31
0.31
$
$
$
$
Ordinary shares equivalents excluded because their effect would have been anti-
dilutive
3,178,024
4,087,559
4,725,618
NOTE 17:
RESTRUCTURING COSTS
Restructuring charges were recorded in connection with plans in order to reduce workforce, close certain facilities and other cost saving
measures which amounted to $2,100 during 2018. In 2020 and 2019, there were no restructuring charges.
F - 45
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 18: MAJOR CUSTOMERS
A substantial portion of the Company's revenue is derived from search fees and online advertising, the market for which is highly
competitive and rapidly changing. Significant changes in this industry or in customer buying behavior would adversely affect the
Company’s operating results.
The following table sets forth the customers that represent 10% or more of the Company’s total revenues in each of the years presented
below:
Customer A
NOTE 19: GEOGRAPHIC INFORMATION
Year ended December 31,
2019
63%
2020
51%
2018
45%
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate
financial information is evaluated regularly by the Chief Operating Decision Maker, who is the Chief Executive Officer, in deciding how to
allocate resources and assessing performance. Over the past few years, the Company has completed several acquisitions. These acquisitions
have allowed the Company to expand its offerings, presence and reach in various markets. While the Company has offerings in multiple
enterprise markets, the Company’s business operates in one segment which is the High Impact Advertising solutions, and the Company’s
Chief Operating Decision Maker evaluates the Company’s financial information and resources and assesses the performance of these
resources on a consolidated basis.
The following table presents the total revenues for the years ended December 31, 2020, 2019 and 2018, allocated to the geographic areas in
which they were generated:
North America (mainly U.S.)
Europe
Other
Year ended December 31,
2019
2020
2018
$
$
$
272,220
49,222
6,621
$
195,903
50,669
14,878
197,440
46,858
8,547
328,063
$
261,450
$
252,845
The total revenues are attributed to geographic areas based on the location of the end-users.
The following table presents the locations of the Company’s long-lived assets as of December 31, 2020 and 2019:
Israel
U.S.
Europe
F - 46
December 31,
2020
2019
$
$
$
11,343
10,157
5,536
15,816
11,987
5,544
27,036
$
33,347
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 20:
SUBSEQUENT EVENTS
PERION NETWORK LTD. AND ITS SUBSIDIARIES
a. On January 20, 2021, the Company closed a follow on offering whereby 6,487,000 ordinary shares were sold by the Company to the
public, (inclusive of 748,500 ordinary shares pursuant to the full exercise of an overallotment option granted to the underwriters). The
aggregate proceeds, net of underwriting discounts and other offering cost, received by the Company from the offering were
approximately $61,126.
b. On March 8, 2021, the Company early repaid the full amount of its loan facility with bank Mizrachi or a principal amount of $8,333
together with the accumulated interest up to this date as per the agreement.
F - 47
ITEM 19.
EXHIBITS:
No.
Description
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
8
12.1
12.2
13.1
13.2
15.1
101
Memorandum of Association of Perion, as amended and restated (translated from Hebrew)(1)
Articles of Association of Perion, as amended and restated(1)
Description of Perion’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934(4)
Perion 2003 Israeli Share Option Plan and U.S. Addendum(2)
Perion Equity Incentive Plan(3)
Compensation Policy for Directors and Officers, adopted on February 6, 2020
Translation of a certain Credit Agreement by and between Perion Network Ltd. and Mizrahi Tefahot Bank Ltd., effective as of December 17,
2018(1)
A Form of Indemnification Letter Agreement between the Company and its Present and Future Directors and Officers(4)
Bing Services Framework Agreement by and between Perion Network Ltd. and Microsoft Ireland Operations Limited, effective as of January 1,
2021**
Membership Interest Purchase Agreement by and between Perion Network Ltd., Mr. Assaf Katzir, Mr. Ziv Yarmiyahu and Content IQ LLC,
dated January 14, 2020**(4)
Summary in English of Lease Agreement by and between Perion Network Ltd. and Kanit HaShalom Investments Ltd., dated January 28, 2014,
as amended on October 7, 2015 and December 26, 2019
List of Subsidiaries
Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the Company
Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the Company
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Auditors
Financial information from Perion Network Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2020 formatted in XBRL
(eXtensible Business Reporting Language)
_________________________
(1)
Previously filed with the SEC on March 19, 2019 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference
(2)
(3)
(4)
**
Previously filed with the SEC on April 29, 2013 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference
Previously filed with the SEC on October 15, 2013 as an exhibit to our Report on Form 6-K, and incorporated herein by reference
Previously filed with the SEC on March 16, 2020 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference
Certain confidential information contained in this document, marked by brackets, was omitted because it is both (i) not material and (ii) would
likely cause competitive harm to the Company if publicly disclosed. “[***]” indicates where the information has been omitted from this exhibit.
79
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
PERION NETWORK LTD.
/s/ Doron Gerstel
Name: Doron Gerstel
Title: Chief Executive Officer
/s/ Maoz Sigron
Name: Maoz Sigron
Title: Chief Financial Officer
By:
By:
80
Date: March 25, 2021
Exhibit 4.6
Certain confidential information contained in this document, marked by brackets, was omitted because it is both (i) not
material and
(ii) would likely cause competitive harm to the Company if publicly disclosed. “[***]” indicates where the information has
been omitted from this document.
BING SERVICES FRAMEWORK AGREEMENT
This BING SERVICES FRAMEWORK AGREEMENT (the “Agreement”) is effective as of the effective date indicated in
Table 1 below (“Effective Date”) by and between the Microsoft and Company entities listed in Table 1 below (each a “Party”,
and collectively, the “Parties”). This Agreement consists of this cover page; the Terms and Conditions; any Schedule; Exhibits;
the NDA; and any Guidelines, including documentation, requirements, and policies referenced herein.
Company:
Perion Network Ltd.
26 HaRokmim St.
Azrieli Center 1, Building A, 4th Fl.
Holon 5885849
Israel
Table 1 – Parties
Microsoft:
Microsoft Ireland Operations Limited
Attention: MIOL Contract Operations Specialist
Address: One Microsoft Place
South County Business Park
Leopardstown
Dublin 18, D18 P521
Ireland
Email: [***]
Jurisdiction of Formation: Israel
Effective Date:
Jurisdiction of Formation: Ireland
January 1, 2021
Term:
4 years
By signing below, the parties agree to be bound by the terms of this Agreement:
Company: Perion Network Ltd.
Microsoft
Signature:
Printed Name:
Title:
Date:
Signature:
Printed Name:
Title:
Date:
Signature:
Printed Name:
Title:
Date:
Attachments:
Table 2 - Attachments and NDA
Exhibit 1: GUIDELINES
Exhibit 2: [***]
Schedule 1:
BING Search Settings Distribution
NDA:
Non-disclosure Agreement between Microsoft and Company dated [***]
Table 3 - Address for Notices
Address for Notices:
Address: 26 HaRokmim St., Azrieli Center 1, Building A, 4th Floor, Holon
5885849, Israel
Phone: [***]
Email: [***]
Attention: [***]
Copy of notice must also be sent to:
Attention: Perion Legal Department
Address: 26 HaRokmim St., Azrieli Center 1, Building A, 4th Floor, Holon
5885849, Israel
Phone: [***]
Email: [***]
Address for Notices:
Microsoft Ireland Operations Limited
Microsoft Ireland Operations Limited
Attention: MIOL Contract Operations Specialist
Address: One Microsoft Place
South County Business Park
Leopardstown
Dublin 18, D18 P521
Ireland
Email: [***]
Copy of notice must also be sent to:
Microsoft Corporation
Attn: Bing Business Devp. ([***])
One Microsoft Way
Redmond, WA 98052 USA
Email: [***]
And to:
Microsoft Corporation
Attn: Microsoft Advertising Legal Department
One Microsoft Way
Redmond, WA 98052 USA
2
Section 1
PURPOSE.
TERMS AND CONDITIONS
This Agreement sets forth the terms under which the Parties will offer or provide Users access to certain Microsoft programs and
services.
Section 2
DEFINITIONS.
For purposes of this Agreement, the following terms will have the following meanings, whether used in the singular or the plural.
Other initially capitalized terms have the meanings ascribed to them elsewhere in the Agreement.
“Affiliate” means any entity that directly or indirectly controls, is controlled by, or is under common control with a Party, where
“control” means the ownership of, or the power to vote, at least fifty percent (50%) of the voting stock, shares or other equity
interests of the entity, or the effective ability to control the management and direction of the entity.
“Bing Services” means the services specified in an applicable Schedule.
“Claim” means any demand, suit, or other action made or brought by an unaffiliated third party, including costs, losses, damages
and expenses (including reasonable attorneys’ fees) related to such third-party claim.
“Company Marks” means Company’s trademarks, service marks, logos and other distinctive brand features.
“Company Network” means those third-party publishers and channels which may be involved in Company’s Implementations,
distributions and related activities under this Agreement or a Schedule.
“Company Property” means any product, website, application, extension, software or service using or accessing the Bing
Services as identified in the applicable Schedule, including any Third-Party Company Property.
“Company User Data” means User Data collected by Company in connection with Queries entered in a Company Property.
“Excluded Implementation” means an Implementation preinstalled on a Windows Personal Computer prior to its distribution to
a User.
“Financial Report” means documentation provided by Microsoft to Company demonstrating amounts payable under an
applicable Schedule.
“Guidelines” means all guidelines specified in this Agreement, and all guidelines, policies and any other instructions or
documentation provided in connection with this Agreement, as they may be provided and updated by Microsoft from time to
time.
“Implementation” has the meaning given to it in the applicable Schedule.
“Microsoft” means the Microsoft entity that signs this Agreement or, where applicable, its Affiliates involved in operating the
Bing Services.
“Microsoft Marks” means those trademarks, service marks, logos and other distinctive brand features of Microsoft or its
Affiliates that are specified in a Schedule for Company’s use in connection with the Bing Services.
3
“Mobile Device” means: (a) a mobile telephony device used for any computing, communications or other services; and (b) any
other device that Microsoft and Company agree in writing are Mobile Devices.
“NDA” means the Non-Disclosure Agreement between the Parties, dated as shown in Table 2 above.
“Personal Computer” means a general-purpose computer, such as a desktop, notebook, laptop, tablet or netbook that: (a) is not
a Mobile Device; and (b) is primarily designed to be used by a single individual or small group of individuals at one time and to
perform a multiplicity of general purpose computing functions at the direction of the User through applications.
“Query” has the meaning given to it in an applicable Schedule.
“Revenue Share” has the meaning given to it in an applicable Schedule.
“Revenue Unit” means [***].
“Schedule” means an applicable Schedule attached to this Agreement.
“Search Access Point” has the meaning given to it in an applicable Schedule.
“Tail Period” means the [***] period that immediately follows the expiration or the termination of this Agreement or the
applicable Schedule except where this Agreement or the Schedule is terminated due to Company’s insolvency or a material
breach of the Agreement (including, for clarity, any breach pursuant to Section 14.7 of this Agreement), in which case there will
be no Tail Period.
“Territory” has the meaning given to it in an applicable Schedule.
“Third-Party Company Property” means any Company Property not owned or operated by Company or its Affiliates.
“User” means an end user of an Implementation.
“User Data” means information provided by or obtained from a User.
Section 3
SERVICES.
3.1
3.2
General. Each Party will perform its obligations as set forth in each Schedule. Each Schedule is subject to and incorporated into this
Agreement.
Service Requirements. Company may only use the Bing Services as expressly stated in a Schedule and in compliance with this Agreement. As
between the parties, [***].
Section 4
COMPLIANCE.
4.1
4.2
4.3
4.4
Applicable Law. Company must ensure that Company, Company Network, Implementations, the distribution of Implementations and its use of
the Bing Services do not infringe on any third party’s proprietary rights; or violate any applicable law, statute, ordinance or regulation,
including the laws and regulations governing (a) misleading, false or deceptive advertising, (b) anti-discrimination, (c) unfair competition, or
(d) export control.
Guidelines. Company must comply with all Guidelines. Microsoft will provide notice of any new or modified Guidelines and Company must
comply with such new or modified Guidelines within [***] from notification thereof ([***]).
Windows Applications. Approval by Microsoft under this Agreement of [***].
Insurance. Company will maintain commercially reasonable levels of insurance with commercially reasonable insurers.
4
Section 5
RIGHTS AND RESPONSIBILITIES.
5.1
5.2
Implementations. The parties will describe Implementations in one or more Schedules and Company will implement the Bing Services as
described in each Schedule, in accordance with this Agreement.
Reviews and Approval.
(a) Microsoft review and approval. Company must receive Microsoft’s review and approval before [***]. Company agrees to promptly provide requested
information and other materials related to [***] under this Agreement so that Microsoft may conduct the reviews described in this Section 5.2.
Microsoft reserves the right to review or re-review and reject or require changes to any Implementation at any time. If Microsoft [***]. If Company
[***]. Notwithstanding the foregoing, [***], solely to the extent [***].
(b) Variation.
(i) Company will request and receive Microsoft’s approval before implementing any addition, update or variation (collectively, “Variation”)
of [***] that affects the functionality or User experience of a Bing Service, [***].
(ii) Company may implement Variations [***].
(iii) For any Variation that does not require approval under Section 5.2(b)(i), and except as allowed by Section 5.2(b)(ii), Company must
notify Microsoft of any other Variation within [***] after implementing such Variation.
(iv) If Microsoft reasonably believes that a Variation made pursuant to Section 5.2(b)(i), (ii) or (iii) [***]. If Company does not agree to
[***].
(c) Review Period. Microsoft will use commercially reasonable efforts to review requests for approval under Section 5.2(a) and (b)(i) within [***] of
Company’s request for review. Upon Microsoft’s request, Company must provide information as reasonably needed for Microsoft to complete its
review of Company’s request. [***]. Acceptance and rejection decisions are [***].
(d) Microsoft Review Limitations. Microsoft will review up to [***] from Company per [***] under Section 5.2, and Microsoft will [***]to [***].
Company acknowledges that [***].
(e) Compliance with Guidelines. Regardless of Microsoft review and approval, Company remains responsible for complying with Section 4.
5.3
Rejected and Suspended Implementations
(a)
If Microsoft rejects a proposed implementation submitted by Company under Section 5.2, or suspends an Implementation, Company will not [***].
(b) Company will not [***].[***]. At Microsoft’s request, Company will cooperate with Microsoft to investigate use [***].
5
5.4
Operations.
(a)
[***]. In accordance with [***], Company must [***] by Microsoft as described in the applicable Schedule, or as otherwise provided by Microsoft
from time to time, and provide information that Microsoft reasonably requests, so that [***].
(b) [***]. Company will [***] in accordance with Microsoft’s [***],[***], and will [***]. For clarity, [***].
(c)
[***]. At the request of Microsoft, [***], Company will [***], including [***]. Company will [***].
(d) Traffic Quality and Ad performance.
(i) Microsoft may at any time after the Effective Date require that [***] determined by Microsoft. Company and Company Network
members will [***]. Company [***], and in accordance with, Microsoft’s requirements and specifications therefor. If Microsoft notifies
Company [***] (determined by Microsoft, in its sole but reasonable discretion) Company will immediately [***]. Microsoft will [***].
If, [***], then, at Microsoft’s request, Company will [***].
(ii) Upon [***], the Parties will collaborate in good faith to [***].
(e) Performance. The Parties will [***]. If either Party reasonably believes [***], the Parties will cooperate and use commercially reasonable efforts to
[***] If such efforts do not [***].
(f) User Support. As between the Parties, Company will provide Users support relating to the Implementation and Microsoft will provide Users support
relating solely to the Bing Services.
5.5 Technology. Microsoft may use technology or other means to protect the [***], including [***]. Microsoft will [***]. Company will not [***]. In the
event of a [***] (e.g., [***]), Microsoft may [***], then, [***].
Section 6
COMPENSATION, INVOICING, AND PAYMENT.
6.1
6.2
6.3
Payment. Microsoft will pay Company amounts as set forth in an applicable Schedule no later than [***] days after Microsoft makes the
Financial Report available to Company according to [***]. If a [***], Microsoft may, [***]. Except as specifically set forth in this Section 6.1
and the applicable Schedule, Microsoft will retain all revenues derived from, or in connection with, its programs and services.
Microsoft Reporting. Within [***] after the end of each calendar month for which a payment may apply, Microsoft will [***]; provided that,
[***], Microsoft will in good faith endeavor to [***].[***]. All information contained in such reports is Confidential Information of Microsoft.
Unauthorized or Fraudulent Revenue. Microsoft will determine invalid clicks and will not owe Company payment in connection with any
search, impression, click-through or conversion Microsoft judges to have been generated through invalid means or in any manner that violates
the Agreement. For clarity, [***], including but not limited to [***] (including, for clarity, [***]). Microsoft may adjust for fraudulent or
unauthorized revenue at any time after its discovery. Upon its discovery, Microsoft will use commercially reasonable efforts to notify Company
of [***]. For any amounts paid and later determined to have been generated in violation of the Agreement, Microsoft may invoice Company or
offset against amounts owed to Company in a later billing period.
6.4
[***]
6
Section 7
TERM AND TERMINATION.
7.1
7.2
Term. The term of this Agreement (“Term”) runs from the Effective Date and continues for the Term specified in Table 1, unless terminated
earlier in accordance with this Agreement.
Termination.
(a) Termination for Cause. Either Party may terminate this Agreement in its entirety or any Schedule: (i) immediately upon written notice if the other
Party becomes insolvent or makes an assignment for the benefit of its creditors; (ii) [***] after written notice to the other Party in the event of such
other Party’s material breach of any of its obligations under this Agreement or the applicable Schedule, unless the breach in the notice is remedied
before the end of [***] period, provided that, if the breaching Party is making substantial progress toward curing such breach with such [***] period,
the non-breaching party may extend the cure period by an additional reasonable period of time; or (iii) as may be described in a Schedule.
(b) Termination of the [***]. [***].
7.3
7.4
Effect of Expiration or Termination. If the Agreement expires or is terminated prior to termination or expiration of all Schedules, the terms
of the Agreement will remain in effect for any remaining Schedule for the remainder of its term.
Survival. The following provisions survive any termination or expiration of this Agreement for any reason: Section 5.4(f) (User Support);
Section 6 (Compensation, Invoicing, and Payment), Section 7.3 (Effect of Expiration or Termination), Section 7.4 (Survival), Section 8
(Privacy and Data), Section 9.1 (Ownership Rights), Section 10 (Representations and Warranties), Section 11 (Indemnification), Section 12
(Disclaimer, Exclusion of Certain Damages), Section 13 (Dispute Resolution and Arbitration), Section 14 (General Provisions) and any other
provisions of this Agreement (including the Schedules) which, by their terms, require performance after the end of the Term and Tail Period, or
have application to events that may occur after the end of the Term and Tail Period.
Section 8
PRIVACY AND DATA
8.1
8.2
8.3
General. Microsoft will retain and own User Data collected from or provided by Users to Microsoft, and Company will retain and own User
Data collected from or provided by Users to Company. For purposes of the General Data Protection Regulation (“GDPR”), Microsoft will be
considered a Data Controller, as that term is defined by the GDPR, with respect to any transfer of personal data occurring under this
Agreement.
Company Data. Information that Company provides [***] is subject to the Microsoft Online Services Privacy Statement for enterprise
services, at https://www.microsoft.com/en-us/privacystatement/enterprisedev, or any successor location, and as it may be updated from time to
time.
Microsoft Data. If Microsoft receives [***], Microsoft will treat such data in accordance with the data practices described in the end user
privacy statement for services powered by Bing, as updated from time to time, at https://privacy.microsoft.com/privacystatement, or any
successor location.
8.4
User Terms.
(a) User Agreement. Company will ensure that each Implementation establishes, maintains, and complies with an agreement with its Users governing the
delivery and use of its products and services hereunder, and that such agreement (i) does not make or purport to make any representation or warranty
(express, implied, statutory, or otherwise) on behalf of Microsoft; (ii) does not create or purport to create any support or other obligations on the part
of Microsoft, with respect to the Bing Services or otherwise; and (iii) constitutes a legally binding agreement under applicable law.
7
(b) User Privacy Statement. Each Party will ensure that: (i) it has, and will at all times maintain, a specific user agreement and privacy statement
governing the delivery and use of its products and services hereunder; and (ii) it will at all times abide by such user agreement and privacy statement.
Company will ensure that each Implementation prominently displays, maintains and complies with a privacy statement for Users, and that this
privacy statement must include, at a minimum, (y) a full, accurate, and clear disclosure regarding the placement, use, and reading of cookies and
related technologies, and the collection, use, storage and transfer of data in relation to activity by Users of the Implementations, and (z) the use of the
Bing Services.
(c) Disclosure of Terms. At Microsoft’s request, Company will provide a copy of the documents described in Section 8.4(a) and (b).
8.5
Use of Company User Data. Company will have the right to [***]. Company undertakes that any Company User Data collected and used in
connection therewith will, at all times, comply with Company’s obligations in this Section 8. Unless as otherwise approved by Microsoft,
Company will not take any other action to alter Redirects from going directly to the Bing Service and Company will not have any such other
traffic routed to the Bing Service via Company’s servers or intermediary applications, websites, or domains. For the avoidance of doubt,
Company will not use any mechanisms to track Users (as such) on Microsoft domains or services.
Section 9
OWNERSHIP, USE OF MARKS, IP COMPLIANCE
9.1
Ownership Rights. Microsoft owns all right, title, and interest in the Bing Services, Microsoft Marks, and all intellectual property rights
therein. Company owns all right, title, and interest in Company Marks, Company User Data, Products and all intellectual property rights
therein.
9.2
Use of Marks.
(a) Microsoft Marks. Microsoft grants to Company and its Affiliates a limited, non-exclusive, nontransferable, non-sublicensable, royalty-free license
during the Term and Tail Period, in the Territory to use, reproduce, distribute and display the Microsoft Marks solely in connection with, and as
described in, an applicable Schedule as contemplated and authorized by Microsoft under this Agreement. Company’s use of the Microsoft Marks will
comply with Microsoft’s Guidelines, including the Microsoft Trademark Usage Guidelines in Exhibit 1, and Company will not use any Microsoft
Mark in a way that is misleading or deceptive. The form of all usage of Microsoft Marks by or under the authority of Company will be subject to
Microsoft’s prior approval. Company will not take any action which may suggest or imply that Microsoft has endorsed Company or any product or
service thereof, or that there is any connection or relationship between Microsoft and Company, other than as set forth herein. All uses of Microsoft
Marks, and all goodwill associated therewith, inure solely to the benefit of Microsoft. Notwithstanding anything else to the contrary in this
Agreement, Microsoft reserves the right to further limit this license grant to the extent that [***].
(b) Company Marks. Company grants to Microsoft a limited, non-exclusive, nontransferable, non-sublicensable (except in the case of Affiliates), royalty-
free license during the Term and Tail Period to use, reproduce, distribute and display the Company Marks solely in connection with the marketing and
promotion of the Bing Services. Microsoft will not take any action which may suggest or imply that Company has endorsed Microsoft or any product
or service thereof, or that there is any connection or relationship between Microsoft and Company, other than as set forth herein. All uses of Company
Marks, and all goodwill associated therewith, inure solely to the benefit of Company.
8
9.3
Intellectual Property Compliance. Without limiting anything else in this Agreement to the contrary, each Party covenants and agrees to
maintain responsible business practices regarding ownership and compliance with applicable intellectual property laws, rules and regulations,
and to maintain, to the extent applicable to it, policies for complying with all such laws, rules and regulations (for example, when applicable
and without limitation, a policy for compliance with the Digital Millennium Copyright Act, as amended).
Section 10
REPRESENTATIONS AND WARRANTIES. EACH PARTY REPRESENTS AND WARRANTS TO THE OTHER PARTY THAT:
(A) IT HAS THE FULL CORPORATE RIGHT, POWER AND AUTHORITY TO ENTER INTO THE AGREEMENT AND TO
PERFORM THE ACTS REQUIRED OF IT UNDER THE AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO
GRANT ANY AND ALL RIGHTS AND LICENSES UNDER THE AGREEMENT WITHOUT VIOLATION OF THE RIGHTS OF
ANY THIRD PARTY; (B) THE EXECUTION OF THE AGREEMENT AND PERFORMANCE OF ITS OBLIGATIONS UNDER THE
AGREEMENT DO NOT AND WILL NOT VIOLATE ANY OTHER AGREEMENT TO WHICH IT IS A PARTY; (C) THE
AGREEMENT, WHEN EXECUTED AND DELIVERED, CONSTITUTES ITS LEGAL, VALID AND BINDING OBLIGATION;
AND (D) ANY AND ALL ACTIVITIES IT UNDERTAKES IN CONNECTION WITH THE AGREEMENT WILL BE PERFORMED
IN COMPLIANCE WITH ALL APPLICABLE LAWS, RULES AND REGULATIONS.
Section 11
INDEMNIFICATION.
11.1
11.2
Scope. Each Party will indemnify, defend and handle at its own cost and expense any Claim brought by a third party against the other Party, its
Affiliates, officers, directors, employees, representatives, or agents if, and to the extent that, such claim or action arises out of or relates to:
[***].
Process. The Indemnifying Party’s indemnification obligation under this Section 11 is subject to the Indemnified Party notifying the
Indemnifying Party promptly in writing of the Claim and permit the Indemnifying Party, using counsel selected by the Indemnifying Party
(provided, however, the Indemnified Party may raise reasonable objections to such counsel and the parties will discuss the objections in good
faith), to answer and defend the Claim (although the Indemnified Party’s failure to notify the Indemnifying Party will not relieve the
Indemnifying Party of any liability under this Section 11, except to the extent such failure materially prejudices the Indemnifying Party’s ability
to defend such Claims). The Indemnified Party will refrain from stipulating, admitting, or acknowledging any fault or liability under the Claim
without the Indemnifying Party’s consent, and, on the Indemnifying Party’s reasonable request, also provide the Indemnifying Party with
reasonable assistance in defending the Claim (and the Indemnifying Party will reimburse the Indemnified Party for any out-of-pocket expenses
incurred in providing that assistance). The Indemnifying Party will not stipulate, admit, or acknowledge any fault or liability on the Indemnified
Party’s part without the Indemnified Party’s express, prior written consent. The Indemnified Party may participate in the defense of Claims at its
own expense and with counsel of its own choosing.
Section 12
DISCLAIMER, EXCLUSION OF CERTAIN DAMAGES
12.1
INCIDENTAL, CONSEQUENTIAL AND CERTAIN OTHER DAMAGES. EXCEPT WITH RESPECT TO EITHER PARTY’S (A)
PAYMENT OBLIGATIONS, (B) INDEMNIFICATION OBLIGATIONS, (C) BREACH OF ITS CONFIDENTIALITY OR DATA
OBLIGATIONS, (D) VIOLATION OF THE OTHER PARTY’S INTELLECTUAL PROPERTY RIGHTS, (E) FRAUD, WILLFUL
MISCONDUCT OR GROSS NEGLIGENCE; OR (F) TAX OBLIGATIONS, EXCEPT AS OTHERWISE PROVIDED IN SECTION 14.14,
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, (I) NO PARTY WILL BE LIABLE FOR ANY INDIRECT,
SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, LOST PROFITS, OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT, HOWEVER CAUSED,
AND UNDER WHATEVER CAUSE OF ACTION OR THEORY OF LIABILITY BROUGHT (INCLUDING, WITHOUT LIMITATION,
UNDER ANY CONTRACT, NEGLIGENCE OR OTHER TORT THEORY OF LIABILITY) EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES, AND (II) [***] EXCEED THE GREATER OF (Y) [***] OR (Z) [***].
9
12.2
DISCLAIMER. EXCEPT FOR THE EXPRESS WARRANTIES MADE IN THE AGREEMENT, ALL MATERIALS PROVIDED BY ONE
PARTY TO THE OTHER PARTIES HEREUNDER ARE PROVIDED “AS IS.” TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, THE PARTIES MAKE NO OTHER WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE, MERCHANTABILITY, TITLE AND NON-INFRINGEMENT. WITHOUT LIMITING THE FOREGOING,
[***].
Section 13
DISPUTE RESOLUTION AND ARBITRATION.
13.1
Dispute Resolution. Except with respect to a Party’s request for equitable or provisional relief or to otherwise protect its intellectual property
rights, or Confidential Information provided under this Agreement, no civil action, proceeding as set forth below with respect to any dispute,
controversy or claim arising out of, or relating to, or in connection with, this Agreement, or the breach, termination or validity hereof,
including the validity of this dispute resolution provision (each of which dispute, controversy, or claim will be termed a “Dispute”) between
the Parties may be commenced, nor may a Party terminate any portion of this Agreement for a material breach of a material warranty,
representation, covenant or obligation of this Agreement, until the Parties have first attempted in good faith to resolve the Dispute amicably in
accordance with this Section 13.1.
(a) Notice of Dispute. In the event of a Dispute, the Party raising the Dispute shall give written notice to the other Party setting forth the details of the
Dispute and any proposed solution or compromise. The Parties shall cooperate in good faith to resolve the Dispute within [***] of receipt of the
notice of Dispute.
(b) [***].
13.2
[***].
Section 14
GENERAL PROVISIONS.
14.1
Notices. [***] as defined in the applicable Schedule will be delivered by email to Company to the respective parties listed in Table 3 of this
Agreement (with a simultaneous copy sent by email to [***]) or through [***]. [***] may be provided by [***]. All other notices required or
permitted under this Agreement will be in writing to the applicable Party at the addresses set forth in Table 3. Notices will be deemed given (a)
if provided electronically on the transmission date, (b) if by mail sent first class, postage prepaid, certified and return receipt requested, [***]
days after mailing, (c) if by internationally recognized courier, on the date received, and (d) if delivered personally, when delivered. Any e-
mailed notice will be immediately followed by original documents by mail or courier, if applicable. Any notices delivered by mail or courier
will be immediately followed by a copy by email, if applicable.
10
14.2
14.3
14.4
14.5
14.6
14.7
Counterparts. This Agreement may be executed in two counterparts, both of which taken together constitute a single instrument. Execution
and delivery of this Agreement and any Schedule may be evidenced by electronic signature or scanned copies exchanged via email.
Governing Law and Venue. This Agreement is governed by and interpreted in accordance with the laws of the State of New York, without
regard to the conflicts of laws principles thereof. The parties each irrevocably consent to the exclusive jurisdiction and venue of the state or
federal courts in the Borough of Manhattan, New York, USA for all disputes arising out of or relating to this Agreement, other than any
Disputes subject to Section 13.2.
Assignment. This Agreement and the performance of any duties hereunder may not be assigned, transferred, delegated (except as set forth
below), sold or otherwise disposed of by a Party other than with (a) the prior written consent of the other Party (not to be unreasonably withheld,
conditioned or delayed), or (b) [***]. [***]. This Agreement will be binding upon and shall inure to the benefit of a Party’s permitted successors
and assigns. Any assignment not permitted by the Agreement is void. Notwithstanding the foregoing, either Party may delegate its performance
to, or exercise its rights through, one or more Affiliates; provided that in the event of any such delegation or exercise, each Party will remain
liable and fully responsible for its Affiliates’ performance of and compliance with such Party’s obligations and duties under this Agreement.
Confidentiality. The NDA is incorporated by reference and made a part of this Agreement and governs the Agreement and any Schedule. The
Agreement, Schedules, and all discussions under or relating to it are considered “confidential information” under the NDA.
Amendment and Waiver; Entire Agreement; Precedence. Except as otherwise expressly provided in this Agreement, no amendment to, or
waiver of, any provision of the Agreement will be effective unless in writing and signed by both Parties. The waiver by any Party of any breach
or default will not constitute a waiver of any different or subsequent breach or default. As of the Effective Date of this Agreement (together with
its Exhibits and Schedules), is the Parties’ entire agreement on the subject matter hereof and merges and supersedes all related prior and
contemporaneous communications and agreements of the Parties on such subject matter, whether written or oral. For the avoidance of doubt, all
internet searches conducted prior to the Effective Date (and revenue therefrom) under that certain Search Distribution Agreement between the
Parties effective January 1, 2018 (the “2018 Search Agreement”) will be governed by such 2018 Search Agreement, and all Included Searches
(and revenue therefrom) as of and after the Effective Date will be governed by this Agreement. Unless the Schedule expressly states otherwise,
in the event of a conflict between this Agreement and any Schedule, the terms of the Schedule will prevail. In the event of a conflict between the
terms of any attachment hereto and any Guidelines incorporated by reference, the terms and conditions of the Guidelines will prevail. For the
avoidance of doubt, this Agreement does not supersede or modify the NDA.
Export Control. The Parties to this Agreement acknowledge that the [***] (“Items”) may be subject to U.S. and other countries’ export
jurisdictions. Each Party will comply with all laws and regulations applicable to the import or export of the Items, including but not limited to
trade laws such as the U.S. Export Administration Regulations and International Traffic in Arms Regulations, and sanctions regulations
administered by the U.S. Office of Foreign Assets Control (“OFAC”) (“trade laws”). Company will not take any action that causes Microsoft
to violate U.S. or other applicable trade laws. In the event that Company learns of a potential violation of trade laws relating to the performance
of this Agreement, or a potential violation of the terms in this subsection, it will alert Microsoft as soon as possible, but in no event more than
[***] after acquiring this knowledge. Microsoft may suspend or terminate the applicable portion of the services under this Agreement or the
applicable Schedule that is in violation of this Section 14.7 until such time that Microsoft reasonably concludes that such violation is resolved, if
curable (for clarity, to the extent a violation is not curable, Microsoft may suspend or terminate the applicable portion of the services or the
Agreement or the applicable Schedule). For additional information related to exporting, see http://www.microsoft.com/exporting.
11
14.8
14.9
14.10
14.11
14.12
14.13
Severability. If any provision of the Agreement or a Schedule is held to be invalid, illegal or unenforceable for any reason, such invalidity,
illegality or unenforceability will not affect any other provisions of the Agreement, and instead, the Agreement or Schedule will be construed as
if such invalid, illegal or unenforceable provision had never been contained in it.
Publicity. No Party may make any public announcement or issue any press release about the existence or terms of the Agreement without the
other Party’s prior written approval, which shall not be unreasonably withheld. It is understood between the Parties that Company desires to
issue a press release upon the execution of this Agreement, which will be subject to Microsoft’s prior written approval. Any and all publicity
relating to the Agreement or any subsequent transactions between the Parties under it must be approved by both Parties in writing and in
advance of the release. Microsoft acknowledges that Company is a publicly traded company, and agrees that as a public company, Company
may be obliged, as part of certain disclosure rules, to disclose the existence of this Agreement and certain of its general terms and conditions.
Company will only disclose information that is absolutely required to be disclosed by law or regulation, will not disclose the Agreement in its
entirety, will not disclose any of the Agreement’s economic terms, and will give Microsoft prior written notice on any such disclosure.
Independent Contractors. Each Party is an independent contractor with respect to the other for purposes of the Agreement and its subject
matter. Nothing contained in the Agreement creates in any manner whatsoever any partnership, joint venture, employment, agency, fiduciary,
or other similar relationship between the Parties.
Sole Responsibility. Company will remain solely responsible for the operation of the Products and Implementations [***], and Microsoft will
remain solely responsible for the operation of the Bing Services, as well as [***].
No Third-party Beneficiaries. This Agreement is solely for Company’s and Microsoft’s benefit. It is not for the benefit of any other person,
except for permitted successors and assigns under this Agreement.
Event of Force Majeure. Neither Party will be in violation of any of the requirements of this Agreement to the extent that its performance is
impaired as a result of any delay, failure in performance, or interruption of service, resulting directly or indirectly from acts of God, acts of
civil or military authorities, civil disturbances, wars, acts of terrorism, strikes or other labor disputes, fires, transportation contingencies,
outages of third party telecommunications networks with whom the non-performing Party does not have a direct contractual relationship,
failure of suppliers with whom the non-performing Party does not have a direct contractual relationship, pandemic or epidemic (or similar
public health crisis) or other similar occurrences which are beyond such Party’s reasonable control; provided, however, that any such delay or
failure will be remedied by such Party as soon as reasonably possible. For clarity, neither party will be excused from its performance hereunder
as a result of the COVID-19 pandemic, except to the extent that there are unforeseen, material and adverse circumstances that result therefrom.
Upon the occurrence of an event of force majeure, the Party unable to perform will, if and as soon as possible, provide written notice to the
other Party indicating that an event of force majeure occurred and detailing how such event of force majeure impacts the performance of its
obligations. Microsoft will maintain during the Term and Tail Period, [***].
12
14.14
14.15
14.16
Tax Matters. Any amounts to be paid by Microsoft to Company do not include any taxes. Microsoft is not liable for any taxes that Company is
legally obligated to pay (“Company Taxes”) which are incurred or arise in connection with or related to the sale of goods and services under
this Agreement, and all such taxes will be the financial responsibility of Company, provided that Microsoft will pay to Company any sales, use
or value added taxes that are owed by Microsoft solely as a result of entering into this Agreement and which are legally required to be collected
from Microsoft by Company under applicable law. Microsoft may provide to Company a valid exemption certificate in which case Company
will not collect the taxes covered by such certificate. Company agrees to indemnify, defend and hold Microsoft harmless from Company Taxes
(including sales or use taxes paid by Microsoft to Company) or claims, causes of action, costs (including, without limitation, reasonable
attorneys’ fees) and any other liabilities of any nature whatsoever related to such Company Taxes. If taxes are required to be withheld on any
amounts otherwise to be paid by Microsoft to Company, Microsoft will deduct such taxes from the amount otherwise owed and pay them to the
appropriate taxing authority. Microsoft will secure and deliver to Company an official receipt for any taxes withheld. Microsoft will use
reasonable efforts to minimize such taxes to the extent permissible under applicable law. In addition, Microsoft and Company will reasonably
cooperate with each other to mitigate, reduce or eliminate any withholding taxes arising in connection with this Agreement, including by using
commercially reasonable efforts to obtain any certificate or other document from any governmental authority or any other person as may be
necessary to mitigate, reduce or eliminate any such taxes. If Microsoft intends to withhold any withholding taxes, Microsoft will provide prior
written notice to Company describing the rationale for such determination. Such notice shall be provided to Company promptly following
Microsoft’s determination to withhold and sufficiently in advance of any actual withholding [***] to provide Company a reasonable time to
contest such determination.
Anti-Corruption. To the extent applicable, Company represents and warrants that it has reviewed and will materially comply with the Anti-
Corruption Policy for Microsoft Representatives available at http://www.microsoft.com/en-us/Legal/Compliance/anticorruption. Company will
provide annual training to its employees who resell, distribute, or market Microsoft products or services on compliance with Anti-Corruption
Laws. Company represents and warrants that Anti-Corruption training has been provided to its employees and, if not, Company agrees to
participate annually in online Anti-Corruption training made available free of charge by Microsoft and certify its completion, understanding,
and compliance with the Anti-Corruption Policy for Microsoft Representatives.
Interpreting this Agreement. All parts of this Agreement and any Schedule apply to the maximum extent permitted by law. Unless stated or
context requires otherwise: (a) all internal references are to this Agreement and its parties; (b) “days” and “months” are to U.S. calendar days
and months, unless otherwise expressly stated, and a “business day” means any day other than a Friday, Saturday or Sunday or any day on
which the Federal Reserve Bank of New York is closed; (c) all monetary amounts are in U.S. dollars; (d) “may” means that the applicable party
has a right, but not an accompanying duty; and (e) a party’s choices are in its sole discretion, subject to any applicable duties of good faith.
Lists of examples following “including” or “e.g.” are not exhaustive (i.e., are interpreted to include “without limitation”), unless qualified by
words such as “only” or “solely.” This Agreement and any Schedule will be interpreted according to the plain meaning of their terms without
any presumption that they should be construed to favor either Party. Section titles do not limit the other terms of this Agreement and any
Schedule. Except as may be stated otherwise herein, all rights and remedies are cumulative.
14.17
Cooperation. Neither Party will unreasonably withhold, delay or condition any approvals or consents under this Agreement or any Schedule,
except with respect to any settlements, stipulations, admissions or acknowledgments made in connection with either Party’s indemnification
obligations set forth in Section 11.
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13
EXHIBIT 1 GUIDELINES
In connection with Company’s distribution, Implementation, and use of the Bing Services under this Agreement, Company must,
and must ensure that its Affiliates, and Company Network members, comply with all Guidelines listed, which are incorporated by
reference herein, and available at the respective URLs listed below, or any successor sites for a given Guideline, as provided to
Company by Microsoft from time to time.
GENERAL
1.
The following comprise the Microsoft Editorial Guidelines:
http://advertise.bingads.microsoft.com/en-us/editorial-guidelines
including without limitation the User Safety Privacy and Download Guidelines:
http://advertise.bingads.microsoft.com/en-us/editorial-privacy-guidelines
Microsoft will use commercially reasonable efforts to notify Company (which may be by email) [***] in advance of
changes to the Microsoft Editorial Guidelines.
2.
Bing Product Guidelines (incorporating the Microsoft Marks) are available at:
https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RE1q9FS
3.
The Microsoft Trademark Usage Guidelines are available at:
http://www.microsoft.com/en-us/legal/intellectualproperty/Trademarks/Usage/General.aspx
The following policies are available at: https://[***]
[***]
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14
[***]
EXHIBIT 2 [***]
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15
BING SEARCH SETTINGS DISTRIBUTION
SCHEDULE 1
This schedule (“Schedule”) is attached to and made part of the Bing Services Framework Agreement.
Company:
Schedule Term:
Territory:
Start Date
Revenue Share Percentage and Revenue Share
True-Up
Serving Cost Rate(s)
Schedule Attachment
Section 1
DEFINITIONS.
Table 4 – Search Settings Distribution
Perion Network Ltd.
Begins on the Effective Date and terminates 4 years thereafter (on December 31st, 2024).
[***]
January 1, 2021
[***]
[***]
Attachment A “[***]”
Terms in this Schedule with their initial letters capitalized that are not otherwise defined herein will have the meanings given to
them in the Agreement. For purposes of this Schedule, the following definitions apply:
“Ad Revenue Deduction” means the [***].
“Ad Revenues” means all revenues recognized by Microsoft in accordance with GAAP in connection with advertisements
returned for Included Searches from Users in the Territory.
“Adjusted Revenues” means, for a given period, the Ad Revenues less the Ad Revenue Deduction (provided that [***]).
“API Call” means a search query request to a Bing Service ([***]).
“Bing Services” means the Microsoft service that provides Users internet search results in response to Queries (e.g. on
www.bing.com or a Microsoft app powered by Bing).
“Extra-Territorial Cost” means the [***].
“Implementation” means the [***].
“Included Search” means a Query that includes Tracking Codes specific to Company, from a Search Access Point. A Query
conducted by a User following an initial search (“Follow-on Searches”) is considered Included Search to the extent that
Microsoft’s Tracking Codes or other mechanism used by Microsoft allow Microsoft to account for follow-on searches. If
Company implements a Tracking Code, Microsoft will use commercially reasonable efforts to track initial searches and Follow-
on Searches using those Tracking Codes or such other mechanisms and to have such Tracking Codes or other mechanisms persist
to track subsequent searches.
16
“Microsoft Offer” means any offer, description, display or other communication by which Company presents Users with the
ability to use or access any Bing Service.
“Microsoft Product” means a Microsoft product or service.
“Paid Listing” means a listing provided by Microsoft’s Bing ads platform in response to a User Query or other active user input
in a Search Access Point and related keyword suggestions on the Bing site in connection with Included Searches, that include
hypertext links to web pages, which may result in payment to Microsoft for displaying the listing, regardless of the basis on
which Microsoft is paid.
“Product” means a non-Microsoft product or service (including for example a website, application, extension or browser) that
Company associates with an Implementation.
“Query” means the internet search query resulting from a User actively initiating a single search request [***].
“Redirect” means the User’s Query is redirected from a Search Access Point to a Bing Service.
“Revenue Share” means the sum for each Revenue Unit of the product of the applicable Revenue Share Percentage identified in
Table 4 and the Adjusted Revenues, less the Extra-Territorial Cost, for the applicable period.
“Search Access Point” means any area where Queries can be initiated by a User.
“Territory” means the geographic territory where Microsoft permits Company to implement the Bing Services as set forth in
Table 4.
17
“[***]” means the [***].
“[***]” or “[***]” means the [***].
“Violation” has the meaning given in Section 3.5(b) of this Schedule.
“Violation Notice” means a written notice from Microsoft to Company communicating an actual Violation, which includes
information reasonably sufficient to remediate the behavior or activity giving rise to the Violation.
Section 2
SERVICES
Microsoft and Company will work to together to deploy the distribution model for Bing Services identified in this Schedule.
Section 3
DISTRIBUTION.
3.1 Distribution. Company will distribute the Bing Services in the Territory according to the Guidelines as described in this Section 3.1. [***].
(a) Platform. Company will present the Implementation for the following types of devices and platforms: [***].
(b) Products. If Company distributes the Bing Services, [***].
(c) Territory. Company must not, either directly or through Company Network, promote or otherwise drive distribution of Bing Services
Implementations or Microsoft Offers outside the Territory and must take reasonable measures to ensure distribution is targeted only to the Territory.
18
(d) Bundled Products. Company may [***] if:
(i)
[***]; and
(ii) [***]; and.
(iii) [***].
3.2 Type of Implementations. Beginning no later than [***], Company will distribute the following types of Implementations under this Schedule and
subject to the terms of this Agreement:
(a)
[***], including
(i)
[***],
(ii) [***],
(iii) [***],
(iv) [***], or
(v) [***].
Company may distribute each of the foregoing independently of each other to each respective User, and through the
[***]; provided, that, [***].
(b)
[***].
3.3 Method of Implementations.
(a)
[***].
(b) Without limiting any other [***].
3.4 Excluded Implementations. Notwithstanding anything to the contrary in this Schedule, Company will not [***].
3.5 Distribution Partners.
(a)
(b)
Company may distribute the Implementations through the Company Network members that make up the Company Network. Company will
disclose to Microsoft, during the Term and Tail Period, all Company Network members that make up the Company Network. Such disclosure
will be deemed Company’s Confidential Information as that term is defined in the NDA.
If any Implementation, Company Network member, or related traffic, in Microsoft’s sole but reasonable discretion: (i) [***]; (ii) violates, or
conflicts with, a rule, regulation, ruling, order, statute, law or binding opinion, notice or policy of a judicial, legislative, or administrative body,
or may subject Microsoft to any regulation or requirement not generally applicable to it; (iii) is engaged in or derived from fraudulent practices;
or (iv) has a [***], then Company will ensure that the Company Network member removes the Bing Services and Redirect functionality from
those Implementations ([***]) within [***] of receipt of a Violation Notice, which Microsoft will provide to Company using commercially
reasonable efforts. [***]. By way of clarification and not limitation, [***].
19
(c)
In the event that [***]. On 1st January each year during the Term, [***].
(d)
Company, its Affiliates and Company Network members must not sub-syndicate or otherwise distribute Implementations incorporating the Bing
Services Redirect functionality through any means to any search distribution companies including [***], unless approved by Microsoft in
writing.
(e)
Company must not directly or indirectly offer the Redirect functionality to [***].
(f)
(g)
During the Term and Tail Period, neither Company nor Microsoft will actively solicit a commercial relationship to provide the Bing Service to
any Rejected or Suspended Implementation nor shall it expressly permit any third party to do so.
Company and its Affiliates must not take any action that directs or otherwise moves traffic from any Company or Company Network members
[***].
Section 4
REQUIREMENTS.
4.1 Installation and terms of use. All Implementations will [***].
4.2 User Settings. Except as authorized in this Section 4.2, [***], Company will not (a) [***]; (b) [***]; or (c) [***]. The foregoing shall not [***].
Notwithstanding the restriction in the first sentence of this Section 4.2, [***] (i) [***], (ii) [***] so long as [***], or (iii) [***].
4.3 Tracking.
(a)
[***].[***]:
(i)
[***].
(ii) [***].
(b)
[***].
(i)
[***].
(ii) [***].
(iii) [***].
(c)
[***].
(i)
[***].
(ii) [***].
(iii) [***].
(iv) [***].
4.4 [***]. [***].
4.5 Review Criteria. When Company [***]Section 5.2 of the Agreement, it will [***]: (i) [***], and (ii) [***].
20
4.6 [***]. [***].
4.7 [***].
(a)
General.
(i)
[***]. Except as otherwise provided in this Agreement, Company will redirect to the Bing Services, [***]. Within [***] of the end of
each calendar quarter (“Report Submission Period”), Company will provide Microsoft with written reports [***] against [***].
(ii) Product and [***]. Implementations that have not been [***], shall not be counted toward the [***].
(b)
[***].[***]:
(i)
[***].
(ii) [***].
(c)
(d)
[***]. If the [***] is removed by Microsoft or Company from [***] arising from non-compliance with this Agreement, then [***] through that
[***] will not be used to calculate [***] set forth in Section[***] (i.e., such [***] may be directed elsewhere and the remainder of the applicable
[***]).
Query Assignment. Company will reasonably cooperate with Microsoft, to the extent necessary, to cause query share from the Queries
submitted to Bing Services from Search Access Points under this Agreement to be attributed to Microsoft by third party traffic measurement
agencies. Without limiting the foregoing, Company will, if requested by Microsoft, sign a letter assigning all query traffic to Microsoft for
purposes of tracking online search traffic by comScore, Inc.
Section 5
COMPLIANCE
5.1 [***]. Microsoft may require Company [***] that Microsoft determines in its sole discretion causes a [***] ([***]).
5.2 [***]. In the event of a [***], Microsoft may:
(a)
[***]; and
(b) [***].
5.3 Investigation. Company will promptly provide information and reasonable assistance in any [***].
5.4 Non-discrimination. During the [***], and in accordance with the provisions of the Agreement and/or a Schedule, Microsoft will, in accordance with
this Agreement, provide [***]. Notwithstanding the foregoing, if Microsoft [***].[***]. Microsoft will use commercially reasonable efforts to [***];
provided, however, [***].
5.5 Offer Screen. The Parties will work together to develop the offer screens. Company must receive Microsoft’s approval in writing [***]. For the
avoidance of doubt, [***].
21
Section 6
REPORTING
6.1 Reporting by Company. To the extent that reporting data, whether complete or partial, is available to Company, within [***] after the end of each
calendar quarter, Company will provide a report to Microsoft in a mutually agreeable form and content (for example, [***], as well as other
information reasonably requested by Microsoft). Upon Microsoft’s request (such requests only [***]), Company shall provide Microsoft [***].
6.2 Reporting by Microsoft. During the Term and Tail Period, Microsoft will use commercially reasonable efforts to provide Company with [***]
reporting [***], reflecting the most recent data that Microsoft [***]. Without limiting the foregoing, Microsoft will use commercially reasonable
efforts to provide [***]. However, it being understood that [***] will be based upon [***]. Only [***] shall be used for [***].
Section 7
PAYMENT
7.1 Payment. Microsoft will pay Company the [***] for each applicable payment period under this Schedule in accordance with the payment terms set
forth in Section 6 of the Agreement.
7.2 Tail Period Payments. During the Tail Period, Microsoft will continue to pay Company a Revenue Share for traffic generated by Implementations that
were implemented or distributed prior to the end of the Term, so long as (a) [***], and (b) [***]. Company will not drive new Implementation or
distribution of Implementations under this Schedule during the Tail Period, and Microsoft will [***]. The Tail Period will [***] if (i) [***], or (ii)
[***].
Section 8
ADDITIONAL [***] INDEMNIFICATION. [***]WILL DEFEND, INDEMNIFY, AND HOLD HARMLESS [***]AND ITS
AFFILIATES AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM AND AGAINST ANY AND ALL
CLAIMS THAT (A) [***].
Section 9
TERM AND TERMINATION
9.1 Schedule Term. This Schedule begins on the Effective Date and continues for the period specified on the first page of this Schedule, unless terminated
earlier in accordance with Section 7.2 of the Agreement.
9.2 Termination for [***].[***].
9.3 Termination for [***].[***].
9.4 Termination for [***].[***].
9.5 Effect of Termination. Company will promptly cease to present Microsoft Offers and perform Implementations under this Schedule upon expiration
or termination of this Schedule. Microsoft will [***]. In the event of termination [***] pursuant to Section [***] of the Agreement or Sections [***] of
this Schedule, [***] in Section [***] of this Schedule.
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22
ATTACHMENT A
[***]
23
Summary of Lease Agreement
Exhibit 4.8
Note: this summary does not contain a full or direct translation of the terms of the original Hebrew-language lease agreement,
and is designated solely for the purpose of providing a general presentation of such agreement.
On January 28, 2014, Kanit HaShalom Investments Ltd. (the “Lessor”) and Perion Network Ltd. (the “Company”) entered into a
lease agreement, as amended on October 7, 2015 and December 26, 2019 (the “Lease Agreement”).
1. Leased Premises
Office spaces of approximately 9,426 square meters, of which 3,131 square meters are subleased (the premises are referred to collectively as the
“Premises”), in a building located at 1 Azrieli Center, Building A, 26 HaRokmim Street, Holon, 5885849, Israel.
2. Purpose of the Lease
The premises are to be used by the Company for its on-going business activities.
3. Leasing Period
The Premises are currently leased until January 31, 2025, with an option for the Company to extend the lease period for two
additional two-year periods, at its sole discretion and upon 180-day prior written notice.
4. Leasehold Improvements
The Lessor shall participate in the cost of leasehold improvements at a sum of up to NIS 18,852,000, as reimbursement for costs
incurred by the Company in performing such improvements. Reimbursement by the Lessor shall be paid upon receipt of tax
invoices from the applicable contractors, evidencing the work performed. Improvements are subject to prior approval by the
Lessor.
5. Consideration
The monthly lease fee for the period commencing on January 1, 2020 and ending on December 31, 2020 shall be NIS 64.6 per
square meter multiplied by the Premises space (excluding of VAT), per month, linked to the Israeli consumer price index.
The monthly lease fee for the period commencing of January 1, 2021 and ending on December 31, 2021 shall be NIS 65.2 per
square meter multiplied by Premises space (excluding of VAT), per month, linked to the Israeli consumer price index.
The monthly lease fee for the period commencing on January 1, 2022 and ending on January 31, 2025 shall be NIS 66.1 per
square meter multiplied by Premises space (excluding VAT), per month, linked to the Israeli consumer price index..
6. Guarantees
The Company shall provide the Lessor with an autonomous bank guarantee in the amount of NIS 3,768,879 linked to the Israeli
consumer price index. Such an amount is equivalent to approximately four monthly lease and management fees.
7.
Insurance
The Company shall maintain customary insurances. Structure, third party and employers liability insurances shall be purchased
by the Lessor.
Legal Name of Subsidiary
CodeFuel Ltd.
IncrediMail, Inc.
Smilebox, Inc.
IncrediTone, Inc.
Content IQ, LLC
BT Media, LLC
Pub Ocean Limited
Make Me Reach SAS
Portilev Ltd.
Subsidiaries of the Registrant
Jurisdiction of Organization
Exhibit 8
Israel
United States
United States
United States
United States
United States
England and Wales
France
Israel
Exhibit 12.1
I, Doron Gerstel, certify that:
1.
I have reviewed this annual report on Form 20-F of Perion Network Ltd.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control
over financial reporting.
Date: March 25, 2021
/s/ Doron Gerstel
Doron Gerstel
Chief Executive Officer
Exhibit 12.2
I, Maoz Sigron, certify that:
1.
I have reviewed this annual report on Form 20-F of Perion Network Ltd.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control
over financial reporting.
Date: March 25, 2021
/s/ Maoz Sigron
Maoz Sigron
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the “Issuer”), for the period ended
December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Doron Gerstel
Chief Executive Officer of the Issuer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
1. The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2.
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: March 25, 2021
By: /s/ Doron Gerstel
Doron Gerstel
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the “Issuer”), for the period ended
December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Maoz Sigron,
Chief Financial Officer of the Issuer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
1. The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2.
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: March 25, 2021
by: /s/ Maoz Sigron
Maoz Sigron
Chief Financial Officer
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-133968,
333-152010, 333-171781, 333-188714, 333-192376, 333-193145, 333-203641, 333-208278, 333-216494, 333-237196 and 333-
249846), of our reports dated March 25, 2021, with respect to the consolidated financial statements of Perion Network Ltd. and
its subsidiaries, which included in this Annual Report on Form 20-F of the Company for the year ended December 31, 2020.
Tel Aviv, Israel
March 25, 2021
/S/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A member of Ernst & Young Global